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Addressing the liability challenge

8th March 2019

Topic(s): law and regulation, Liability

Liability continues to be viewed by some project developers, policy-makers and regulators as a critical issue for the deployment of carbon capture and storage (CCS). The topic has been debated at length across several fora and jurisdictions and in recent years, regulators have done much to address parties’ concerns and clarify their exposure. Despite this, many continue to highlight liability as a potential barrier to the wider deployment of CCS technology.

While undoubtedly a critical consideration, ‘liability’ is frequently raised in a broad and ill-defined manner. Closer assessment reveals that in many instances, several far more nuanced issues are at play.  For those seeking to deploy the technology however, the broader question as to whether the issue of liability represents a real challenge persists.

  • Is liability truly a showstopper for project deployment?
  • Do CCS-specific legal and regulatory models go far enough?
  • What may be learned from previous experience?

What is meant by ‘liability’?

A critical factor when addressing these concerns, is determining what is meant by the term liability. The Institute’s previous work on the topic, compared legal regimes across three common law jurisdictions and identified several different forms of liability that will be applicable to storage operations. The study identified civil and administrative liabilities, together with those potentially borne under national or regional emissions trading schemes, whose management will pose risks and challenges to both operators and regulators alike.

Liabilities borne under broader regimes governing environmental protection, oil and gas activities, marine management and water protection are well understood by operators and regulators, however their impact under many of the newly-established CCS-specific legal regimes is perhaps less certain. Under these largely statutory regimes, regulators may require an operator to take a specified action as well as recover costs where they have been compelled to act on the operator’s behalf.

Civil liabilities may be owed by an operator where the interests of third parties are harmed. Termed ‘tortious liability’ in some common law jurisdictions, damage caused by CCS operations may result in actions brought for compensatory damage for losses suffered, and/or an injunction where the damaging activity is continuing. While these liabilities are likely to be broadly familiar to those operators engaged in industrial activities, their application to damage resulting from CCS operations is more uncertain.

In jurisdictions where an emissions trading regime has been introduced and an operator may secure some form of credit in relation to the amount of CO2 stored, a liability is again borne where subsequent leakage occurs. Of all these liabilities, ‘climate liability’ is perhaps less easily charactised and quantified, and as such, pose some unique demands for operators and regulators.

Practical experience, theoretical application

Notwithstanding the potentially broad range of liabilities applicable throughout the project lifecycle, their impact is likely to vary greatly when considered individually. The development of CCS-specific laws and regulations has provided much-needed clarification and guidance, however, the novel aspects of both the technology and these provisions will likely prove challenging.

Operators are likely to more readily understand and accept the extension of some traditional forms of liability to CCS operations. For those undertaking other industrial activities or operating in the resources sector, the risks associated with these pre-existing regulatory models will undoubtedly prove familiar and quantifiable. The imposition of potentially new liabilities and the absence of practical experience in the application of this new legislation will however, represent considerable uncertainty for those seeking to invest in the technology.

Regulators will be similarly challenged by the lack of practical experience in applying these new regulatory frameworks, as well as the potentially challenging administrative arrangements. While there are analogies to be drawn from the regulation of other industrial processes, from which several aspects of the CCS-specific frameworks are drawn, the application of these new regimes across the entirety of the CCS lifecycle has yet to occur.

How are these liabilities to be managed?

The introduction of CCS-specific provisions requiring financial security and insurance will address, in some part, the potential risks associated with the operational phase of CCS operations. Aspects of both these concepts are well-understood by operators and regulators and, despite potential concerns regarding their application in novel circumstances, will likely be viewed as a practical approach to managing these issues.

Perhaps of greater concern for both parties, will be the management of the longer-term aspects of the storage process – notably the closure and post-closure phases of the project lifecycle. The development of transfer provisions within CCS-specific legal and regulatory models, as well as the incorporation of CCS within greenhouse gas trading schemes, has resulted in liabilities that may prove less palatable to both parties, particularly in the case of climate change liabilities which may prove more difficult to quantify and insure.

Absence of CCS-specific law and regulation

The concerns of potential investors and project proponents will likely be exacerbated, within those jurisdictions which have yet to review and clarify their legal and regulatory position. It is unlikely that developers will be prepared to invest in a project, absent a clear position on the allocation of liabilities and where they may bear responsibility for a storage site in perpetuity.

It is notable that several of the most comprehensive models of CCS law and regulation, have adopted provisions which attempt to address the most challenging aspects of the project lifecycle and the roles of both operators and regulators. For CCS facilities to move beyond the conceptual and planning phases, further work is required to refine the liability aspects of many regulatory regimes.

The way ahead

While some liabilities are likely to prove an issue for proponents and regulators in the near term, many may be adequately managed through existing approaches and practices. Legislation developed to-date has gone some way towards alleviating concerns, however, further refinements and greater collaboration between CCS project developers, policy-makers and regulators, will ensure that the issue does not frustrate ambitions for more widespread deployment of this vital climate mitigation technology.

 

Written by Ian Havercroft, Senior Consultant - Legal & Regulatory

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