A new report released by the Lawrence Livermore National Laboratory analyzes the economics of different types of carbon capture/sequestration projects, setting the stage for more transparent negotiations between landowners and sequestration project developers and informing lawmakers and public agencies of further incentives that may be necessary to encourage certain types of carbon capture/sequestration projects.

Key Points:

• Economic viability of carbon capture/sequestration projects is dependent on many factors, including but not limited to the source of carbon capture (i.e., ethanol plant vs. natural gas plant) and associated capture costs, transportation method and costs, and proximity to suitable geologic storage.
• Carbon capture from ethanol plants is currently economically viable given the low cost of capture in that setting, carbon capture from petroleum refineries is moderately economically viable, and carbon capture from natural gas plants and cement kilns is unlikely to be economically viable without different incentives.
• Landowners and project developers should structure sequestration agreements similarly to oil and gas leases to ensure that high fixed costs do not make sequestration projects economically infeasible, and to fairly compensate the landowner on profitable projects.
• Public agencies may need to create different incentives to encourage capture and sequestration of carbon from natural gas plants, cement kilns and some refineries, given that capture from these sources is only moderately economically viable at best.

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In May 2023, the Lawrence Livermore National Laboratory released a report entitled Sharing the Benefits – How the Economics of Carbon Capture and Storage Projects in California Can Serve Communities, the Economy and Climate.This report examines the economic feasibility of carbon sequestration projects in California, implications for project developers and host communities, and the necessity for additional policy considerations. This report also builds off a previous report on potential methods and feasibility of achieving carbon neutrality in California that was published by Lawrence Livermore National Laboratory in August 2020: Getting to Neutral – Options for Negative Carbon Emissions in California.

According to the May 2023 report, in order to facilitate California’s goal of achieving carbon neutrality by 2045, carbon capture and storage (CCS) and carbon dioxide removal (CDR) projects must satisfy three needs: emission reduction, economic viability, and local considerations.

With respect to economic viability, the report divides carbon capture/sequestration projects into three groups, from most to least economically viable:

• Most economically viable: this group includes a small number of applications, such as ethanol and certain refinery applications, which require no additional policy support, and offer significant potential for local benefits.
• Moderately economically viable: this group consists of a larger range of applications, including less favorable refinery applications and potentially some relatively easy natural gas power plant applications. The economic viability of this group varies from reasonably profitable to uncertain, depending on project specifics and local factors.
• Least economically viable: this group encompasses most natural gas power plants and cement plants, which are likely to require additional revenue streams and/or policy support to become economically sustainable.

Aside from the CO2 source sector, there are other factors that influence a project’s true cost, including the plant’s age, configuration, proximity to suitable geologic storage, viability of cheap CO2 transport, transport routings through areas of different sensitivity or logistical complexity, and other considerations. Two similar-looking projects may have materially different economics depending on their location, plant configuration, and other factors.

Currently, CCS and CDR projects in California rely on two main incentive programs: the California Low Carbon Fuel Standard (LCFS) and the federal 45Q tax credit. These programs provide financial support to projects that reduce carbon intensity. Additionally, federal funding opportunities may be available through the U.S. Department of Energy under the Bipartisan Infrastructure Law and the Inflation Reduction Act. Another option is The California Cap-and-Trade Program, which does not currently include the California Air Resources Board's (CARB) CCS Protocol. However, this may change in the future, indicating a potential integration of the CCS Protocol into the Cap-and-Trade program.

Implication for policy makers: A one-size-fits-all policy approach is probably not suitable for driving deployment in the carbon capture/sequestration industry. Different projects may require different incentives, and using a fixed-price incentive can be insufficient for some projects and excessive for others. To avoid inefficient use of public funding, policy instruments like reverse auctions can be used to prevent overspending while still having a significant impact on the sector.

Implications for landowners and project developers: It is important that landowners and project developers have detailed discussions based on project specifics and economics prior to entering into an agreement allowing carbon sequestration on a particular property. Without examining these details, it is difficult to determine a fair and reasonable figure that respects the challenges of implementing projects and addresses the interests of landowners and host communities. The May 2023 report concludes that leases for CCS projects should be based on the structure of oil and gas leases, where royalties are indexed to the price of produced fuel. This would ensure that landowners receive payments based on the revenue generated by the project, considering both fixed and variable components. Without such a structure, landowners and communities would miss out on the economic benefits of CCS projects, which can be substantial and may change significantly over time. Conversely, demanding unreasonably high fixed payments could hinder project viability and make projects uneconomical.

For the May 2023 report on the economics of carbon sequestration projects, please go to: https://gs.llnl.gov/sites/gs/files/2023-05/ca-ccs-economic-study-report.pdf

For the August 2020 report on the options for negative carbon emissions in California, please go to: https://gs.llnl.gov/sites/gs/files/2021-08/getting_to_neutral.pdf