Guidance document 4
Financial security and financial contribution

EUROPEAN COMMISSION
Directorate-General for Climate Action
This document has been prepared with the assistance of DNV Netherlands B.V. under contract to theEuropean Commission (Service contract No. 090203/2022/881796/SER/CLIMA.C.2)
It has also greatly benefitted from discussions with, and information supplied by, experts from Member
States through the expert group on the geological storage of carbon dioxide and key stakeholders througha targeted stakeholder consultation.
DG CLIMA gratefully acknowledges contributions from other Commission departments (COMP, ENER,
ENV, MARE, GROW, REGIO, SANTE, RTD, JRC, SG, and SJ) to the finalisation of the guidance
documents.
Email:

CLIMA-CCS-DIRECTIVE@ec.europa.eu

European Commission
B-1049 Brussels

EUROPEAN COMMISSION

Guidance document 4
Financial security and financial contribution

Directorate-General for Climate Action
2024

The aim of this guidance document is to contribute to a better understanding of the requirements of Directive
2009/31/EC on the geological storage of carbon dioxide. It has been prepared by the European Commission
on the basis of the views and knowledge provided by stakeholders. The purpose of this guidance is
explanatory and illustrative. It does not create any rights or obligations.

Manuscript completed in July 2024

This document has been prepared for the European Commission however it reflects the views only of theauthors, and the European Commission is not liable for any consequence stemming from the reuse of thispublication.
© European Union, 2024

The reuse policy of European Commission documents is implemented by Commission Decision
2011/833/EU of 12 December 2011 on the reuse of Commission documents (OJ L 330, 14.12.2011,
p. 39). Unless otherwise noted, the reuse of this document is authorised under a Creative Commons
Attribution 4.0 International (CC BY 4.0) licence (https://creativecommons.org/licenses/by/4.0). This meansthat reuse is allowed provided appropriate credit is given and any changes are indicated.

Guidance document 4

Contents

1.

Revision history ....................................................................................... 7

2.

Purpose and scope of guidance documents ......................................... 8

3.

Financial security................................................................................... 10
3.1. Legislative context ............................................................................... 10
3.2. Selecting a financial security instrument .............................................. 10
3.3. Obligations that financial security must cover ...................................... 14
3.4. Amounts of financial security ............................................................... 16
3.4.1. Responsibility for determining required amounts of financial security ...... 16
3.4.2. Principles for determining amounts of financial security .......................... 16
3.4.3. Calculating amounts of financial security in the event of permit withdrawal
17
3.4.4. Accounting for the effects of inflation on the amount of financial security 23
3.4.5. Periodic adjustment of the amount of financial security ........................... 24

3.5. Proof of validity and effectiveness of financial security ........................ 25
3.6. Maintaining validity and effectiveness of financial security .................. 26
3.7. Reporting ............................................................................................. 27
3.8. Release of the obligation to maintain the financial security ................. 27
4.

Financial contribution ........................................................................... 29
4.1. Legislative context ............................................................................... 30
4.2. Obligations to be covered by the financial contribution ........................ 30
4.3. Estimating the amount of the financial contribution.............................. 31

Appendix A: Acceptance criteria for financial security instruments ......... 33
Appendix B: Options for financial security instruments ............................ 35
A.B.1 Funds (‘deposits’) to the competent authority ..................................... 35
A.B.2 Collectively financed CO2 fund ........................................................... 35

5

Guidance document 4

A.B.3 Irrevocable trust fund .......................................................................... 35
A.B.4 Parent company guarantee/affiliated company guarantee/selfguarantee ............................................................................................ 36
A.B.5 Escrow ................................................................................................ 36
A.B.6 Bank guarantees................................................................................. 37
A.B.7 Irrevocable standby letter of credit issued by a bank .......................... 37
A.B.8 Bond issued by a surety company (or a bank) .................................... 37
A.B.9 EU emission allowances (EUAs) ........................................................ 38
Appendix C: Eligibility criteria for issuers of financial security instruments................................................................................................................. 39
A.C.1 Criteria for determining the eligibility of issuers that are financial
institutions ............................................................................................ 39
A.C.2 Eligibility criteria for instruments issued by government agencies ....... 39
A.C.3 Eligibility criteria for self-insurance, captive insurance, and related-party
guarantors ........................................................................................... 40

6

1. Revision history
Key changes relative to previous version•

Tone and language in purpose of guidance document has been revised to reassure investors that
the Carbon Capture and Storage Directive (CCS) does not require very strict and expensive
financial security provisions, leaves flexibility to Member States to find appropriate arrangements,
and provides competent authorities (competent authorities) with reasonable market-based options
to develop such arrangements together with operators.

•

Edits to allow flexibility in selecting financial instruments.

•

Guidance provided on the opportunities and limitations with insurance, and approaches to covergaps in insurance coverage.
Principles guiding determination of financial security amounts simplified. Probability weighting is
included as a principle to be applied when calculating the amount of financial security required for
uncertain future events.

••

Requirement for a 25% contingency removed – replaced by risk-based contingency to address
uncertainties.

72. Purpose and scope of guidance documents
This guidance document (GD) is part of a set of guidance documents as follows:●

Guidance document 1: CO2 storage life cycle risk management framework;●

Guidance document 2: Characterisation of the storage complex, CO2 stream
composition, monitoring and corrective measures;●

Guidance document 3: Criteria for transfer of responsibility to the competentauthority;●

Guidance document 4: Financial security and financial contribution.

The aim of these GDs is to improve understanding of the requirements of Directive
2009/31/EC on the geological storage of carbon dioxide (the ‘CCS Directive’) and giveindications on how it can be implemented. They should therefore facilitate a correct anduniform application of the CCS Directive across the EU. The guidance does not represent
an official position of the Commission and is not legally binding. The binding
interpretation of EU legislation is the exclusive competence of the European Court ofJustice that can make final judgments concerning the interpretation of the CCS Directive.
GD 4 provides guidance on:●

Article 19 - financial security (Section 3); and● Article 20 - financial mechanism (Section 4).
CCS is a proven technology that uses applications from well-established industries; thus,
a catalogue of well-developed financial security tools can be used also for CCS. Member
States and competent authorities should use the existing tools to develop predictableand balanced financial security and financial mechanism requirements that aim to limit
taxpayer burdens, while reducing unnecessary financial burden on operators. Thisbalance is important for the cost-effective implementation of CCS.
Financial security and financial mechanism requirements should be based on risk
assessments of the actual site and project risks. General risk distinctions can, however,be made between different project settings (e.g. onshore vs. offshore; existing vs. new
infrastructure; aquifer vs. depleted field, etc.), and should be considered when assessing
operational costs and the associated amount of financial security or financial mechanism
required.
It is the role of the Member States and competent authorities to ensure that CCS
regulatory rulemaking encourages projects with lower risk profile by permitting financial
security and financial mechanism instruments and amounts that are commensurate withthe risks and financial needs of a storage project, as otherwise the associatedrequirements will deter deployment of CCS.
The guidance is not intended to be prescriptive, but rather to outline options open to thecompetent authority to support large-scale deployment of CCS value chains acrossEurope.

8

Member States that decide to support the development of CO2 storage sites in thecontext of reaching climate neutrality may find it useful to share some of the financial
risks or to cover part of the financial contribution. Some financial security and financial
mechanism approaches may qualify as state aid within the meaning of Article 107(1) of
the Treaty on the Functioning of the European Union (TFEU).
According to Article 108 of the TFEU, state aid may have to be notified to and authorisedby the Commission before it is granted. Examples of state aid include risk sharing
arrangements between Member State and operator, or cost-share financial security
instruments that are more favourable than market conditions.
Note: GD 1, Section 2.4, for interpretations of the main defined and non-defined terms
used in the CCS Directive. Of particular relevance for GD 4 are the terms ‘financial
security’, ‘financial mechanism’ and ‘financial contribution’.

