3 Need for state aid for CCS
3.1 Market failure in relation to CCS
Two sets of market failure work together to prevent actors in the market from developing and using necessary climate technology of their own initiative [27, 28].
The first and most important market failure is that the price of emitting greenhouse gases is lower than the socioeconomic costs associated with such emissions. For this reason, actors who produce emissions do not bear the socioeconomic costs of emissions. This makes it more profitable from a business economics perspective to emit more greenhouse gases than is sensible from a socioeconomic perspective. In economics, this is called negative externalities.
By putting a price tag on emissions equal to the socioeconomic costs, the cost of emissions will be encompassed by micro-economic adaptations. This pricing of emissions, either by way of taxes or a market for emission allowances, is the single most important measure in Norwegian climate policy.
Norway participates in the EU Emissions Trading System (EU ETS) and has introduced its own taxes on greenhouse gas emissions. According to the World Bank, only about 22.3 per cent of global emissions are currently covered by emission pricing [23], but the scope of sectors and sources of emissions covered by pricing is being continuously extended. Although national and regional emission pricing measures were stepped up and extended in 2019 [29], fossil fuel consumption still receives significant subsidies in a number of countries [29, 30].
Furthermore, the prices of global emissions remain significantly lower than many believe necessary to reduce emissions in line with the Paris Agreement’s temperature goals in a cost-effective way [31]. The International Monetary Fund (IMF) estimated the global average price of emissions to be around NOK 18 per tonne of CO2e in 2019 [32]. The allowance price in the EU ETS stabilised at around NOK 250 per tonne of CO2e in 2019 [29]. For the sake of comparison, the general carbon tax in Norway increased to NOK 544 per tonne of CO2e in 2020. Emission pricing may play an important role in achieving the goals of the Paris Agreement going forward.
Article 6 of the Paris Agreement enables countries to cooperate to achieve their national contributions to reducing greenhouse gas emissions, including by way of a mechanism for market-based cooperation. As yet, no detailed regulation has been prepared nor a final decision made on how this market-based mechanism can be used. The detailed regulation under Article 6 will facilitate more extensive global emission pricing and help to realise the potential for cost-effective emission reductions.
The other market failure is related to the development and scope of new technology. The development of technology may have the characteristics of a public good. This means that the technology is useful to others and not just the actor that developed it. The actors that develop the technology will therefore bear the costs, while the benefits are shared by many [33]. In economics, this is called positive externalities, and a market left to its own devices will create too little of this kind of public good [27, 34].
The initial actors, both producers and consumers, develop experience and knowledge that will entail lower costs for subsequent actors. Again, this means that the costs are borne by few, while the benefits are shared by many. From a business economics perspective, it can therefore be profitable to wait until others have borne the costs of development and early application. This is a particular problem for technologies that lead to large positive externalities that are difficult to patent or that are necessary, but do not in themselves provide a significant competitive advantage in the market. CCS is an example of this.
A potential willingness to pay for ‘green products’ may mitigate the problem to some degree. The challenges of underinvesting in the market are amplified by the fact that many of the necessary investments in the development of technology are complementary to other investments in new technology [27, 28]. One actor’s investments can thereby make other actors’ investments more valuable [35]. As an example, the development of better carbon capture technology will make new CCS technology more valuable because it increases the effectiveness of the whole value chain.
These two sets of market failure have a cumulative effect. This means that setting the price of emissions equal to the socioeconomic cost of emissions is not on its own sufficient to stimulate new technology.
It also means that if emissions are priced high enough for the market to generate the necessary new technology, it would need to be priced higher than the socioeconomic costs of emissions and thus entail an economic efficiency loss. This is problematic in a situation where we need to develop new technologies and use them on an industrial scale. The most effective solution is therefore emissions pricing combined with funding of new technology development.
Further investment barriers also apply to CCS. There are clear economies of scale, particularly for storage activities: Establishing the storage facility entails high costs, while the costs are lower, relatively speaking, for new users to utilise the facility. It is also the case that CCS requires a whole chain of activities and actors – capture, transport and storage. A CO2 storage facility is of little value if no CO2 is captured. The same is true of CO2 capture without storage. Before the markets have developed, risk will therefore be associated with how other actors develop solutions for the other parts of the CCS chain. This is a risk that is difficult for any one industry actor in the chain to take.
