Thoughts on a Carbon Capture, Utilisation and Storage framework for New Zealand

Last week, the Government released a Consultation Document outlining a proposed Carbon Capture, Utilisation and Storage (CCUS) framework for New Zealand (available here) as part of its strategy to achieve net-zero emissions by 2050 – see our earlier Energy Blog post on this here.   

We share below some thoughts on a CCUS framework for New Zealand:

1.    Regulatory certainty

While the extent to which CCUS will be taken up in New Zealand (at least in the short term) remains to be seen, the Government should establish a clear regulatory framework for CCUS. Investors, whether local or from overseas, require certainty and the ability to make decisions within clearly defined parameters. Large scale CCUS facilities require significant financial investment from investors that have multiple investment options and do not want (or need) to invest in projects that do not have a regulatory framework that clearly sets out the process to progress the investment, and the associated rights and obligations.  

Having a clear regulatory framework communicates to investors, operators, users and other stakeholders that the Government sees CCUS as an important part of the mix for the solution to reducing emissions, alongside the broader shifts required towards a low-emissions future. Conversely, leaving CCUS to be managed under general existing regulatory frameworks communicates the opposite message.

While existing regulatory frameworks do not prohibit (and are neutral towards), and could accommodate, the development of CO₂ storage sites in New Zealand, a targeted regulatory regime would be able to address the nuances of the drivers, incentives, risks and opportunities for CCUS in New Zealand.

Further, a framework which manages liability for CO₂ storage sites will ensure CCUS operators are accountable for what they say they will deliver, for example, in relation to leakage of CO₂. This is likely to encourage a more considered adoption of technology that can achieve the promised benefits.

2.    Inconsistencies in existing legislation for consenting and permitting are bad for investment 

Currently, different rules and policy frameworks apply across regions, and multiple consents or permits under different pieces of legislation are required, making certainty of investment challenging and unduly inefficient and time-consuming.

The Government considers New Zealand has a "neutral policy environment for consenting", but CCUS consenting is not explicitly supported under any core pieces of environmental and planning legislation, including the Resource Management Act 1991 (RMA), Exclusive Economic Zone and Continental Shelf (Environmental Effects) Act 2012 (EEZ Act), Crown Minerals Act 1991 or Climate Change Response Act 2002.
 
Therefore, consenting large infrastructure projects like CO₂ storage sites in New Zealand raises various challenges. As there is no national direction for CCUS activities, different rules, objectives, and policies will apply across regions. Enabling provisions are unlikely to be present, leading to complex consenting processes, particularly if there are strong "avoid" policies in play. As some of the technologies involved will be new to New Zealand, there is also likely to be limited understanding and expertise within decision-makers which may impact consenting timeframes and conditions imposed. Decisions, and conditions imposed, may also differ substantially across regions.  

We suggest the Government considers:

• The development of a national direction on CCUS activities under the RMA and EEZ Act. 
• Amendment to the purpose of the EEZ Act to acknowledge renewable energy and climate change commitments.

3.    Objectives for enabling regime

We agree with the objectives for the enabling regime proposed in the Consultation Document: 

• Efficient emissions abatement – Adding CCS to the emissions reduction toolkit provides New Zealand businesses with an alternative (and potentially more cost efficient) option to reduce their emissions or emissions liability. The Ngāwhā geothermal field CO₂ re-injection included in the Consultation Document is a good example of CO₂ reinjection enabling a saving of approximately $2.5 million worth of emissions units.¹ CCUS is not a one-size-fits all solution, but enabling diversity in approach provides flexibility and choice for New Zealand businesses in managing emissions responsibilities.   
• Environmental integrity – This is an important objective. The enabling regime should not offer benefits for the development and use of CCS without considering the environmental and public health impact of CO₂ leakage.   
• Energy security – New Zealand is currently experiencing natural gas supply shortages, with current demand expected to outstrip supply for the next three years.² CCS can help manage and reduce emissions from gas exploration, thus supporting New Zealand's transition to a low-emissions economy (alongside development of further renewable energy generation).

4.    Modification of the ETS is critical

In order for CCS to be an efficient emissions abatement tool, the Emissions Trading Scheme (ETS) should be modified to recognise emissions reductions (or removals) from CCS activities. This will provide financial incentive for investors in and users of CCS facilities, without requiring the Government to provide additional financial incentives – see point #5 below. 

