STATEMENT OF KIPP CODDINGTON, ESQ.

PARTNER

ALSTON & BIRD LLP

*before the*

COMMITTEE ON ENERGY AND NATURAL RESOURCES

UNITED STATES SENATE

*concerning*

S.731, NATIONAL CARBON DIOXIDE STORAGE CAPACITY ASSESSMENT ACT OF 2007,
and S.962, DEPARTMENT OF ENERGY CARBON CAPTURE AND STORAGE RESEARCH,
DEVELOPMENT, AND DEMONSTRATION ACT OF 2007

April 16, 2007

**Mr. Chairman and Members of the Committee**, thank you for the
opportunity to appear before you today to discuss some possible
solutions to the liability issues that currently stand as an impediment
to the commercial deployment of carbon capture & storage ("CCS")
technology in the United States. I am Kipp Coddington, a partner in the
law firm Alston & Bird LLP. The firm represents a number of companies
who are engaged in the CCS and CO~2~-EOR industries, and carbon-based
projects worldwide, but add that my testimony today is mine alone and
does not represent the views of any company.

In the interests of time, my comments today are focused on liability
issues associated with the long-term storage of industrial emissions of
carbon dioxide in geologic reservoirs, as opposed to those arising from
capture and pipeline transportation.

**[Introduction]{.underline}**

First off, let me commend the sponsors of the legislation that are the
topic of today's hearing: S.731, which focuses on a national assessment
of geologic storage capacity, and S.962, which focuses on R&D and the
large-scale deployment of geologic storage tests in advance of the
"commercial deployment of technologies for \[the\] geologic containment
of carbon dioxide" (§ 2). Both bills place a necessary priority on
advancing our knowledge and understanding of CCS, and envision a day
when these technologies will be deployed throughout the Nation.

I share the vision of a prosperous CCS industry in the United States and
the associated benefits it would bring in terms of jobs, tax revenue,
and greater energy independence (via CO~2~-EOR, for example). Geologic
injection and storage operations have occurred safely in many locations
of the United States -- the Permian Basin, for example -- and other
areas of the world for many decades.

Depending upon the outcome of the ongoing carbon management debates, I
perceive a day in the future when facilities such as CTL, IGCC and the
like are safely injecting CO~2~ under a regulatory regime that is
rigorous, certain and with broad public acceptance of the practice. CCS
may be the only path forward in a carbon-constrained world for fuels
such as coal and industrial facilities such as power generation. For the
same reason, I believe that it is critical that CCS be expressly
recognized in any federal, State or regional cap-and-trade program.

Although I deem CO~2~ injection and geologic storage to be a proven
technology in many contexts, conducting geologic injection and long-term
storage operations more broadly domestically or in different classes of
geologic reservoirs, particularly in the face of uncertain carbon
management requirements, will require resolution of a host of
challenging legal, regulatory, policy, financial and technical issues.

One of the most challenging issues is liabilities associated with the
long-term geologic storage of carbon dioxide.

**[Liabilities Associated With The Long-Term Geologic Storage of
CO~2~]{.underline}**

Numerous liabilities are associated with the long-term geologic storage
of CO~2~. The existence of these liabilities should not be interpreted
to suggest that the geologic storage of CO~2~ is unsafe. I believe that
geologic storage in the proper subsurface reservoir is inherently safe
and holds great promise for wider application, based upon the oil & gas
industry's long experience with CO~2~-EOR and the research which has
been conducted on CCS to date. The existence of liabilities nonetheless
can and will impede commercial CCS projects because, today at least, CCS
liabilities could be characterized as un-quantifiable uncertainties. The
deployment of CCS technology will require billions of dollars in capital
expenditures by industry, and those types of investments are not made in
the face of un-quantifiable uncertainties. Capital expenditures will
only be made and facilities will only get built if project liabilities
are identified, quantified and minimized.

Liabilities associated with the long-term geologic storage of CO~2~ may
be divided into several categories, as follows.