93. Financial security
3.1. Legislative context
Article 19 of the CCS Directive requires that Member States ensure that, when applying
for a storage permit, the potential operator must provide proof that adequate provisions
can be established, by way of financial security or any other equivalent, on the basis ofarrangements to be decided by the Member States.
●

Article 19(3) states that the financial security will remain valid and effective:oafter a storage site has been closed in accordance with Article 17(1)points (a) or (b), until the responsibility for the storage site is transferredto the competent authority in accordance with Article 18(1) to (5); andoafter the withdrawal of a storage permit in accordance with Article 11(3);■until a new storage permit has been issued; and■ where the site is closed in accordance with Article 17(1)(c), until
the transfer of responsibility in accordance with Article 18(8),provided the financial obligations referred to in Article 20 havebeen fulfilled.
●

Article 19(2) requires that the financial security should be periodically adjusted totake account of changes to the assessed risk of leakage and the estimated costsof the obligations under the permit issued under the CCS Directive.

●

Article 19(1) clarifies that the amount of the required financial security is to be
based on the estimated cost of meeting the obligations arising out of the permit,
as well as obligations arising from the ETS Directive.

3.2. Selecting a financial security instrument
As far as possible, Member States and competent authorities should promote financial
security instruments that are simple, based on established financial products, low risk,
flexible, and low cost. It is recommended to avoid complex financial instruments that are
beyond the core expertise of competent authorities, or that would preclude certain typesof operators.
The intent of financial security is to protect taxpayers and, if the financial security
instrument takes the form of capital that can be reinvested, the Member States must
provide for strict prudential rules to prevent the risk of financial speculation. Member
States and competent authorities should also aim to establish financial security
requirements that promote competition for storage permits and ensure compliance with
the Directive.
Financial security instruments should be defined by the competent authority, taking into
account the type and likelihood of risks and financial products available on the market.

10

On this basis, the operator may propose one instrument, to be reviewed and approvedby the competent authority. The competent authority must not unreasonably withhold ordelay its approval. Member States should evaluate financial security instruments against
criteria for desired certainty, amount, liquidity, duration and flexibility. Questions that canbe considered part of this evaluation are listed in Appendix A.
The availability and features of financial security instruments will vary in different Member
States, or across Member States. Ideal instruments may not be available in every
Member State, which may mean having to accept some compromises.
To identify and select appropriate financial security instruments, Member States andcompetent authorities can review and evaluate existing instruments applied within thejurisdiction.
1. Financial security instruments within existing laws and regulations. This
includes financial security instruments acceptable for closure and post-closure
care of waste landfills, for waste from extractive industries, decommissioning ofoffshore structures1, trans-frontier movements of hazardous wastes2,
environmental liabilities under Directive 2004/35/EC3, waste management inaccordance with Directive 2008/98/EC (4), and other relevant national
programmes. Appendix B provides an overview of relevant financial security
instruments. These instruments may be tailored for financial security obligations
as best considered by the competent authority on a case-by-case basis.
2. Insurance products. Insurance companies issue a wide variety of insurance
contracts with varying features, some of which resemble guarantees and others
which are quite different (e.g. liability insurance).
Insurance designed for CCS may be similar to environmental liability insurance,
which the European insurance and reinsurance federation (CEA)5 describes as adeveloping market, with specialist underwriters selectively offering products
based on highly detailed risk criteria.
CCS insurance products may be similar to insurance for oil and gas activities.
These insurance products are well-known and mature in the oil and gas industry
for both onshore and offshore operations.

1 The 1998 Convention on the Protection of the Marine Environment of the North East Atlantic(https://www.ospar.org/convention/text) established a regime for decommissioning disused
offshore installations, including a ban on disposing offshore installations at sea. The NorthEast Atlantic Environment Strategy (NEAES 2030) was subsequently developed toestablish an updated strategy, https://www.ospar.org/documents?v=46337. Legislation in
Member States may authorise competent authorities to require financial security for suchdecommissioning.
2 EC 1013/006 of the European Parliament and of the Council on the shipments of waste.

https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex%3A32006R1013.
3 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32004L0035.

4 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32008L0098.
5 https://www.insuranceeurope.eu.

11The commercial insurance market should be able to provide insurance products
to the CCS industry on a similar basis as the oil and gas industry for:a) assets installed by the CO2 storage operator(s);b) drilling and well operations6;c) business interruption;d) third-party liabilities.
However, insurance will generally only provide coverage for fortuitous(unforeseen, sudden and accidental) occurrences which result from externalcauses, including negligence by employees of the operator or third parties.
Insurance will therefore only partially cover the obligations of financial security.
For instance, gradual leaks from the reservoir via geological pathways will usually
be excluded, unless caused by a fortuitous occurrence.7
Insurance will also usually not be available for loss of or damage to the storagesite, such as lower-than-expected injectivity or incorrect estimation of storage
capacity, which renders the operator incapable of meeting project objectives,
irrespective of causation.8
Shell presented an evaluation of the insurability of different elements of theirPeterhead CCS project in Shell UK Limited (‘Peterhead CCS Project – insurance
plan’, 2014), and concluded that damage or loss from ‘reservoir seepage andpollution, subsurface liability’ and ‘loss of carbon credits’ are not insurable.9 Thisevaluation is still considered representative of what the commercial insurance
markets are willing to offer.

6

Oil and gas companies insure their exploration risks under a cover called energy explorationand development insurance (EED-8/86), which provides control of well insurance (e.g. thecost of controlling a well blow-out incident), Re-drilling/extra expense (to redrill/restore awell lost by blow-out), and seepage & pollution, cleanup and contamination insurance(above ground and in water pollution from a well blow-out). The policy form also provides
additional cover for care, custody and control of third-party equipment rental, undergroundcontrol of well cover (communication between subsurface geological zones via thewellbore), making wells safe (when drilling or production unit/equipment is damaged and
one “reservoir-to-atmosphere safety barrier’ is lost), and finally extended re-drilling andrestoration cost (re-drill/restoration of wells due to loss of drilling rig/platform, etc.).
7 There were attempts to insure reservoir risks in the USA in the early 1980s, but it turned out

not to be a commercial success and it has since been accepted by the industry that
reservoir risks are uninsurable.
8 Commercial insurance can be established to cover incidents of unforeseen geological leakage

up to a limit; however, these policies would be expensive and require extensive
documentation.
9 The figure summarising the evaluation is reproduced in GCCSI, Lessons and Perceptions:

Adopting a Commercial Approach to CCS Liability (2019). www.globalccsinstitute.com/wpcontent/uploads/2019/08/Adopting-a-Commercial-Appraoch-to-CCS-Liability_ThoughtLeadership_August-2019.pdf.

12

To overcome the risk of potential gaps in insurance coverage, the insurance canbe combined with other financial security instruments. Such combination of
instruments would increase the effectiveness of the entire financial security
scheme, to the benefit of the competent authority, and will increase the chanceof the financial scheme being approved, thereby avoiding unnecessary delays,
and also benefiting the operator.
3. Any other equivalent instrument. Member States and competent authorities
may also consider instruments not covered by i) and ii) that can provide therequired security. Some ‘equivalent’’ options may, however, lack adequate
certainty, amount or liquidity to be accepted as equivalent to financial security.
This includes, for instance, pledges or assignments of future revenues (e.g. frominjection) or assets.
Member States should avoid imposing financial security obligations on storage operators
before start of the operations which are disproportionate to the initial amounts of CO2
stored. Member States may therefore want to consider allowing operators to provide
financial security in phases. No funds should be required for financial security prior tostart of injection.
One option for phased accumulation of funds for financial security over time is to createa ‘sinking fund’ whereby the operator makes regular contributions to the financial
security. This can be achieved by, for instance, with arrangements based on theaggregation of a levy per tonne of CO2 stored, which accumulate as storage sites arebeing filled.
This option does pose a risk that the operator will default before the required amount offunds has built up. This risk can be mitigated by requiring that the operator complement
the gradual build-up of funds with another financial security instrument that covers thebalance. For example, the complementary instrument could be a bank guarantee, letterof credit, equity commitment letter or surety bond.
As the funds build-up toward the required amount, the amount of complementaryfinancial security can be reduced. Furthermore, if financial security revisions (per Section
3.4.5) conclude that the required financial security is less than the accumulated amount,then the competent authority should allow instruments providing any excess amount tobe withdrawn or released.
A Member State may also offer risk-sharing arrangements on a case-by-case basis –subject to state aid approval. This can include providing insurance in part or full, by
accepting some transfer of risk.
The Member States may also want to pool financial security arrangements for the
first-mover sites in an insurance scheme, and thereby reduce the premiums required toprovide a given level of security to the competent authority. The Member States would
need to establish the arrangements for financing any liability in excess of the pool, andfor sharing any profits and losses from the pool.

