Out With Carbon Delusions

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January 2020 Sarah Miller

Carbon-emissions trading and carbon capture are no longer promising tools for advancing the energy transition, if they ever were. Rather, they are roadblocks to effective action and should be openly discarded. The December UN climate conference in Madrid highlighted how pointless and disruptive efforts are to develop global rules for cross-border carbon-trading. There is no resolution in sight to arguments over operating rules themselves and the fundamental fairness of "offset" schemes. Carbon capture, utilization and storage (CCUS) is going nowhere either, serving mainly to slow the emergence of clear policy visions for all-renewable power generation. Much is obviously different between the two issues, but they share two critical negatives: uncertainty as to their ultimate viability, and a lengthy timeline even under best-case scenarios, which doesn't align with the urgency of the climate -- or oil industry -- situation.

The difficulties involved in operating a cap-and-trade system for carbon dioxide emissions even at the national or EU level makes almost absurd the notion that a worldwide agreement on CO2 trading parameters can be developed in time to limit climate change to UN-agreed levels. The EU Emissions Trading System (ETS) has existed for 15 years. Yet only in late 2018 did it manage to rein in chronic oversupply of emission permits enough to keep prices at a level -- in the still modest €25 ($27.50) per ton range -- that has any impact at all.

Even at these prices, national carbon taxes or other command-and-control systems for altering fuel use are credited with the bulk of the reductions EU member countries have made in carbon emissions in the power and transport arenas. Also, major obstacles remain to extending the system into critical industrial sectors (NE May16'19). Member state disagreement has often been the problem, and that's with fewer than 30 members, compared to over 190 in the UN.

China has tried hard, but so far failed, to get a nationwide cap-and-trade system going, with adoption now more than three years behind its original schedule. South Korea's cap-and-trade is one of the few with high enough prices to be effective, at around $33/ton recently, but remains controversial, and coal is still the country's dominant generation fuel.

California has had an emissions trading scheme for years, operated in cooperation with a few other US states and Canadian provinces, but prices are down around $17/ton, again due to oversupply of credits. The state's substantial progress in cutting both power and transport sector emissions is widely attributed to regulatory approaches -- including requiring rising percentages of auto sales to be zero-emission vehicles and, most recently, solar panels on all new houses -- than it is to carbon trading (WEO Nov.1'17).

Prices are too low to affect fuel choices under a long-operative carbon trading system in several US East Coast states, at under $8 per (metric) ton, and the funding that the system's emission credit sales has provided for renewable energy projects -- or ones that purport to be renewable and low- or no-carbon -- is coming under increasing question from the environmentalists.

Indeed, questions are spreading about the validity of many of the claims of the countries or other entities that are selling emissions credits or offsets. These range from accusations that the energy involved isn't really renewable or zero-emission, to doubts about whether carbon cuts would have happened anyhow without extra funding from the credits, to suspicion that the projects may not ever become fully operational.

All the questions that have arisen relating to EU, national and subnational schemes came back in spades during the debates at the December UN climate gathering in Madrid. If international emissions trading spreads on a wide level, will emission cuts pledged at a national level actually occur? Will emission cuts be double-counted, by both the sellers and the buyers of credits or offsets? And more fundamentally, is it desirable or legitimate for richer countries, industries, companies and individuals to pay others to stop polluting so they can maintain existing, carbon-emitting activities?

Whatever answer you come up with to that last ethical and political question, the fact is that the very presence of a debate on the matter makes it even less likely that nearly 200 countries can agree on rules for what would inevitably be a complex and unruly carbon market. The effort is a huge waste of time; time that the world does not have to waste.

Nothing Captured

Environmentalists aren't alone in questioning the strategy of purchasing offsets in carbon markets as an alternative to direct carbon emissions cuts or in-house offsets. Italian gas and oil major Eni last year launched its own reforestation programs in order to lower the climate risk associated with its growing natural gas production. CEO Claudio Descalzi explained to investors at the time that "buying carbon offset credits is no longer enough." If nothing else, this statement could be taken as a strong expression of doubt that investors -- much less environmental activists -- will continue to accept the purchase of marketable carbon credits of dubious validity as part of a credible corporate climate risk-reduction strategy (NE Mar.28'19).

Even more interestingly, when quizzed on why Eni didn't go for carbon capture and utilization instead of reforestation, Descalzi said that trees can "clearly" store carbon more cheaply than CCUS projects. He put the cost of natural carbon sinks such as reforestation at $11-$15/ton. Costs estimates for carbon capture and storage often run to 10 times or more that amount after decades of trying by corporations and governments alike. Time frames for breakthroughs that might change this usually run to decades more.

Even in the US, the globally dominant home to such projects with wide use of enhanced oil recovery providing what should be a large market for recovered CO2, tax breaks of $35-$50/ton are not expected to spark a CCUS boom -- assuming federal tax authorities can come up with the needed complex implementing regulations.

Nonetheless, most oil and gas companies cling to the notion that carbon capture, with or without a market for the extracted CO2, will allow them to continue fossil fuel production even after emission limits would otherwise prohibit their use. Indeed, Eni itself just signed on to work with Abu Dhabi on CCUS "midterm solutions," presumably linked to a planned expansion of a small CCUS facility the company has in that country. If the UN climate goals are to be met, in the mid- to long-term, the oil industry as we know it will largely be dead.

Improving and expanding the oil industry's own ability to use CO2 in upstream operations doesn't change the fact that power generators, the presumed first candidates for removing carbon from exhaust streams so they can continue to operate coal or gas-fired power plants, show no inclination to move in this direction. New solar and wind capacity already provides cheaper electricity than existing coal and gas-fired plants in some places and, with the cost of renewable power continuing to fall rapidly, anything that adds to fossil fuel electricity costs is clearly a non-starter (WEO Oct.18'18). Even as a backup for intermittent renewable power, battery and other electricity storage options are quickly moving to the fore.

It's conceivable -- just -- that CCUS might play a role in decarbonizing energy-intensive industrial processes, since viable and cost-effective alternatives to fossil fuels are not yet readily available for many of these uses. It's a long-shot, however, since attention is starting to turn toward alternative approaches to steel- and concrete-making, for example. The oil and gas industry needs desperately to find new ways forward now, not 10 years from now, as its more imaginative leaders concede. Dwelling on long-time losers such as carbon trading and carbon capture won't advance that process. On the contrary.

Sarah Miller is Editor-at-Large at Energy Intelligence, and a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass.

Carbon Capture (CCS), Low-Carbon Policy, Carbon Markets
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