The **[first]{.underline}** category is liabilities associated with an
uncertain regulatory regime. While fluid injection and retention are
well understood and competently regulated in many contexts -- e.g., oil
& gas water flooding (secondary recovery), CO~2~-EOR and natural gas
storage -- there is no dedicated CCS regulatory regime. The federal
Environmental Protection Agency has issued R&D injection guidance under
the Safe Drinking Water Act, with the primary endpoint of concern being
protection of drinking water aquifers. The Interstate Oil & Gas Compact
Commission, meanwhile, is working on its own State-based regulations for
CCS. Commercial companies need regulatory certainty, and such regulatory
certainty is lacking today for the CCS industry in the United States.

The **[second]{.underline}** category is liabilities associated with
environmental/natural resource damage claims. Numerous federal and State
environmental laws could potentially be applied to companies engaged in
the injection and long-term geologic storage of carbon dioxide for
purposes other than CO~2~-EOR. Those laws typically operate by focusing
on particular environmental features that are to be protected (e.g.,
drinking water aquifers) or by applying regulatory requirements based
upon the label which applies to the specific constituent of concern --
i.e., under the Resource Conservation & Recovery Act, vastly differently
regulatory regimes apply depending upon whether a waste is hazardous or
non-hazardous.

These existing environmental laws could create liabilities for companies
wishing to engage in CCS. For starters, none of them was enacted with
CCS in mind, a situation that itself creates uncertainty because it
deprives companies of an unambiguous legal framework to conduct their
operations. By approaching CCS from a traditional environmental
perspective, the laws also overlook other subsurface features and
attributes, such as mineral rights and resources, which also require
attention and that historically have been the domain of State, not
federal, concern.

Additionally, the laws' focus on the nature of the specific constituent
means that the legal label which applies to carbon dioxide when it is
injected into the subsurface and thereafter geologically stored is
important. I believe that the CCS industry could be crippled if carbon
dioxide is deemed a waste when in the subsurface. The CO~2~ which is
being injected into the subsurface today is not deemed a waste, an
approach which has spurred the environmentally safe injection of
significant volumes of carbon dioxide through stringent, State-based
regulations and oversight.[^1]

Unfortunately, I am worried about the regulatory label which applies to
carbon dioxide. For example, on April 2, 2007, in its *Massachusetts v.
EPA* decision, the United States Supreme Court declared carbon dioxide
an "air pollutant" for purposes of the federal Clean Air Act. Some media
reporting on that case unfortunately referred to greenhouse gas
emissions as hazardous or dangerous gases.[^2] Even if *Massachusetts v.
EPA* could be distinguished in this context because it deals with air
emissions, I worry about what the case portends for future public
acceptance of geologic storage in the United States.[^3]

The **[third]{.underline}** category is liabilities associated with
mineral rights and resources. CCS has as much to do with energy and
mineral rights as it does with the environment, a consideration which is
sometimes overlooked in the rush to pigeonhole CCS regulation into the
framework of existing environmental laws. If my injected plume
inadvertently interferes with my neighbor's natural gas storage
facility, who is responsible and what laws apply? Similarly, who owns
the pore space into which the CO~2~ is injected? Is it the mineral
estate or the surface estate? Who owns the plume? The answers to these
questions are critically important for commercial CCS operators.[^4]

The mere existence of these questions, meanwhile, raises an interesting
issue of federalism \-- namely, these and related real property issues
historically have been an exclusive matter of State real property law,
regulatory expertise, authority and control. The State geologic surveys,
mineral resource boards, and oil & gas commissions possess the reservoir
data and employ the geologists and reservoir engineers who understand
the subsurface.

Moreover, under State real property law, mineral ownership rights
historically were severed from the surface estate and subjected to
multiple ownership rights by subsequent assignment to numerous parties,
none of whom typically is the federal government (with the usual
exception being federal lands). Would a new federal CCS regulatory
regime federalize real property law?[^5]

Meshing these State-based regulatory responsibilities and considerations
with a possible federal CCS regulatory regime that is focused on
drinking water aquifers would take great care and attention to develop.

