Deploying CCUS: Foundations of the European decarbonisation strategy

Pinsent Mason's partner Hermenegildo Altozano and associate Ana Maria Sánchez-Valdepeñas join inspiratia to share their views on the potential of CCUS.

Let's start from the basics. What is CCUS? 

CCUS stands for carbon capture, utilisation and storage, an acronym that aims to capture the value chain in relation to carbon capture activity in response to decarbonisation goals. CCUS is particularly relevant to those industries that emit large quantities of greenhouse gasses into the atmosphere as a result of the industrial processes developed therein and that are particularly difficult to decarbonise. Current regulatory frameworks at the European Union (EU) level have translated into domestic legislation for member states that aim to ensure the permanent storage of carbon that has not been captured in order to reach a net-zero target on emission levels. This is a tricky element due to the risk of secondary emissions once CO2 has already been captured.

 What is the relevance of CCUS in the transition to a net-zero future?

Massive. CCUS is a key element in the overall energy transition strategy. A series of policies (e.g. the EU Industrial Carbon Management Strategy) and regulatory frameworks on CCUS have recently been approved, but a binding legislative framework whereby highly polluting industries are forced to decarbonise needs to be introduced, too. A key tool that has been deployed to reach this goal is the free allocation of emission allowances, which will however be phased out by the end of 2030. Even within that, industries utilising iron, cement, aluminium etc need to undergo different rules. For those industries, CCUS is the only way to meet net-zero targets.

 Is the regulatory framework around CCUS specific enough?

In our opinion, the regulation of CCUS is at a very early stage. Regulatory frameworks have so far focused on storage, while regulation for areas like renewable fuels of non-biological origin (RFNBO) and recycled carbon fuels (RCF) for instance are still under discussion. The most significant bit of the regulatory puzzle that is still missing at the moment is that around the utilisation of CO and the computation of emissions from the entire carbon value chain as well as the barrier to the exportation and storage of CO due to the lack of ratification of the amendment to the prohibition of the export of CO for incineration on the seabed established by the London Protocol.

 What are the main risks associated with CCUS projects?

Regulatory risk is one of the main ones at the moment, as lack of specific appropriate regulatory frameworks for the entire CCUS chain will hinder most projects in this space. However, technology risk also plays a role as technology around CCUS has not reached full maturity yet. The European Innovation Fund has been and will continue to be key in funding pilot projects as well as clean-tech manufacturing, small-scale, medium-scale and large-scale projects. Supply risk is another one, as in certain projects, it is key to ensure that there is a continued supply of CO2  

The lack of appropriate infrastructure to support the transportation of carbon captured is another challenge that this sector is facing for the creation of an investable pipeline. Visibility of cashflows and certainty of the regulatory frame is key to stimulate  appetite from offtakers and private financial institutions to enter this space.

 What is the role of the European Union Innovation Fund in the future development of CCUS projects?

The EU Innovation Fund plays a pivotal role in enhancing financing support and development of projects aimed at capturing CO2. There is new regulation currently under discussion around the possibility of permanent abatement and utilisation of CO2 in cases of it becoming permanently chemically bound in a product.

There are many projects currently underway in this space that are eligible for funding from the European Union Innovation Fund across the North Sea, in the Netherlands, as well as across the continent. Project Pycasso, which aims to decarbonise industries in the region between the south-west of France and north of Spain, is a good example.

The Innovation Fund has a strong focus on CCUS, at present 41 projects have received funding for a total of €3.6bn 

(£3.08bn $3.94bn) in the third call for large-scale projects. With the fourth call for funding set to close by April, another estimated of €4bn is expected to go towards CCUS projects in Europe.

 What have been some of the most innovative projects? What are the lessons to be learned?

Northern Lights in Norway is one of the most relevant ones. Once operational, it will be the first cross-border, open-source CO2 transport and storage infrastructure network globally.

That is your lesson right there. The industry should look at replicating Northern Lights in the south of Europe. Another space to watch for potential investments in the storage element of CCUS is abandoned mines. There is going to be strong demand for mine space that can be used for storage purposes and create transport and interconnectors opportunities going forward.