Aegon Asset Management: Carbon capture and storage: Friend or foe?

Carbon capture and storage has made headlines this summer, with two new UK schemes receiving government backing and more identified over the next decade. Carbon capture is an industry which has had many false starts. Does it really have a part to play in our race to net zero?

As we transition to a net-zero world, industrial emissions remain a challenge to mitigate. One approach to reducing them is carbon capture and storage (CCS), also known as carbon sequestration.

How does carbon capture and storage work?

There are four main stages in the CCS value chain¹:

1. Capture: This is the separation of CO₂ from other gases, mostly post-combustion through capturing waste gases. It is also possible pre-combustion, by modifying input fuels to create hydrogen and separate CO₂, or through oxyfuel, which is using pure oxygen for combustion to produce pure CO₂.
2. Transportation: Compressing and transporting captured CO₂ to sites for storage or use.
3. Storage: Injecting waste CO₂ into geological formations, such as old oil or gas reservoirs or saline formations, for permanent storage.
4. Usage: Putting the captured CO₂ to an economic use, instead of geological storage. Some uses result in permanent removal, while others are only temporary.

Carbon capture is not self-standing. To work, it generally needs to be attached or integrated into a process or other emissions source. That is why it is viewed as playing a role in the decarbonization of energy-intensive industries such as oil and gas. 

CCS also provides a solution for sectors such as cement, where renewables cannot provide a practical solution to the manufacturing process of heating limestone if industry is not able to come up with an alternative way of producing cement.

Generally, industrial processes are tuned for efficiency. CCS is an add-on to those processes, so often results in performance or energy penalties. It is different to other low-carbon technologies as it is effectively pollution control – rather than being genuinely new and transformative. Furthermore, significant investment is needed to build the transportation and storage required to safely handle captured CO₂.

As waste, CO₂ has little to no market value, so demand for deployment of carbon capture technology is dependent on both policy support and regulatory incentives. In practice, this means there is unlikely to be widespread adoption without either direct subsidies for the technology and infrastructure itself, or a price on carbon which is high enough to overcome the cost of deployment.

The reaction from environmental campaigners

Environmental campaigners have been highly sceptical of CCS. They cite the fact that there are currently fewer than 30 working CCS plants in the world, the vast majority of which are used for enhanced oil recovery. This is a process which oil and gas companies use to help them push out to deeper oil reserves that would otherwise be too difficult to reach.

Campaigners also view CCS schemes as a distraction from the capital investment that is needed in renewable energy sources, which needs to at least quadruple to remain on track for 1.5C.² 

Better alternatives

Technologies that achieve the same end goal of reduction or elimination of greenhouse gas emissions at a lower cost or at a more mature stage of development are available. So, while it is possible, for example, to retrofit coal-fired power stations with carbon capture technology, replacing the same electricity generation capacity with a combination of renewables, storage and possibly low carbon fuels would achieve the same outcome at a similar or lower cost – while also reducing the other negative pollutant impacts of continued use of fossil fuels. A win, win.

The investment case for CCS

One of the reasons we have yet to see CCS develop outside a small number of oil and gas projects is because it is not yet proven to be a strong investment candidate. As the global economy transitions in pursuit of Paris-aligned objectives, achieving net zero emissions by 2050 requires much more than mitigants to sustain one sector. It is unlikely to be a coincidence that we are talking about carbon capture in the same week as new oil and gas licences were being granted in the UK. 

CCS faces an uncertain road to mass deployment, particularly where other options exist to skip inefficient and destructive extraction-combustion-capture cycles. Projects to date have produced mixed results and new use cases are key to an economic business case.

The investment bank Jefferies estimates that globally, CCS could develop into an industry with earnings of $600 billion³. Perhaps so, but only if it is sufficiently attractive to oil and gas companies to repurpose pipelines and reservoirs to transport and store industrial CO₂ emissions. More transparency is required if we are to view this as a compelling contributor to climate goals. 

So back to our original question: Is carbon capture and storage a friend or foe on our transition journey? It depends on who you ask.

References

^{1 International Energy Agency (IEA) Energy Technology Perspectives – CCUS In Clean Energy Transitions (September 2020)}

^{2 IRENA: https://www.irena.org/Publications/2023/Feb/Global-landscape-of-renewable-energy-finance-2023}

^{3 Financial Times Lex Column 1st August 2023. Earnings defined as earnings before interest, taxes, depreciation and amortization (EBITDA)}

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