Why private capital is the key to unlocking carbon capture at scale

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Namita Vikas Founder and Managing Partner, AuctusESG & Sourajit Aiyer, Vice President, Sustainable Finance & ESG, AuctusESG

• Fossil fuels will still account for two-thirds of the global energy mix by 2030.
• Clean energy strategies must take this into account – which is why carbon capture and storage must play a major role.
• To achieve the necessary scale, we need to mobilise private investment. Here’s how.

The UK has recently mandated all its companies to disclose the financial risks associated with their climate risks, impact and strategies – as per the framework set out by the Taskforce on Climate-related Financial Disclosures (TCFD) – by 2025. Not only will this help understand how a given company’s activities are contributing to climate change, but the transparency of reported data will also help unlock the investment required by the more complicated carbon emission-management technologies.

Ground realities for carbon management

While the transition to greener forms of energy features on most corporate agendas, two realities must be appreciated. First, despite the push towards renewables, fossil fuels could still account for around two-thirds of the global energy mix by 2030. That means the world’s strategies to move towards a net-zero carbon future cannot ignore fossil fuels. Second, emissions are yet to dip substantially despite the traction in renewables. Estimates suggest they must decline by over 7% each year until 2030 if the world is to meet the 1.5°C goal set out in the Paris Agreement. Thus, the world need strategies to reduce fossil fuel emissions at scale.

A primer on carbon capture

These realities bring the discourse on carbon management technologies like carbon capture, utilization and storage (CCUS). Simply put, CCUS captures emitted CO2 and stores it in soil or beneath the seabed so that it does not escape into the atmosphere. The ‘utilization’ aspect refers to recycling and reusing that stored CO2 to produce goods of economic value such as oil recovery, fuels, construction material and plastics. The cost of capture and storage can be partially offset by this utilization, thus creating an economic incentive. This technology answers the realities outlined previously because it is focused on fossil fuels and reduces their emissions through its circular carbon-management model.

This strategy can be particularly effective in managing emissions in hard-to-decarbonize sectors, such as carbonate aggregates, fuels, concrete, methanol and polymers. CCUS technology will reduce the emissions generated by these industries, whether in new or existing facilities. In cement, a sector fuelled by demand from high-growth emerging economies, CCUS may be only technology capable of delivering the necessary scale of emission reduction. CCUS-based fuels could also power the electrolysers used to produce low-carbon hydrogen, a product being spoken about increasingly in energy transition discourses.

Further, an Ellen MacArthur Foundation report finds that only around 55% of emissions can be managed with renewables or energy efficiency. Achieving the reaminder will require circular models that delink business activity from resource extraction. While a few nations have launched CCUS projects, Norway stands out since it is also a major fossil fuel exporter. Its Longship project transports the captured CO2 to a storage facility below the North Sea, while its Sleipner offshore gas project’s CO2 storage is now two decades old.

Finding the funds?

The Global CCS Institute estimates the capture capacity of the 50 or so CCUS facilities globally at around 96 million tonnes of CO2 annually, a fraction of the 40 billion tonnes of CO2 emitted globally each year. The Energy Transitions Commission estimates as much as $5 trillion is needed by 2050 to create the capacity for carbon removal, which would include technologies like carbon capture and storage. But where would funding on this scale come from?

Government-funded programmes, like those overseen by the US Department of Energy, have supported CCUS. Financial incentives like tax credits, guarantees, tax-exempt bonds and grants can help, just as they have with renewable energy. Carbon offsets/credits can be monetised to mobilise capital, though the shift from the Kyoto Protocol to the Paris Agreement has pushed carbon credits to the background. But these channels are still limited vis-à-vis the scale needed. To achieve the necessary scale, it is imperative to incentivise private capital.

How can financial climate disclosures help unlock private capital?

Private capital is often disincentivised from looking at nascent technologies (that target the SDGs) due to a lack of reporting and disclosure of data, because this impedes financiers’ ability to assess and monitor the project. This is where mandating of the TCFD disclosure framework can be a game-changer – starting with the UK and also for other geographies who follow the UK’s decision. The framework set out by the TCFD requires companies to provide specific data to evaluate climate risks, which is precisely what CCUS seeks to do.

The TCFD requires detailed scope-wise emission disclosures as well as granular disclosures on metrics like carbon flaring and capture, which form part of any CCUS project, set apart from the disclosures of the financial implications of the company’s climate risks, impacts and strategies. These detailed disclosures provide investors with more holistic information that enables them to better analyse the risk-reward trade-off of carbon projects initiated by that company, assess its impact on climate and price the capital. In short, the disclosures mandated by the TCFD framework can help close the data gaps that private capital faces while assessing or monitoring new technologies such as CCUS.

What’s the World Economic Forum doing about the transition to clean energy?

Moving to clean energy is key to combating climate change, yet in the past five years, the energy transition has stagnated.

Energy consumption and production contribute to two-thirds of global emissions, and 81% of the global energy system is still based on fossil fuels, the same percentage as 30 years ago. Plus, improvements in the energy intensity of the global economy (the amount of energy used per unit of economic activity) are slowing. In 2018 energy intensity improved by 1.2%, the slowest rate since 2010.

Effective policies, private-sector action and public-private cooperation are needed to create a more inclusive, sustainable, affordable and secure global energy system.

Benchmarking progress is essential to a successful transition. The World Economic Forum’s Energy Transition Index, which ranks 115 economies on how well they balance energy security and access with environmental sustainability and affordability, shows that the biggest challenge facing energy transition is the lack of readiness among the world’s largest emitters, including US, China, India and Russia. The 10 countries that score the highest in terms of readiness account for only 2.6% of global annual emissions.

To future-proof the global energy system, the Forum’s Shaping the Future of Energy and Materials Platform is working on initiatives including, Systemic Efficiency, Innovation and Clean Energy and the Global Battery Alliance to encourage and enable innovative energy investments, technologies and solutions.

Additionally, the Mission Possible Platform (MPP) is working to assemble public and private partners to further the industry transition to set heavy industry and mobility sectors on the pathway towards net-zero emissions. MPP is an initiative created by the World Economic Forum and the Energy Transitions Commission.

Is your organisation interested in working with the World Economic Forum? Find out more here.

With the discourse on CO2 exposure and climate risk becoming ever-more pervasive, more companies will need to report on their carbon materiality. Those who do not address their CO2 footprint could face higher capital costs or scarcer sources of capital. This augurs well for the future of carbon management technologies like CCUS.

Part of the journey

Managing fossil fuel emissions will be a necessary part of the journey towards a net-zero future. Scaling up CCUS technology will not only address this environmental scourge but can also deliver branding benefits for companies along with lower risks for business continuity as policies increasingly turn green. But such carbon technologies will require a lot of funds, and largely from private capital. The mandating of TCFD disclosures can be the means to achieve that end.