Case study: Carbon Capture and Storage (CCS) & Forestry

(Abhishek Uppal, Clean Technology Private Equity 2009; Reference to DB Advisors Investing in Climate Change)

CCS is a crucial example where innovation policies can unlock substantial opportunity, because it is a highly important technology that could reduce emissions from fossil fuel power plants and other major sources by 80-90% – while enabling continued use of the fuels that provide the world with 88% of its primary energy supply. A variety of cost estimates exist for CCS plants, depending on the type of plant CCS is used for, and whether the plant is built with CCS already integrated, or has to be retrofitted with CCS. In a report published in September, 2008, McKinsey estimates the marginal mitigation costs for early commercial CCS plants at between €35 and €50/ton CO2 by 2030. Early demonstration projects are expected to be more costly, with marginal costs of mitigation between €60 and €90/ton CO2.

CCS has very high up-front high capital costs, lengthy construction times, requires more fuel to deliver the same energy, and in most cases would demand a network of pipelines for carbon dioxide transport. From a business perspective, carbon prices might have to be higher than the economic marginal cost of abatement to justify deployment of CCS at scale. This is because carbon revenues are somewhat uncertain and take place far out in the future, while the costs are more certain and immediate.

Society clearly has a need to develop a way to continue using fossil fuels, while limiting the harmful emissions they cause in a relatively cost-effective manner (at around €35 to €50 per ton). Waiting for carbon to be priced over €90 per ton before the private sector starts to implement CCS may result in energy (and other carbon-intensive) costs that act as an overall drag on the economy, constraining economic growth and potentially calling into question the political sustainability of cap-and-trade rules. In this situation, it makes sense for the public sector to take on some of the business risk of unknown carbon prices, shoulder a portion of the up-front research and construction costs with direct subsidies, tax incentives, and perhaps even guaranteed carbon prices.

The government’s role in establishing the knowledge and physical infrastructure required for CCS can lower the costs of entry for firms that then scale up. The network effect of constructing pipelines means that the cost of transporting carbon will drop substantially as the number of CCS plants rises. As technologies become more standardized and learning eliminates unnecessary expenditures, up-front costs of deploying CCS will drop and more activity will become feasible at a lower carbon price. Additional benefits (“learning externalities”) of R&D into CCS may spill over into other sectors of the economy.

Is forestry an alternative to CCS?
Potentially making a large impact on deforestation and encouraging reforestation could boost the available mitigation from this source so much that it reduces the short-term (i.e. out to 2030) need for CCS, giving more time for technological learning to take place.

Forestry and how it fits as a CO2 Mitigation Option
Forests cover 30% of the world’s land mass and store around 1.2 trillion tons of CO2 in their trees, vegetation and soil.

They are important for the global climate balance because:
1.    Land use changes, deforestation and degradation can cause net emissions from forests
2.    but forests also have enormous potential to remove CO2 from the atmosphere through re-forestation.

So, forestry projects broadly fall into two categories:
•    Reduced Emissions from Degradation and Deforestation (REDD), where land that would have been deforested or degraded is instead used sustainably;
•    Afforestation/Reforestation (A/R), where tree cover is restored to deforested land (reforestation) or new forests are planted on land that was not initially under tree cover (afforestation).