2021 THOUGHT LEADERSHIPUNLOCKING PRIVATE FINANCE TOSUPPORT CCS INVESTMENTSDOMINIC RASSOOL
Senior Consultant Policy and FinanceCONTENTS

2

KEY MESSAGES

3

1.0 CCS IS NEEDED AT SCALE

5

2.0 THE COST OF WIDESCALE DEPLOYMENT REQUIRES PRIVATE INVESTMENT IN CCS

7

3.0 BARRIERS TO PRIVATE INVESTMENT IN CCS

8

4.0 PROJECT FINANCE INCREASES PRIVATE INVESTMENT IN CCS

12

5.0 ACCELERATING THE USE OF SUSTAINABILITY LINKED LOANS AND GREEN BONDS FOR CCSINVESTMENTS

17

6.0 CLIMATE RELATED FINANCIAL DISCLOSURES WILL HELP DRIVE INVESTMENTS IN CCS

20

7.0 FINANCING CCS IN DEVELOPING COUNTRIES

22

8.0 CONCLUSIONS

28

9.0 REFERENCES

29

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

KEY MESSAGESThe need for CCS
Carbon capture and storage (CCS) comprises a groupof technologies that prevent carbon dioxide (CO2)from being released into the atmosphere. The captureof CO2 from gas streams is not new. CO2 capture
technologies based on chemical solvents (amines)
were first commercially deployed in the 1930s to
separate CO2 and other acid gases from methane innatural gas production. The first commercial CCS facility
commenced operation in 1972 at the Val Verde Natural
Gas Plant in west Texas USA. This facility is still operating
as the Terrell gas processing facility. CO2 captured fromnatural gas processing at Terrel is transported via apipeline to oil fields where it is injected for Enhanced Oil
Recovery (EOR). The first use of CCS purely for climate
mitigation was at the Sleipner natural gas processing
facility in the North Sea. This facility has permanently
stored about 0.9 million tonnes of CO2 every year since
1996.
As the world’s emissions have continued to rise and theglobal carbon budget diminishes, climate experts haveincreasingly cited the use of CCS in their scenario models
whereupon the technology is used to permanently store
CO2 in geological formations.
One of these models is the International Energy
Agency’s Sustainable Development Scenario (IEA-SDS)
which is aligned with the goals of the Paris Agreement. It
starts with the United Nations Sustainable Development
Goals and then works back to set out what would beneeded to deliver these goals in a realistic and costeffective way. The IEA-SDS requires 9% of the world’s
emissions reductions to be achieved using CCS.

3UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

Private investments areneeded to meet CCS capitalrequirements
The need for CCS in the IEA-SDS translates to an
estimated 70-100 CCS facilities built per annum, forwhich we estimate the total capital requirement to be
between US$655 bn and US$1280 bn. To achievethis, the private sector must be incentivised to invest
in CCS because the capital requirement far outstrips
what governments are willing to pay in the timeframe
required. This means most of the funding for CCS is
to come from debt, capital markets, and other sources
such as sovereign wealth funds, which currently do notdirectly fund CCS at a meaningful scale.

Governments can create anenabling environment forinvestments in CCS
Thus far, the 28 commercial CCS facilities around theworld have mostly been financed on the books of stateowned enterprises and large corporations (throughcorporate finance), and, in most cases, these projects
have relied on the commercial value of CO2. Whatis clear is that if there is a business case for CCS, theprivate sector will invest in and deliver CCS projects.
However, for CCS to be deployed at scale, governments
can support the deployment of CCS in two ways. Firstly,
they can create climate-based policies to provide areliable source of revenue for CCS projects. These
policies may take the form of various mechanisms, solong as they place a sufficient value on CO2 to create abusiness case for CCS investments. Secondly, smaller
emitters with more constrained balance sheets cannot
invest in CCS through the corporate finance model.
Instead, they will require support to enable theirinvestments through project finance. To enable project
finance, governments can mandate specialist financierssuch as multilateral agencies (MLAs) and credit export
agencies (ECAs) to support CCS investments. Support
from these specialist financiers will allow the participationof commercial lenders in CCS projects as they can fundthe most high-risk areas of projects.

Sustainable finance canbenefit CCS deployment
As CCS deployment accelerates, sustainable financehas an important role to play, whether through innovative
lending instruments such as sustainability linked
loans (SLL’s) or through capital markets, for example,
bond markets. SLL’s have proved particularly popular,
despite their recent emergence, whilst green bonds
have supported the deployment of other sustainableinfrastructure projects such as offshore wind and solar
farms. Issuances of green bonds have accelerated overthe past decade and yields of green bonds are now
often less than conventional debt. As new standards
emerge to include CCS within the taxonomy of green
and sustainable bonds, it is essential that large capital
flows find their way to CCS projects.

4

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

Potential for climate financeto support CCS deployment indeveloping countries
For CCS to achieve widescale deployment, however,
deployment will also be necessary in developing
countries, where there are relatively few facilities. The
risks that beset CCS investments in developed nations
are compounded in developing countries. Climate
finance must play an important role in helping countries
to create an enabling environment for CCS projects.
Firstly, vertical funds such as the Green Climate Fundand their agencies can provide concessional financing
to support the capital needed to fund pilot projects thatserve the purpose of derisking investments. Verticalfunds can also support the development of policy
mechanisms that place a value on CO2 to create abusiness case for investing in CCS.
Secondly, international carbon markets are also a means
through which CCS projects in developing countries cangenerate revenue. As international climate negotiations
get underway at COP 26, the developments surrounding
Article 6 of the Paris Agreement will help to ensure CCS
projects in developing countries can generate revenue
through carbon crediting mechanisms.

1.0 CCS IS NEEDEDAT SCALE
Climate change is often referred to as the greatest
challenge of our time. To avoid the irreversible effects
of climate change, global average temperatures should
remain within 2 degrees Celsius above pre-industrial
levels. The Paris Agreement is a landmark achievement
for the world as it legally binds 196 countries to acommon goal of limiting global warming to well below
2 degrees, preferably to 1.5 degrees Celsius compared
to pre-industrial levels. Achieving this requires countries
to peak their emissions as soon as possible to aim forclimate neutrality (referred to as net-zero emissions) in
the second half of this century.

There are many scenario models that have beendeveloped to define the actions that will be needed overthe coming years. One such scenario is the International
Energy Agency’s Sustainable Development Scenario(IEA-SDS), which estimates that global annual emissions
must come down from around 33 GTCO2 today to
10 GTCO2 in 2050. Figure 1 compares the effects of
the world’s existing policies (Stated Policies Scenario)
with those of the IEA-SDS, describing the wide rangeof mitigation technologies and each of their required
contributions.

figure 1

Figure 1 The IEA’s Sustainable Development Scenario (International Energy Agency, 2020)

CURRENT TRENDS
STATED POLICIESSCENARIO

40

Gt CO230

20

10
SUSTAINABLE DEVELOPMENT SCENARIO

2020

2030

2040

POWER
LIGHT & INDUSTRYCARS & TRUCKSHEAVY INDUSTRYAIR CONDITIONERSNUCLEAR
WIND
SOLAR PVBIOFUELS TRANSPORTOTHER RENEWABLES POWER
OTHER RENEWABLES END USESAVIATION & SHIPPING

5

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

HYDRO

RENEWABLES

BUILDINGSEFFICIENCYINDUSTRIAL ELECTRIC MOTORS

2050

FUEL SWITCH INC. HYDROGEN
ELECTRIC VEHICLESCCUS POWER
CCUS INDUSTRYBEHAVIOURAL CHANGERESOURCE EFFICIENCYFUEL SWITCH,
CCUS AND OTHER

2010

For its part, Carbon Capture and Storage (CCS) is
required to mitigate emissions across hard to abate
sectors, including firm power generation as well as in
the manufacturing and chemicals industries, amounting
to 15% or 5.6 GT CO2 per year.
Approximately two thousand commercial CCS facilities
constructed between now and 2050 will be required
to meet the IEA-SDS, approximately one hundred times
more than are currently in operation. For this to happen,
the build rate of CCS facilities must be ramped up: from
28 facilities constructed over the past forty years toaround 70 to 100 new facilities built each year.

