August 15, 2022

Volume XII, Number 227

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August 12, 2022

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Carbon Capture and Storage Risk Management

Risk management is one of the few key policy issues to facilitate carbon capture and storage (CCS) in Class VI storage facilities that has not been the beneficiary of substantial policy revision in the past few years. Stakeholders are interested in the development of policy to effectively manage the safety, performance, and liability risks associated with containment of captured and stored CO2.

In 2019 the National Petroleum Council (NPC) issued at the Secretary of Energy’s request a report entitled “Meeting the Dual Challenge: A Roadmap to At-Scale Deployment of Carbon Capture, Use, and Storage in the United States,” containing a broad range of recommendations. Many view this as the premiere current report on CCS policy issues in the U.S. One recommendation was to “convene an industry and stakeholder forum to develop a risk-based standard to address long-term liability.” No such forum has been convened, but we are aware of interest among both emitters and insurers in exploring risk management solutions.

What are the risks from CCS?

CCS can be conceived as having four phases, each with different risks: the site selection phase, during which a storage formation is reviewed for suitability for long-term containment of CO2; the injection phase, during which the facility is actively injecting CO2 for storage; the post-injection site care phase, after injection has ceased, but during which the site continues to be monitored to assure the CO2 will remain safely contained; and the post-closure phase, which arises after the facility has satisfied the requirement of showing, in essence, that the sequestered CO2 no longer poses a risk of escape.

These different phases pose different issues with respect to risk management. This blog post primarily will discuss the post-closure or “long-term” phase.

Assuming the site selection, injection, and post-injection site care phases have been handled appropriately – as the Class VI UIC regulatory program has been designed to assure they are –  post-closure risks should be very low. Under 40 C.F.R. § 146.93, “monitoring must continue until the geologic sequestration project no longer poses an endangerment to [underground sources of drinking water]” and the regulator (either the state or the EPA) has approved a demonstration to that effect. A main factor in whether there is threat of endangerment is whether the CO2 and the associated underground pressure front continues to be mobile.

The Class VI regulatory program instituted a 50-year default post-injection monitoring period. Most anticipate that injected CO2 and the pressure front will cease to be mobile well before 50 years after the last injection. If so, the “default” period allows the regulator to shorten the monitoring period, based on the demonstration described above.

If research can show a likelihood that CO2 plumes can be expected to stabilize sooner, EPA should shorten the default period to encourage carbon storage projects to move forward, especially since the Infrastructure Investment and Jobs Act enacted last November allocated $2.5 billion over the next five years for carbon storage projects. As the NPC study found, “long-term liabilities and responsibilities can have a detrimental effect on project development.” (National Petroleum Council report, Chapter 3, p. 22.) The “long-term” includes not just the 50-year default post-injection site care period, but also the post-closure period, the truly long term. As indicated above, the very definition of being in the post-closure period is that a regulator has determined that the facility no longer poses a threat to underground sources of drinking water, a reasonable proxy for other risks posed by loss of containment.

In 2008 Hunton formed the CCS Alliance, a coalition focused on risk management for carbon capture and storage. At the time, Congress was poised to enact cap-and-trade legislation to require CO2-emitting power plants to reduce their CO2 output over time, with an emission credit trading program.

The prevailing long-term risk management idea at that time was a trust fund, to be capitalized with a per-ton fee on CO2 injected into Class VI facilities. There was resistance to the trust fund idea, for a number of reasons. First, the per-ton fee discussed at the time was $1. Multiplied by the billions of tons of CO2 to be stored over time, society would be setting aside enormous amounts of money, the use of which would then be restricted. Risk should be managed in a financially efficient way. If the regulator’s determination was right that a site no longer posed risk, a trust fund to cover post-closure liability would be “dead capital,” held to cover nonexistent risk.

Second, concerns were raised about governments’ poor records in managing trust funds. A trust fund of course is not by necessity a government instrument, but in the context of CCS long-term liability, it was conceived as such at that time. Moreover, with a trust fund for CCS, money would be less available during operation when what low risks there are expected to be were likely to be highest, but the money would keep accumulating and growing (via interest) after injection when risks are decreasing.

We worked with a group of entities to propose a different concept: a structure under which early mover sequestration facilities could enter a cooperative agreement with the Secretary of Energy, the main benefit of which would be a structure to address long-term liability. Under the “layered” approach the group proposed, the site owner/operator would be responsible for “first dollar” responsibility, up to a defined limit (in the millions). Damage beyond the first layer limit would be shared evenly across all parties with cooperative agreements for other sites, up to a second defined limit. In the instance (deemed highly unlikely) that damage went beyond the first two layers, the federal government would share in the liability, subject to a third defined limit.

Some benefits of this approach were that the liability protection would be an attraction for early sites, and the review by DOE before entering an agreement would be added assurance of good site selection. Moreover, the proposal included a requirement that the facility not have been refused by commercial insurance, yet another assurance of good sites. However, the proposal has a key anachronism: it put too much money on the table. The risks very likely are lower than the proposal assumed. However, the concept of risk sharing through layers, for which there are analogues in other risk management contexts, may be useful for CCS.

Ultimately, another concept or structure may need to come forward. Some companies look at liability of unknown duration for stored CO2 and would like to devise a mechanism that will avoid any associated risks being kept on the books indefinitely – especially since those risks are expected to be very low.

The key to bringing about additional risk management concepts is discussion between carbon capturers and storers and risk management experts. Some is taking place, but more needs to occur. As CCS is about to take off, and Congress has provided substantial funding for storage projects over the coming years, such collaboration is timely.

Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.National Law Review, Volume XII, Number 40
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About this Author

Frederick R. Eames Government Relations Hunton Andrews Kurth Washington, DC
Partner

Fred advocates for clients before Congress and federal agencies, devising and executing strategies that advance their interests with regard to legislation, rulemakings and permitting. Success in the federal arena depends on trust, which Fred has built by delivering solutions that blend a keen understanding of a client’s business, the law in question and the policy considerations that underpin it.

Clients trust Fred for his insightful and practical know-how acquired from years spent as counsel to the US House of Representatives Energy and Commerce Committee. That experience...

202-778-2245
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