Partner and head of New York office

Michael Gerrard – Arnold & Porter LLP

Legal and Regulatory Issuesin Carbon Capture &

Sequestration

Michael B. Gerrard

Arnold & Porter LLP

February 14, 2008

Legal and Regulatory Issues

• Capture

• Transport

• Sequestration– On-shore– Off-shore

• Post-closure

• Incentives

• Other legal issues

Capture: Current law

• No requirement that new coal plants provide for capture– Under U.S. Clean Air Act, capture has not

been held required as “best available control technology” (new source review) or “lowest achievable emission rate” (prevention of significant deterioration)

– After Massachusetts v. EPA, new attempts likely

Capture: Emerging Laws

• November 2007 – Washington State Energy Facility Site Evaluation Council rejected application for 650 MW coal plant with IGCC that was “capture ready” because sequestration not yet technologically and economically feasible

• Proposals in both U.S. and E.U.:– New coal plants must be “capture ready”– Old coal plants must be retrofitted

– Emissions performance standards for CO2

Transport: Pipeline

U.S. models for regulation• Existing method for CO2 pipelines: State

law determines siting; Surface Transportation Board may review privately-set rates if third party complains

• Oil pipeline model: State law determines siting; FERC sets rates

• Natural gas pipeline model: FERC determines siting and rates

Transport: Pipelines

S. 2144 – Carbon Dioxide Pipeline Study Act of 2007

Would mandate study of feasibility of construction and operation of:

• Pipelines to transport CO2 for sequestration or enhanced oil recovery

• CO2 sequestration facilities

Transport: Ships

• No novel issues presented

Storage: On-shore

Separate property rights to:• Surface (injection site)

• Subsurface (storage reservoir)

• Stored CO2

• Groundwater

Property Rights -- continued

• Relevance– Whose permission is needed?– Who is liable?– Who gets credits?

• Attributes– Title, lease or license– Covenants, easements to restrict future use– Transferability– Acquisition through eminent domain?– Adjust liability and credits via contract or law

Storage: On-shore

Existing comparable legal regimes• Injection of CO2 into underground

formations for enhanced oil recovery

• Storage of natural gas in geologic reservoirs

• Injecting acid gas into underground formations

Storage: On-shore

Waste vs. resource issueNational and international regulatory

requirements are far more onerous if:

• CO2 injection is treated as disposal rather than resource storage/use

• If CO2 is contaminated with mercury or other hazardous constituents

U.S. Safe Drinking Water ActUnderground Injection Control

• Regulates underground injection of fluids

• Purpose: Protect groundwater supplies

• Governs siting, construction, operation, closure of injection wells

• Primarily implemented by states (34 have primacy)

• Five classes of wells, each with its own rules

U.S. Safe Drinking Water ActRecent Developments re CCS

• March 1, 2007: U.S. EPA guidance document, “Using the Class V Experimental Technology Well Classification for Pilot Geologic Sequestration Projects”

• October 11, 2007: U.S. EPA announced plans to develop regulations under SDWA UIC program for CCS; proposal due summer 2008

Energy Policy Act of 2005

Title XXVI, Indian Title:

May allow tribes to control CCS on tribal lands

Interstate Oil and Gas Compact Commission

Model legal and regulatory regime for geologic storage

However: Energy Independence and Security Act of 2007 explicitly authorizes EPA to preempt state rules on CCS; leaves open whether states or federal government will have authority to oversee long-term storage

EU CommissionJanuary 23, 2008 Proposed Directive

on CCS• Selection of storage

sites• Exploration permits• Storage permits• CO2 stream

acceptance criteria• Monitoring• Reporting• Inspections

• Corrective action if leakage occurs

• Closure and post-closure obligations

• Transfer of responsibility

• Financial security• Third party access to

transport and storage sites

Measurement, monitoring and verification

• Necessary for:– Safe operation– Determination of effective storage models– Allocation of liability and credits– Public acceptance

• Who is obligated to do what• Rights of government access to inspect• DOE General Guidelines for Voluntary Reporting

of GHGs (1605(b)) Program – Guidelines for monitoring options

Once Reservoir is Full

• Closure

• Decommissioning criteria

• Post-closure– Financial assurance– Proposals for federal- or state-administered

trust fund to pay for closure, post-closure; perhaps funded by fee on storage facility operators

Liability concerns

• Local– CO2 in atmosphere or shallow subsurface

• Harm to humans, animals or plants

– CO2 dissolved in subsurface• Contamination of underground drinking water• Interference with deep subsurface ecosystems• Corrosive to well materials

Liability concerns – Cont’d

• Local – cont’d– Pressure-based

• Ground heave or induced seismicity• Contamination of drinking water by displaced

brines• Damage to hydrocarbon resources• Subsurface trespass into pour space owned by

others

Liability concerns – cont’d

• Global – “climate risk”– Release of CO2 to atmosphere

Source: Jeffrey Logan et al., “Building Public Acceptability for Carbon Capture and Sequestration,” WRI Issue Brief No. 2, Oct. 2007, p. 2, citing E. J. Wilson et al., 2003, “Regulating the Ultimate Sink: Managing the Risks of Geologic CO2 Sequestration,” Environmental Science and Technology, 37: 3476-3483

Liability Issues

• How long will it persist? Statute of limitations?