The capital requirement for the deployment of CCS at
this scale is vast, but costs are anticipated to come downover time through deployment. Estimates for the CCS
learning rate vary depending on various factors including
location, and the sector within which the technology is
being applied. Experts estimate that costs can comedown by 10% to 25% for every doubling of capacity
installed (Rubin, Davison and Herzog, 2015), which gives
rise to a total cumulative capital requirement that we
estimate to be between US$ 655 bn and US$ 1280 bn(Figure 2). In either scenario, this has drastic implications
for how CCS projects are financed.

Figure 2 Estimated costs for deploying CCS to meet emissions targets of the IEA-SDS. For each doubling of
global CCS capacity, a reduction in cost, due to the learning rate, is achieved. These two scenarios estimate theoverall cost for both a 20% and 10% learning rate.
ESTIMATED CAPITAL REQUIREMENT FOR CCS DEPLOYMENTCAPITAL COST (BILLIONS OF US$)

1400
1200

CUMULATIVE COST AT 10% LEARNING RATE

1000

CUMULATIVE COST AT 20% LEARNING RATE

800
600
400
200
0

15.62

31.25

62.5

125

250

500

NUMBER OF CCS FACILITIES CONSTRUCTED

6

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

1000

2000

2.0 THE COST
OF WIDESCALE
DEPLOYMENTREQUIRES PRIVATEINVESTMENT IN CCS

7

CCS facilities are large-scale, capital intensive
infrastructure projects, requiring capital in the orderof hundreds of millions, or sometimes billions of US
dollars. During the early stages of CCS deployment,
financial support from governments is necessary tomobilise private capital for CCS projects. In order todeploy CCS at the scale required by the IEA-SDS, mostcapital will have to come from the private sector withsome support from government via special financiers(see Chapter 4).

As we shall see in Chapter 4, investments have beenenabled through public policy incentives that placea sufficient value on CO2. These have often been
supplemented by the sale of CO2 under an offtakeagreement. When revenue generated through either ofthese sources is insufficient, the only way to maintainan acceptable return on investment is by reducing thecapital required from investors. As a result, several CCS
projects have relied significantly on capital grants toreach a positive financial investment decision (FID).

Unlike other mitigation technologies, CCS does not
generate revenue since it does not produce a productsuch as electricity. The only means by which a positive
return on investment in CCS is achieved is when theservice provided by CCS (CO2 emissions abatement) ismonetised. This requires that the value placed on theCO2 captured, transported and stored exceeds the costof CCS. The value on CO2 can be explicit, such as acarbon tax, or implicit, such as a licence to operate. In
the absence of this value, investors will not invest.

However, the capital required to achieve widescale
deployment massively outstrips what governments
are willing to provide in the timeframe required. By
contrast, there are trillions of dollars currently locked
up in the private sector across financial markets, capital
markets as well as other sources of funding such as
sovereign wealth funds. Private funding can come froma wide range of investors, especially banks, as they areexperts in funding infrastructure projects. Unlocking thisliquidity will require governments to develop ambitious
policy incentives that enable viable business models for
CCS projects.

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

3.0 BARRIERSTO PRIVATEINVESTMENT IN CCS
To understand government’s role in creating an
enabling policy for CCS, it is first important to determine
the key barriers to investment in CCS. In a similarmanner to other large-scale climate mitigation projects,
the development and operation of CCS projects
engenders risks that, if not properly managed, create
barriers to investment.

•

Cross-chain risk arising from the interdependencyof the CCS value chain
CCS projects require the coordination of several
activities, often with multiple investment decisions,and each with long lead times. Taking decisions
to develop each element of the CCS value
chain exposes various risks associated withrelative timing and capacity management. This
interdependency continues during the operational
phase. One component of the CCS value chain’s
failure may affect others’ costs and revenues andprevent the value chain from performing as awhole.

•

Long-term storage liability risk
While the risk of leakage from geological storage
is diminishingly small, it is not zero. This presents asignificant risk to CCS project owners if they remain
liable for the risk of leakage over an indefinite
period since the value of this contingent liability
is very likely to increase with time (e.g. as carbon
prices rise).

CCS investment risks can be broadly categorised into
two broad groups:••

General project or mitigable risks, being thosethat are mitigated through learning by doing. As
more CCS facilities have been constructed, project
developers have learned how to manage theserisks.
Hard-to-reduce risks, which are the risks thatcannot be mitigated in the same way by private
sector actors and should, therefore, be addressedby government which is best suited to manage
them.

For the purposes of this paper, it is important to notethat if hard-to-reduce risks are not properly managed,
CCS projects are unlikely to reach a positive FID. The
Global CCS Institute has previously identified thefollowing hard-to-reduce risks (Zapantis, Townsend andRassool, 2019):•

8

Revenue risk arising from an insufficient value on
CO2 emissions
For a potential capture plant developer, the main
impediment to investment is often the lack of aclear and compelling CO2 price signal that places
a sufficient value on emissions reductions. Without
this, there is no incentive to incur the costs ofconstructing and operating the capture facility.

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

For CCS projects to become investible, public policy
plays an essential role in managing hard-to-reducerisks. To this end, there have been several ways
governments can and have responded to each ofthem. Table 1 provides examples of the types of policy
responses that governments can consider.

Table 1 Potential policy responses to overcome hard-to-reduce risks
HARD-TO-REDUCE RISKEXAMPLES OF POTENTIAL POLICY RESPONSE

Insufficient value on CO2emissionsIntroduce a value on CO2 emissions reductions through a carbon tax, tax
credit, emissions trading scheme, CCS obligation, emissions performancestandard, or government procurement standards. A robust policy mechanismthat places a sufficient value on CO2 will support investments in capture
facilities that can then pass on a share of the benefit to transportation andstorage providers.

Interdependency of the CCS
value chain

Provide capital support to enable the development of shared CO2transport and storage networks, focusing on integrated hubs and clusters
where economies of scale can reduce unit costs and a diversified sourceof emissions can reduce the risk of CO2 transport and storage asset
stranding. Governments may initially own the T&S infrastructure. As more
emitters connect to the network the interdependency risk will be reduced.
Government may then choose to sell the infrastructure to the private sector
for a profit.
Legal and regulatory frameworks may place limits on private investors’
exposure to any long-term storage liabilities. This can be achieved bytransferring these liabilities to the state after a specified period of postclosure, and subject to acceptable performance of the storage facility.
Jurisdictions may specify a minimum number of years for which operators will
have to continue post-closure monitoring of a site.

Long term storage liability
Another way long-term storage liability can be managed is through a risk
capping mechanism. This would allow the private sector operator to takeresponsibility for risks incurred below a cap, whilst the government would
take responsibility for all additional risks above that cap. The value of the cap
could be a function of the balance of public and private equity in the storage
operation, with higher private equity translating to a higher cap.
While the policy mechanisms that governments may choose can vary significantly, they all achieve the same
objective: to create a business case for investing in CCS. To help examine this, Figure 3 provides information on thecurrent fleet of commercial CCS facilities in operation or construction1. Understanding the key trends during theseearly stages of deployment provides some insight into what has worked in terms of policies and the nature of CCS
investments.

FOR CCS PROJECTS TO BECOME INVESTIBLE,
PUBLIC POLICY PLAYS AN ESSENTIAL ROLE IN
MANAGING HARD-TO-REDUCE RISKS.

1

9

CCS facilities in operation or construction as of April 2021

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

Figure 3 The location of commercial CCS facilities in operation, project characteristics and enabling policies.

POLICIES& PROJECTCHARACTERISTICS

Carbontax

Tax credit
or emissions
creditUS
Terrell
Enid Fertiliser
Shute Creek
Century Plant
Air Products SMR
Coffeyville
Illinois Industrial
Lost Cabin**

Petra Nova**
Great Plains
ZEROs Project*
Arkalon
BonanzaCore Energy
PCS Nitrogen
CANADA
Boundary Dam
Quest
ACTL Sturgeon Refinery
ACTL Nutrien
BRAZIL
Petrobras Santos
HUNGARY
MOL Szank
NORWAY
Langskip CCS, Brevik Norcem*
Sleipner
SnøhvitUAE
Abu Dhabi CCSSAUDI ARABIA
Uthmaniyah
QATAR
Qatar LNG CCS
CHINACNPC Jilin
Sinopec Qilu*
Karamay Dunhua
Sinopec Zhongyuan
Taizou*AUSTRALIA
Gorgon*In construction**Operation suspended.