The **[fourth]{.underline}** and final category includes all
climate-related liabilities. Will CCS be recognized under existing
State/regional and a possible future federal climate regime, such as
cap-and-trade, and even if it is so recognized, how will it be
regulated? Will geologic storage be covered as a means of compliance?
Will the reservoir operator receive allowances? Will the act of geologic
storage be eligible to generate offset credits under the cap-and-trade
scheme, and if so which party in the CO~2~ value chain would be eligible
to receive those credits?[^6] Will the new standing requirement set
forth in *Massachusetts v. EPA* subject the CCS industry to billion
dollar claims from the plaintiffs' bar on the theory that a possible 1%
leakage rate of CO~2~ from a reservoir over a thousand-year period might
contribute to degradation of Massachusetts' shoreline? Will a regulator,
after injection operations have concluded, impose a constituent
requirement on the stored fluid?[^7]

If CCS is to go forward commercially, I believe that it is critical that
these and related questions be explicitly and favorably addressed in
whatever climate laws may be developed. Failure to do so would stall the
deployment of the technology commercially.

**[Why Liabilities/Uncertainties May Impede CCS
Transactions]{.underline}**

Certain CCS projects -- e.g., those dedicated exclusively to the
long-term storage of carbon dioxide in deep saline aquifers \-- will be
costly (to the tune of billions of dollars) and complex to build. Doing
a large-scale commercial CCS deal will require complex negotiations
among numerous sophisticated parties -- the industrial source, the
capture company, the pipeline company, the drilling contractor, the
injection company, the reservoir operator and, for each, their bankers,
insurers, engineering firms and consultants. Financing would have to be
arranged, and even if a company were to do such a project off balance
sheet, it likely would face internal financial reviews as stringent as
what Wall Street might require. All of those companies would have to
allocate the carbon risks among them. While I believe that such deals
are doable, doing them in the face of the uncertain liabilities
highlighted above would be a tall order.[^8] If the liabilities were
clarified, I believe that many of these deals would move forward.

Moreover, CCS projects will last a very long time. A typical CO~2~-EOR
project may last ten to thirty years; a long-term geologic storage
facility (either post CO~2~-EOR or a reservoir dedicated for storage
purpose) may be expected to last for substantially longer \-- and
perhaps an eternity. Even if the potential liabilities associated with
CCS were identified and quantified -- and they are not, as highlighted
above -- I am not aware of any commercially responsible company that
would agree to assume such liabilities for an eternity based upon
current law and policy.

**[Some Possible Solutions]{.underline}**

I believe that the best way to minimize the liability challenges facing
CCS is for the government to assume liability for the geologically
injected carbon dioxide at some fixed date, perhaps at the conclusion of
injection activities, well plugging, or, alternatively, at the end of a
post-closure period.

This concept is not new. For example, the State of Texas, in the context
of FutureGen, enacted legislation that made the State liable for
injected plumes of CO~2~. The Norwegian government is considering a
similar model -- one which perceives a dominant role by a
government-owned corporation in the long-term management of the
geologically stored carbon dioxide.

This approach does not mean that the government would be left with
uncertain risks under a moral hazard theory. Standards and protocols
could be developed that preclude the injection and storage of carbon
dioxide in inappropriate geologic conditions or sensitive areas. The
standards and protocols might also specify other conditions that must be
met, perhaps during a defined closure period, before the government
would assume responsibility.

Based upon the current legal, policy, and regulatory environment, any
solution short of the government assuming all liabilities at some future
date would run the risk of hindering the commercial deployment of CCS
technology.

