To ensure adequate and rapid CCS development, we need federal incentives for coal and gas plants to use CCS. Four types of incentives should be a part of any final climate bill adopted by Congress:
- Commercialization Fund for Early Technology: Even the most promising CCS technologies are often stuck at small, demonstration plant scale. Few companies will accept the risks of building the first project that applies a new technology at large commercial scale. A commercialization fund would advance these early commercial scale projects and make them more attractive to conventional lenders.
- Investment Tax Credits and Accelerated Depreciations: Government loan or cost-share programs typically involve long lead times and uncertainty. This undercuts the ability of project developers to access necessary private capital. CATF advocates in favor of a portion of the CCS development incentives being structured as “self activating”—accelerated depreciation and investment tax credits that are earned by putting the project into operation.
- Direct Payments for Geologic Sequestration: Direct payments should be made from CO2 processes or allowance value of a climate bill to close the gap between low early carbon prices and the early, higher cost of CCS (see Reverse Auction below).
- Federal Financing: The scale of CCS needed may stretch conventional lenders’ limits. The federal government should consider extending financing to CCS projects to lower the cost of obtaining credit.
Financial incentives should come from the proceeds of allowance value of a national climate policy. For example, in the American Clean Energy and Security Act passed by the U.S. House of Representatives in 2009, a “cap”, or ceiling, would be set on emissions of CO2 and other greenhouse gases, with the cap steadily declining over time. The federal government would both give and sell CO2 allowances, or permits, to industry to meet this cap. In the American Clean Energy and Security Act, the amount of direct payments available for carbon capture and storage from allowances could reach $180 billion over the next 50 years.
Reverse Auctions
A reverse auction is an efficient and effective method to close the gap between low early carbon prices and the early, higher cost of CCS. By providing direct payments to industry for the installation and use of carbon capture and storage, it offers the most practical way to make deep reductions in CO2. These direct payments, funded by CO2 “bonus allowances” in a climate bill, will need to total tens or hundreds of billions of dollars over the next 50 years.
To make these payments effective, a reverse auction brings efficiency to the process through competition in a CCS direct payment program. In an ordinary auction, buyers bid up the price until a winner is chosen. In a reverse auction, the roles are switched. Sellers (in this case, companies wishing to sequester CO2) compete by lowering the price at which they will store CO2 until a winner (the lowest bidder) is chosen. The winning bid gets first access to a government-administered pool of direct payment CCS money. The next lowest bid gets the next amount of the pool, and so forth until the money is gone.
Reverse auctions came into use in the 1990s by automobile and aerospace buyers. Today, utilities in New Jersey, Pennsylvania, and Delaware use them to procure electricity.
The US House version of the climate bill contains a reverse auction provision. A detailed description of the reverse auction concept within the context of the climate bill debate was prepared for CATF in August 2009 by the Northbridge Group.