10

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

Grant
support

Provision by
government
or SOE

Regulatory
requirement

Enhanced
oil recovery

Low cost
captureLow cost
transport& storage

Verticalintegration

Figure 3 shows that investments have been incentivised
through a range of mechanisms. While each specificmechanism may differ, the following features arecommon in CCS projects:
•

•

•

11

CCS deployment has occurred chiefly across
low-cost capture opportunities. These areopportunities, such as natural gas processing,where the separation of CO2 gas from methaneis standard industry practice. This substantiallyreduces projects’ capital requirement since thecapture facility’s costliest component is preexisting. This limits the additional cost of CCS tocompression, transport and storage.
Most of the world’s CCS facilities rely upon
revenue generated from the sale of CO2 forenhanced oil recovery (EOR) purposes. This isbecause, in the absence of a policy mechanismthat places a sufficient value on the capture,transportation and storage of CO2, practices suchas EOR can provide a reliable stream of revenue
to CCS projects. This occurs most frequently by
selling CO2 gas to a third-party off-taker, whereby
the value of CO2 is indexed to the oil price. This
practice predates the use of CCS for climate
considerations, with the first facility having been
built in the United States in the 1970s. This helps to
explain why the United States is now the country
with the most CCS activity since the use of CO2 forEOR started there.
Most CCS facilities have been developed on
the books of large corporations or state-owned
enterprises (SOEs). These emitters have tended
to have deep knowledge of the technologies andpractices that underpin CCS, primarily because of
their knowledge of the oil and gas sector. It follows
that they are more comfortable with CCS projectrisks than other emitters and are large enough toabsorb the costs of these risks if they materialise.

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

The combination of low-cost opportunities, enabling
policy measures, the sale of CO2, and corporate
investments, has given rise to the current fleet of CCS
projects. However, these circumstances cannot support
deployment at the accelerated rate required to meetclimate objectives because:•

The opportunities for commercial sale of CO2
will be limited and cannot absorb the scale ofemissions that will need to be captured and stored
through CCS. Further, there are logistical barriers
to selling CO2 since not all large emitters are withinproximity of those seeking to offtake CO2.

•

Meeting climate targets requires the applicationof CCS to a broad range of industries, not just thelowest cost opportunities.

•

Most of the world’s companies that have a highneed for CCS to reduce their emissions will not be
in a financial position to fund CCS projects throughtheir balance sheets.

To overcome these challenges, new projects will haveto come from a more diverse group of emitters. In turn,their investments in CCS will be driven primarily byclimate-based policies as opposed to the commercial
value of CO2. For this to happen, policy frameworks
should include measures to enable project finance. The
importance of project finance to CCS deployment is
discussed further in the following chapter.

4.0 PROJECTFINANCE INCREASESPRIVATE INVESTMENT
IN CCSThis section describes the role of different financing
structures to deliver widescale CCS deployment.
As discussed in the previous chapter, funding for manyof the world’s commercial CCS facilities has beenchannelled through large corporations and state-owned
enterprises. Projects developed in this way are funded
directly by the corporation and have not required theapproval of commercial financiers to achieve positive
FID. This form of structuring is known as corporate
finance, and its prevalence across CCS projects
underlines the importance of policy and financial
derisking if the technology is to be deployed rapidly
and at scale. Currently, CCS projects are perceived to
be too high-risk to be funded using alternative means.

Corporate financeThe corporate finance model involves a single
corporation that develops the project and finances allof its costs. The corporation may choose to implement
the project through a subsidiary, which would then be
consolidated into the corporate’s financial accounts.
Since it has full ownership of the subsidiary, thecorporation reaps all the benefits of the project. Still, it
is also exposed to all of the risks and liabilities, which
can be significant should the project not perform as
expected. Such an arrangement makes it possible toraise debt at the corporate level, with the lenders having
recourse to all of the corporate’s assets in the event the
project should not perform. This significantly reduces
the interest rate applied to debt, making the latter
relatively cheaper. Also, since the project management
is internalised, this makes the entire corporate financeprocess attractive in terms of cost of capital and speedof implementation. Not all companies however, arelarge enough to develop projects in this manner. So,

12

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

while corporate finance is efficient, it cannot deliver thevolume of investments required to meet the number of
CCS projects proposed under the the IEA-SDS.

Project finance
An alternative, and perhaps more scalable funding
model, is project finance. It allows multiple equity
investors to participate in a single project, and unlike
corporate finance, the financiers have no recourse to
the assets of project owners. Debt provided throughproject finance is referred to as non-recourse debt, and
it is for this reason that this form of debt is charged at
higher interest rates than corporate debt.
Under project finance, the project is set up through astandalone company, known as a special purpose
vehicle (SPV), with each investor having an equity
stake. Capital for the project is raised based on
future cashflows, so both equity and debt investors
are exposed to any uncertainty in the project’s
performance, thereby increasing the investment risk
and subsequently the cost of debt.
The ratio of debt to equity – also known as the gearing– in project finance can vary significantly and will bedependent on the project specifics, availability of capitaland risk profile of the project owners. Some projects
may have a very high gearing of up to 85% debt,
whilst others will be much lower, at around 50% debt.
Each project is unique, and its gearing can depend on
a wide range of variables, from the amount of equity
available to the number and nature of risks and how
they are managed. Since debt raised for project financeis secured entirely based on future cashflows, a lot of
analysis is required before these types of projects cansecure funding.

figure 4

Large companies, such as utilities, will find that
corporate finance suits their needs better than project
finance. This is because large corporations have two
distinct advantages: their ability to use cash flows
from other operating activities and use their generalcreditworthiness to borrow money to fund projects.

Smaller companies which do not have the largebalance sheets of corporations will find the project

finance structure to be the more attractive andaccessible option for funding CCS projects. Key totheir participation in the project finance model willbe their capacity to partner up with other investors.
Project owners will need to form consortia to raise
equity, whereas lenders will come together to provide
syndicated project loans on the debt side. Figure 4
provides a simplified illustration of how a CCS project
could be structured through project finance.

Figure 4 Illustrative example of how a project finance structure used to enable a CCS investment

GOVERNMENTLENDERSFINANCIAL CONTRIBUTION
EG: GRANTS,
CONCESSIONAL FINANCE

DEBT

DEBT
PAYMENTS

ESCROW
AGENT

SPECIALPURPOSE
VEHICLEVALUE ON CAPTURE
AND STORAGE OF CO2

POLICYMECHANISM

13

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

EQUITYPARENT
COMPANIES

Conditions for lending
Since non-recourse debt commands higher lending
rates, project costs will be sensitive to the proportionof debt in the capital structure of such projects. This isfurther compounded by any hard-to-reduce risks, which
project developers cannot effectively mitigate.. If notproperly managed, these risks will drive up the lending
rates further, leading to high financing costs. This cansignificantly impact the amount of debt financing thatCCS projects can raise.

To close the funding gap, general projects risks shouldbe allocated to the parties that are best placed to
manage them. During the early stages of deployment,
when general project risks are at their highest, CCS
projects will have to rely on specialist financiers who
can provide insurance for risks, loan guarantees anddirect funding for components of CCS projects thatcommercial banks will otherwise charge at a premiumor not fund at all.
Where a funding gap remains, this implies there areresidual risks, at which stage it will be necessary forgovernment to intervene. Whilst the private sector
investors in the project are driven by expectationsof a financial return, government can be driven by
investments that deliver a public good. In this case, thepublic good is the mitigation of emissions through CCS.
For this reason, government can take a financial loss byfunding the component of the project where residual
risks remain, thereby making the project economically
viable. This closes the funding gap and enables thedevelopment of the project, which then goes on to derisk investments in projects that follow.

figure 5 new

Banks will require that CCS projects generate enoughrevenue to service their debts i.e., the revenue
generated by the project is greater than all project
costs, including the amount of principal repayment andinterest due for each billing period. A measure of this is
the debt-service coverage ratio (DSCR)2, which lenders
will set a minimum target for. This effectively limits theamount of debt that can be applied to a project. In
cases when the revenues are too low in comparison to
the cost of debt, this leads to a funding gap (Figure 5).