Other approaches could be considered, however. For example, the
government could back-stop the private insurance markets in an effort to
induce insurers to accept the liabilities.[^9] This solution may be
insufficient, however, because of concerns within the insurance industry
about taking on "eternal" risks, too. Even if the insurers would agree
to insure the risks, the premiums and other attributes of such coverage
could make CCS projects non-viable for commercial reasons.[^10]

Another manner in which liabilities could be managed, although not
eliminated in a way that might enable the full deployment of commercial
CCS technology, is to do geologic storage \-- at least initially \--
where it makes the most sense from a geologic perspective. Location
matters because geology varies. Oil & gas may be found where it is
because of the existence of natural traps in those locations, for
example. A quick jump start to the industry could be provided by
mitigating liabilities in those regions first, while conducting R&D on
storage in other geologic structures in other areas of the country.

Finally, I believe that the manner in which carbon dioxide injection is
regulated -- a theme echoed throughout this testimony -- will go a long
ways towards determining the manner in which liabilities are addressed,
managed and resolved. If CO~2~ injection and long-term storage is
regulated from the starting position that carbon dioxide is a
contaminant that poses substantial environmental risks, I would expect
to see few if any commercial CCS facilities built in the foreseeable
future.

Conversely, if the subject matter is regulated from the starting
position that (i) CO~2~ is not a contaminant; (ii) CO~2~ injection and
storage operations have occurred safely for many years both domestically
and abroad in various contexts; (iii) the environmental risks are
identifiable and subject to responsible regulation; and (iv) the States
have substantial experience in dealing with subsurface matters and that
experience should not be overlooked or trumped, I would expect to see a
commercial CCS industry start and maybe even flourish. And I would
expect that industry to bring the Nation a variety of energy,
environmental, and economic benefits to all stakeholders, including the
public.

Congress has been in this position before. In 1980, Congress amended
with Safe Drinking Water Act to exempt the injection of natural gas for
purposes of storage.[^11] Congress did so on the notion that there was
scant evidence that the practice threatened drinking water aquifers and
that natural gas storage operators had an incentive to minimize, if not
eliminate, reservoir leakage. I believe that similar arguments could be
made for CCS today. Since that time, the natural gas storage industry
has grown and the public interest served through competent regulation at
both levels of government (e.g., the federal Natural Gas Act of 1938 and
State-by-State laws/regulations that include well performance standards
and related matters).

With appropriate regulation of liabilities in mind, it thus might be
worthwhile for Congress to consider whether regulation of non-CO~2~-EOR
CCS under the Safe Drinking Water Act's Underground Injection Control
("UIC") program is necessarily the only logical starting point for
regulation. It may be. I just do not believe that the analysis has been
done to support such a determination.

**[Conclusion]{.underline}**

In conclusion, I commend that Committee for its efforts to examine CCS,
including geologic storage. S. 731 and S. 962 are critically important
pieces of legislation because they will help to pave the way for the
commercial CCS industry in the United States.

Looking beyond those bills to the day when commercial players are
engaged in the new CCS industry, policymakers will need to address
liability issues associated with long-term geologic storage of carbon
dioxide. Failure to do so is likely to stall, if not impede, the
construction of billions of dollars of productive CCS-related
infrastructure in the United States in the years ahead -- and to the
detriment of carbon-based fuels that may be expecting that
infrastructure to be there to support them. I believe that the public
interest would best be served if the CCS infrastructure gets built.

\* \* \*

This concludes my testimony, Mr. Chairman and Members of the Committee.
I would be pleased to answer any questions that you may have.

[^1]: In Texas alone, for example, there are 10,000 permitted carbon
    dioxide injection wells, 8,000 of which inject carbon dioxide
    exclusively. Since the initiation of CO~2~ injection activities in
    the Permian Basin several decades ago, approximately 9.6 tcf (or 550
    million tons) of carbon dioxide have been stored in geologic
    reservoirs there. *Source*: Steve Melzer, Melzer Consulting,
    (Midland, Texas).

[^2]: Arguably in conflict with *Massachusetts v. EPA*, the U.S.
    Department of Transportation ("DOT) regulates carbon dioxide as a
    non-hazardous liquid for purposes of pipeline transportation (*see*
    49 C.F.R. part 195 (2006). Does this mean that the legal status of
    captured carbon dioxide emissions from an industrial source switches
    from air pollutant to non-hazardous liquid at the moment they are
    compressed and put into a pipeline?

