Capturing the Carbon Opportunity – Government explores CCUS as part of its Net Zero Ambitions

New Zealand has officially joined the growing list of countries exploring carbon capture, utilisation and storage (CCUS) as means to accelerate decarbonisation and the transition to a lower emissions economy. 

Last month Energy Minister Simeon Brown released a Consultation Document which proposes a regulatory framework for CCUS in New Zealand.     

Natural gas production, steel production and cement production are identified as industries in New Zealand that create CO2 and which may be targeted by (and benefit from) CCUS projects, which would at the same time help New Zealand pursue its own climate targets.

What is CCUS?

CCUS is gaining reputation as a critical technology to help countries meet climate targets.  It involves the capture of carbon dioxide, typically from power generation or industrial facilities that use fossil fuels.  The CO2 is used on site, or captured, transported (by pipe or vehicle) where it is eventually:

1. used as an input or feedstock to create products or services, for example:
   1. dry-ice for chilling meat;
   2. beer (and other carbonate drinks) production;
   3. use in greenhouses to foster plant growth;
   4. production of CO2-based synthetic fuels, chemicals and building aggregates;
2. stored permanently in underground geological formations, onshore or offshore –where the carbon dioxide is prevented from entering the atmosphere.

CCUS could reinvigorate natural gas production

While natural gas is a fossil fuel, it has the least CO2 content among the fossil fuels and will therefore remain important as an energy source for New Zealand during our transition to a low emissions economy.  This includes it as a source of electricity generation when renewable generation is not able to meet demand.

It is noted in the Consultation Document that CCUS technology can improve the economics of gas production, especially for higher CO2 content gas fields.   Fields that would otherwise release CO2 into the atmosphere would receive economic incentives to capture and use or store the CO2.  This could promote investment in gas production, leading to a reversal in the current sharp decline in the sector.

CCUS internationally

Successful implementation of CCUS projects in other parts of the world have relied on clear and specific CCUS regulatory frameworks.

Australia’s Carbon Credit Unit Scheme allows storage projects to be awarded carbon credit units if project activities capture greenhouse gases and inject them for permanent underground storage.  As of May 2024, there were 18 carbon capture and storage projects at various stages of progress in Australia, with planned projections forecast to sequester 20 million tonnes of CO2 a year by 2035.[1]

Canada, Norway and the EU have also implemented specific schemes to provide economic incentives for CCUS projects.  Norway’s Northern Lights CCUS project[2] is expected to commence later in 2024 and will involve the capture of CO2 in multiple countries across Europe, to be transported to a central hub and stored offshore in Norway.

Shortcomings in New Zealand’s existing regulatory framework

At present there are no emissions trading scheme (ETS) regulations for recognising and rewarding emissions removed and sequestered through CCUS activities, aside from certain forestry and geothermal activities.    

The Consultation Document identifies that emission accounting and monitoring rules for CCUS projects (outside of forestry and geothermal) are required in order to put CCUS on a ‘level playing field’ with other options for reducing emissions.

In addition to ETS challenges, resource consenting and permitting challenges exist for CCUS projects under NZ law.  These include:

• how to attribute long term liabilities for the CO2 storage sites after the CO2 injection has taken place.
• A lack of guiding principles for CCUS projects and what might be appropriate for managing the CO2 storage sites.
• definitions in existing legislation (including “dumping” as defined in the RMA), could mean that CO2 injection into an underground natural gas reservoir could fall afoul of local laws in certain geographical zones.

Proposed approach for a new regulatory Framework

The Consultation Document outlines some key proposals for a new CCUS framework:

• ETS to include mechanisms to recognise and reward emissions reductions resulting from carbon storage activities. ETS participants engaged in carbon storage activities would be able to subtract emissions captured and stored from its own activity through carbon storage projects.
• Regulations to be created to require a CCUS operator to monitor CO2 storage sites, and to collect information on CO2 captured, sequestered and leaked from transport and/or storage, together with a framework of accounting and reporting rules (and inspection of CO2 sites) for verification purposes. ETS liability would attract to any leak from a storage site.
• Establishment of a clear and thorough permitting framework for keeping records of carbon storage operations and storage sites.
• Liability for storage sites post closure – project operators would need to provide financial assurance to cover post closure activities. When a site closing certificate is issued, it is proposed that project operators remain liable for a minimum of 15 years.  Thereafter, if the Minister is satisfied there are no significant risks of leakage, the liability for the site would be transferred to the Government.

Final Thoughts

The willingness of investors to participate in CCUS projects in New Zealand will rely on a clear and thorough regulatory framework governing CCUS activities.  This will require updating of the emissions trading scheme, resource consenting legislation and importantly, ensuring certainty regarding long term risk/liability for CO2 storage sites.  Hesketh Henry’s Corporate and Commercial team will be following developments closely.

Our Corporate & Commercial team represent domestic and international clients operating across energy and infrastructure sectors.  If you require further information, please contact Ben Hickson.

[1] https://www.energycouncil.com.au/analysis/carbon-capture-storage-a-viable-option-for-australia-s-future/#:~:text=There%20are%20currently%2018%20CCS,CO2%20a%20year%20by%202035.

[2] https://norlights.com/how-to-store-co2-with-northern-lights/

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.