Source: EURLEX
Language: en
Format: md

**EN**

# **EN EN**

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.** **P** **ROBLEM DEFINITION** **:** **W** **HAT 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.** **A** **NALYSIS OF SUBSIDIARITY** **:** **I** **S** **EU** **ACTION JUSTIFIED ON GROUNDS OF SUBSIDIARITY**
**(N** **ECESSITY 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.** **O** **BJECTIVES OF THE** **EU** **INITIATIVE** **:** **W** **HAT 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.** **P** **OLICY OPTIONS** **:** **W** **HICH 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.** **A** **SSESSMENT OF IMPACTS** **:** **W** **HAT 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 plant [1]
is estimated at around €730 million for an IGCC plant (€125m for capital cost and €340m for
operational costs, €265m for transport and storage costs [2], approximately) and around €980
million for a pulverised coal plant (€235m for capital cost and €445m for operational costs, €300
for transport and storage costs [3], 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 CO 2 leakage can be avoided by the employment of appropriate
site selection, modelling and monitoring techniques.

1 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).
2 This includes capital and operational costs over 25 years of 7€/t CO 2 stored.
3 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.** **C** **OMPARISON OF OPTIONS** **:** **W** **HAT 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.** **M** **ONITORING AND EVALUATION** **:** **W** **HAT 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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