13

3.3. Obligations that financial security must cover
Article 19 is intended to ensure that all obligations arising under the permit can be met
in the following cases:(i)there is a need to cover competent authority costs for performing obligations
under the permit if the operator fails to do so;(ii)

the competent authority withdraws the storage permit and temporarily takes
over all relevant obligations in accordance with Article 11(4):1. Monitoring, as specified by Article 13 and the approved monitoring plan.
Related obligations are to update the monitoring plan in accordance withthe requirements laid down in Annex II at least every 5 years and toprepare reports of monitoring results in accordance with Article 14.
2. Corrective measures as specified by Article 16, and the approved
corrective measures plan. This includes costs for updating the approved
corrective measures plan.
3. Surrender of EU ETS emission allowances for leaked CO2 volumes.
4. Update the provisional post-closure plan, taking account of risk
analysis, best practice and technological improvements.
5. Closure of the storage site as specified in Article 17 and the approved
and updated post-closure plan, including sealing the storage site andremoving the injection facilities.
6. Operating the site,10 including obligations relating to CO2 stream
acceptance criteria when the competent authority decides to continue
CO2 injection temporarily, after the competent authority withdraws astorage permit in accordance with Article 11(3).
According to Article 12, acceptance criteria obligations include keeping a
register of the quantities and properties of the CO2 streams delivered andinjected, including the composition of those streams. In addition, thecompetent authority may need to conduct composition analyses and risk
assessments and prepare reports in accordance with Article 14.
7. Reporting, as specified by Article 14.

These obligations can be divided into two types:(i) obligations that are certain to occur (e.g. monitoring and reporting);(ii) obligations that are not certain to occur (e.g. corrective measures and surrenderof allowances).

10 Although the CCS Directive refers only to obligations related to CO 2

acceptance criteria during temporary continuation of injection following
permit withdrawal, the Commission believes that continuation of injection will
require the competent authority to temporarily take over operation of the site
as a whole.

14Some financial security instruments may be suited to cover only one of these types ofobligations. For instance, liability insurance instruments may be more suited for (ii) thanfor (i).
Other types of prepaid insurance may be amenable to financial security coverage ofmonitoring, closure and reporting. Table 1 shows when obligations may arise, i.e. during
the operational period or during the closure/post-closure period.
Table 1: Obligations under the permit that must be covered by financial security.
Operations period

Closure and post-closure period

1.

Monitoring, updates of monitoring plan,and required reports of monitoring
results

1.

Monitoring, updates of monitoring plan, andrequired reports of monitoring results2.

Updates of corrective measures plan,and implementing corrective
measures, including measures related
to protecting human health2.

Updates of corrective measures plan, andimplementing corrective measures,
including measures related to protecting
human health3.

Surrender of allowances for any
emissions from the site, including
leakages, in accordance with ETS
Directive

3.

Surrender of allowances for any emissions
from the site, including leakages, inaccordance with ETS Directive

4.

Update of provisional post closure plan

4.

Sealing the storage site and removing
injection facilities

5.

Maintaining injection operations by thecompetent authority until a new
storage permit is issued, if permit iswithdrawn, including CO2 composition
analysis, co-mingling of CO2 streams,
risk assessment and registration andrequired reports of CO2 streams
delivered and injected.

5.

Making the required financial mechanism
available to the competent authority

As shown in Table 1, some of the obligations to be covered by financial security may
become moot or decrease with the passage of time. Specifically, after the site has beenclosed, the competent authority would have no need for financial security to covertemporary continuation of injection (i.e. to operate the site) nor would financial security
for closure be necessary (because the site would have already been closed).
Once in the post-closure period, if the remaining time interval prior to site transfer
decreases, the potential duration of monitoring obligations to be covered by financial
security may also decrease.

15

3.4. Amounts of financial security
3.4.1. Responsibility for determining required amounts offinancial security
Amounts of financial security can be derived by the operator and approved by thecompetent authority (in accordance with Article 9(9)), or by the competent authority with
operator input. In either case, amounts should be based on:●

the relevant plans (e.g. the approved monitoring plan, the approved corrective
measures plan and the approved provisional and updated post-closure plan);●the performance of the storage site;●

costs for new relevant methods or technologies; or●other obligations.

3.4.2. Principles for determining amounts of financial
security
In preparing, reviewing or approving cost estimates that determine amounts of financial
security, best practice consists of several principles.
1. Amounts should be sufficient for the competent authority and/or its agent (e.g.
contractor) to perform the obligations stemming from the storage permit, while
not hindering investment in the storage site operation.
2. Financial security and contingency costs should be calculated based on a sitespecific assessment, considering technical risk and risk associated with the typesof financial instruments used. The competent authority may request that an
independent review of the site-specific risk assessment is commissioned and thatthe assessment of technical risk complies with the requirements of Step 3 inAnnex I of the CCS Directive (see also Section 4.3 of GD 1).
3. Amounts of financial security for covering costs of uncertain future events should
be probability weighted using conservative assumptions. This implies that thecosts that may be incurred if an uncertain future event occurs should be multiplied
by a conservative estimate of the likelihood of the event occurring, whencalculating financial security amounts (see Box 1).
4. A cost-risk analysis should be applied to address uncertainties in the costestimate. This can involve a Monte Carlo simulation approach combining allprobability weighted future events, whereby the required contingency can bederived from the resulting cost-uncertainty distribution. Acceptable levels of thederived contingency and thereby the financial security amount can then beassessed by comparing the overall cost estimate distribution and its probabilistic
values, such as the median (P50) and conservative (P90) values, with estimatedcosts for specific, individual, low-probability events with high costs (e.g. well blowouts). The competent authority should communicate acceptable methodologies

16for performing probabilistic or deterministic cost assessments and the resulting
contingencies, and encourage the operator to describe and document the
adopted costing methodology, data sources and assumptions. The methodology,
data sources, and assumptions may be published by the competent authority,with the agreement of the operator.
5. Assumptions made in determining the amounts of financial security should bestated and agreed by the competent authority and operator, and included in thepermit. This includes assumptions related to the availability to the competentauthority of on-site equipment and infrastructure owned by or under the controlof the operator of the storage site. This is relevant to enabling the competentauthority to perform monitoring or take corrective action. Installing new equipment
or infrastructure will generally entail greater cost and should therefore be avoided
when possible.

Box 1: Example of principle 3 for determining amounts of financial
security.
Here, the legacy wells are used to estimate corrective measures financial security
rather than the injection well(s) because at the start of the project this produces thehighest amount of financial security due to the low expected probability of themleaking.
A CO2 storage project has 2 legacy wells, and the likelihood that leakage of CO2 orformation fluids will occur in these wells during the project life is conservatively
assessed to be 1.0x10-3 and 1.0x10-2 respectively. If leakage occurs, the operator
has assessed that well intervention will be required, and that the cost of the wellintervention will be between EUR 5 and 8 million. In this case, the likelihood that wellintervention will be required for 1 well is 0.01099, and the likelihood that wellintervention will be required for both wells is 1.0x10-5.
Assuming well intervention costs will be EUR 8 million, the corresponding
probability-weighted cost of intervention on legacy wells during operation is:0.01099 x EUR 8 million + 1x10-5 x EUR 16 million = EUR 88 080.
In addition to applying the principles for determining the amounts of financial security,
the competent authority may also take into account any previous experience with theoperator, as an understanding of its competency, capacity, financial position, geologicalknowledge of the storage area, ability to develop and operate the storage project or otherestablished factors may be beneficial.