Funding raised for CCS project

Figure 5 Project risks can influence the amount of debt that is made available to CCS projects, and if not
sufficiently well managed this leads to a funding gap

Risks that are adequately managed will lead to
improved terms of lending, including lower lending
rates. This allows the project to meet (or surpass)
the minimum level of funding required.
MINIMUM AMOUNT OF DEBT NEEDEDFUNDING GAP
Risks that are not adequately managed will drive up
lending rates. This reduces the amount of debt thatthe project can sustain, creating a funding gap.

Cost of debt

DSCR is equal to the net operating income divided by the total debt service. The net operating income is the total revenue generated minus certain operating expenses notincluding taxes and interest payments.

2

14

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

Lenders and financial instruments
There are a host of different financiers that can support CCS projects. There are three types of financiers that, forthe purposes of this paper, shall be referred to as specialist financiers: National Export Credit Agencies (ECAs),
Multilateral Agencies (MLAs) and Developmental Financial Institutions (DFIs). Some of the main differences between
specialist financiers and commercial banks are highlighted in Table 2.
Table 2 Specialist financiers and commercial banks’ areas of financing

FINANCING TYPE OR
SOURCE

EXAMPLES OF FINANCIAL
INSTITUTIONSROLECommercial Banks

HSBC, Wells Fargo. BNPParibasExperts at pricing term debt toprojects. Commercial banks are
sensitive to risks.

Export Credit Agencies
NEXI, UK Export Finance(ECAs)

ECAs provide risk guarantee tocover a significant proportion ofa transaction. They also provide
improved terms and conditions.

Multilateral Agencies(MLAs) and
Development Financial
Institutions (DFIs)World Bank Group, AsianDevelopment Bank, InterAmerican Development
Bank, UK Infrastructure
Bank3 and the European
Investment Bank.

Term debt providers that promotesustainable economic and social
development in low-income
member countries.

Developmental
Financial Institutions(DFIs)FMO (Netherlands), DEG(Germany), Proparco(France), UK Infrastructure
Bank3 and OPIC (USA).

DFIs are owned by singulargovernments and are tasked withpromoting sustainable economic
and social development

EXAMPLES OF SPECIALISTAREAS OF FINANCINGKEY
EQUITYPOLITICAL OR COMMERCIAL RISK INSURANCE

LONG-TERM DEBT

GUARANTEESMEDIUM-TERM DEBT

CONCESSIONAL FINANCING

These specialist financiers are driven more so by countries’ policy goals rather than conventional market forces.
They are prepared to accept a much lower risk-weighted return on capital than other lenders. They have thecapacity to help close the funding gap described in Figure 5, and will, therefore, have an essential role to play in thedevelopment of CCS projects. Figure 6 provides an overview of the different types of funding offered by each of thespecialist financiers. For example, DFIs and MLAs will often provide the most expensive forms of capital (equity andmezzanine debt4) but at far lower rates than is available from commercial lenders.

While the UK Infrastructure Bank is not strictly a DFI, it serves a similar purpose within the UK. The UKIB is to co-invest alongside the private sector and act as a cornerstone investor
on key infrastructure projects including CCS investments

3

15

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

figure 6
REDUCED COST OF CAPITAL

Figure 6 The different funding instruments and structures offered by specialist financiers
EQUITY &MEZZANINE DEBT4
Development FinanceInstitutions andMultilateral Agencies

RECEIVABLESFINANCING

Eligibility criteria of CFI
and MLA will limit theprovision of equity andmezzanine debt.
Environmental social
and labour standards
will be deeply scrutinised.

Export Credit
Agencies

PROJECTFINANCEECA programmes help
their exporters’ by taking
on short-term commercial
and political risk.

Available from all
specialist financiers

CORPORATEFINANCE

Subject to guidelines
relating to social /environmental / labour
standards.

Available from all
specialist financiers

ECAs are government institutions or private companies
operating on behalf of governments, providing financeto support national exporters competing for overseas
sales. Project proponents will be able to partner up
with CCS technology providers from a country where a
suitable ECA is able to lend their support, such as in theform of loan guarantees and direct funding.
MLAs and DFIs are specialists at funding projects
in relatively new sectors or high-risk environments,
specifically those that are aligned with theirdevelopment goals. Their objectives, experiences anddiplomatic leverage often enable them to provide coverfor risks in countries and projects that would otherwise
struggle to access funding. One of the most prominent
funders in large-scale climate infrastructure projects, isan MLA – the European Investment Bank (EIB). It hasoften played a key role by committing large amounts ofdebt to projects such as offshore wind during its earlystages of deployment.
As the CCS sector evolves, investors will become
more comfortable with general project risks, so theparticipation of financiers will diversify. At this stage,commercial lenders will play a more prominent role
than during the early stages of deployment. Over time,commercial banks will gain confidence, becoming
increasingly more important contributors of nonrecourse debt for project finance.

Terms generally equal
to or better than terms
that the obligor canobtain from the commercialbank / bond market.

It is important to note, however, that not all derisking
occurs over long timescales. Like all large-scale
infrastructure projects, CCS projects will have avarying risk profile across the different phases ofdevelopment, construction and operation. Once a
project is commissioned, its risk profile falls because
risks are highest during the construction phase andlower during operation. This drop in the risk profile ofa project can lead to the refinancing of a project’s debt
with more favourable terms of lending being applied.
This, therefore, opens the door to private lenders who
may not participate in the construction of the project,
but will be attracted to the lower risk and lower returns
nature of the operational phase.
As rates of CCS deployment increase, it is expectedthat a significant proportion of private funding will beraised from the private sector, for example, throughthe issuance of green bonds (see Chapter 5). Bondissuances can either be delivered at corporate or
project level. For corporates, they serve to financeportfolios of CCS projects. For individual projects,
these tend to raise financing from bond issuances
through SPVs as part of a non-recourse, project financestructure.

4
Mezzanine debt is a form of subordinate debt that bridges the gap between conventional debt and equity finance. It is more expensive than senior debt, which tends to be secured
and is more likely to be paid back in the event of bankruptcy

16

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

5.0 ACCELERATINGTHE USE OFSUSTAINABILITY
LINKED LOANS AND
GREEN BONDS FOR
CCS INVESTMENTS
Environmental, Social and Governance (ESG) criteria
have emerged as an important factor in investors’
behaviour. Lenders have responded to the need for
improved ESG ratings by creating specialised forms ofdebt that link back to sustainability so that borrowers are
incentivised to develop sustainable projects. A recent
innovation in corporate finance has been sustainabilitylinked loans (SLL). In this arrangement, a borrower canuse the proceeds for any purpose but is incentivised toraise the ESG performance of the project being funded.
This is because an in-built pricing mechanism meansthat the loan is cheaper (lower lending rate) if theborrower achieves certain ESG-related targets. By thesame token, if the borrower underperforms, the lending
rate increases. Issuances of SLLs have grown rapidly
in the past couple of years, with most of the issuances
coming from the US (40%) and European region (39%)(HSBC, 2020). SLLs present emitters with a potentiallyattractive form of debt financing for CCS projects.
Banks and corporates will initially be an importantsource of CCS finance. Still, the scale of the necessary
investment may easily exceed both their capabilities,
notwithstanding the financial implications of COVID-19
that have yet to take hold. Bond markets5, which caneither be an alternative or supplement to debt andcorporate finance, and have some of the largest flowsof liquidity, may play a pivotal role in helping CCS meetits capital requirement for mass deployment. Bonds arealso potentially more cost-effective than project financesince, often times, the interest cost of the latter is higher
than the yield for investment-grade project bonds(Kaminker, 2015).
In recent years, green bonds have contributed
significantly to the deployment of other mitigation
technologies such as wind and solar. Green bonds
are long term debt instruments that are specificallydesigned to fund environmentally friendly projects. A
project or company that issues a green bond will use
the proceeds to finance activities that fall within whatgreen bond standards classify as ‘green’. Climatechange mitigation technologies are usually accepted assuch, but there are exceptions.
Green bonds can be issued by governments, banks,municipalities or corporations, but will first have to meetcertain criteria prior to issuance. At a high level, thebond ensures that proceeds go to “green” assets (TheClimate Bonds Initiative, 2018), which precludes some
applications of CCS, for example, in coal fired power
plants6. Bonds can also go on to obtain green labelling,

Bonds are a form of debt that companies, governments or municipalities can raise. The borrower issues a bond with clear terms of the loan and interest payments as well as amaturity (when the loan amount or the principal will be paid back). The yield to maturity (YTM) of a bond is the total return on a bond if the lender holds onto it for the entirety of its
lifetime and is a useful way of comparing the value of bonds. Bonds can be traded from one party to another and the income on bonds are generally taxable.

