The rise of Carbon Capture and Storage (CCS)

In a previous article, we discussed whether Direct Air Carbon Capture and Storage (DACCS) should benefit from public financing. Much has happened in the few weeks since its publication with significant strides being made both in France and Germany, despite political instability on both sides of the Rhine River. As the pressure of the 55% emissions reduction target in 2030 compared to 1990 begins to bite, stakeholders are giving renewed attention to this technological option. 

Why is CCS, a marginal technology, so important?

The IPCC has long recognised that the deployment of CCS would be an integral part to reaching carbon neutrality. It even published a special report on the topic as early as 2005. In the 6th Assessment Report (AR6), the 3rd Working Group contribution on climate change mitigation (a 2000 page document), all modelled pathways toward carbon neutrality involve some form of CCS. Simply put, Carbon Capture and Storage is the only way we can truly reach carbon neutrality since there are still many industrial sectors for which there are no commercially viable technological option for complete emission suppression. These “hard-to-abate” sectors will still be emitting CO2 in the atmosphere for the foreseeable future: cement production, steelmaking, long-distance transportation…

The trouble is, there were only 37 CCS installations operating in the world in 2023 (source), and most of them were using different technologies and setups. There is still a lot of ground to cover before industrial-scale deployment, on par with decarbonation objectives, can be achieved. This has led critics to consider that CCS is a form of “magic bullet” embedded in transition pathways forecasts and it has long been shunned as an easy way-out that would invalidate real mitigation efforts.

However, as the 2030 and 2050 deadlines draw closer, environmental objectives are exerting an increasing pressure on the economy. For example, the amount of emission allowances on the EU-ETS carbon market is set to decrease by more than 4% per year over the coming years. These measures will inflate carbon prices and push emitters to look for decarbonation solutions or to seriously contemplate CCS. Current prices at around €80 per tonne render a range of CCS technologies economically viable, hence the renewed interest.

In France, an ambitious interest 

In 2023, the then Prime Minister Elizabeth Borne asked the High Council on Climate – a body of scientific experts on climate change – to produce a report on the proposed national strategy for Carbon Capture Utilisation and Storage (CCUS). The strategy rests on the central paradigm that CCS should not become a substitute for decarbonation but that its development is inevitable to achieve carbon neutrality. It is the second most important lever after electrification in the French transition strategy.

While the Council found that the 4 to 8 million tonnes of yearly CO2 capture by 2030 was “ambitious” given the current state of the technology, it validated the relevance of the strategy. One of the main contentious points was however the question of storage as few geological sites are available in France. Transporting CO2 over long distances is both dangerous and expensive and requires the development of specific infrastructures. One of the options being pursued is to send the CO2 to Denmark and Norway for long-term storage in depleted oil fields in the North Sea but geological research campaigns are being launched to identify potential storage sites in France.

In order to incentivise the development of CCS, a mechanism of Carbon Contract for Differences (CCfD) is currently under limited deployment. This mechanism would see industrial sites finance their CCS installations through allowance prices on the EU-ETS. A reduction in the emissions of an industrial site means it has more allowances than required and it can therefore sell them on carbon markets, thus deriving a profit. However, these prices fluctuate and can result in reduced profitability for the actor. With a CCfD, the State would compensate investors when prices drop below a certain value, while the State would appropriate revenues generated above a certain price ceiling.

In Germany, a strategic U-turn

The situation in Germany is different. Since 2012, geological storage of CO2 is forbidden except for research purposes, out of safety concerns. The main fear has always been that underground reservoirs might leak some gas over time, possibly destroying the environment and creating deadly CO2 “bubbles” on the surface in case of a major outflow. The argument that CCS would also provide a negative incentive for actual decarbonation was also strongly supported.

The recent energy crisis led to a paradigm shift. When Russian gas imports stopped, Germany relied heavily on coal power plants to produce its electricity. These are some of the most carbon-emitting installations and they subsequently had to purchase significant amounts of allowances on the EU-ETS market to cover the increase in production. This pushed carbon prices to historic heights, well above €100 per tonne with dire consequences for German industries.

The German government introduced a new Carbon Management Strategy at the beginning of 2024 that takes stock of the change in conditions and economic pressure. It would allow CCS in Germany and permanent storage but only offshore as it would be faster, safer and easier to develop. For onshore storage, the Strategy advocates for an “opt-in” mechanism that would allow Federal States to authorize such storage on their territory. In terms of financing, the government has introduced a subsidy for hard-to-abate industries to help them use notably CCS to decarbonise. 

A general European movement

Both France and Germany’s decisions are to be seen within the framework of the Net Zero Industry Act and the EU Industrial Carbon Management Strategy that provide an overarching goal for the EU. The reluctance towards CCS has clearly been lifted both at EU and national levels. Nonetheless, this is only the first step towards the emergence of industrial-scale solutions that match the decarbonation needs of industrial emitters. Many hurdles will need to be overcome in terms of production capacity, investments, finance, skills… The road towards a massive recourse to CCS remain highly uncertain. 

On a final note, the debate should not overshadow the fact that the current decarbonation push is occurring in an asynchronous fashion with our main trade partners. This will undoubtedly create competitive frictions between EU-based producers that invest massively in decarbonation and their overseas counterparts. As the Draghi report noted, in a context where Europe has to redevelop a green industrial base, it remains to be seen whether the CBAM (Carbon Border Adjustment Mechanism) will be sufficient to level the playing field or not.