Global insurers remain wary of long-term CCS risks
Liability issues continue to slow commercial projects
To the list of challenges that have so far slowed the commercial evolution of carbon capture and storage (CCS) you can add liability.
A stubborn question accompanies plans to snare carbon dioxide from power plant and refinery exhaust for disposal deep below the earth’s surface: What happens – and who pays – if the underground caverns set aside for storage of the unwanted gas spring a leak?
CCS is viewed as a critical tool by industry to cut greenhouse gas emissions. But private insurers have so far balked at underwriting the disposal schemes, in no small part because policies in some regions expose corporate balance sheets to what they describe as an unquantifiable level of risk.
“We recognize that it’s this long-term storage risk which is really kind of the key that would unlock the industry,” says John Scott, chief risk officer with global insurer Zurich Financial. “What’s absolutely clear is you can’t just simply insure this stuff. It’s just not as straightforward as that.”
The difficulty is pervasive everywhere except Alberta. In Europe, policy-makers keen to accelerate commercial deployments of CCS are grappling with how, and to what degree, future liabilities associated with long-term storage should be built into legislation.
The latest incarnation of the European Union’s CCS Directive compels CCS operators to post a type of financial surety upfront, before they inject carbon underground, to cover the future cost of auditing and monitoring injection sites, plus pay for any third-party liabilities resulting from a leak.
In the event that carbon escapes from a storage reservoir, operators would also be on the hook for offset credits received under the European carbon trading system. That penalty would be pegged to the prevailing price of carbon at the time of a leak, which could occur months, years or even decades after a storage site is deemed safe by authorities.
“That’s an unquantifiable liability,” Scott says of the upfront financial obligation. It’s impossible to predict the price of carbon 40 years from now, he notes. “No sensible, commercial entity will accept an unlimited, unquantifiable liability on to their balance sheet.”
At the opposite end of the spectrum is Alberta’s Carbon Capture and Storage Statutes Amendment Act. Passed in 2010, it indemnifies private companies against any liabilities associated with long-term sequestration. That burden will instead be borne by the province.
Operators will be awarded so-called closure certificates once injections are complete, provided “the captured carbon dioxide is behaving in a stable and predictable manner, with no significant risk of future leakage,” according to the legislation.
The act, known as Bill 24, also paves the way for the creation of what the province calls a post-closure stewardship fund – with unspecified contributions from industry – to cover costs associated with long-term monitoring of injection sites, land reclamation and remediation of orphaned facilities.
While the legislation is viewed by industry and government as necessary to accelerate commercial CCS projects, it has nevertheless raised eyebrows. Lawyers at the Calgary office of Blake, Cassels & Graydon LLP, for instance, have called Bill 24 “one of the most significant transfers of liability to the province of any legislation in Alberta.”
At Zurich, Scott suggests such lopsided arrangements could unwittingly encourage negligence. “There’s kind of a moral hazard issue that you’re not encouraging people to manage the risk if you take all of it,” he says.