5

17

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

figure 7

which becomes an option if projects comply with the
ICMA Green Bond Principles or the LMA Green Loan
Principles. While conventional bonds are taxable, green
bonds come with tax incentives such as tax credits andtax exemptions. This feature of green bonds makes
them particularly attractive to investors.

Over the past ten years or so, the market for green
bonds has been growing rapidly. Global issuancesurpassed US$250 billion in 2019, equivalent toapproximately 3.5% of total global bond issuance(Ehlers, Mojon and Packer, 2020). Climate mitigationenergy investments received most of the allocations(Figure 7).

Figure 7 The energy sector has received the most allocations of green bonds in Europe but its share is falling (TheClimate Bonds Initiative, 2018).

100%

80%

ICT
INDUSTRY60%

ADAPTATIONLAND USE

40%

WASTE
WATER
TRANSPORT20%

BUILDINGS
ENERGY

0%
2013

2015

2016

2017

2018

Green bonds originally gained popularity because they
offered financial institutions the opportunity to invest
in environmentally friendly projects and companies.
Initially, companies would make these investments fora slightly lower return as a means of demonstrating
they were contributing towards the environment.
Over time, these returns improved7. Today, climate
related investments are regularly outperforming theircounterparts (Westminster Forum, 2019).

•

A four-fold increase in economies with carbon
pricing schemes covering emissions in power
and industry by 2030, from 20% of CO2 emissions
in 2020 to all major economies and over 75% of
CO2 emissions by 2030 - while Carbon Border
Adjustments Mechanisms (CBAMs) will increasingly
feature:•Rapid acceleration in international coal phaseouts, including most coal intensive markets

However, there are now more powerful drivers that are
increasing demand and growth in green bonds. The
latest forecast from the United Nations Principles for
Responsible Investment (Fulton, 2021) anticipates that,among other things, there will be:•

All major industrial economies including the US,
Germany, Japan and China will require all new
industrial capex, led by steel and cement, to be
low-carbon by 2040, through a combination ofemissions performance standards and carbon
pricing.

6
7

18

2014

Although coal fired power plants with CCS do not qualify for green bonds this does not imply that they are not technically viable mitigation options.
Returns improved because the cost of physical renewable energy assets fell as their deployment increased, similar to how it is anticipated the cost of CCS will fall with deployment.

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

figure 8
These developments will all occur as a result of the
management of climate risks8. Although climate risks
comprise physical and transition risks, it is the latterthat financial institutions are most exposed to. This isbecause, while a given physical manifestation of climatechange may not affect a corporate bond’s value, policy
action to promote the transition towards a low-carbon
economy could spark a fundamental reassessment(Carney, 2015). For example, the adoption by somecountries of a deadline for coal phase out, results incoal burning assets being rendered ‘stranded’.

have been reluctant to issue green bonds in fear of
being accused of greenwashing (The Economist, 2021).

Tonnes of CO2 per $M of revenue

For green bonds to have more impact, they must be
applied to low-carbon projects within hard to abate
30 developments tosectors. One of the most recent
enable this has been the EU taxonomy for sustainable
investments, which now qualifies20CCS investments assustainable, easing the path towards financing CCS
from capital markets within the EU. The EU taxonomy for
10 certain applications
sustainable investments recognisesof CCS, all modes of CO2 transport infrastructure andpermanent CO2 storage as sustainable activities. It is0
expected that bond issuances across these sectors
will grow over the next decade because financial
MEDIAN
institutions are increasingly cognisantof impending-10
transition risks as these pose a major threat
to their
BASELINE
portfolios.

The emergence of transition risks has led to increased
demand for green bonds. Yet, while green bonds havebeen highly effective at supporting renewable energy
and energy efficiency projects, there is evidence they
have had little impact on the emissions intensity of theirissuers (Figure 8). By contrast, companies operating in
the hard to abate sectors (called brown companies),
-3

-2

-1

0

-20

1

2

AVERAGE3

Figure 8 Green bond issuance over theYears
pastbefore/after
decade has
firstrisen
greendramaticallybond issued but not had a significant impact on the
carbon intensity of 200 large issuers (The Economist, 2021). This has occurred chiefly because the issuers wererelatively green to begin with i.e., they produce relatively low emissions per unit of revenue.

US$ (Billion)300

figure 8

200

100

0
2013

2014

2015

2016

2017

2018

2019

Years before/after first green bond issued

Tonnes of CO2 per $M of revenue

30

20

10

0
MEDIAN
-10

-20
-3

-2

-1

0

1

2

BASELINE
AVERAGE

3

Years before/after first green bond issued
8
Climate risks comprise physical risks (such as fires, floods, draughts and sea-level rise) and transition risks. Transition risks emerge from the policy responses from governments
to fight climate change.

300
UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

)

19

200

6.0 CLIMATERELATED FINANCIALDISCLOSURESfigure 9
WILL HELP DRIVEINVESTMENTS IN CCSTO ACHIEVE CLIMATE ALIGNMENT,A FINANCIAL INSTITUTION MUST:

1. UNDERSTAND CURRENT PORTFOLIORELATIVE TO A <2ºC PATHWAY

2. COMMIT TO TAKE THE STEPS NECESSARY
An ever-growing number of climate pledges from financial institutions has been occurring.
Since 2017, financial
TO MERGE ONTO THAT PATHWAY
9
institutions representing at least US$17.2tn have pledged to become climate-aligned(Bloomberg,2019). For a
3. CLIMATE-ALIGNED PORTFOLIO
financial institution to achieve climate alignment it must cover all of its operational emissions as well as the emissionsof its lending and investment portfolio (Figure 9). While financial institutions will find it more straightforward toaddress their operation’s emissions, there are barriers to decarbonising their portfolio’s emissions.
Portfolio Emissions

figure 9

Figure 9 Charts showing what is required to achieve climate-alignment and what the implications are for highcarbon assets (LaMonaca et al., 2020).
2050

Climate-Aligned Trajectory

TO ACHIEVE CLIMATE ALIGNMENT,A FINANCIAL INSTITUTION MUST:MERGING ONTO THIS PATHWAY WILLREQUIRE THE FINANCIAL INSTITUTIONS TO:

2. COMMIT TO TAKE THE STEPS NECESSARY
TO MERGE ONTO THAT PATHWAY

Portfolio Emissions

3. CLIMATE-ALIGNED PORTFOLIO

2050

Climate-Aligned Trajectory

1. INCREASE LOW-CARBON INVESTMENT

Value of assets in the Real Economy

1. UNDERSTAND CURRENT PORTFOLIORELATIVE TO A <2ºC PATHWAY

2. SUPPORT THE TRANSITION OF
CARBON-INTENSIVE SECTORS

1990

2000

2010

2020

2030

2040

2050

Value of assets in the Real Economy

ONTO THISPATHWAY
WILL themselves. Financial institutions have often tended to assess
Part of the challengeMERGING
is assessing
transition
risks
REQUIRE THE FINANCIAL INSTITUTIONS TO:
their exposure by identifying emissions across their portfolio, which requires reporting by the emitters themselves,
1. INCREASE LOW-CARBON INVESTMENTa voluntary process called carbon disclosure. In some parts of the world, the process of climate-related disclosure
2. SUPPORT THE TRANSITION OF
is becoming more frequentand may soon
be mandatory. For example, one of the key catalysts in advancing the
CARBON-INTENSIVESECTORS
understanding of climate risks has been the Task Force on Climate-related Financial Disclosures (TCFD).

The TCFD sets clear guidelines (Table 3) and recommendations to help businesses disclose climate-related financial
information, which has led to an increased effort by companies to disclose their emissions.