[^3]: The role of public acceptance of CCS technology, including
    education, is critical, and next to liability resolution, may be
    among the greatest challenges facing the U.S. CCS industry.
    Internationally, public acceptance to CCS is growing. The EU, for
    example, has adopted pro-CCS policies recently and in countries such
    as the UK, Norway, and Australia, the practice is generally well
    supported and understood (which is not to suggest that those
    countries do not face challenges of their own). The world's first
    CCS law was actually implemented in Australia. International codes
    are also moving in a pro-CCS direction: a 2006 amendment (effective
    February 10, 2007) to the 1996 Protocol to the 1972 Convention on
    the Prevention of Marine Pollution by Dumping of Waste and Other
    Matter now allows the sub-seabed injection of carbon dioxide for CCS
    purposes, for example.

[^4]: To the extent that answers to these questions exist, they likely
    are rooted in State common law principles governing real
    property/mineral rights and the State oil & gas codes. These laws,
    which vary by State, have reasonably resolved a variety of
    comparable injection-related issues over the decades. Secondary
    recovery/water flooding technology, for example, faced similar
    liability questions when it first appeared on the scene many years
    ago but now enjoys widespread and safe use, with liabilities being
    addressed in the ordinary course of business. I thus suspect that
    the answers to at least some of the CCS liabilities will be found or
    developed through the legal interpretation of existing State
    energy/property/mineral resource laws or amendments to the same.

[^5]: This issue is not hypothetical. The low-carbon generation
    provisions of S.309, for example, refer to federally approved
    geologic reservoirs.

[^6]: The Clean Development Mechanism's ("CDM") Executive Board under
    the Kyoto Protocol is currently considering several CCS-related
    proposals. If approved, such projects would be able to generate
    certified emission reduction credits under the CDM Mechanism. To the
    extent that a regional (e.g., RGGI) or federal cap-and-trade program
    allowed the use of international carbon credits in some scenarios,
    those CCS-related credits (if ultimately approved internationally,
    and that's an open question) presumably could also be used in the
    United States.

[^7]: For purposes of pipeline transportation, DOT defines carbon
    dioxide as a "fluid consisting of more than 90 percent carbon
    dioxide molecules compressed to a supercritical state." *See*
    49 C.F.R. § 195.2 (2006). This definition has served the public,
    industry and government well for many years.

[^8]: Projects based solely on CO~2~-EOR could proceed even in the face
    of the current uncertainties. CO~2~-EOR is a mature, safe and proven
    technology that has been regulated by the States for decades. In the
    worthwhile effort to further a CCS industry in the United States, no
    action should be taken to impair CO~2~-EOR, and I am not aware of
    any pending regulatory approaches that would do so. The issue for
    CO~2~-EOR may instead be whether the practice would be excluded from
    the coming CCS regulatory regime. That would be an unfortunate
    result, as I believe that CO~2~-EOR is in fact geologic storage. The
    Permian Basin could fairly be viewed as one of the world's largest
    CO~2~ storage sites. *See note 1, supra.* CO~2~-EOR also is a
    technology that, in part through market forces, holds the promise of
    expediting the build-out of some CCS infrastructure. This is not to
    suggest that CO~2~-EOR is a panacea that will enable a CCS industry
    on its own. CO~2~ floods are costly, technically challenging, and
    face tough project economics, even with oil at \$60/barrel.

[^9]: *See* K. Coddington, "A Model CCS Code: Establishing the
    Regulatory Framework & Incentives to Enable Technology Deployment",
    5^th^ Annual Conference on Carbon Capture & Sequestration, May 2006.

[^10]: All insurance-based solutions are complicated but worthy of
    further analysis. The Price-Anderson Act, for example, has been
    cited by many commentators as a possible model for the long-term
    management of CO~2~ storage liability.

[^11]: 42 U.S.C. § 300h(d)(1)(B)(i) (2006).