3.4.3. Calculating amounts of financial security in the eventof permit withdrawal
Table 2 illustrates two scenarios that can arise if the competent authority decides towithdraw the storage permit during the injection phase. In accordance with Article 11(3),the competent authority can only withdraw the permit as a last resort. This suggests thatthe permit can only be withdrawn if the operator is in breach of permit conditions, or not

17

able to stop leakages or implement required corrective measures to address significant
irregularities, as per Article 11(3)(a-c).
The amount of financial security to be provided in the event of permit withdrawal should
be based on the ‘minimum’ cost of the two options available to the competent authority:●

if the competent authority decides to close the storage site, the competentauthority will need sufficient financial security for the closure and post-closure
period; or●if the competent authority decides to temporarily continue injection until a new
permit is issued, the competent authority will need sufficient financial security until
a new permit is issued.

If the competent authority decides to select the higher cost option, then the incremental
cost of that option should be funded by the Member States by other means than throughthe financial security.
Table 2: Competent authority obligations in two scenarios after withdrawal of permit.
Competent authority withdraws permit and closes
the site

Competent authority withdraws permit, but
continues operations temporarily until new
permit is issued

1.

Monitoring, updates of monitoring plan and required1.
reports on monitoring results through the end of the
post-closure period

Monitoring, updates of monitoring plan andrequired reports on monitoring results forapplicable period until new permit is issued

2.

Updates of corrective measures plan and2.
implementing corrective measures, including healthprotection measures through the end of the postclosure period

Updates of corrective measures plan andimplementing corrective measures, including
health protection measures until new permit isissued3.

Surrender of allowances for any emissions, including3.
leakages, through to the end of the post-closure
periodSurrender of allowances for any emissions,
including leakages, until new permit is issued

4.

Update of provisional post-closure plan, sealing the4.
storage site and removing injection facilities

N/A

5.

N/A

Temporary operation of storage site, including
CO2 composition analysis, risk assessment,
registration and required reports on CO2
streams delivered and injected until new
permit is issued

5.

The following subsections will provide guidance on calculating the amount of financial
security for each of items 1-5 in Table 2.
In accordance with principle 3 in Section 3.4.2, conservative probability weighting should
be applied to determine the amount of financial security for uncertain future events. This
includes the amount of financial security for corrective measures (see Section 3.4.3.2)
and amount of financial security for surrender of allowances (see Section 3.4.3.3).
It should be noted, however, that the estimated probability of future events occurring maychange over time. The probability estimates should therefore be regularly updated toreflect changes in the risk profile for the site.
18

3.4.3.1.

Calculating monitoring component of financial
security

The amount of financial security for monitoring depends on:●

the duration of monitoring the financial security should cover; and● the yearly cost of monitoring.
The approved monitoring plan will include information about monitoring activities,
frequencies and equipment that can provide a basis for estimating costs.
Duration of monitoring
The operator should specify the assumptions applied to determine the duration ofmonitoring, and ensure that the amount of financial security is sufficient to cover the costof monitoring for all relevant scenarios, including both circumstances in Table 2.
Article 18(1)(b) requires at least 20 years of monitoring after closure prior to transferring
responsibility to the competent authority, unless the competent authority is convincedthat the criterion in Article 18(1)(a) has been met before the 20 years has elapsed.
A 20-year post-closure monitoring period should be used as a starting point forcalculating the amount of financial security, since the actual length of the post-closure
period cannot be predicted in advance.
The duration of the post-closure monitoring period may be reconsidered if the sitespecific post-closure plan demonstrates that quantitative key performance indicators
used to measure compliance with the criteria for transfer (see GD 3) are likely to be met
before the end of the 20-year post-closure period.
Annual costs of monitoring
Annual costs of monitoring depend on the scale, scope, and intensity of monitoring
required. For example, a more expansive scale of monitoring may be required as more
CO2 is injected for storage, potentially from multiple CO2 sources.
As described in GD 2, monitoring scopes may include:●

injection facilities;●

the storage complex;●(where appropriate) the surrounding environment.

Increased monitoring intensity may be required if any leakages or significant irregularities
are detected. These factors should be considered in a balanced manner when setting
the initial amount for financial security and also in subsequent updates, taking into
consideration the project-specific risk profile and available data. The annual costs ofmonitoring should include both the costs of a base case monitoring programme and acontingency monitoring programme for leakage scenarios.
The calculated annual monitoring cost should include the costs of updating themonitoring plan and preparing required reports of monitoring results. Monitoring costs

19may include not only the direct costs of collecting and analysing monitoring data but also
anticipated costs for maintaining, repairing and/or replacing (as necessary) the various
components of the monitoring system, as may be needed over the relevant duration ofmonitoring.

3.4.3.2.

Calculating corrective measures component offinancial security

Obligations for corrective measures are described in Article 16, as well as in Article 11(4)and 17(2) regarding preventive and remedial actions in accordance with Articles 5 to 8
of Directive 2004/35/EC.
Articles 16(4) and (5) state that if the operator fails to take necessary corrective
measures, the competent authority must do so and will recover its incurred costs,
including by drawing on the financial security. Although the competent authority may
withdraw the storage permit in this situation, withdrawal is not required. If the permit is
not withdrawn, then the operator should be required to replenish the corrective measuresfinancial security for amounts drawn by the competent authority.
The approved corrective measures plan should provide information about:
1. the likelihood that the described corrective measures are required;
2. the activities, labour, and equipment anticipated for different types of corrective
measures, if they are required.
The plan can therefore form a technical basis for cost estimation. Considerations fordefining the corrective measures plan are outlined in GD 2.
The amount of financial security for corrective measures should be conservatively
weighted for probability in accordance with principle 3 in Section 3.4.2.
This means that estimated costs associated with item (2) above should be multiplied bya conservative estimate of the likelihood that the corrective measure is required.
The cost of the respective corrective measures (if required) will be affected by thefollowing factors:●

Scale, scope and duration. The corrective measures plan will identify different
scenarios calling for corrective measures, and will determine the scale, scopeand duration of corrective measures. It is recommended that the future costs are
estimated conservatively, relative to the uncertainty of these future costs. For
instance, when determining the amount of financial security for corrective
measures it is good practice to deploy cost estimates with 80% or higher
confidence that the cost has not been underestimated.

●

Frequency. Some corrective measures may be required more than once. The
plan for any repeated implementation of corrective measures should be stated in
the corrective measures plan.

●

Implementation period. The amount of financial security should cover the costof corrective measures during both the injection and post-closure periods.

20

3.4.3.3.

Calculating component of financial security related
to surrender of allowances

By virtue of the inclusion of geological storage sites under Annex I of the EU ETS
Directive11, installations will be required to surrender allowances for any leakages as
defined by the CCS Directive and clarified in GD 1.
The leakages will be calculated in accordance with the Monitoring and Reporting
Regulation (MRR) 2018/2066/EC, Annex IV, Section 2312.
The amount of the financial security for this obligation can be based on the following
formula:Amount of financial security = (∑potential leakage events P(event) x M(event)) x C(allowances)
Where:●P(event) = conservative estimate of likelihood of event occurring;●M(event) = conservative estimate of mass of emissions if event occurs; and●C(allowances) = estimate of cost of allowances for emissions.

