Rescuing assets stranded by carbon markets

The European Union and countries on its periphery have implemented some of the most aggressive carbon pricing plans in the world. EU carbon charges are currently at €76 per tonne of emitted CO2, and are scheduled to rise to €90 per tonne by the end of this decade, if not sooner.

Brexit has of course exempted the UK from the EU program, but the UK has promulgated a parallel phasing in of carbon charges with allowances already trading at prices higher than the EU levels.

Elsewhere in Europe, Sweden has the world’s highest carbon tax rate.

Such programmes display moral leadership but also risk stranding fixed-point emission sources that may no longer prove economical.

At risk of being marooned

Industrial facilities with high carbon emissions can potentially be moved offshore, though at a cost to local employment and economic competitiveness. For power plants and cement manufacturing facilities, such offshoring is less plausible.

The cost disadvantage conferred by local carbon taxes may be ameliorated by a carbon border adjustment scheme, but tensions with external trading partners may delay or defeat such a tariff regime.

In this context, nascent interventions in the carbon market by a few states are leading the way in devising policies that transfer much of the brunt of such carbon capture expenses to the public purse in recognition of the fact that combatting climate change is a priority at the national level rather than at the firm level.

If deepened and widened in the coming years, such policies offer the prospect of “unstranding” assets that might otherwise have been marooned by aggressive carbon policies.

The role of carbon capture

The UK has announced aggressive plans to slash its emissions by 78 percent by 2035 below its 1990 levels. The majority of these reductions are set to be achieved by producing fewer emissions, via say, the further penetration of solar and wind power.

But a sizable proportion is intended instead to comprise emissions that are produced, but recaptured before they reach the atmosphere – in other words, carbon capture and sequestration (CCS).

CCS is anticipated to ease the transition to net zero by providing an alternative means of compliance for industrial processes that may prove hard to decarbonise or for fossil fuel-burning facilities that have not yet reached the end of their economic useful lives.

In the latter case, the fossil fuel would continue to be combusted, but a chemical scrubber would be installed within the flue that would rinse roughly 90% of the CO2 out of the effluent stream before reaches the atmosphere.

While not 100% green as solar power, a 90% reduction in emissions from such plants would make a huge dent in carbon budgets and accelerate the pace of progress towards net zero.

Two distinct sectors

While two previous attempts to spur the scaling of CCS infrastructure failed in the UK, better results are expected through its £1 billion CCS Infrastructure Fund.

A key innovation in the current approach is to cultivate “clusters” of CCS infrastructure rather than standalone projects. Properly conceived, the CCS industry consists of at least two sectors rather than one.

The first is the arena of emitters, which include pre-existing electric utilities or industrial facilities. These spew into the air large quantities of CO2, which must hereafter be captured post combustion.

This can be achieved by installing chemical scrubbers, but such retrofits require both upfront capital costs and ongoing operating expenses.

Further, the captured carbon must be transported to a viable storage location, pumped underground, and subsequently monitored to ensure it does not leak back to the surface. This latter “transport & storage” activity is a second standalone sector in its own right.

The UK aims to capture between 20-30 million tCO2/year by 2030 – 13 to 20 percent of current global capacity. To do this successfully, it must scale up its carbon capture ecosystems both to bend the emissions curve and to rescue assets at risk of being stranded as carbon pricing schemes kick in.

Role for insurance

The process presents risk challenges and opportunities due to the rapid development of emerging technologies - some of which are relatively untested.