• Retroactive loss of trading credits, offsets?

• Who is liable – buyer or seller?

• Discount offsets/credits to account for expected leakage?

• Escape through bankruptcy or dissolution?

Liability issues – Cont’d

• Establishment of post-closure fund, perhaps through fee on income/credits?

• Process for resolution of liability? Adjudication, arbitration?

• Role of insurance?

• Government backstop?

Off-Shore Storage

United Nations Convention on Law of the Sea (UNCLOS)

• U.S. is not a party

• Recognizes coastal states’ sovereign rights to natural resources of their exclusive economic zones and continental shelf areas

• States must take measures to prevent, reduce and control pollution of the marine environment from land-based sources

London Convention (1972)

• Convention on the Prevention of Marine Pollution by Dumping Wastes and Other Matter

• U.S. is a party• Prohibits “dumping” of “industrial waste”• Excludes “[t]he disposal of wastes or other

matter directly arising from, or related to the … exploitation and associated offshore processing of sea-bed mineral resources”

London Protocol (1996)

• London Protocol to the Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matter

• U.S. not a party

• November 2006, effective February 2007: Amended to allow sequestration of CO2 in subseabed geological formations

U.S. Ocean Dumping Act (1972)

• Marine Protection, Research and Sanctuaries Act

• Implements London Convention

• Prohibits “dumping” “industrial wastes” “into ocean waters”

• May not apply to subseabed

Incentives and Accounting for CCS

• National inventories under UNFCCC/Kyoto Protocol– IPCC 2006 Guidelines for National

Greenhouse Gas Inventories

Trading to meet mandatory GHG reduction targets

• European Union Emissions Trading System– EU Commission currently considering whether and

how to recognize CCS in the EU ETS for Phase III (2013- ); possibility exists for intermediate recognition of CCS activities in Phase II (2008-2012) under Article 24 of ETS

• U.S.: Lieberman-Warner Bill, S. 2191– Sets aside allowances as bonuses for implementing

CCS; incentives to be in operation before 2013

Offsets

• Regional Greenhouse Gas Initiative– Approved offsets include sequestration

through afforestation but not CCS

• State of Oregon– Sequestration in trees is permissible offset;

not CCS

Clean Development Mechanism, Joint Implementation

• CCS not yet recognized

• Concerns that, if recognized, could swamp CDM and JI with credits and dominate portfolio

Government subsidies

• Research and development• Cost sharing for demonstration projects• Tax exempt financing and other tax

incentives• Loan guarantees• Direct funding• Energy Independence and Security Act of

2007: major awards for R&D and demonstration programs

S. 2323, Carbon Capture and Storage Technology Act of 2007

• If enacted, it would:– Establish competitive grant program for 3-5

commercial demonstration projects on long-term effects of sequestration of CO2 in deep geological formations

– Establish 3-5 commercial demonstration projects for capture of CO2 from coal plants

– Establish interagency task force to develop regulations for CCS

– Require DOE to carry out R&D program– Require assessment of CO2 storage capacity

Voluntary incentives

• Chicago Climate Exchange– Allows carbon sequestration in U.S. forestry

projects, U.S. agricultural soils

• Public relations, marketing, “carbon neutrality”

Other legal issues with CCS

• Enhanced oil/gas recovery resulting from CO2 injection

– Economic benefit from recovery– Accounting for GHG emissions from

recovered oil/gas

• Intellectual property rights– Protection and enforcement of patents,

trademarks, etc. important for technology transfer to developing countries

Other legal issues – Cont’d

• Labor rules– Energy Independence and Security Act of

2007 – Davis-Bacon Act (prevailing wage rates) applies to construction of CCS projects funded under this enactment

• Rate recovery– Can regulated electric utilities recover cost of

carbon capture from the rate base, if not legally required?

Decision-making processes

• Environmental impact assessment (NEPA, etc.)

• Degree of public participation

• Supranational, national, state, local control

• Transparency of information

• Availability of judicial, arbitral forums for dispute resolution

Conclusions

• None of these issues are conceptually impossible, but advance resolution is desirable

• Uncertainty inhibits development by impeding investment, increasing transaction costs and delays