The EU Industrial Carbon Management Strategy: Building a CO2 Market to Meet Climate Goals

On February 6, 2024, the Commission set out how it envisages the “European Industrial Carbon Management” (ICM) strategy by 2040.[1]

The European Union now has the opportunity to take the lead in the carbon capture, utilization and storage (CCUS) technologies, opening up new business opportunities. The goal is to deploy CCUS at large scale and to target sectors where it is difficult or impossible to fully eliminate greenhouse gas emissions (the so-called “hard-to-abate” sectors). The EU efforts in carbon management is part of a larger policy framework aiming to transform the EU into a climate-neutral economy by 2050.

The ICM strategy will be based on three pathways, all targeting the capture of CO₂ emissions, (i) for storage (Carbon Capture and Storage, CCS), which implies trapping the emissions from fossil, biogenic or atmospheric sources and transporting them for permanent and safe geological storage (onshore or offshore); (ii) to remove  CO₂ from the atmosphere; and (iii) for utilization (CCU), which means that captured CO₂will be utilized for various industrial applications, such as constructions, synthetic products, chemicals or fuels.

The ICM strategy fits into a broader legal framework supporting the CCUS technologies in the EU, which consists mainly of:

• the EU Emissions Trading System (ETS) Directive,[2] including the Carbon Border Adjustment Mechanism, which now offers exemptions from allowances for emissions that are permanently captured and utilized.[3] The revenues generated by the EU ETS are used by the EU Innovation Fund, to support CCS projects with significant financing.
• the CCS Directive,[4] which establishes permitting rules to ensure safe and environmentally sound CO₂ storage, and mandates transparent and non-discriminatory access to the infrastructure.
• the Net Zero Industry Act (NZIA)[5] aims to boost CCS investments by setting, among other measures, an annual storage capacity of 50 million tons of CO₂ by 2030, and requiring EU oil and gas producers to contribute pro rata to their production share.[6]

Despite the existing policies, large-scale projects for ICM face a number of challenges, such as significant up-front investment, unavailability of transport or storage infrastructure, insufficient cross-borders coordination to enable the establishment of the different pathways. To create a viable market for CO₂ in Europe, the Commission has outlined several measures in the ICM Communication.

Deploying an infrastructure for the transport of CO_2. The Commission has begun preparatory works for a future CO₂ transport regulatory package. The Commission identifies two options: transport by (i) pipeline or (ii) ship. In the short term (until 2030), shipping will be unavoidable but the long-term goal is to expand the pipeline infrastructure. However, shipping is not trivial either, as it requires the availability of specialized fleets. Challenges in terms of complex logistics, lengthy permitting procedures and uncertainties about the volume of CO₂ to be transported create barriers to investment.

To finally enable an efficient internal market for the transportation of CO₂, the Commission considers, among other things, (i) reusing or repurposing existing infrastructure for the transportation of CO₂, (ii) developing rules for emissions accounting,(iii) minimum standards for CO₂ flows and (iv) assisting in the development of guidelines for safe shipping.

Capturing and storing CO₂ emissions. Storage of CO₂ is critical, especially in hard-to-abate sectors (e.g., cement). To address this, Commission plans to collaborate with the Member States to develop a platform for pooling demand for CO₂ transport and storage, while also working with EEA geological on an investment atlas of potential storage sites. By 2025, Member States must establish transparent procedures for issuing storage permits. They also have to enable their geological services to contribute existing data and generate new data to support the EEA-wide investment atlas. The goal is to increase storage capacity steadily over the coming decades, with expected high economic benefits even after 2050.

Removing CO₂ from the atmosphere. So far, the EU ETS does not recognize negative emissions, meaning that an emitter cannot offset its unavoidable emissions by removing CO₂ from the atmosphere. The Commission is mandated to examine whether and how this can be changed and develop policy options and support mechanism for industrial carbon removals, including if and how to account for them in the EU ETS.

Using captured CO₂ as a resource to replace fossil fuels in industrial production. The aim of CCU is to turn CO₂ from a pollutant into a commodity, a valuable resource. Capturing CO₂ and recycling it to produce advanced synthetic fuels, chemicals, polymers or minerals is in fact another key aspect of an industrial carbon management value chain. However, much is still unclear. The Commission itself acknowledges that it needs to assess how to create effective and efficient incentives for CCU by 2026.[7] This applies in particular to cases in which captured CO₂ is used in products that are not permanent—that means from which, sooner or later, the CO₂ will escape again.