9

To align their portfolio emissions with the temperature goals of the Paris Agreement.
1990

20

2000

2010

2020

2030

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

2040

2050

Table 3 High level summary of the TCFD’s guidance on disclosure for various organisations (Task Force on
Climate Related Financial Disclosure, 2021)
ORGANISATIONTCFD GUIDANCE
•

Banks
•
•

Insurance companies should describe the processes for identifying and assessing climaterelated risks on re-/insurance portfolios by geography, business division, or product segments,
including the following risks:•physical risks from changing frequencies and intensities of weather-related perils,•
transition risks resulting from a reduction in insurable interest due to a decline in value,changing energy costs, or implementation of carbon regulation, and•liability risks that could intensify due to a possible increase in litigation.

•

Asset owners should describe, where appropriate, engagement activity with investee
companies to encourage better disclosure and practices related to climate-related risks to
improve data availability and asset owners’ ability to assess climate-related risks.
Asset owners should describe how they consider the positioning of their total portfolio withrespect to the transition to a lower-carbon energy supply, production, and use. This could
include explaining how asset owners actively manage their portfolios’ positioning in relation tothis transition

Insurancecompanies

Asset owners

Banks should consider characterising their climate-related risks in the context of traditionalbanking industry risk categories such as credit risk, market risk, liquidity risk, and operational
risk.
Banks should also consider describing any risk classification frameworks used (e.g., theEnhanced Disclosure Task Force’s framework for defining “Top and Emerging Risks”).

•••
Asset managers••

Asset managers should describe, where appropriate, engagement activity with investee
companies to encourage better disclosure and practices related to climate-related risks in orderto improve data availability and asset managers’ ability to assess climate-related risks.
Asset managers should also describe how they identify and assess material climate-relatedrisks for each product or investment strategy. This might include a description of the resources
and tools used in the process
Asset managers should describe how they manage material climate-related risks for eachproduct or investment strategy.
Asset managers should also describe how each product or investment strategy might beaffected by the transition to a lower-carbon economy.

In doing so, this provides a clear indication to financial
institutions to which extent their portfolios are exposedto transition risks and in which sectors. In turn, they
have choices to make in terms of taking action to
reduce their exposure: they can divest away frombrown companies and projects, engage with them, or
choose a combined strategy.
The practice of divestment, however, simply transfers
climate risks from one investor onto another. It does
not necessarily help to bring the global portfolio
closer towards climate alignment. To achieve climatealignment at this level, institutions will have to engage
their customers to honour the commitments made totheir shareholders.
For some investors, climate risk is best managed by
active engagement with businesses. This has been thecase for both Norway’s US$1tn Government Pension
Fund Global and Japan’s US$1.36tn Government
Pension Investment Fund (GPIF). Both have decided
against exiting fossil fuel investments and have insteadfavoured engaging with companies on climate change.

21

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

The COVID-19 crisis has triggered governments intodeveloping a response to mitigate the pandemic’s
economic ramifications. To meet the dual challengeof economic recovery and emissions reductions,several governments and industry groups haveproposed economic recovery packages that include
the development of new, climate friendly infrastructure.
For example, the Canadian government is making
it a requirement for large corporations that apply
for government loans to publish annual climate
disclosure reports as well as reports that link to wider
environmental sustainability goals (Havercroft, 2020).
Through this approach, key sectors that underpin the
global economy – sectors such as steel, cement, oiland gas, and electricity – that are not currently on apathway towards the goals of the Paris Agreement, canbe supported as they seek to transition towards lowcarbon emissions. This is important for CCS because it
is one of the few technologies that can be applied todecarbonise these sectors.

7.0 FINANCING CCS
IN DEVELOPING
COUNTRIESCCS will have to be deployed in all regions of the world,
in order to meet the emissions reductions definedin the IEA-SDS. This means developing countries
have an important role to play in CCS deployment.
Developing countries represent high risk environments
for investments in CCS, which further extend the funding
gap discussed in Chapter 4. It is the role of climate
finance to help close such funding gaps.

At the same time as they adopt enabling policies for
CCS deployment, however, developing countries mustalso implement demonstration CCS projects that will
help to reduce risks for future investments. Funding
these projects is, therefore, a key consideration fordeveloping countries that have a high need for CCS in
key industries. Climate finance can play a critical role inthis regard.

Given the long lead times associated with developing
CCS projects, success in deploying CCS to meet the
IEA-SDS emissions targets will depend on the steps
taken between now and 2030. In developed countries,
policy derisking and commercial deployment of CCS has
already begun to occur but has yet to attract significant
levels of private financing through project financeand, crucially, from capital markets and sovereign
wealth funds through green bonds. By 2030, a rapidly
growing demand for CCS projects must emerge from
capital markets and sovereign wealth funds as this will
indicate that the technology is on course for widescale
deployment.

The lack of CCS in developing
countries

In anticipation of learning by doing benefits that arise
from deployment in developed countries, developing
countries may take steps to improve their level of CCS
readiness. This can be achieved through policy derisking.

22

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

While several developed countries have taken steps
to improve their enabling environment for CCS (seenext section), developing countries lag far behind. One
measure of this performance is to compare countries’
general need for CCS with their level of CCS readiness.
Figure 10 shows a recent analysis by the Global CCS
Institute, whereby countries’ CO2 emissions from sectors
where CCS can be applied are measured against theirlevel of readiness for CCS deployment.

Figure 10 Countries’ proportional emissions10 (representing their need for CCS in iron and steel manufacture,
cement production, power generation from fossil fuels, and bioethanol production) is measured against theirscores in the Global CCS Institute’s Readiness Index. The higher the value of proportional emissions, the greater
the need for CCS. The larger the size of each circle, the greater a country’s overall emissions.

Estonia

0.7

0.6

Philippines
Botswana

VietnamJapan

Bulgaria
South Korea
GreeceIndia South
AfricaMalaysia

Egypt
Proportional Emissions

China

CyprusPoland0.5

Czech Rep.

Australia
Germany

Indonesia
Saudi Arabia
UAE
MexicoThailand

0.4

BrazilNetherlands

USA

Denmark

0.3

United Kingdom

0.2

CanadaFranceNew Zealand

0.1

Norway

10

20

30

40

50

60

70

Readiness Index

REGIONAFRICA
AUSTRALASIAASIAEUROPELATIN AMERICA & CARIBBEANNORTH AMERICA
SOUTH-EASTERN ASIA

While the data in Figure 10 does not represent all of the sectors where CCS can be applied, it is an indicator of theneed for CCS in sectors where the technology can play a key role. Further, Figure 10 also shows the extent to whichgovernments are responding through policy action. Developing countries, particularly those in Asia and SE Asia, arefalling behind in terms of their response to a clear need for CCS deployment in these sectors. By contrast, developed
countries with similar or sometimes lower need for CCS are further ahead in their level of readiness. Notwithstanding
this, some developing countries have explicitly or implicitly included CCS as a technology required to meet their
Nationally Determined Contributions (NDC) under the Paris Agreement (Table 4).
1023

The sum of a country’s CO2 emissions from key sectors where CCS can be applied, divided by that country’s total emissions.

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

Table 4 CCS in countries’ NDCs
INDC

1ST NDC

1ST NDC UPDATE

2ND NDC

Australia
Bahrain
China
Egypt
Iran
Iraq
MalawiMongolia
NorwaySaudi Arabia
South Africa
UAE
United States
KEY
NDC MENTIONS CCS

NDC DOES NOT MENTION CCSThe United Nations Framework Convention on Climate
Change (UNFCCC or “the Convention”) recognisesthat countries’ contribution to climate change and theircapacity to prevent (and cope with) its consequences
varies significantly. Climate finance is an area ofinternational development that facilitates the provision offinancial resources (from developed countries) to assist
developing countries in implementing the Convention.
The UNFCCC’s Financial Mechanism administers thesefunds to developing countries. Climate finance can bebroadly divided into non-market and market-based
mechanisms.

Non-market-based
mechanisms
The UNFCCC has several funds which serve thepurpose of climate finance, but its two most prominent
are the Global Environment Facility (GEF) and the Green
Climate Fund (GCF). Both funds separately pool financial

24

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

NOT AVAILABLE

resources from donor countries and administer them todeveloping countries, usually through third parties.

