Investments in carbon capture, utilisation, and storage (CCUS) are likely to be instrumental in de-carbonising a number of different sectors, including oil and gas production, fertilisers, chemicals, steel, and cement.
They are also necessary to help begin to close the emissions gap—the difference between the levels of CO₂ in the atmosphere that can be achieved by abatement and those required to meet net-zero. Currently, there is a 19-23Gt CO₂/year emissions gap between 2030 emissions reduction projections and the 2030 interim targets under the International Energy Agency’s (IEA) 2050 net-zero scenario.
CCUS has been discussed for years as one of many solutions to help close this gap, but progress has been slow. The private sector has long maintained it to be too expensive to develop without subsidy.
Governments have heard these calls to action and policies have been evolving to make projects more financially viable. In the US, the Inflation Reduction Act (IRA) could influence the pace of investment with substantial increases in federal income tax credits for domestic CCUS projects from US$50/tonne to US$85/tonne of sequestered CO₂.
Other jurisdictions such as Canada and the EU are also presenting policy incentives, although they differ in their approach to support—particularly on operational expenditure. The EU emissions trading scheme (ETS) has a strong carbon price, but it is volatile. Projects in that region typically require more certainty to make Final Investment Decisions (FIDs); this is one of the reasons why the European Commission is developing a Contract for Difference (CfD) under its Innovation Fund. The Canadian policy by comparison is centered around a combination of investment tax credits and a carbon price that increases out to 2030. The bulk of Canada’s CCUS projects are situated in Alberta, which has a carbon management program called the Technology Innovation and Emissions Reduction Regulation (TIER). However, uncertainty around the value that can be generated with those carbon credits in the TIER system is still proving to be a barrier to investment for Canada’s CCUS projects. Canada introduced a CfD mechanism in their 2023 budget to help support these types of projects, which is a welcome policy to help overcome the volatility of credit markets for progression of investment decisions.
These policy mechanisms are a good start, but they should be supported by further action. Scaling this industry will likely require vast amounts of public and private sector investment—as much as US$4.9tn by 2050, according to think tank Energy Transitions Commission (ETC). A number of barriers may need to be overcome before that level of capital is unlocked.
Collaboration and technology investment
Once clear and supportive government policy is in place, the next step is increased collaboration between value chain entities, governing bodies and other external organisations. Encouraging these collaborations to form at an early stage may be vital to the development of project bids and to the apportioning of project risk—as evidenced by the UK’s cluster bids.
Technologies also should be developed further. Although mature carbon capture processes have been proven in a number of different sectors, there is still scope to help improve capture efficiency, increase scale, and bring down overall costs. In the power generation, steelmaking and fertiliser production sectors, CCUS technology is still at a low technology readiness level (TRL)—meaning it may require ongoing R&D investments to commercialise. Even with the support given by the IRA, there are still not adequate incentives for US firms to make these investments. More targeted innovation funding is likely required to help them do so. In the midstream, hubs and clusters offer an opportunity to help advance the maturity of transport technologies. At the same time, storage sites should be developed by oil and gas companies with the necessary sub-surface knowledge.
Educating the investment community on these technologies and their alignment with Environmental, Social and Governance (ESG) strategies should remain a priority. Investors could create access to deeper and broader pools of capital and could benefit from gaining an understanding of where their money can make a significant difference. This could help capital start to flow to large debt-financed projects. Meanwhile, new financing and collaboration structures will likely be needed for those oil and gas firms that have been reducing their debt positions in recent years and that may struggle to add large debt loads again.
New business models emerge
As these changes start to take place, three broad categories of different business models may emerge: ’operatorship’, ‘CCUS-as-a-service’ and ‘ecosystem emitters’.
The first model is exclusive to energy companies, and sees them handling their own CO₂ from end-to-end. The second sees a provider—likely a utility or technology solutions company—offering to remove emissions as part of a service. The third sees emitters co-creating a CCUS ecosystem from the start, agreeing to share transportation, storage infrastructure and risk.
However, these models are illustrative, not exhaustive. One of the interesting observations about this sector is that some companies are prioritising knowledge-sharing and collaboration over near-term profit. The nature of these collaborations means that models could develop in new and unexpected ways, with a focus on environmental leadership bringing about a collective desire to help advance projects rapidly. The financial aspects will likely form an important part of the business case—and may still need to be addressed with policy levers—but they might not need to compete with those of a typical investment project.
If organisations continue to openly share important learnings from the developing of clusters in the next phase of regional project developments, the sector could start to gain momentum and accelerate towards achieving those interim 2030 targets laid out by the IEA.