Estimating potential leakage amounts
The determination of leaked amounts should be based on an evaluation of thesite-specific leakage risks and the amount that can leak from each identified leakage
pathway.
The amount of financial security for surrender of allowances should be based on anassessment of risk of leakage at the time the calculation is made, and should reflect theamount of CO2 that has been injected. The estimated amount of leakage should then be
updated throughout the project, as per Section 3.4.5.
Estimations of potential leakage amounts can be based on deterministic or probabilistic
quantification approaches. If a probabilistic approach is used, then the competentauthority should specify a particular percentile (e.g. 80%) that should be used to derivea ‘conservative estimate of mass of emissions’ from the probability distribution for
estimated leakage, i.e. a value for M(event) in equation (1) above.
Estimating the costs of allowances
Emission Unit Allowance (EUA) prices vary with carbon market fluctuations. Therefore,
to predict the future price of EUA (in order to determine the EUA price when a potential
leakage event occurs), it is recommended that the operator uses projections of low- and11 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32003L0087.
12 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018R2066&rid=1.

21

high-end EUA prices over the period until next revision of financial security, as per
Section 3.8.
The base-case price may be based on the best-fit linear trend in the EUA price over theperiod since the revision of financial security.
The low- and high-end price may be based on the deviation from this linear trend overthe period since the revision of financial security, i.e. the minimum and maximum EUA
price, assuming that the best-fit linear trend observed continues over the next period.

3.4.3.4.

Calculating the component of financial security
related to closure and post-closure

The amount of financial security for closure and post-closure must be sufficient for:1. updating the provisional post-closure plan during the closure period;
2. the costs of sealing the storage site and removing the injection facilities, including
their recycling or disposal;
3. the estimated financial contribution to be provided, in accordance with Article
2013.
The activities, labour, equipment, and disposition plans for site closure should be
described in the provisional post-closure plan. This plan can therefore provide a technicalbasis for estimating the amount required for closure financial security.
Although the operator may plan for closure to follow many years of successful
operations, the amount of financial security should be sufficient to cover the eventualitythat the facility must be closed earlier.

3.4.3.5.

Calculating the component of financial security
related to continued injection

In accordance with Article 11(4), the competent authority may temporarily continue CO2
injection operations, following the withdrawal of a permit under Article 11(3). In doing so,
the competent authority becomes responsible for legal obligations relating to CO2
acceptance criteria, monitoring, potential corrective measures and surrender ofallowances during the applicable period.
Article 11(4) authorises the competent authority to recover any costs it incurs from theformer operator, including by drawing upon the financial security. This phrasing appears
to allow Member States to require amounts of financial security for operating the site for

13 Article 19(3)(b)(ii) states that the financial security can only be released if the financial

contribution under Article 20 has been provided. However, this condition might not be able
to be met if, for example, the operator has become insolvent. The amount of financial
security should therefore be sufficient to also cover the financial contribution required under
Article 20.

22the time period required to issue a new permit (e.g. 3 to 5 years), including all associatedobligations (as per items 1, 2 and 3 in Table 2).
The amounts of financial security for site operations should initially be based on theoperator’s pro forma cash flow financial plan, and updated later using actual cost
information from the operator. There should be no offset to the cost estimate forpresumed revenues, which may be unlikely to materialise in this situation.

3.4.4. Accounting for the effects of inflation on the amountof financial security
Member States may take different approaches to reflect future inflation when
determining amounts of financial security:●

Method 1 – estimate all amounts (including for future years) in current year Euros
and add up the yearly amounts;●

Method 2 – inflate estimated costs in later years to incorporate potential for
inflation and add up the yearly amounts;●

Method 3 – periodically adjust the amount to account for actual inflation since
the prior amount was calculated;●

Method 4 – periodically recalculate financial security amounts anew, either incurrent-year (Method 1) or inflated (Method 2) Euros.

Methods 3 or 4 may be used to complement Methods 1 and 2 for purposes of updating
financial security amounts.
Method 1 simplifies the determination of financial security amounts by excluding future
inflation. There is some financial risk of underfunding the obligations with this method.
Method 2 may also underestimate the future inflation. Regular updates to the financial
security amounts can mitigate these financial risks. On the other hand, if Method 2
overestimates future inflation, then the operator will have incurred some unnecessary
costs for financial security.
The technique of discounting can be used to determine a present value for a stream ofmonetary values over time. Discounting is used to calculate a present value by adjustingfor both inflation and the time value of money. Member States may identify instances
when discounting future amounts into a present value may be used as the required
amount of financial security.
Discounting should be used only, if at all, in connection with financial security instruments
where actual funds have been set aside in anticipation that their value will grow over time(e.g. in a trust fund or bank certificate of deposit).
It is recommended that the competent authority approves or determines the discount rateaccording to best practice and after tax, and that the discount rate reflects the earnings
rate appropriate for the financial security instrument and the instrument’s investment

23

restrictions, if any, and is consistent with the treatment of inflation in determining amountsof coverage.14
Otherwise, basing the financial security amount on the present value of the obligation is
not appropriate. It is furthermore recommended that the competent authority approves
or determines the discount rate for the obligation according to best practice and after tax,
and that this discount rate is consistently used in determining amounts of coverage.

3.4.5. Periodic adjustment of the amount of financial
security
Article 19(2) directs that the financial security must be periodically adjusted to takeaccount of changes to the assessed risk of leakage and changes to the estimated costsof all obligations listed in Section 3.3.
Adjustments based on changes to the assessed risk of leakage should be based on theeffect of changes to the site-specific leakage risk profile on the cost elements discussed
in Section 3.4.2.
Such changes can occur as a result of factors such as:●changes in scale or timing and volumes of injections;●changes in the subsurface area covered by the CO2 plume;●

advances in science and technology;●changes in prices of emission allowances;●inflation and currency exchange fluctuations;●changes to the monitoring plan;●changes to the corrective measures plan;●

updates to the provisional post-closure plan;●changes to regulations; and●changes to permits.

The CCS Directive does not specify when adjustments should be made to the amountsof the financial security (in the absence of a precipitating event, such as a change to theassessed risk of leakage). Member States may want to synchronise the timeframes forsuch updates with the timing of one of the following obligations:●the monitoring plan must be updated every 5 years;●

the competent authority must review and where necessary update the storage
permit 5 years after it was issued and every 10 years thereafter (in addition to thetriggers listed in Article 11(3)(a)-(f)).

14 If Method 1 is used, the discount rate should not include an inflation component. If Method 2

is used, the discount rate may include an inflation component.

24

In scheduling periodic adjustments to the amounts of financial security, Member States
may wish to consider the following:●

periods of high inflation may call for more frequent updates than periods of low
inflation; and●after closure, there will be no further injections, and changes in the subsurface
area covered by the CO2 plume should be minimal, suggesting that less frequent
updates of financial security after closure may be acceptable.

3.5. Proof of validity and effectiveness of financial
security
The operator is responsible for establishing and maintaining financial security. The
operator must, as part of the storage permit application, present proof that adequate
financial security will be valid and effective before injection starts.
The CCS Directive does not define what is meant by ‘valid and effective’ financial security
instruments. The Member States should therefore provide clarity on what is required forthe instruments to be valid and effective. The following options can be considered:●an financial security instrument is ‘valid and effective’ when it satisfies the legal
criteria for that type of instrument, is issued by an eligible party (see Appendix C),
is enforceable by the competent authority and otherwise complies with the lawsof the Member States jurisdiction where storage will occur; and●an financial security instrument is ‘valid and effective’ when it has been properly
executed by all required signatories and authorising, witnessing and/or attesting
parties as being effective as of a stated date, prior to the date when injection
starts.

Member States may require the documentation for the financial security in the permit
application to include one or more of the following:●draft of the financial security instrument and necessary accompanying
documents (e.g. resolutions, powers of attorney);●

explanation how the financial security instrument satisfies the criteria for that typeof instrument;●

demonstration that the issuing institution satisfies the eligibility criteria for issuersof that type of instrument;●

explanation of any deviation from the criteria and statement regarding the impact
of such deviations on the certainty and liquidity of the financial security;●

independent legal opinion regarding financial security amount, validity andeffectiveness;●basis for proposed initial amounts of financial security, including description of all
calculations, data, data sources and documentation of assumptions used; and25

●confirmation that the financial security is sufficient, either independently orcollectively (if more than one) to cover the estimated obligations.