3.2 Development of new CCS projects will lead to lower costs
High investment and operating costs combined with low income potential and technical risk make it challenging for commercial actors to invest in CCS. CCS is necessary to achieve the global temperature targets, but its development will take time and require technological, industrial and regulatory innovation. If the measure is to be effective after 2030, more facilities must be developed now, even if the price signals do not indicate profitability in a short-term business economics perspective. The low price of emissions together with the risk of companies moving production to areas with less stringent climate regulations (carbon leakage) mean that it is not a realistic scenario for industry exposed to competition in Europe to bear all the costs of establishing CCS in the short term.
A large number of empirical studies show that the costs of new technologies will be lowered in step with increased use. [36–40]. Experience also shows that it takes a long time for many technologies to generate experience that moves us up the learning curve. On the basis of Norway’s demonstration project for full-scale CCS, DNV GL has assessed the potential cost development of CCS when more facilities are built [41]. The analysis shows how the cost of CCS measures is expected to fall when capacity utilisation increases, solutions in the chain are optimised and technology improves, as a result of higher utilisation of CCS.
The results are shown in Figure 3.1. They are based on the assumption that economies of scale are utilised by a Norwegian CO2 storage facility.
Figure 3.1 Expected development of average cost per tonne CO2 for CCS projects1 and expected CO2-prices2
1 Cost curves (NOK per tonne CO2) are based on “Potential for reduced costs for carbon capture, transport and storage value chains (CCS)”, DNV GL, 2019. Costs have escalated from 2018-NOK to 2020-NOK. The curve’s starting point (to the left) is adjusted with updated costs from the FEED studies as presented in “Oppdatert samfunnsøkonomisk analyse av demonstrasjonsprosjekt for fullskala CO2-håndtering”, Gassnova/DNV GL, 2020. The cost curves are average cost curves, and there will potentially be projects with both higher and lower costs per tonne CO2.
2 Expeced CO2-price is based on IEA’s Sustainable Development scenario from World Energy Outlook 2019. The price reflects expected CO2-prices in advanced economies for sectors such as power and industries, and the price is escalated to 2020 prices. The exchange rate is assumed to be 9 NOK/USD. IEA WEO gives expected prices for 2030 and 2040. DNV GL has projected linear price growth up to 2050. IEA’s price expectancies are based on policy expectations beyond CO2 prices. E.g. the price is based on increased support for CCUS projects. IEA’s CO2-price expectation is therefore not a marginal cost curve. This explains why IEA’s price expectation is lower than the marginal cost curves in line with the Paris accord from other agencies.
3 Investor-perspective is based on a 8 per cent rate of return (real, before tax) both on CO2 reductions and costs over 25 years.
4 NEA’s methodology is based on a 4 per cent rate of return on project costs over the lifetime of the project (25 years), but the CO2 reduction is not discounted
Source Gassnova based on DNV GL
By utilising the capacity of a Norwegian CO2 storage facility, the costs will be reduced for subsequent projects. Technological optimisation, development and learning will bring further reductions. DNV GL believes that, on average, a doubling of capacity will give a ten per cent reduction in costs over time. The cost curves in the graph are based on Norway’s project and are average values.
The costs of CCS will vary immensely depending on what kind of process, industry and sector carbon is captured from. The actual costs for subsequent projects may therefore be both higher and lower than that shown in Figure 3.1. This is illustrated in an analysis by Thema and Carbon Limits [25]. The analysis includes an assessment of the varying costs of carbon capture, transport and storage measures from different industry sources. With the technology currently available, the cost per tonne of CO2 captured, transported and stored from ammonia/hydrogen production can be as low as EUR 39 per tonne of CO2, while the equivalent cost of waste incineration with today’s technology is estimated to be EUR 150–200 per tonne of CO2.
The results of DNV GL’s study combined with rising CO2 prices, as illustrated in Figure 3.1, show that CCS can be profitable in a business economics perspective if a facility with flue gas capture was built today that could capture and store around 40 million tonnes of CO2 per year. The cost curve would then intersect the estimated CO2 price in 2030 in the IEA’s sustainability scenario. Given that CCS is necessary to achieve our climate targets, although there are measures that cost less in the short term, postponing the development of CCS is likely to increase the costs for the world as a whole. Postponing development may mean that CCS would have to be developed faster, which would reduce the possibility of exploiting learning effects from one project to the next.
The project’s contribution to cost reductions is described in Section 6.