When Will the Era of CCUS Commercialization Arrive?

There is a global consensus on the key role of Carbon Capture, Utilization and Storage (CCUS) in addressing climate change, especially on its significance as one of the few viable technologies for substantial emission reduction in the “hard-to-abate” sectors, such as steel, cement, and petrochemical, etc. According to the China Status of CO2 Capture, Utilization and Storage Report, CCUS is defined as "a technology that captures CO2 from industrial processes and energy use, or directly separates it from the atmosphere before using or injecting it into the ground for permanent emission reduction."

The commercialization of CCUS has not developed as fast as expected due to high costs, technical bottlenecks, and lack of policy support. Currently, most CCUS projects worldwide are merely demonstrations, with very few in actual commercial operation. As a carbon-negative technique that can potentially reduce costs over the medium to long term, CCUS is expected to play a critical role in the global net-zero transition.

CCUS can be divided into three types based on the method by which CO2 is captured, whether this is achieved by purifying a mixture of gases emitted from fossil fuel power plants and industrial processes, Direct Air Carbon Capture and Storage (DACCS), or Bioenergy with Carbon Capture and Storage (BECCS). The conventional CCUS, which aims at fossil fuel power plants and industrial production, is currently the prevalent type due to its relatively low cost of capture. Globally, more than 80 percent of all CCUS projects are related to fossil fuel-fired production.

Compared to other energy efficiency projects, emission reduction with CCUS comes at a high cost and with many unknowns, given it is still in development. For hard-to-abate sectors, it is not yet the preferred method to cut emissions. Due to its expensive and technically challenging nature, the deployment of CCUS facilities worldwide has not been as fast as expected and is far from achieving the CCUS carbon capture goals set for achieving net-zero emissions. According to the International Energy Agency (IEA), there are only 35 commercial projects out of approximately 300 CCUS facilities around the world, mainly used for industrial processes such as fuel switching and power generation, capturing around 45 million tons of CO2 annually. According to the work plans, more than 200 new carbon capture facilities will be commissioned worldwide by 2030, which could capture over 220 million tons of CO2 every year. This number, however, still pales in comparison to the 1.6-billion-ton target under the net-zero emissions scenario.

Despite the need for further development, high costs, and sluggish deployment, CCUS will play a key role in the mid-to-late-stage of the global net-zero transition due to its contribution to the effective decarbonization of hard-to-abate and energy-intensive sectors as well as its potential to couple with renewable energy sources to achieve negative emissions.

Comparatively, the CO2 capture cost from fossil fuel power plants and industrial process is a lot lower than DAC and BEC, though it is still more costly than using renewable energies to reduce carbon emissions. Also, capturing technologies of CCUS are more mature than DAC and BEC, as it is the most common type worldwide. In addition, CCUS deployment in thermal power plants can help energy systems attain decarbonization goals while ensuring flexibility, reliability, and energy security. When looking at medium-and-long-term planning, DACCS takes center stage, enjoying sizable government subsidies and private sector investments to promote technological innovation, cost reduction, and the development of future carbon removal equipment. BECCS, as one of the key technologies for negative carbon emissions, will help mitigate difficult-to-eliminate CO2 emissions and keep the global greenhouse effect at a manageable level.

The inflated cost of CCUS is one of the main causes behind its slow commercialization, as its immediate carbon reduction costs cannot compete with renewable energy sources.

Due to the different capture, transportation and utilization methods, the overall cost of CCUS can vary, with prices inversely proportional to the concentration of CO2. The higher the concentration, the lower the cost of capture. According to IEA, the cost of CO2 capture in global industrial production ranges from $15 to $120 USD per ton, while the cost of direct air capture can be as high as $335 USD per ton. Transportation costs are directly affected by the initial investment in pipelines and the transportation distance, while storage costs are mostly around $10 USD per ton. With increased oil production, CO2 Enhanced Oil Recovery (EOR)can generate profits substantial enough to cover the costs fully. However, the combined cost of CCUS is much higher than that of the more commercialized renewable energy and higher than carbon prices worldwide.

Second, CCUS necessitates a complex industrial supply chain. The geographic locations of its various facets are critical to cost control and commercialization.

The existing supply chain was not designed for CCUS production and, as a result, has stemmed its growth with technological development, having to adapt to its supply chain rather than the other way around. A well-planned industry chain can significantly reduce the transportation cost of CO2 and CCUS by-products, which in turn reduces the overall cost of CCUS.

CCUS also faces the challenge that the whole industry chain is not yet fully integrated, and its potential financial returns remain unknown. There is an urgent need for more successful whole-industry-chain demonstration projects to prove CCUS’ financial viability and attract private sector investment.

Given that CCUS as an industry is still nascent, most projects rely on policy guidance, public subsidies, and low-cost green finance products. The "carbon lock-in" caused by CCUS technology and public skepticism around CCUS deployment in the fossil fuel industry has made the private sector conservative and cautious about investing in related projects.

According to the Administrative Center for China’s Agenda 21 and recent public data, more than 40 CCUS demonstration projects are in operation or under construction in China, with a capture capacity of about 6 million tons per year. Most are for small-scale CO2 Enhanced Oil Recovery (EOR) in the petroleum, coal chemicals, and power industries.

However, the deployment of large-scale industrial demonstration projects for the whole process has accelerated in the last two years. At the end of August 2022, China's first million-ton CCUS project, the Qilu Petrochemical Shengli Oilfield, began commercial operation, with a CO2 reduction capacity of 1 million tons per year. In May 2023, CHN Energy, in partnership with PetroChina, announced the construction of a 3-million-ton CCUS whole-industry-chain demonstration project in Ningxia, which is expected to be the largest project of its kind in China upon completion.