The GEF
The Global Environment Facility (GEF) provides grantfunding for relatively small projects. These projects varyin size, with full-sized (the largest type) projects ranging
from $1M to $15M. The use of GEF funds tends to be
restricted to activities that increase countries’ capacity
to deploy technologies, such as the development ofpolicies, technical studies and small pilot projects. In
comparison to the cost of a commercial CCS project, thesums involved are small.
Because of its limited funding capacity, the support
that the GEF can lend to CCS deployment is in thedevelopment of legal, regulatory and policy frameworks
to improve countries’ level of CCS readiness. To date,there haven’t been any CCS projects that have been
approved by the GEF.

The GCF
The GCF is a financial mechanism of the UNFCCC and isa dedicated financing vehicle for developing countries.
Since the approval of the first project funding in 2015,
the GCF has made rapid strides in building a portfolio of
more than 100 projects.
The GCF operates at a much larger scale than the
GEF and has the capacity for delivering large-scale
infrastructure projects, including CCS, through several
financial instruments, including grants, loan guarantees,
concessional loans and equity investments. By partneringwith private sector investors, the GCF enables a blended
finance approach, combining different sources of capital
to reduce risk, making otherwise unaffordable efforts
viable.
Given the volume of financing (in the order of tens
to hundreds of millions of US dollars) and the arrayof financial instruments at its disposal, the GCF has
the potential to significantly accelerate the rate of
deployment of CCS in developing countries.
While the GCF can help projects meet their capitalrequirement, it does not make provision for overcoming
the entirety of the revenue risk associated with all types
of CCS projects. The GCF recently approved its firstproject with a reliance on carbon markets, which canprovide much-needed revenue for CCS projects so longas they do not conflict with the GCF’s eligibility criteria.

Market-based mechanisms
In most developing countries, there are few existing
government-led policies that place a sufficient value
on CO2. There are, however, a group of initiatives thathave been successfully used for mitigation projects indeveloping countries that give insight into potential
incentives for CCS investments. These are known ascarbon crediting mechanisms.

Carbon Crediting
Carbon crediting – a form of carbon pricing – serves
the broader function of carbon offsetting, whereby
carbon credits are used to offset equivalent amountsof emissions either locally or elsewhere in the world. In
the context of climate finance, crediting schemes areused to finance the development of mitigation projects
in developing countries, and the credits they generate
are then used to offset emissions in more industrialised
countries.
The most notable example of a crediting scheme is the
UNFCCC Clean Development Mechanism (CDM) and
was developed under the Kyoto Protocol in 1997. The
design of the CDM was based on developing countries
participating on a voluntary basis since they did not haveemissions targets. Through it, developing countries
hosted low-carbon projects (developed by entities fromeither the public or private sector) to obtain credits,
called certified emissions reductions11 (CERs), in return.
CERs were then transferred to developed countries tomeet their targets.
The CDM created a price signal for emissions, providing
sufficient incentive for investments in projects that would
otherwise not have occurred. While CCS was an eligible
technology under the CDM, the price of CERs was neverhigh enough to enable CCS projects12. Despite this, theinclusion of CCS in the CDM points to the importanceof CCS even at a time when the technology was lesscommon, and the carbon budget was significantly
higher.
A rapidly growing area of carbon crediting is that ofvoluntary carbon markets (VCMs). As the emissions
mitigation options to address climate risks (discussed
in Chapter 6) are exhausted, businesses and financialorganisations will eventually be left with residual
emissions. These can only be tackled through carbon
dioxide removals, which can be achieved throughnature-based solutions as well as technological solutions
such as CCS. VCMs offer a pathway to invest in carbon
removals.
VCMs operate in a similar way to the CDM, wherebya baseline13 and credit approach allows investors topurchase (and subsequently surrender) credits to offset
their emissions. Three of the prominent VCMs are theGold Standard, Verified Carbon Standard, as well as the
CDM itself. In recent times, demand for credible offsets
has surged. Between 2007 and 2019, around 612 million
carbon credits were issued from baseline-and-crediting
programmes that targeted mainly VCMs, including 142
million in 2019 alone (Doda et al., 2021).

One CER represents one tonne of CO2 avoided or mitigated.
Methodologies were developed to account for the emissions reductions from two CCS applications: Egypt (BP) and Mexico (Petronas).
13
Methodologies are designed to establish a baseline that is used to determine a targeted carbon intensity level for units of material produced. Producers earn credits when unitsof material are produced at a lower emissions intensity than that which is set by the baseline, otherwise they must surrender credits if their emissions intensity is higher than thebaseline.
11

12

25

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

Carbon removal is relevant to some forms of CCS, mostnotably bioenergy with carbon capture and storage(BECCS). Biogenic CO2 can be produced through fuelprocessing (for example CO2 from fermentation to
produce bioethanol) and from fuel use (CO2 from direct
combustion of biofuel). The value of BECCS to investors
is that it offers the benefit of permanent removal ofcarbon dioxide from the atmosphere. By contrast, naturebased solutions such as afforestation – which can belower cost – do not have the same level of permanence.
The most cost-effective application of BECCS is when it
is used in fuel processing. For example, when applied tobioethanol fermentation, very high CO2 concentrations
can be reached, leading to lower costs. We estimate
the amortised cost of capture of bioethanol with CCS
to range from US$1/tCO2 to US$10/tCO2, whilst VCM
credits most relevant to BECCS are anticipated to be
priced between US$5/tCO2 and US$20/tCO2 (TSVCM,
2021). This implies that under the right conditions, CCS
projects can be supported in developing countries
through voluntary markets.
In comparison to BECCS, DACs projects are today
less cost-effective forms of removal. DACs, however,is anticipated to play an important role in the future,especially as low-carbon electricity becomes morewidespread and demand for CO2 removals increases.
An indication of this is the emerging demand for DACs
projects in developed countries.

Aside from the need for a legal and policy framework
to support such a CCS project in a developing country,
CCS projects will firstly have to be legitimised by wayof a methodology before they can generate credits
for sale in VCMs. Currently, there are no approved
methodologies for CCS to allow for this.

Article 6 of the Paris Agreement
Carbon crediting can also form the basis of aninternational carbon market, which is being enabledthrough Article 6 of the Paris Agreement. Article 6
comprises three approaches for cooperation between
Parties:•••cooperative approaches
a new mechanism to promote mitigation andsustainable development
and a framework for non-market approaches

The framework that is set to be defined under Article 6
is an outstanding issue for negotiations at the UNFCCC,
which may be resolved later this year at the Conferenceof Parties (COP 26). Article 6 provides a framework for
two distinct approaches to market-based mechanisms
and one approach for non-market-based mechanisms.
Table 5 provides a summary of these, as described in
the text of the Paris Agreement.

Table 5 Mechanisms under Article 6 of the Paris Agreement (Tamme and Scowcroft, 2020)
ARTICLEDESCRIPTION

Article 6.2

Allows countries to strike bilateral and voluntary agreements to trade units (Internationally Transferred
Mitigation Outcomes – ITMOs). It establishes an accounting framework that also applies to Article 6.4.

Article 6.4

This creates a centralised governance system for countries and the private sector to trade emissions
reductions anywhere in the world. This system is due to replace the CDM. The system will be supervised
by a specifically established UN Supervisory Body, which tends to mean a heavy layer of administration tooperate under it (article 6.2 should be easier to use).

Article 6.8

This develops a framework for cooperation between countries to reduce emissions outside market
mechanisms, such as aid, financing adaptation, using taxes to deliver emission reductions. In the current
draft texts, it is a work program, not an accounting framework like 6.2 or a mechanism like 6.4.

Making use of market-based mechanisms is a choice that individual countries will have to make. Some countries
have already specified the use of international cooperation as part of their NDC commitments (Figure 11).

14

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The higher the concentration of CO2 in a flue gas, the lower the cost of capture.

UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

Figure 11 Market friendly NDCs (International Emissions Trading Association, 2018)CARIBBEAN
COUNTRIES0601

PACIFIC ISLANDCOUNTRIES
4225

NDC will be met domestically
NDC includes the use of international markets
Country will maybe make use of international markets
Not Specified
NDC Not Submitted

The extent to which Article 6 will enable CCS indeveloping countries is as yet unknown. But there areseveral pilot initiatives already underway that are testingand experimenting with the concepts of international
market mechanisms emerging from the climate

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UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

negotiations. The lessons learned from these can help
to inform discussions surrounding Article 6. Figure 12
provides an overview of the different mechanisms andwhere projects are being piloted using them. (Figure 12).

Figure 12 Article 6 pilot initiatives (Greiner et al., 2019)

EU & SWITZERLAND
MONGOLIAMEXICOSAUDI ARABIACOSTA RICA

COLUMBIAVIETNAMLAOSETHIOPIASENEGALMYANMARBANGLADESH

PHILIPPINESTHAILANDPALAU

CAMBODIANIGERIAKENYA
RWANDAPERUMALDIVESINDONESIACHILE

SELECTION OF ARTICLE 6 PILOT INITIATIVESWORLD BANK SCFKLIK FOUNDATION

NEFCO

EU-ETS / SWISS ETS LINKINGSEA VIRTUAL PILOTCHILE-CANADA AGREEMENT

JCM

To date, none of these pilot initiatives, which include otherforms of carbon crediting through, for example bilateralarrangements, have yet to support the development ofa CCS project. For this to happen, significant support
from other areas of climate finance will be required toplace a sufficient value on CO2 to enable the first pilot
projects in developing countries. This will likely have tocome from the GCF combined with each country’s CCSspecific policies.

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UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

If CCS projects are deployed through climate finance,
the important lessons learned, for policy derisking aswell as learning by doing, will then have to be sharedwith climate negotiators as well as the next wave ofprojects. The developments at COP 26 – specifically in
relation to Article 6 –will indicate to which extent CCS
deployment in developing countries will come to rely onmarket-based mechanisms to enable pilot projects overthe next decade.

8.0 CONCLUSIONS
CCS is currently at a critical stage in its deployment.
Given the long lead times associated with developing
CCS projects, the steps taken between now and2030 will determine whether CCS technology will be
deployed at the scale necessary to meet the climate
challenge. A critical step towards achieving this is forenabling policies to be implemented between now and2030. These policies are key to attracting private sector
investments, which will have to occur at a rate of tens ofbillions of US dollars a year, driven by enabling policies.
These policies will lead to significant transition risks,
and it is through them that incentives to drive private
investments in CCS will occur. At the same time, othergovernment-led initiatives to support and enable theseinvestments should also be prioritised.
The role of specialist financiers will be crucial in
supporting emitters that are unable to fund their CCS
investments on their balance sheets. Governments
can mandate specialist financiers to support investors
through project finance. Further, transition risks play therole of triggering engagement from the financial sector.
To this end, it is also within the remit of governments
to support the development of financial standards thatrecognise the eligibility of CCS investments as green
or sustainable. This will not only lead to better termsof finance for CCS projects but will first make it far
easier for financial institutions to engage with browncompanies in their portfolio and for issuers to benefit
from the huge potential of the green bond market.

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UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS

While CCS deployment advances in developed
countries, actions to support early deployment indeveloping countries will have to increase dramaticallyover the coming years. Climate finance has supported
numerous mitigation technologies around the world,
helping to create enabling environments for theirdeployment at scale. If CCS is to be deployed indeveloping countries, where CO2 emissions are growing
most rapidly, a concerted effort is needed to ensurethat developing countries are well supported whenincreasing their level of CCS readiness. Further, CCS
investments will greatly benefit from support acrossboth non-market as well as market-based mechanisms
such as the Green Climate Fund and what is to emerge
from Article 6 of the Paris Agreement at COP 26.

9.0 REFERENCES
1.

Bloomberg (2019) ‘Financing the Low-Carbon
Future: A Private-Sector View on Mobilizing
Climate Finance.’, Bnef, (September).

2.

Carney, M. (2015) ‘Breaking the Tragedy ofthe Horizon – climate change and financial
stability’, (September), pp. 1–16. Available at:www.bankofengland.co.uk/publications/Pages/
speeches/default.aspx.

3.

4.

Doda, B. et al. (2021) Voluntary offsetting: credits
and allowances. Available at: https://www.
umweltbundesamt.de/publikationen/voluntaryoffsetting-credits-allowances.
Ehlers, T., Mojon, B. and Packer, F. (2020) ‘Greenbonds and carbon emissions: exploring the casefor a rating system at the firm-level’, BIS Quarterly
Review, (September), pp. 31–47. Available at:https://www.bis.org/publ/qtrpdf/r_qt2009c.htm.

5. Fulton, M. (2021) Climate policy - the coming
acceleration The Inevitable Policy Response under.
Available at: https://www.unpri.org/pri-blog/climatepolicy-the-coming-acceleration/7394.article.
6. Greiner, S. et al. (2020) ‘Article 6: State of play andway forward’, Climate Focus (CF), Perspectives
Climate Group (PCG), pp. 1–5. Available at: https://www.climatefinanceinnovators.com/wp-content/
uploads/2020/12/Climate-Finance-Innovators_
Article-6-piloting_State-of-play-and-stakeholderexperiences_December-2020.pdf.
7.

Havercroft, I. (2020) ‘Environmental, Social andGovernance (ESG) Assessments and CCS’.

8.

HSBC (2020) Sustainable financing and investing
survey 2020: Pandemic intensifies awareness ofenvironment and society. Available at: https://www.
sustainablefinance.hsbc.com/mobilising-finance/sustainable-financing-and-investment-survey-2020

9.

International Emissions Trading Association (2018)‘IETA input to the Talanoa Dialogue’, (December2015), pp. 2–5.

10. International Energy Agency (2020) ‘World Energy
Outlook 2020 Summary’, World Energy Outlook
2020 - Event - IEA, pp. 1–25. Available at: https://www.iea.org/events/world-energy-outlook-2020.

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11. Kaminker, C. (2015) ‘Policy Perspectives: Green
Bonds - Mobilising the debt capital markets for a
low-carbon transition’, OECD Publishing, (OECD/
Bloomberg Philanthropies). Available at: http://
www.oecd.org/environment/cc/Green bonds PP[f3] [lr].pdf.
12. LaMonaca, S. et al. (2020) ‘Charting the Course to
Climate-Aligned Finance’, Rocky Mountain Institute,pp. 1–17. Available at: https://rmi.org/insight/
navigating-five-barriers-to-climate-aligned-finance/.
13. Rubin, E. S., Davison, J. E. and Herzog, H. J. (2015)‘The cost of CO2 capture and storage’, International
Journal of Greenhouse Gas Control. Elsevier Ltd,40, pp. 378–400. doi: 10.1016/j.ijggc.2015.05.018.
14. Tamme, E. and Scowcroft, J. (2020) ‘The Role of
CCS in the Paris Agreement’, (April). Available at:https://www.globalccsinstitute.com/resources/
publications-reports-research/the-role-of-ccs-inthe-paris-agreement-and-its-article-6/
15. Task Force on Climate Related Financial Disclosure(2021) TCFD Recommendations. Available at:https://www.fsb-tcfd.org/recommendations/.
16. The Climate Bonds Initiative (2018) The Green
Bond Market in Europe.
17. The Economist (2021) ‘Do green bonds actually
reduce carbon emissions?’, p. 2021. Available
at: https://www.economist.com/graphicdetail/2020/09/17/do-green-bonds-actually-reducecarbon-emissions.
18. TSVCM (2021) Taskforce on Scaling Voluntary
Carbon Markets Summary Pack.
19. Westminster Forum (2019) ‘Green finance and theimpact of climate change on financial services managing risk , opportunities for growth and theGreen Finance Strategy’.
20. Zapantis, A., Townsend, A. and Rassool, D.
(2019) Thought Leadership report: Policy
priorities to incentivise large-scale deploymentof CCS, Global CCS Institute. Available at:https://www.globalccsinstitute.com/wp-content/
uploads/2019/04/TL-Report-Policy-prorities-toincentivise-the-large-scale-deployment-of-CCSdigital-final-2019.pdf.

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UNLOCKING PRIVATE FINANCE TO SUPPORT CCS INVESTMENTS