Commission staff working document - Communication from the Commission to the European Parliament and the Council - Demonstrating Carbon Capture and Geological Storage (CCS) in emerging developing countries : financing the EU-China Near Zero Emissions Coal Plant project - Summary of the impact assessment {COM(2009) 284 final} {SEC(2009) 814}
Date: 2009-06-25
Institutions: European Commission
Subjects: EU employment policy, energy policy, energy storage, environmental impact, greenhouse gas, innovation, new technology, reduction of gas emissions

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 25.6.2009 
SEC(2009) 815 

COMMISSION STAFF WORKING DOCUMENT 

accompanying the 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL 

Demonstrating Carbon Capture and Geological Storage (CCS)  
in emerging developing countries:  

financing the EU-China Near Zero Emissions Coal Plant project 

SUMMARY OF THE IMPACT ASSESSMENT 

{COM(2009) 284 final} 
{SEC(2009) 814} 

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EXECUTIVE SUMMARY 

1. 

PROBLEM  DEFINITION:  WHAT  IS  PRECISELY  THE  PROBLEM,  WHO  IS  MOST  AFFECTED 
AND WHY IS PUBLIC INTERVENTION NECESSARY? 

Both developed and developing countries need to act to reduce their greenhouse gas emissions, to 
achieve the objective of limiting average global temperature increase to less than 2°C compared 
to pre-industrial levels. European Commission analysis indicates that under an emissions scenario 
compatible with the 2ºC target, around 18% of global fossil fuel power generation would have to 
be fitted with CCS in 2030. 

As  part  of  a  range  of  low  carbon  technologies,  CCS  deployment  in  fossil-fuel  dependent 
emerging and developing countries could play a vital role in helping achieve global sustainable 
development. However, in a business-as-usual scenario (ie without additional assistance from the 
public  sector  and  without  international  agreement  or  national  policies  establishing  a  carbon 
market price), CCS would not be demonstrated at commercial scale outside of OECD countries 
and would therefore not be viable for large scale global deployment on a timescale commensurate 
with the need to reduce global emissions by at least 50% by 2050. Without global development, 
demonstration,  diffusion  and  deployment  of  CCS,  the  fight  against  climate  change  could  be 
significantly more expensive. 

The  different  components  of  the  CCS  process  are  already  operational,  but  one  challenge  is  in 
combining all these elements to enable the commercial deployment of CCS in the power sector. 
There are many barriers to the demonstration and subsequent deployment and diffusion of CCS 
technologies in developing countries. The provision of public funding can help overcome some 
of  these  barriers  and  lever  private  financing  which  would  not  otherwise  be  available. 
Demonstration  can  promote  a  better  understanding  of  the  technical,  methodological,  political, 
legal,  environmental,  public  acceptance  and  financial  issues  and  therefore  facilitate  a  better 
estimation  of  the  extent  to  which  we  could  rely  on  CCS  as  one  of  the  key  future  mitigation 
technologies.  A  positive  demonstration  experience  will  reduce  perceived  risk;  facilitate  further 
demonstration on the path to deployment and diffusion, and help drive down costs.  

2. 

ANALYSIS  OF  SUBSIDIARITY: IS EU  ACTION  JUSTIFIED  ON  GROUNDS  OF  SUBSIDIARITY 
(NECESSITY AND EU VALUE ADDED)? 

Because of the scale of the problem and the costs involved, action by individual MS is unlikely to 
have any impact. In 2005, the EU and China committed to develop and demonstrate in China and 
the EU advanced, near-zero emissions coal technology through carbon capture and storage. The 
development  and  deployment  of  CCS  in  China  and  other  emerging  economies  would  be 
significantly  delayed  without  assistance  from  developed  countries.  The  EU's  commitment, 
coupled with technological and financial assistance is a unique offer which can help to maximise 
the potential for CCS in emerging economies.  

