PAYNE INSTITUTE COMMENTARY SERIES: COMMENTARY

By Brad Handler

October 24, 2024

The following remarks were prepared for the Houston Strategy Forum’s “Carbon Conclave” held on October 22, in Houston, TX.

Let me start by thanking Ravi and the Houston Strategy Forum for the opportunity to join you all today. I am glad to be able to be part of this conversation. My remarks address some of the academic and advocacy communities’ thinking on the state of risk management and financing opportunities for the U.S. CCS sector.

The Payne Institute’s perspective on some of these issues comes out of its ongoing work in carbon finance and some specific work looking at managing liability in CCS.

In that work, we saw that the relevance of liability as a factor in the growth of CCS is likely growing. Of the universe of “full suite” (capture through storage) developers seeking approvals from the EPA for Class VI permits, just under 1/3 are new companies, formed for this purpose.

These new CCS developers, who as my fellow panelists demonstrate fully intend to be the fastest movers, are likely going to be more reliant on third parties than large, well established counterparts like the major oil companies. These new companies, for example, lack the balance sheet to either finance the projects themselves or to provide adequate Financial Assurance to the EPA.

Those third parties, which include financing sources and insurance firms, need to get comfortable with these projects, as well as the developers themselves. How do they do that? By getting comfortable with risk and the revenue streams.

Our focus included releasing developers from liability over the very long term. We concluded that, on the margin, release of liability can help these new developers get financing and we encouraged adoption of a national-level framework vs. the inefficient patchwork of provisions at the state level today.

We also spoke with insurers and noted how they are getting closer to providing coverage for U.S. CCS projects. For example, there have been placeholder, or indicative, policies written to provide environmental liability coverage for Financial Assurance packages for Class VI applications.

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Turning to revenue streams, my fellow panelists all offer examples of making this work. But to scale up CCS in earnest and across more point sources, it is worth considering how to supplement the revenues that can be generated from CCS projects in order to encourage more investment capital.

Let’s first consider the 4 broads ways CCS projects are receiving financial support

The 1^st is funding from government. The DOE now as $4.7B of authorization in 3 programs.

A 2^nd is also from government but provides demand side support. This relies on having a product produced and so won’t apply to all CCS projects, but one relevant example is the $1B DOE Regional Clean Hydrogen Hubs program. This is under development, but presumably will commit to buying hydrogen or supporting its price for the producer.

Without trying to diminish the impact of these programs in any way, presumably they are supposed to be limited, kick-starters to lower costs and bridge to self-sustaining markets.

A 3^rd and broader way is through policy. This can include carbon prices, emissions allowances or, in the case of the U.S., tax credits such as 45Q and the useful adaptation to allow for direct pay of such credits.

U.S. CCS actors are leveraging these policies and stacking revenue sources as possible to raise funds. For example, the IRA does not allow the “stacking” of IRA incentives (the 45Q carbon capture tax credit cannot be stacked with the 45Z for clean fuels). But proceeds from sales of emissions allowances tied to products, such as through California’s Low Carbon Fuel Standard program, can be stacked with 45Q.

And there is ongoing innovation in finance to leverage current policy. For example, just last month HarvestOne announced, with Bank of America,  the first tax equity deal that commits to buying tax credits generated either from 45Q or 45Z.

Finally, a 4^th way stems from engaging carbon finance. I mean this in a very broad sense – any results-based finance where the investor cares about a climate impact. But it is generally thought about with a carbon market lens.

Carbon markets, or at least the voluntary carbon markets, are digging their way out from integrity challenges. But If terms can be agreed by countries or private parties, these markets clearly represent an opportunity to generate a lot of money for CCS projects.

CCS credits exist today, although I think are limited to those issued by Red Trail Energy for its ethanol facility and, forward contracts  Drax has signed to sell credits tied to BECCS from a future plant in the US.

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With that groundwork laid, let me turn to what more can be done. To try to encourage more availability of financing, academics and policy analysts have floated ideas to adjust policy and carbon finance further.

In policy, we have seen encouragement of extending the duration of IRA tax credit provisions. On the more creative side, we have seen consideration of lessening  restrictions on using losses from passive investments as an offset to wage or portfolio income. This was shut down decades ago but a window for certain types of decarbonization projects could be opened.

In a different example, carving out exceptions to tighter Basel III constraints on bank lending for decarbonization projects has also been considered. This would lower banks’ cost of capital against these loans.

In carbon finance, there is some recognition that trying to shoehorn CCS projects into current principles stressed in the VCM might be challenging. Additionality, i.e. the claim that the project would not have proceeded without the financial support of the credit, seems particularly tricky. It suggests each project must prove that it needs credits, which is cumbersome and probably involves developers getting more open about costs and financial returns than they’d like.

But it has been discussed that there can be a different form of credit, for which additionality doesn’t have to be established.

One name put on this is the Carbon Sequestration Unit, or CSU. CSUs would not pretend to be a source of emissions reduction. A buyer of the unit could not use it to claim offsets against its own emissions. Rather, that buyer is sponsoring the activity because it views CCS as an important technology. CSUs are simply a currency to help fund CCS projects.

If that sounds a little weird then consider that in the Paris Agreement, governments do not only make commitments to lower their emissions. Governments have made commitments to add Renewable Energy, for example. Obviously, more renewable energy contributes to climate mitigation, but it is a separate goal. CSUs could support something similar and might find support from governments or companies that want to promote CCS and expect the world to rely on it to meet decarbonization commitments.

Thanks again and I look forward to the rest of the discussion.

ABOUT THE AUTHOR

Brad Handler, Payne Institute Program Manager, Sustainable Finance Lab, and Researcher

Brad Handler is a researcher and heads the Payne Institute’s Sustainable Finance Lab. He is also the Principal and Founder of Energy Transition Research LLC. He has recently had articles published in the Financial Times, Washington Post, Nasdaq.com, Petroleum Economist, Transition Economist, WorldOil, POWER Magazine, The Conversation and The Hill. Brad is a former Wall Street Equity Research Analyst with 20 years’ experience covering the Oilfield Services & Drilling (OFS) sector at firms including Jefferies and Credit Suisse. He has an M.B.A from the Kellogg School of Management at Northwestern University and a B.A. in Economics from Johns Hopkins University.

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DISCLAIMER: The opinions, beliefs, and viewpoints expressed in this article are solely those of the author and do not reflect the opinions, beliefs, viewpoints, or official policies of the Payne Institute or the Colorado School of Mines.