By now, most people with any connection to the energy sector in Alberta are familiar with carbon capture and storage (CCS) – the proposed technological solution to Alberta’s growing greenhouse gas emissions. When the Government of Alberta tabled ts Climate Change Strategy in 2008, the goals (shown in the figure below) were to achieve 200 Mt/yr of emissions reductions, relative to business-as-usual, by 2050 and CCS was tapped as the technology through which 139Mt/yr of emissions would be prevented from reaching the atmosphere, and perhaps more importantly from reaching our GHG inventories.
The Government has failed to address what I have called 4 hard truths about the implementation of CCS in Alberta. First, CCS is expensive and so the existing $2 billion CCS fund will only deliver, at best, 4Mt/yr of emissions reductions, getting us about 3% of the way to our long-term goal. Second, technological improvement does not mean that the average cost of new CCS projects will decrease over time. Third, there is only one exit strategy for the government from long-term CCS funding, and that is the implementation of more stringent GHG emissions policies. Finally, significant changes in energy markets suggest that CCS may no longer be the most cost-effective option for significant GHG emissions reductions in the province.
The first hard truth is that the Alberta Government has written a check for $2 billion to cover a $2 billion/year promise. The Alberta Carbon Capture and Storage Development Council stated that the projects funded through the $2 billion CCS fund will be “insufficient to ensure that the province reaches its longer-term 2020 and 2050 GHG reduction goals.” In fact, the Council concluded that “an investment of between $1 to $3 billion per year from the governments of Alberta and Canada will be required to promote further CCS projects,” and that, “industry will likewise need to shoulder significant additional investment,” in order for for Alberta to meet its near-term goal of 25-30 Mt of CCS by 2020. There are also additional hidden expenditures already on the table such as royalty relief programs for Enhanced Oil Recovery (EOR) which effectively use oil in the ground to pay for CCS over and above the $2 billion CCS fund.
Government funding is required to close the gap (shown above) between the costs of capturing and transporting the CO2 and the net cost or revenue from storing the CO2 in geologic formations. This cost gap depends on several factors. First, the largest cost is capturing the CO2 itself, and this cost is highly variable. Second, the small but scale-dependent costs of compression and transportation need to be covered, and in many cases, this will imply paying up-front for new infrastructure. Finally, the injection of the CO2 may produce added revenues, through EOR or further costs in the case of geologic sequestration. The after-tax net costs of capture, transportation, and injection must be compensated for by payments from government and/or avoided carbon emissions charges in order for businesses to make the required investment. The estimate of the funding gap of $50/ton above, multiplied that by 20Mt/yr, leave a $1 billion/yr gap, and that’s assuming $40-60/ton of EOR revenue and a $50/ton carbon price. Current policies in Alberta likely put that cost gap at closer to $100/ton, hence my estimate of a $2 billion/yr promise.
The second hard truth is that the costs of new CCS projects are unlikely to decrease over time. Technology will improve over time, but it is crucial to understand the context in which this learning will occur. In new, purpose-built facilities like NorthWest Upgrading, the cost of capture may be quite low while the cost of capturing CO2 through retrofitting existing power plants or other facilities may be 3-4 times greater. In the Figure shown above, sourced from Ian Murray and Co.’s 2008 report on CCS costs, the cost of CCS increases to well-above $100/ton at the annual quantities targeted by the Alberta Climate Change Strategy. Technology will improve, but CCS will need to be applied more challenging circumstances in order to reach our goals and so the costs of new projects will likely increase.
The best analogy I can provide for understanding this cost increase combined with technology improvement is the oil sands industry. There is no doubt that the technology has improved from the time that the original mines were built, but this does not imply that the costs per barrel from new mines like Kearl or Joslyn will be lower than at older mines like Millenium or Muskeg River. High grading tells us to expect the best resources to have been developed first, and so in order for costs at Kearl or Joslyn to be lower than those at older sites, the technological improvements would have to overcome cost increases due to other characteristics of the leases. The same is true in CCS – technology will improve over time and shift the supply curve shown above downward…but these improvements are unlikely to outstrip the rate that costs increases as we increase the quantity we seek to capture and store. In other words, early deployment of CCS might reduce costs for the most expensive facility needed to meet our 30Mt goal from $100/t to $80/ton, but that facility will still likely cost more than those facilities being developed today because it will be a more challenging application of the (potentially improved) technology.
The third hard truth I see is in the lack of an exit strategy for government. Looking back at the cost gap figure above, the potential revenue generated by EOR is only about $50-60/ton, and that is in the best plays under the assumption of high oil prices. As we extract more and more oil from EOR plays, and at the same time are trying to increase quantities stored, we are going to have to move to more expensive capture opportunities and toward pure storage plays, which both increases capture costs and turns EOR revenues into a storage cost (you are not going to make money injecting CO2 into saline aquifers unless you are being paid to do so). The only remaining items on the revenue side of the equation are avoided carbon charges and tax benefits, both of which come from government coffers. The only exit strategy, if you can call it that, for government is a strong commitment to carbon pricing or regulatory requirements for CCS. Otherwise, CCS will only happen under a long-term commitment to billions of dollars of annual expenditures under a sustained pay for results approach as recommended by the CCS Development Council.
The fourth hard truth is that having a CCS-oriented policy limits companies’ options for GHG reductions, and it is likely to lead to much more expensive emissions reductions or fewer reductions per dollar spent in the long term. When the Climate Change Strategy was announced, gas prices were high and getting higher, with forecasts of over $17/GJ by 2050 being used in leading climate models. Since then, of course, gas prices have fallen and are predicted to remain at less than half that price for the medium term. This means that the portfolio of abatement opportunities available has shifted considerably, and so the push to CCS may not be the right path in all cases. For example, the EIA now estimates that the levelized cost of electricity generation through coal with CCS to be $136/MWh by 2016, while gas generation is expected to cost $63. From a GHG emissions point of view, replacing many of our aging coal plants with gas plants rather than replacing a few with CCS-equipped plants for the same expenditure is an easy decision, but one which a policy based around CCS would not consider – if the Government is going to pay for results, they should not be willing to pay substantially more for a ton of carbon stored through CCS than for a ton of carbon abated in other ways.
The Government of Alberta owes it to the citizens of Alberta to come clean on CCS and admit that a long-term commitment to an aggressive fiscal or regulatory framework which goes far beyond the existing $2 billion fund will be required to meet our goals. If we are going to implement a sustained and aggressive policy on GHG emissions in this Province, I believe that the Government should look to policy designs which allow businesses to adopt the lowest cost means of emissions reductions, i.e. carbon pricing, rather than a prescriptive policy which favors one solution over another. I believe Albertans will see the advantages of this as well, if all the cards are on the table.