In that regard, the simplicity of the approach proposed in the Consultation Document will assist with ease of application and provide certainty on the level of incentive arising from investment in, and use of, CCS. We presume that any amendments to the ETS will be calibrated to ensure that they do not undermine New Zealand's achievement of domestic and international climate change commitments.  

The Ngāwhā example described in the Consultation Document (and at point #3 above) illustrates how innovative thinking on CCS can achieve CO₂ reduction in a cost-effective manner – modification of the ETS will encourage more of this and at larger scale.

5.    Success is not dependent on other financial incentives  

The Consultation Document states that the New Zealand Government’s role is not to provide financial incentives, but to create a clear regulatory landscape for CCUS that provides a level playing field for reduction and removal activities.

This can be contrasted with the approach taken by other governments internationally, for example, the Alberta Carbon Capture Incentive Program providing grant funding of 12% for new eligible CCUS capital costs³ and the Canadian Federal Government providing an investment tax credit that applies to eligible expenditures incurred for a qualified CCUS project from 2022 to 2040.⁴

In our view, provided the ETS is modified as discussed above, and there is a clear and practical regulatory regime, there would be investment appetite for developing CCUS facilities in New Zealand.

6.    Approach on liability for CO₂ storage sites 

The nature of permanent storage of CO₂ creates a problem relating to allocating the long-term liability for CO₂ storage sites. The Government's proposed approach is for a site operator to be liable for the CO₂ storage site from conception of the CCS activities, until a set period after site closure. During this period, the operator is responsible for monitoring, maintenance and remediation (including paying compensation in the event of any leakages of CO₂). At the end of the set period, the Government may opt to indemnify the operator where the responsible Minister is satisfied that there is no significant risk of leakage and adverse environmental impacts.⁵

We support this approach. It ensures that the risks, liabilities, and rewards lie with the party that is best able to operationally manage those issues, including to prevent leakage of CO₂ (which would have an environmental impact and could give rise to public safety issues) and ensure financial accountability from failure of the CO₂ storage site. This facilitates a fair allocation of risks as between the Government and investor / operator, including so as not to detract from the social licence to use and operate CCUS. A clearly defined liability regime also provides certainty to investors and operators, and so encourages development of CCUS technology and facilities. 

Alignment with the regime from Australia will further enhance the ease of investment between the countries in this sector.

7.    Trailing liability regime will have a chilling effect on investment 

We previously shared our views on trailing liability in the oil and gas sector – see here. Our views on trailing liability in the CCUS regime are fundamentally the same as in the oil and gas sector, which, in short, is likely to have a chilling effect on investment in CCUS. This is because investor / owners will have to find ways to manage their ongoing exposure, even after divestment of the CO₂ storage site to a new owner (noting there are ways around it, including a transferee (or purchaser) of the storage site providing upfront security for any trailing liability retained by the transferor or via comprehensive insurance, each of which will involve significant cost). 

Alternatively, the financial risk could be mitigated by requiring CCUS operators to contribute to a post-closure stewardship fund on a basis proportionate to the volume of sequestered CO₂, similar to the approach in Alberta, Canada, and some US states.⁶ We support this approach being explored further.
 
8.    Government indemnity provides certainty

We support an approach whereby the Government would indemnify CCS operators once a CO₂ storage site has closed and the agreed closure assurance period has passed. If CCS operators have an "in perpetuity" responsibility for CO₂ storage sites following closure, this could disincentivise investment in CCS technology and development of CO₂ storage sites, and therefore undermine the benefits of the enabling regime.  

We also support New Zealand aligning its approach with Australia, in particular having a 15 year closure assurance period, before the Government would consider indemnifying the operators. This timeframe allows sufficient monitoring and assessment to ensure the integrity of the CO₂ storage site.  

However, there should be a maximum cap on the length of the closure assurance period, so as to provide certainty for operators. If, at the end of the maximum closure assurance period, there are still concerns about the integrity of the CO₂ storage site, then the Government could consider establishing carve-outs in the indemnity for persistent environmental risks or failure to meet safety standards, or requiring the operator to maintain comprehensive environmental liability insurance until the integrity concerns are addressed. These need to be balanced finely, as any reduction to the scope and timing of the indemnity offered by the Government is likely to disincentivise investment.

We applaud the Government for taking this positive step to add to the tools available to New Zealand to achieve the country's net-zero emissions goals. Time is of the essence, so we encourage the Government to continue to take the pragmatic approach shown in the Consultation Document, in balancing the incentives, opportunities, risks and accountability for CCUS in New Zealand.