International cooperation. Cross-border CCS agreements are becoming a reality, with the first agreement signed to ship CO₂ from the Netherlands to a storage provider in Norway.[8] Extending these benefits beyond EEA would create significant business opportunities for CCUS related-industries but would also requires specific conditions,[9] including similar safety standards to the EU CCS Directive.

Investment and funding. A viable market for carbon capture will ideally develop by 2030, with an estimated economic value of EUR 45 to 100 billion. Until then, the CCUS projects, as well as the other initiatives laid out by the Commission, will require significant funding.

Aside from capture costs and the current deficit from announced CCS projects,[10] the estimated investment needed to reach the NZIA storage target described above, is EUR 3 billion, with an additional c. EUR 6 to 9 billion for transportation infrastructure. Investment needs are expected to increase up to EUR 23 billion by 2050.[11]

The EU ETS Innovation Fund (EUR 3.3 billion) and the Connecting Europe Facility for Energy (CEF Energy) (EUR 680 million) provide some financing for deployment of selected innovative large scale CO₂ projects.[12] In addition, the European Climate, Infrastructure and Environment Executive Agency also refers to the Horizon Europe program, which has a budget of around EUR 95 billion and already funds CCUS projects.[13] Finally, the Commission plans to engage as of this year with the European Investment Bank, on financing CCUS projects, with the Green Deal Industrial Plan financing package of EUR 45 billion.

Despite funds and various mechanisms allowing financial backing, the Commission anticipates that additional support by the Member States will be required. The EU’s Guidelines on State Aid for climate and environmental protection,[14] along with the General Block Exemption Regulation, set conditions under which state aid for CCS and CCU projects is permissible. To bridge the gap between a carbon reference price and the project’s cost, “Carbon Contracts for Difference” schemes can provide a predictable revenue stream for project developers. In addition, Member States can use the Recovery and Resilience Facility, to support carbon capture investments through schemes, assessed by the Commission under State aid rules, in particular Article 107(3)(c) of the TFUE.

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Co-authored with Consuelo Pollonara and David Schmidt

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[1]        European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Towards and ambitious Industrial Carbon Management for the EU, February 6, 2024, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM%3A2024%3A62%3AFIN&qid=1707312980822 (the “ICM Communication”).

[2]        Which operates in EEA-EFTA states.

[3]        Directive 2003/87/EC.

[4]        Directive 2009/31/EC.

[5]        See Energy Resource Center dedicated post, available here.

[6]        The NZIA is also mandating producers to share geological data from decommissioned hydrocarbon sites to reduce the cost of identifying new CO₂ storage locations, while EU countries must publicly disclose all areas suitable for CO₂ storage; and committing the EU and its Member States to make reasonable efforts to develop necessary CO₂ transport infrastructure.

[7]       ICM Communication, § 4.4.

[8]        Yara invests in CCS in Sluiskil and signs binding CO2 transport and storage agreement with Northern Lights – the world’s first cross-border CCS-agreement in operation | Yara International.

[9]        ICM Communication, § 5.4.

[10]      There is already a funding deficit of EUR 10 billion for announced CCS projects and capture costs from point sources are estimated to range from EUR 13/t and EUR 103/t of CO₂ depending on the industry, capture technology and CO₂ concentration, ICM Communication, § 5.1.

[11]      ICM Communication, § 5.1.

[12]      To date, the Innovation Fund has allocated support under the EU ETS Directive to 26 large- and small-scale CCS and CCU projects with more than EUR 3.3 billion in grants. The CEF has granted around EUR 680 million to CO2 projects of common interest (see ICM Communication, § 5.1).

[13]      European Climate, Infrastructure and Environment Executive Agency, Industrial Carbon Management interactive stories: a new tool to discover EU-funded projects in the CCUS sector, February 13, 2024, available at https://cinea.ec.europa.eu/news-events/news/industrial-carbon-management-interactive-stories-new-tool-discover-eu-funded-projects-ccus-sector-2024-02-13_en.

[14]      Communication from the Commission (2022/C 80/01). Guidelines on State aid for climate, environmental protection and energy 2022.