If the operator seeks to add or replace an financial security instrument, the addition or
replacement should be reviewed against criteria for instrument acceptability (AppendixA) and issuer eligibility (Appendix C).
The existing financial security should be valid and effective until the competent authority
has approved the addition or replacement, after which the equivalent prior financial
security instruments may be allowed to terminate or be cancelled.
Member States should further consider whether the validity or effectiveness of theassociated financial security would be impaired by a proposed change in the entity
serving as the operator of the storage site or a change in ownership of the site. For some
instruments, such a change may require substitute or replacement financial security.
Such changes may also affect issuer eligibility, where self- or related-party guarantees
are being used.

3.6. Maintaining validity and effectiveness of financial
security
Member State arrangements for financial security should include provisions relating tocancellation, termination, non-renewal, voiding or suspension of financial security
instruments by issuers. Member States should consider requiring the following.
●

No changes may be made to the terms and conditions of financial security
instruments without the prior written approval of the competent authority (which
is not to be unreasonably withheld or delayed).

●

Sufficient prior notice should be given to operators and the competent authorityof any intent by issuers to cancel, terminate, not renew, void or suspend an
instrument so that a replacement instrument can be provided.

●

The competent authority should be allowed to draw funds from an instrument
prior to its cancellation, termination, non-renewal, voiding or suspension – if theoperator does not produce an approved substitute instrument in good time. Whenreviewing proposed financial security instruments, the competent authority
should consider that not all instruments will allow for such withdrawal.

As opposed to an issuer’s voluntary decision to cancel, terminate, non-renew, void orsuspend an financial security instrument, an instrument may become invalid or
ineffective if the issuer:●ceases to satisfy the eligibility criteria; or●loses their legal authority to issue the financial security instrument.

Although desirable, giving prior advance notice of incapacity by the issuer to the operator
and the competent authority may not be possible or may not occur. Member Statesshould consider requiring that the operator provide a substitute or replacement financial

26

security instrument within a specified time period after learning of the issuer’s incapacity
to maintain a valid and effective financial security instrument.

3.7. Reporting
Article 14 states that at least once a year the operator must submit to the competentauthority proof of establishing and maintaining the financial security. More frequent
reporting, although authorised under the CCS Directive, should rarely be required.
Member States may wish to describe specific information to be provided by the operator
in these annual maintenance reports on the This could include the following:●

any changes made to the terms and conditions of financial security instruments
without the written approval of the competent authority;●evidence demonstrating that the issuing entity continues to meet eligibility criteria;●

information about costs (e.g. of site operations, of monitoring and of complying
with CO2 acceptance criteria); and●evidence demonstrating that the financial security is still adequate with respect tothe most recent risk assessment of the storage site.

Some financial security instruments may require additional information. For example,
where an instrument (such as an insurance policy) requires regular payment ofpremiums, the operator’s annual reports may provide evidence to the competentauthority that the required payment was made. The operator should report when an
instrument has been renewed or extended after a termination date.

3.8. Release of the obligation to maintain the financial
security
Article 19 describes the following three situations when an operator no longer needs tomaintain the financial security:●

when a new storage permit has been issued after the storage permit has been
withdrawn in accordance with Article 11(3);●when a storage site has been closed in accordance with Article 17(1)(a) or (b)and the responsibility for the storage site is transferred to the competent authority
in accordance with Article 18(1) to (5); and●where the site is closed in accordance with Article 17(1)(c) until the transfer of
responsibility under Article 18(8), provided the Article 20 financial obligations
have been fulfilled.

The competent authority should formally release the financial security to the operator
following these situations. The competent authority should also release certain
components of the financial security when it is no longer required to meet financial
security obligations.

27

For example, after the operator completes closure, the competent authority should
consider releasing the following financial security components:●

financial security for closure, and●financial security for temporary continuation of injection.

Member States should provide transparency regarding the criteria and procedure forreleasing financial security components. The competent authority should, for instance,clarify whether:●

the operator must ask the competent authority for permission to release thefinancial security, and the reasons for which the competent authority may decline
to release the financial security;●

the operator may unilaterally release the financial security; or●

the competent authority alone may release the financial security.

Issuers should be formally notified about any release of financial security, including when
the financial security need no longer be maintained.
Where the financial security took the form of funds or other assets given to the custodyof the competent authority, release will entail the return of those funds or other assets tothe operator. The competent authority is recommended to require a written receipt or
acknowledgement from the operator as evidence that the financial security was received
by the operator.

28

4. Financial contribution
Article 19 Financial security and Article 20 Financial mechanism in the CCS Directive arelinked by similar intent, and by similar options available to Member States:
1. One intent of Article 19 is to ensure that the costs of performing the obligations
listed in Section 3.3 can be fulfilled, if the operator is unable or unwilling to do so,
or if the permit is withdrawn under Article 11(3).
Article 19 also intends to limit any delays in the performance of these obligations
by ensuring that funds are readily available.
Article 20 shares the intent that the post-transfer costs of at least the monitoring
obligation for a period of 30 years need to be fully covered by the operator andthat necessary funds be made readily available to the competent authority.
2. The same principles used to determine the financial security can be used todetermine the financial contribution covered by the financial mechanism. Thereis, however, a significantly different risk profile for storage sites before and after
responsibility is transferred in accordance with Article 18. This may impact theappropriateness of the instruments, as well as the cost to obtain and maintainthem.
The competent authority is recommended to perform a robust and independent
review of the risks for each phase before approving an instrument. Before
accepting a financial mechanism, the competent authority is recommended totake the operational history of the storage site into consideration, in order toassess the risk profile of the storage site post-transfer and thus the acceptablesize and format of the financial mechanism.
This section elaborates on how the financial contribution to be covered by the financial
mechanism can be estimated, to provide transparency and predictability for operators.
Due to the similarities in the intent and options noted above, this section will focus on
options for the financial contribution that may differ from the guidance for the financial
security, and it will discuss provisions that are unique to Article 20.
Member States should specify procedures and timetables for the financial contribution.
It is anticipated that the financial contribution will involve a one-time transaction between
the operator and the competent authority, but Member States may allow otherarrangements. The financial contribution should be considered available to thecompetent authority when the competent authority can exercise exclusive rights ofownership, control, possession and disbursement of the financial contribution, and theoperator transfers to the competent authority or relinquishes all rights and claims withrespect to the financial contribution.
However, although the financial contribution need not be made available to thecompetent authority until the end of the post-closure period, the operator’s injectionrelated revenues will have ceased with site closure and there might appear to be afinancial risk to the competent authority, unless the financial contribution has been
secured at an early stage of the storage project.

29

Art. 19(3)(b)(ii) requires that the financial security can only be released if the financial
contribution under Art. 20 has been provided. However, this condition might not be able
to be met if, for example, the operator has become insolvent and if the financial security
has at this stage already been exhausted to meet other obligations under the storage
permit. Therefore, the financial security should in substance also cover the financial
contribution required under Art. 20.

4.1. Legislative context
Article 20(1):‘Member States shall ensure that the operator, on the basis of arrangements to be
decided by the Member States, makes a financial contribution available to the competentauthority before the transfer of responsibility pursuant to Article 18 has taken place. The
contribution from the operator shall take into account those criteria referred to in Annex I
and elements relating to the history of storing CO2 relevant to determining the posttransfer obligations, and cover at least the anticipated cost of monitoring for a period of
30 years. This financial contribution may be used to cover the costs borne by thecompetent authority after the transfer of responsibility to ensure that the CO 2 iscompletely and permanently contained in geological storage sites after the transfer of
responsibility’.
Article 18(1) states that the post-transfer obligations of the competent authority include
the following:●

monitoring – reduced level which will enable leakages or significant irregularities
to be detected (Article 18(6));●

corrective measures in the event of leakages or significant irregularities;●

surrender of allowances in the event of leakages, in accordance with the ETS
Directive; and●obligations for preventive and remedial action under Articles 5(1) and 6(1) of
Directive 2004/35/EC.

