CCS Regulations Take Shape

Conventional wisdom is that carbon capture & storage technology (CCS) is afflicted by legal and regulatory uncertainties that threaten to delay its timely deployment once it has been commercially demonstrated in applications such as coal-fired power.

We respectively disagree.  Our view is that CCS regulations are falling into place in a timely manner to support the build-out of CCS projects.

Capture Regulation

EPA is rapidly putting in place a regulatory regime for Clean Air Act (CAA) regulation of major stationary source emissions of greenhouse gases, about which we have previously reported [see our 4/1/10 update entitled EPA's Approach to Stationary Source GHG Controls Starting to Emerge].  Those regulations should nudge ever-increasing volumes of captured industrial emissions of carbon dioxide towards geologic storage.

At the moment, there are at least three challenges regarding CCS under EPA's forthcoming capture regulations that cause us some concern.  The first is EPA's recently proposed re-interpretation of its so-called "Aggregation Policy," which could, if finalized as proposed, discourage CCS deals by requiring emissions associated with the compression of carbon dioxide for pipeline transport to be aggregated with source emissions in a way that discourages or complicates CCS transactions.

The second is CCS as a Best Available Control Technology (BACT) under the CAA.  Our view is that, with the possible exception of natural gas plants that are selling their carbon dioxide to enhanced oil recovery and other "low-hanging fruit" capture, transport and injection opportunities, CCS is not commercially proven in a way that could make it BACT for a variety of source categories, including but not limited to coal-fired power.  This development could change over time, of course, as a growing number of industries gain confidence in the technology's use.

Third, and finally, is cost.  The point has been made that CCS will only be done when a price is put on carbon that enables the technology's use.  The frequently cited cost mechanism is cap-and-trade.  We are not optimistic that Congress is poised to enact even a more limited cap-and-trade law any time soon, and even if it were, the resulting bipartisan bill is likely to include cost collars, caps or other cost-containment mechanisms that would prevent the cost of carbon from rising to a level that might support CCS.  We never viewed CCS as being enabled per se by cap-and-trade (although the CCS bonus allowances under the Waxman-Markey and Kerry-Boxer bills would have been nice), so our bullish views on CCS are not diminished by the fact that Congress remains stymied over a climate bill.  Our optimism over CCS is buoyed by the fact that CCS is more likely to march down a more straightforward technology development path, with appropriate governmental technology support, incentives for projects, and the judicious mandates on the technology's deployment and use.

Pipeline Regulation

We continue to see, and are puzzled by, efforts to grant the Federal Energy Regulatory Commission or Surface Transportation Board (STB) with authority over pipelines transporting anthropogenic emissions of carbon dioxide for sequestration, enhanced oil recovery, or both.

The most recent manifestation of this is S. 2889, the Surface Transportation Board Reauthorization Act of 2009, which was introduced by Sen. Rockefeller on December 16, 2009.  Almost as an afterthought, S. 2889 amends, in its final section (§ 502), the Interstate Commerce Act to extend STB regulation to interstate carbon dioxide pipelines that transport the fluid for third parties.

We are concerned about § 502 of S. 2889 for several reasons.  For starters, the United States already has an interstate carbon dioxide pipeline network that is functioning well under a regulatory regime that is dominated by the States.  That network is growing and expanding without a federal role - to wit, Denbury's Green Line.  (At the moment, the federal role is largely limited to DOT pipeline safety standards, about which we do not quibble.)

Second, we are not aware of any CCS deal that has been stymied because of intrastate or interstate pipeline regulatory considerations.  Our evidence for this is anecdotal, of course.  But still, we don't see the commercial need for an expanded federal role in carbon dioxide pipeline regulation.

Third, those who are arguing for a dominant federal role in carbon dioxide pipeline siting and rate regulation seem to assume that a massive pipeline network to support CCS will be built out quickly.  We don't see CCS happening that way.  We believe that pipelines will be built slowly over time, as they are now, with companies such as Kinder Morgan and Denbury making the appropriate commercial decisions on a case-by-case basis.

Fourth, numerous legal issues need to be sorted even if the commercial case for an expanded federal role in pipeline regulation could be credibly advanced.  In the context of S. 2889, these issues include, but are not limited to, pro-rationing of previously contracted pipeline capacity under common carriage requirements that could upset the apple cart for commercial carbon dioxide offtake deals.

Geologic Sequestration Regulation

With the possible exception of a federal role in long-term stewardship and clarification of how CCS could be conducted on federal lands, we believe that regulation of geologic sequestration is falling nicely into place, too.

For example, injection shortly will be regulated under EPA's forthcoming CCS rule under the Underground Injection Control (UIC) Program.

Storage itself soon will be separately regulated by a growing number of States that already have passed comprehensive CCS laws that roughly follow the legal approach recommended by the Interstate Oil & Gas Compact Commission (IOGCC) several years ago.

And what about stewardship?  We frequently hear commentators note that long-term stewardship is a significant impediment to CCS projects.  We agree.  Frequently lost in the discussion, however, is the fact that several States already have enacted laws that call for State assumption of storage site liability after numerous critical project milestones are met, including a site's receipt of a so-called certificate of closure or certificate of completion.  The States that are doing so are following the recommendations of the IOGCC.  Although we believe that a federal governmental role in long-term stewardship would be helpful to backstop these State efforts, it nonetheless is notable that the States are moving diligently to establish the types of stewardship programs that will support the development and financing of CCS infrastructure. 

And pore space?  We've long believed that pore space could be acquired even in States that lacked pore space statutes.  And as it so happens, the States are working on pore space statutory enactments, too.  Been there, done that.

EPA recently has proposed a reporting scheme for CCS-related emissions that should shed additional light on the volumes of carbon dioxide that are being sequestered in geologic formations.  We could quibble with aspects of this proposal - for example, we believe that it should be expanded to include beneficial reuse - but by and large, we believe that EPA is moving in the right direction on CCS-related emissions reporting.

And what about application of the Resource Conservation & Recovery Act (RCRA) and Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) to CCS operations - specifically underground storage?  In its preamble to the proposed UIC rule for CCS, EPA took the position that RCRA and CERCLA could apply to geologic storage, a development which we privately believed would hinder the built-out of CCS projects.  However, EPA recently signaled that it might propose a conditional CCS exemption to RCRA later this year, a positive development for CCS developers - and the environment.  That leaves CERCLA liabilities, which are non-trivial, but perhaps a federal long-term stewardship program could help address this.

And with respect to a federal long-term stewardship program, the discussion draft of a CCS bill that was recently released by Senators Voinovich (R-OH) and Rockefeller (D-WV) included a placeholder for a possible federal long-term stewardship program.  We are hopeful that that placeholder will be replaced with legislative text in the near future.