Because  of  European  leadership  in  climate  change  policies  and  technologies  and  the  massive 
potential for abatement in China due to the rate of expansion of its coal-fired power plant fleet, 

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Europe and China have a unique opportunity to work together to develop and demonstrate CCS 
technologies for future deployment. These are among the aims of the EU-China Climate Change 
Partnership, established in 2005.  

China adopted a National Climate Change Programme (CNCCP) in June 2007, which specifically 
mentions  the  development  of  technologies  for  CCS.  Specific  CCS  technology  guidelines  are 
planned for publication in 2009.  

3. 

OBJECTIVES OF THE EU INITIATIVE: WHAT ARE THE MAIN POLICY OBJECTIVES? 

The EU's general policy objective is: 

•  To  limit  the  increase  in  global  mean  surface  temperature  to  be  2°C  compared  with 
pre-industrial  levels,  which  in  turn  requires  that  global  greenhouse  gas  (GHG) 
emissions  peak  by  2020  at  the  latest  and  be  reduced  by  at  least  50  %  as  compared 
with 1990 levels by 2050 and continue to decline thereafter.  

The specific objective of this policy in contributing to this is: 

•  To facilitate early deployment of CCS technology in emerging developing countries 
in  order  to  maximise  the  public  benefits  of  these  technologies  (GHG  emissions 
reductions,  improved  air  quality),  as  they  move  from  demonstration  to  deployment, 
and  to  increase  experience  and  economies  of  scale  and  drive  down  costs,  initially 
using China as a case study. 

Operational objectives are to: 

•  Identify the additional financing needed for a large scale CCS demonstration plant in 
China  in  the  absence  of  a  global  carbon  price or  other  incentive,  in  order  to  enable 
demonstration  quicker  than  might  otherwise  be  the  case  under  normal  market 
conditions. 

•  Provide financing through a viable financing model for CCS demonstration in China, 
which  brings  together  public  and  private  financing  as  a  concrete  example  of 
technology and financing cooperation between developed and developing countries in 
the context of the international climate change negotiations.  

•  Given  limited  resources  from  the  Community  budget,  determine  a  split  of 
public/private  financing  to  maximise  the  leverage  of  the  public  funding,  to  be 
explored further in the design of the above-mentioned vehicle. 

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4. 

POLICY  OPTIONS:  WHICH  OPTIONS  HAVE  BEEN  CONSIDERED  AND  WHICH  HAVE  BEEN 
ASSESSED IN DETAIL? 

Options  considered  for  financing  CCS  demonstration  in  emerging  economies  were  a)  no 
involvement, b) relying on public grant funding and c) setting up public-private partnership. For a 
public-private  partnership,  three  models  were  considered:  joint  undertaking,  ITER-type  ad-hoc 
international treaty and special purpose vehicle (SPV).  

5. 

ASSESSMENT  OF  IMPACTS:  WHAT  ARE  THE  MAIN  ECONOMIC,  ENVIRONMENTAL  AND 
SOCIAL IMPACTS? 

In order to assess the amount of investment required and the public/private financing necessary to 
ensure an appropriate return for private investors, existing literature and estimations of the cost of 
a commercial-scale CCS demonstration plant were reviewed (bearing in mind that globally, none 
has  been  built  yet)  and  used  as  the  basis  for  specific  calculations.  The  additional  capital  and 
operational cost over a lifetime of 25 years for this first-of-a- kind 400 MW demonstration plant1 
is  estimated  at  around  €730  million  for  an  IGCC   plant  (€125m  for  capital  cost  and  €340m  for 
operational  costs,  €265m  for  tr ansport  and  storage  costs2,  approximately)  and  around  €980 
million for a pulverised coal plant (€235m for cap ital cost and €445m for operational costs, €300 
for transport and storage costs3, approximately). Within this period a strengthening of the global 
carbon  market  and  the  emergence  of  a  domestic  carbon  price  in  all  major  economies  can  be 
expected.  Assuming  a  carbon  value  of  €10/tCO 2  in  2015  gradually  increasing  to  €20,  the 
financing gap is estimated at roughly €300 million  for an IGCC plant and at €550 for a pulverised 
coal plant. Sensitivity analysis showed that the cost estimate may vary in the range of +/- 40% 
according to the specific technology and construction/storage sites chosen.  

