An explanation of Carbon Capture and Storage and of insurers' interest in this developing area.
Capturing and storing carbon emissions is now considered a priority in the fight to reduce the amount of carbon emissions released into the atmosphere. The insurance sector looks likely to play a crucial role in the implementation of these novel and considerable Carbon Capture and Storage schemes.
What is Carbon Capture and Storage ("CCS")?
CCS is one of a range of schemes designed to reduce the amount of carbon being released into the atmosphere. Estimates are that CCS has the potential to reduce the harmful effects of carbon dioxide emissions from power plants by up to 90 per cent.
It involves capturing the carbon dioxide produced by power stations and other industrial processes and storing it on a long-term basis to prevent it being released into the atmosphere. The most likely places to store the carbon are in deep geological formations, such as depleted oil and gas fields, and in deep oceans with a depth of between 800 and 4,000 metres.
Government initiatives and consultations
Proposals to develop demonstration projects, aimed at addressing the viability and promoting the acceptance of CCS schemes, have been announced by the Government and, in October 2007, it opened a competition to develop the UK's first full-scale CCS demonstration. In the Pre-Budget Report, the Government's commitment to CCS was reinforced when it confirmed the intention to finance four Carbon Capture and Storage demonstration projects.
Both National and European initiatives have been implemented to encourage the use of CCS. For example, the Department of Energy and Climate Change ("DECC") has announced that new coal-fired power stations will only be permitted in the future with CCS facilities, and the EU has introduced a Directive1 which requires certain technical assessments for each new combustion plant over 300mWe.
The Government is also consulting widely on the introduction of CCS, focusing initially on the licensing regime to be implemented. One of the key aspects of the proposed licensing regime is the need for financial security for post-closure risks. The most likely provider of this would be the insurance industry, which has been invited to comment on the consultation process2.
The insurance market
Assessing the risks connected with carbon conversion plants, and the storage of carbon products, is extremely difficult. Research projections for the storage of carbon products stretches hundreds, and sometimes thousands, of years into the future and technology for the conversion of by-products, at combustion plants, is continuously evolving.
This introduces a need for financial security, and insurers, such as Zurich, have responded by launching insurance products which aim to cover pre-operational, operational and long term aspects of CCS. However, there are few existing CCS plants on which to base industry predictions, and actuarial calculations.
As with the Environmental Liability Directive, the need for mandatory financial security as part of the licensing regime is potentially good news for insurers as it will lead to demand for new and innovative products. However, the uncertainties of what they are being asked to insure, and the long-tail nature of some of the exposures is likely to make them understandably hesitant. There may be a gap between what operators need, in order to satisfy their mandatory financial assurance obligations and to make their projects viable, and what insurers are prepared to underwrite.
Footnotes
1 DIRECTIVE 2009/31/EC of the European Parliament and of the Council on the geological storage of carbon dioxide
2 See: DECC Consultation on the proposed offshore carbon dioxide storage licensing regime - Page 20 Para 79 - decc.gov.uk/en/content/cms/consultations/co2storage/co2storage.aspx
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