Some financial mechanism approaches may trigger state aid, such as when thecompetent authority accepts a lower financial contribution than required by the CCS
Directive. Where state aid within the meaning of Article 107(1) of the Treaty on the
Functioning of the EU (TFEU) is involved in establishing the financial contribution, in
accordance with Article 108 of the TFEU, that state aid must be notified to and authorisedby the Commission before it is granted.

4.2. Obligations to be covered by the financial
contribution
The CCS Directive does not require that the financial contribution covers all costs which
the competent authority will incur for the post-transfer obligations, but requires that thefinancial contribution covers ‘at least the anticipated cost of monitoring for a period of 30

30

years’. Member States should clarify their requirements for items that are to be included
in calculating the financial contribution.
As per Article 18(1), the financial contribution should cover costs for three principle
components:●

Monitoring. The plan for post-transfer monitoring should be based on theassessment of any residual risk of future leakage and any residual risk to theenvironment and human health. For circumstances where such residual risk is
considered to warrant monitoring, the competent authority should conduct
monitoring at a level which allows for detection of leakages or significant
irregularities. If any leakages or significant irregularities are detected, monitoring
must be intensified as required, to assess the scale of the problem and theeffectiveness of corrective measures.

●

Corrective measures and preventive and remedial action. As per GD 3, a precondition for transfer is that ‘modelling projections demonstrate that the CO2 willremain contained through various trapping mechanisms in the storage complex
over the modelled time-period, and that there is no significant risk for futureleakage’. The likelihood that corrective measures or preventive or remedial action
is required is therefore low.

●

Surrender of allowances. In the unlikely event that leakage does occur after
transfer, the financial contribution should cover costs related to the surrender of
any allowances.

4.3. Estimating the amount of the financial contribution
The principles and approach described in Section 3.4.2 to determine amounts of financial
security may also be used for estimating the amounts of the financial contribution. Thismeans that costs related to obligations that are certain to occur (i.e. monitoring at a level
which allows for detection of leakages or significant irregularities for at least 30 years)
should be estimated deterministically; and that estimated costs associated with
contingent obligations should be probability weighted. The latter relates to obligations
that occur if leakages or significant irregularities are detected, i.e.:●

intensification of monitoring as required to assess the scale of the problem andthe effectiveness of corrective measures;●

implementation of corrective measures and preventive and remedial action; and●surrender of allowances.

However, whereas the calculation of the amount of the financial security related tocontingent obligations should use a conservative probability weighting, it isrecommended that the corresponding amount of the financial contribution is calculated
based on a best estimate of the likelihood of the associated future events.
This means that the best estimate of contingent costs should be multiplied by the best
estimate of the probability that the event giving rise to the contingent cost will occur. This
will then ensure that the financial contribution does not put an undue cost-burden on
project developers.

31Section 3.4.3.4 clarifies that the financial contribution should be incorporated into theestimated amount of the financial security related to closure and post-closure. Section
3.4.5 further specifies that the amount of financial security must be periodically adjusted
to take account of changes to the assessed risk of leakage and the estimated costs ofall obligations.
This therefore means that amount of the financial contribution should be adjusted, as
required, based on the site’s history, risk profile, technology developments and otherrelevant information, including the occurrence of any leakages or significant irregularitiesor the detection of significant adverse effects, and the effectiveness of any corrective
measures taken.

32Appendix A: Acceptance criteria for financial security
instruments
Member States may wish to evaluate the following criteria when determining which
instruments to accept as financial security:
1. Certainty presented by the instrument. For example:oWill the instrument be valid and effective in the Member State jurisdiction
where the storage site is located?

oIs the financial security instrument accessible and enforceable by thecompetent authority in the Member State jurisdiction where the storagesite is located?

oWill the instrument protect the financial security against claims bycreditors and other competing claimants in the event of the operator’s
insolvency or bankruptcy?

oWill the instrument effectively remove the financial security from theoperator’s ownership or control?

o

Under what conditions, if any, can the financial security instrument becancelled, terminated, non-renewed, voided or suspended?

oIs the instrument issuer a financial institution that is subject to financial
supervisory oversight of its solvency?

oFor parent company guarantees or self guarantees, what is thecompany’s corporate credit rating?

2. Amount of funds guaranteed. For example:oIs there an adequate level of confidence that the funds will be sufficient tocover all obligations listed in Section 3.3? For instance, are the scenarios
used in Section 3.4.2 to determine the probability weighting as per
principle 3 adequately conservative?

oWill the instrument provide the necessary coverage if funds are required
prior to a future maturity date? (This may be an issue for deposit
certificates which impose a penalty for liquidation prior to maturity.)oWill the instrument cover funding needs from the first euro? (This may be
an issue for instruments such as types of insurance that include a
deductible or retention which remains the responsibility of the operator.)oIs the value of the security independent of the operator’s financial
situation? Other operator assets may be subject to prior or subsequentclaims in whole or in part by regulators, authorities, lenders, suppliers or
customers, thus impairing their value.

3. Liquidity of funds (can they be accessed whenever needed, with no penalty?).
What conditions must be met for the competent authority to gain access to thesecurity? (For example, must proof of the operator’s default be adjudicated?)33

4. Duration or term of the instrument. How often must the instrument be renewed
or replaced, given the expected duration of the permit?
5. Flexibility regarding necessary adjustments. For example, if the required
amount of financial security coverage increases, can the instrument be readilyamended accordingly or will an additional financial security instrument berequired to make up the difference?

34

Appendix B: Options for financial security
instruments
A.B.1 Funds (‘deposits’) to the competent authority
Deposits are typically provided as a lump sum but possibly also as instalment payments.
This gives funds directly into the custody and control of the competent authority, which
can either create an account on behalf of the operator or turn the funds over to thegovernment treasury.
This approach puts the responsibility on the competent authority to access funds whenneeded and to return funds to the operator when the financial security is released.
Whether the funds earn interest will vary across Member States.
Unlike with trust funds and escrows, the competent authority itself will be responsible
for all recordkeeping. The competent authority is recommended to protect the funds
from other uses by ring-fencing the financial security, ensuring it is available throughout
all relevant project phases.

A.B.2 Collectively financed CO2 fundThis may involve either a state-owned or private body collecting fees from the operatorsof various projects prior to or during operation, linked to e.g. a euro amount per tonne
stored.
The CO2 fund may in return provide financial security for all or parts of the liabilities
during the individual project’s lifetime, depending on the approval of the competentauthority.
Following the instructions of the competent authority, the CO2 fund may release funds
as needed to satisfy obligations, when the operator is unable or unwilling to do so, or asa financial contribution prior to transferring responsibility under Article 18, in accordancewith Article 20.

A.B.3 Irrevocable trust fundThis involves the legal transfer of property to a trustee who acts as a fiduciary on behalfof the competent authority, which is the beneficiary of the trust. The trust is consideredirrevocable because the operator cannot unilaterally terminate the trust and reclaim theproperty.
A trust is advantageous when the property constituting the trust is protected from claimsin the event that the operator becomes insolvent or goes bankrupt. The trustee provides
or arranges for the professional management of property in the trust.

35

The certainty of the availability of funds is increased by restrictions on investing the trust
fund in any stock, bonds or other securities of the operator and its legal affiliates(including corporate parents and subsidiaries). This certainty could outweigh the lost
income from investing the trust fund in higher risk securities, which typically provide ahigher return.
Following the instructions of the competent authority, the trustee may release the trust
fund assets to the operator when the financial security is no longer required or as
reimbursement for expenses incurred by the operator. Alternatively, the competentauthority can instruct the trustee to release assets as needed to satisfy obligations, when
the operator is unable or unwilling to do so.

