The election debates have been a bit tame so far, and the topics that are really important for the future, such as climate, don't seem to be really discussed because of the COVID pandemic. Yet, for a subject such as the climate it is important what the outcome of the election will be.
The parties that will form the coalition will determine which techniques are stimulated and how subsidies and support packages are used to achieve the climate objectives. One of the new techniques that is being embraced by more and more companies is the capture and storage of CO2 (also called CCS). For example, Exxon recently announced that it will invest €2.5 billion in CCS solutions.
In this article, we consider whether this technique will indeed contribute to the realization of the Paris Climate Agreement and whether it constitutes an attractive investment category.
CCS IS ESSENTIAL FOR ACHIEVING CLIMATE TARGETS
One of the most commonly cited arguments in favour of CCS is that we need it in the transition to a CO2-neutral society. Reducing carbon emissions is a serious challenge, particularly for heavy industry. Their processes are often run at high temperatures that simply cannot be attained without fossil fuel sources unless their plants undergo major adaptation. On top of that, electrification or a shift to hydrogen power would result in a hugely increased demand for electricity. In addition, CO2 is a by-product of chemical reactions that take place.
CCS plays an important part in most climate scenarios, alongside capturing CO2 through reforestation. In 2018, the IPCC published the "Special Report on Global Warming of 1.5°C", which set out 90 scenarios each offering at least a 50% chance of limiting temperature increases to 1.5°C. Most of these scenarios assume net negative emissions, often using CCS. The IPCC's four basic scenarios are shown below (Figure 2). The four basic scenarios are among the total of 90 scenarios. These scenarios were chosen as a basic scenario because they are representative of the different ways of addressing the climate problem. The first scenario (P1) uses natural means alone for removing CO2 emissions from the atmosphere. However, this scenario requires a significant fall in the demand for energy (-15% in 2030 and -32% in 2050, compared to 2010) in order to achieve the Paris targets in time. The other scenarios all make greater or lesser use of CCS. In its Fifth Assessment Report (AR5), the IPCC also concludes that excluding CCS from the range of transition technologies would push up the cost of the energy transition more than any other technology.
Breakdown of contribution to global net CO2 emissions in four illustrative model pathways
Source: IPCC Special Report on Global Warming of 1.5°(2018)
CCS IS NOT AN IDEAL TECHNOLOGY
While people ascribe an important role to CCS in achieving climate targets, it is not free of risks to the environment. Firstly, CCS may well capture CO2, but other emissions that exacerbate global warming, such as methane, still end up in he atmosphere. Critics also argue that underground storage of CO2 might be susceptible to leaks. These could harm natural habitats and ground water, or else some of the escaping CO2 could even end up back in the atmosphere. Leaks could occur either at the storage sites themselves or during transportation to them, which is often via pipes. Any leak would rapidly release a large volume of CO2. This would be hazardous to humans and animals within close proximity to the leak, as CO2 displaces oxygen due to its greater weight.
The risk of this happening led to planned trials of CO2 storage being scrapped in an area of Barendrecht back in 2009, under pressure from the local population. There is a mitigating factor in that many countries only allow the storage of CO2 once there is research and proof that the chance of leaks is minimal. European legislation prescribes that adverse consequences for and risks to the environment and public health must be avoided before the permanent storage of CO2 can be allowed. Also, monitoring is often required by law during the storage period, so that any leaks can be detected. However, because the technology is relatively new, there is little understanding as yet of the potential impacts in the longer term.
THE FINANCIAL APPEAL OF CCS IS STILL UNCERTAIN
The financial appeal and technology of CCS are still uncertain and depend heavily on government subsidies to get going. The level of costs depends on a wide range of factors. Technology, location and the source of the emissions all play their part. The purity of the emissions plays an important part if the emissions are captured immediately adjacent to the source. Certain emissions, such as those from ethanol plants, are purer than those from other sources, including steel and cement production. Relatively clean emissions can be captured for between €20 and €25 per tonne, though the price rises to between €50 and €125 per tonne for dirtier emissions (McKinsey).
The cost of capturing emissions via Direct Air Capture (DAC), where the emissions are filtered directly from the atmosphere, are substantially higher still (averaging between €400 and €500 per tonne).
These high costs mean that CCS projects are significantly less attractive if they do not receive government subsidy. For instance, ExxonMobil cut its support for a CCS project in the USA in 2020, although it continued investing in the Dutch Porthos project during the same period. The difference? Whereas the US project had to be financed out of the company's own coffers, the Dutch project incurred fairly low costs for the participating firms because of high government subsidies.
CO2 emissions certainly do have a price tag in Europe. The higher the price, the more attractive it becomes for companies to pump their CO2 underground. The price is currently fluctuating between €25 and €30 per tonne of CO2. In recent presentations, Aker Carbon Capture showed that the break-even point will only be reached once the effective CO2 price rises still further and the costs of CCS technology fall. In 2018, the Netherlands Environmental Assessment Agency (PBL) calculated that the national costs incurred for CCS in industrial processes were between €40 and €100 per tonne of CO2. This PBL estimate means there is a gap of between €14 and €74 per tonne compared to the current European CO2 price.
For investors, this raises the question of whether it is worth investing in a technology that is not yet profitable without government subsidy, knowing that there are alternatives available for generating green energy at lower cost prices. And there lies the rub. Because prices of solar, wind and other forms of green energy have fallen so markedly in recent years, those prices are, in certain areas, comparable with or sometimes even lower than the price of coal-fired and particularly gas-fired power stations equipped with CCS.
While ACTIAM regards innovations in CCS as a positive development, the question is whether the technology has been overtaken by reality before it has had the chance to mature. In theory, CCS can provide a valuable contribution towards achieving climate targets. However, the question that investors have to ask themselves, is whether it is logical to invest in an as yet fledgling technology (which is no more than an interim solution and that is tied into major environmental risks), given that there are greener options available.
Also, CCS should not be used to camouflage dependence on fossil fuels. Although it can indeed contribute towards achieving climate targets, oil and gas companies will have to intensify the energy transition to avoid being saddled with stranded assets. Investors should therefore approach these two topics separately and CO2 capture should not be used to mask the risks of the energy transition.