The double burden: How the ETS revision can address cross-chain risks for carbon capture and storage
Europe is finally beginning to see its first new carbon capture and storage (CCS) projects in nearly two decades, with the Brevik cement plant in Norway starting up last year, and several others scheduled to begin operating in 2026 and 2027. Yet, this progress still falls far short of the pace needed to meet the EU’s Climate Law target of reducing emissions by 90% by 2040. With a growing number of CCS developments receiving funding through the EU’s Innovation Fund and other subsidies, why are so many still struggling to reach a final investment decision (FID)? A major part of the problem is the unique ‘cross-chain’ risks faced by CCS developers, which can be difficult or impossible for lenders and insurers to accept, and ultimately translate to much higher project costs.
Cross-chain risks arise because every part of the CCS value chain – CO2 capture, transport, and storage – is mutually dependent. If one part of the chain is delayed or out of action, the other parts lose the revenue streams or avoided costs which underpin their business case. Most of this risk is currently loaded on to industrial CO2 emitters, which have described this as a ‘double burden’ or ‘double penalty’. Despite having invested in CO₂ capture equipment, an emitter may be faced with a situation where no storage option is available for the captured CO₂. In that case, the emitter would have to release the CO₂ and continue paying the EU ETS price for these uncaptured emissions.
The CCS projects going ahead in Europe are partly protected from this risk, as they mostly rely on Norway’s heavily state-supported Northern Lights facility for CO2 transport and storage infrastructure. Two of the three Northern Lights users located in the EU are also biogenic CO2 emitters, which are not exposed to the ETS, while the third is an ammonia plant which already produces a relatively pure stream of CO2. The commercial arrangements reached between Northern Lights and its users are expected to include some compensation in the event of unavailable infrastructure, while users are typically bound to ‘ship or pay’ contracts which guarantee consistent revenue to infrastructure providers. For other EU projects, the risks are much greater. These projects often require major new investment in CO2 capture infrastructure, particularly at cement plants, and depend on entirely new transport and storage infrastructure.
Cross-chain risk and the double burden have risen to prominence in recent discussions around CCS in the EU, but they are far from a new idea for the sector. The UK identified cross-chain risks as a key contributor to the failure of its early efforts to fund complete CCS value chains in 2015. This led to the development of relatively complex ‘CCS business models’, in which the government bears most of the cross-chain risk. For example, an industrial capture project such as the Padeswood cement plant is covered by the ‘Industrial Carbon Capture Contract’, which provides the project with a subsidy based on the difference between its abatement costs and a reference carbon price – a carbon contract for difference. If the CO2 transport and storage network is delayed or unavailable under specific circumstances, the contract counterparty continues to pay out to the capture project, covering the fixed costs of operating the capture plant and repayment of the capital investment. The transport and storage operator is also covered by a subsidy which can top up its revenue should insufficient captured CO2 be available.
The UK’s rigorous approach to cross-chain risk has likely been pivotal in unlocking unprecedented levels of commercial finance for the country’s first CCS projects. This has been hailed as a turning point for CCS deployment in Europe but will be difficult to replicate in the EU under the current regulatory and funding frameworks. While several EU countries have made similar carbon contracts for difference eligible for CCS in industry (the Netherlands, France, Germany, Denmark), none of them include this risk mitigation. Neither does the EU’s Innovation Fund, which provides a grant to cover a portion of project capital and operating costs.
How can the EU help mitigate cross-chain risk and limit the double burden faced by capture projects in industry?
One option gaining stakeholder support is a state-backed fund which could cover a portion of a facility’s ETS costs in the event of infrastructure delivery delays or outages. This could potentially be funded through ETS revenues, including a portion of the €100 billion the Commission has already earmarked for an Industrial Decarbonisation Bank (IDB). The IDB is also expected to include its own carbon contract for difference subsidies for CCS and other decarbonisation technologies, which could consider continuing to cover projects during periods of downtime outside their control, in a similar manner to the UK. Several design questions will be critical: how large the fund should be, when it should pay out, and where the money should come from. Over time, companies across the CO2 value chain could be expected to increasingly cover the cost of the fund, and risks should also decline as CO2 infrastructure comes online and a more resilient network develops.
With the Commission’s ETS revision proposal released in July, and the CO2 transport and storage market regulation expected at the end of the year, we are at a pivotal moment for addressing this roadblock facing the decarbonisation of EU industry. Finding the right balance of public and private risk sharing will be challenging, but through close engagement between policymakers and stakeholder groups, this challenge can and must be resolved.