A.B.4 Parent company guarantee/affiliated company
guarantee/self-guarantee
This is an agreement in which one party, called the guarantor, takes on the payments
or obligations from the debtor if the debtor is unable or unwilling to do so. This also
includes issuance of an ‘equity commitment letter’ issued to the operator from one ormore of its equity holders.
In the event of self-guarantee, the corporation or legal entity responsible for providing
the financial security will also be the guarantor. To this end, proof must be provided that
adequate funds for the financial security cannot be accessed by the company for otherpurposes than to cover the obligations covered by the financial security in accordancewith Article 19.
Member States and competent authorities should ensure that guarantee requirements
are limited to covering the obligations under the CCS Directive, based on a site-specificassessment.

A.B.5 Escrow
This involves setting aside property in accordance with a written agreement. Legal
protection of escrowed property from the claims of creditors may not be available insome Member States.
Escrows that are revocable by the operator lack the desired certainty for a financial
security. The escrow agent is not typically a fiduciary of the beneficiary, but instead is
responsible to the party putting property into the escrow.15

15 In many parts of Europe notaries have traditionally functioned as depositories who stored andadministered valuables on behalf of their clients. In some MS jurisdictions notaries may beable to provide escrow agent services.

36

A.B.6 Bank guarantees
These can take many forms. For example, a bank guarantee may accompany a chequedrawn on the operator’s account; a guarantee like this gives assurance to the competentauthority that the operator’s cheque will be honoured by the bank.
Bank guarantees often are used as a performance bond, to allow the beneficiary (e.g.
the competent authority) to make a demand on the bank in the event of non-performanceof the obligations covered by the guarantee.
Banks may issue a payment guarantee instead of a standby letter of credit.
The International Chamber of Commerce developed Uniform Rules for Demand
Guarantees (URDG) in 1991 and revised the rules and model forms in 2010.
The UN Convention on Independent Guarantees and Stand-by Letters of Credit isdesigned to facilitate the use of independent guarantees and standby letters of credit
where only one or the other of those instruments is traditionally in use.

A.B.7 Irrevocable standby letter of credit issued by abank
The competent authority can draw funds from the letter of credit to use for the costs of
the assured obligations. Although irrevocable by the operator, the issuing bank may set
a finite term on the letter so that the issuing bank can periodically review the operator’s
creditworthiness. This instrument is widely used in international commerce, following
the Uniform Customs and Practice for Documentary Credits of the International
Chamber of Commerce.

A.B.8 Bond issued by a surety company (or a bank)
The bond gives assurance to the competent authority that, if the operator fails to perform
its assured obligations, the surety will make the required amounts available (‘paymentbond’) or will arrange for performance of the obligation (‘performance bond’).
Surety companies make bonds available only to creditworthy parties. Bonds are
effective until cancelled or terminated; sureties may set a finite term on the bondbecause the operator’s creditworthiness may change over time. Bond terms of 5 to 10
years are not uncommon.
Some Member States may not have legislation authorising surety bonds. Surety bonds
are industry standard in the United States for drilling activities and ‘plugging andabandonment’ (‘P&A’) to ensure payment for and performance of well P&A. They are
not as commonly used in the European market.

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A.B.9 EU emission allowances (EUAs)
To provide funds for possible surrender of allowances for leakage, in accordance with
the CCS Directive, and as per inclusion of geological storage sites as an EU ETS facility
under Directive 2003/87/EC, the operator may elect to purchase excess emission
allowances and include these excess allowances in the financial security or financial
contribution.
This instrument has the advantage of avoiding risk related to EUA price changes forpotential future leakages and associated surrender of allowances.
Member States should consider whether these EUAs, even when placed outside theadministrative control of the operator (e.g. in a trust fund, or transferred directly to thecompetent authority), provide sufficient certainty, amount, liquidity and duration to be
acceptable as equivalent to a financial security.
Member States should in any case ensure that EUAs held as a financial security to meet
obligations arising from inclusion of the storage site under ETS Directive 2003/87/EC
are not held as financial security for any other purposes, or for emissions at the sametime. In this case, the amount of EUAs tendered as financial security should be equal toat least the amount of allowances used to determine the amount of required financial
security, as described in Section 3.4.3.3.
The EUAs valid in a certain trading period held as financial security should be replacedin a timely fashion by a substitute, e.g. by banking the allowances in accordance with
Article 13(2), second subparagraph, of Directive 2003/87/EC.
If the operator chooses to use EUAs as a financial security to meet the obligations
arising from inclusion of the storage site under Directive 2003/87/EC, instead of EUAs,
EUA futures or forwards can also be used.

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Appendix C: Eligibility criteria for issuers of financial
security instruments
The security provided by a financial security instrument depends on the terms andconditions of the instrument and on the financial strength of the body issuing the
instrument. Therefore, an Member States may wish to define criteria for determining
acceptable issuers.
To this end, the Member States can adopt eligibility criteria used for national financial
security programmes for waste facilities (e.g. landfills), extractive operations,decommissioning of offshore installations, trans-border movements of hazardous waste,environmental liabilities under Directive 2004/35/EC, waste management in accordancewith Directive 2008/98/EC, and similar programmes, taking into account lessons learned
from those programmes.

A.C.1 Criteria for determining the eligibility of issuersthat are financial institutions
Member States and competent authorities may wish to specify criteria for identifying
types of institutions eligible to issue acceptable financial security instruments forpurposes of Article 19. Criteria may address the types, sizes or other characteristics ofsuch institutions.
For example, if a Member State decides that bank guarantees are acceptable
instruments, it is recommended that the Member State determine whether to accept suchguarantees from any bank or only from certain types of banks, banks of certain sizes, orbanks meeting other criteria (e.g. credit ratings from recognised or accredited ratingorganisations).
It is recommended that eligibility criteria are chosen to support the certainty and liquidityof an instrument and in consideration of the enforceability of the instrument by thecompetent authority. For example, issuing institutions that are subject to a higher levelof financial supervision and approval may provide greater certainty and liquidity thaninstitutions subject to less oversight.
Member States should keep in mind that as eligibility criteria become more stringent,
fewer issuers may qualify, which can affect the availability and cost of financial security
instruments to operators.

A.C.2 Eligibility criteria for instruments issued bygovernment agencies
Member States may decide that eligibility criteria are not needed when the financial
security instrument is issued by a national government. Governments typically haveample liquidity and can secure funds through their powers to tax.

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Governments at sub-national levels and government agencies lacking legal authority to
tax or otherwise raise funds may provide less certainty and liquidity. Member States may
wish to specify eligibility criteria for such bodies. Criteria may relate eligibility to their type,size, financial characteristics or other features (e.g. credit ratings from recognised or
accredited rating organisations).

A.C.3 Eligibility criteria for self-insurance, captive
insurance, and related-party guarantors
Eligibility criteria are important when the issuer of the allowable Financial security
instrument is the operator themself or a related corporate parent or subsidiary. Financial
security provided by such instruments do not entail a potential independent third-party
source of funds; without that independence, there is a greater risk that whatever may
cause the need for financial security also may cause the self- and related-party
instruments to fail.
Because of this lack of independence, some Member States may decide not to accept
such instruments. Other Member States may decide to accept such instruments
because:●the probabilities of issuer default for self or related-party guarantees remain
exceedingly low, even if somewhat greater than for default by an issuing financial
institution;●

the costs of alternative instruments are much higher;16●

alternative instruments are not readily available;●some bodies issuing self and related-party guarantees may have greater
resources than banks and other financial institutions.

Eligibility criteria for issuers of acceptable self-guarantees and related-party guarantees
may be based on the issuers’ size, type of organisation (e.g. a public utility), indicatorsof financial strength or other characteristics that may affect the certainty and liquidity of
their commitments (e.g. credit ratings from recognised or accredited ratingorganisations).
As is true for the other categories of issuing institutions, eligibility criteria will reduce thepotential pool of parties that may provide acceptable financial security instruments, withpossible implications for cost and competition.

16 The costs of alternative instruments will always be greater than the nominal costs of self- andrelated-party instruments. Alternative instruments provided by financial institutions are often
issued for customers who are considered creditworthy. The costs of such instruments
should not be interpreted as evidence of the customer’s potential for default. Instruments
acceptable for financial security purposes are intentionally not well-suited for speculative
activities.

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