It is not possible in the course of this Impact Assessment to assess the full range of impacts of 
CCS deployment in China, and that is not our immediate policy objective. Rather, we attempt to 
assess  the  impacts,  particularly  the  financial  impacts,  of  using  a  combination  of  public  and 
private  financing  to  support  our  policy  objectives  and  extrapolate  broader  impacts  where 
possible. This analysis focuses on one demonstration project, which in itself is not likely to lead 
to a major immediate reduction of emissions or to immediate economic benefits. Also, the direct 
social and employment impacts are likely to be very limited due to the limited scale of the CCS 
demonstration projects. 

In  generic  terms  and  at  large  scale,  environmental  impacts  of  CCS  relate  to  improved  local  air 
quality  and  global  atmospheric  concentrations  of  greenhouse  gases  with  resultant  health  and 
economic  benefits  from  reduced  exposure  to  air  pollution  and  reduced  climate  change  impacts. 
Physical  problems  of  potential  CO2  leakage  can  be  avoided  by  the  employment  of  appropriate 
site selection, modelling and monitoring techniques. 

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Expressed as net present value in 2010 over the 4 years of construction and 25 years of operation using a 
social discount rate of 2.5% (net of inflation).  
This includes capital and operational costs over 25 years of 7€/t CO 2 stored. 
This includes capital and operational costs over 25 years of 7€/t CO 2 stored. 

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The key impacts of China being in a possible first wave of CCS demonstration globally relate to 
the  learning  benefits  and  first-mover  advantages  in  relation  to  achieving  future  emissions 
reductions and avoiding carbon lock-in.  

The  CCS  demonstration  project  and  the  supporting  financial  vehicle  are  designed  under  the 
assumption that carbon will have a value in China and other emerging and developing countries 
in future that will take into account the social price of carbon.  

6. 

COMPARISON OF OPTIONS: WHAT IS THE PREFERRED OPTION ON THE BASIS OF WHICH 
CRITERIA/JUSTIFICATION? 

In  order  to  bring  together  the  required  sum  of  funding  and  minimise  the  strain  on  the  public 
budget,  a  public-private  partnership  was  identified  as  the  most  suitable  option  for  financing  a 
CCS  demonstration  project  in  China  Three  public-private  partnership  models  were  analysed:  a 
Special  Purpose  Vehicle  (SPV),  a  Joint  Undertaking  under  Art.  171  of  the  EC  Treaty,  and  the 
"Ad hoc international treaty" model used to establish the ITER collaboration on the design and 
construction  of  an  experimental  fusion  reactor.  The  SPV  (or  a  similar  investment  vehicle)  was 
identified as the most suitable model. Potential future revenues from the carbon market would be 
an incentive for the private sector to invest in the SPV.  

7. 

MONITORING AND EVALUATION: WHAT ARE THE ARRANGEMENTS TO ESTABLISH THE 
ACTUAL COSTS AND BENEFITS IN THE ACHIEVEMENT OF THE DESIRED EFFECTS? 

The performance of the SPV would be subject to monitoring; risk management and compliance 
procedures  ensure  compliance  with  appropriate  laws  and  guidelines.  The  SPV  would  be  set  up 
with a governance structure to ensure that the appropriate body (e.g. an Investment Committee or 
a Board of Directors) would supervise the monitoring and control of the correct implementation 
of the investment and divestment decisions. 

The  Community  Budget  contribution  to  the  investment  vehicle  would  come  from  the 
Environment and Natural resources Thematic Programme (ENRTP). Cooperation with China on 
CCS  under  the  auspices  of  the  ENRTP  would  be  monitored  in  compliance  with  the  standard 
provisions under the development cooperation funding instrument. 

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