From a policy perspective, the Chinese government has been introducing more favorable policies for CCUS development in recent years. Government agencies have issued policies regarding CCUS development routes, technology research, industry chain demonstration, sector-specific emission reduction, and investment and financing support. In February 2021, the State Council issued The Guiding Opinions on Accelerating the Establishment of a Sound Economic System for Green, Low-Carbon and Circular Development, which encouraged CCUS pilot programs and demonstrations to drive the transition to energy systems. In October 2021, the State Council published a white paper, China's Policies and Actions to Address Climate Change, suggesting the establishment of the CCUS Strategic Alliance for Entrepreneurship and Technological Innovation, the CCUS Special Committee, and other specialized agencies which aim to continue the advancement of CCUS technologies and commercialization.

In addition to policy guidance, the Chinese government has provided financial support and funding for CCUS projects. In 2021, the People's Bank of China, the National Development and Reform Commission, and the China Securities Regulatory Commission jointly issued The Green Bond Endorsed Projects Catalogue (2021 Edition), which expresses support for the construction and operation of CCUS projects. In the same year, the People's Bank of China rolled out a structured re-lending tool to reduce emissions by providing financial institutions low-cost funding to support "carbon emission reduction technologies, such as carbon capture, storage and utilization." In addition, a few local governments also provided subsidies and financial support to CCUS projects at various level. For example, the Shenzhen government can provide up to 10 million RMB for CCUS demonstration projects and an additional subsidy of 20 RMB/ton of CO2 captured after the projects are commissioned.

Most of the current demonstration projects in China are led by State-owned-enterprises, and most of those in operation are small in scale. Private companies are not actively deploying CCUS projects due to the considerable initial investment and unclear financial returns. Adding to the issue, the price of China's Carbon Emission Allowance is only 55 RMB per ton, lower than the international level, whereas the cost of CCUS can easily soar to 200 to 500 RMB per ton, making the already expensive CCUS project less appealing. A small number of CCUS demonstration projects in China can break even, though their revenue mostly comes from the economic benefits of CO2 utilization by-products, such as the by-products of CO2 mineralization, fertilizer, or CO2 EOR. However, these economic benefits are highly dependent on a well-planned industry chain. Chinese institutional investors suggested that "economic benefits are possible when the distance between upstream and downstream CCUS companies is within 200 to 300 km." However, the CCUS-related policies released in China are scattered in various aspects, such as low carbon development, sector-specific emission reduction, and scientific and technological advancement, lacking targeted and synergized CCUS development plans or policies.

US: Promote CCUS commercialization through tax credits With one of the longest histories of CCUS development, the US has gained advantages in technological advancement and application. It has received widespread support from the business community, academia, and government with an established CCUS industry chain. By the end of 2022, US-based CCUS projects in operation had captured more than 20.5 million tons of CO2 annually, accounting for about 45 percent of the carbon capture capacity of operating projects worldwide. By 2030, the carbon capture capacity of CCUS projects in the US is expected to reach 250 million tons of CO2 per year.

Tax credits are one of the most common CCUS incentives in the world, with Section 45Q of the US Federal Register making a good example. Due to the tax credits introduced by the US government, about half of the projects in the US are no longer dependent on the application of CO2 EOR for revenue.

In 2010, the US enacted Section 45Q, which provides tax credits for up to 12 years after carbon capture facilities are placed in service for new fossil fuel-fired power plants or CO2-generating plants that begin construction before 2024. With the 2018 revision, the subsidy received by producers per ton of CO2 was significantly increased. Incentivized by this, 12 of the 17 CCUS projects built worldwide in 2020 were set up in the US. In late 2021, the US federal government passed the Inflation Reduction Act (IRA), which substantially increased the level of 45Q tax credits to promote CCUS commercialization.

First, the tax credit amount significantly increases, particularly for direct air capture (DAC) projects, with the highest rate offering up to $180 USD per ton of CO2 permanently stored, driving DAC technological innovation, adoption, and cost reductions. Second, the IRA expands the scope of 45Q credit-eligible projects by extending the deadline to begin construction and significantly lowering the annual threshold. For example, the threshold for DAC projects has been reduced from 100,000 tons to just 1,000 tons per year, favoring smaller facilities. Third, owners of qualified CCUS projects can seek direct payment for 45Q credits, avoiding the lengthy process. Finally, taxpayers can choose to transfer their annual 45Q credits to other unrelated taxpayers. The IRA is expected to drive the US toward a 40 percent reduction in total GHG emissions by 2030 compared to the level of 2005, with carbon capture contributing four to six percent of the reduction, according to Rhodium Group.

Unit: USD per ton of CO2

UK: Public Funding and Mandatory Policy to Support Commercialization of CCUS

The UK government has shored up the commercialization of CCUS through public funding, support for key projects, and mandatory phase-out of carbon-intensive facilities. In 2020, the UK government set up the Carbon Capture and Storage Infrastructure Fund, announcing it would allocate 1 billion GBP to support the development of CCS projects. In April 2023, the UK government published the CCUS Net Zero Investment Roadmap to emphasize further the long-term collaboration between public and private funds to develop CCUS projects. In August 2022, the UK government shortlisted 20 projects for the next stage of its CCUS cluster process, with plans to capture up to 20 to 30 million tons of CO2 annually by 2030.

In addition, the UK government has announced it will phase out unabated coal-fired power generation by 2025 and decarbonize its national power sector by 2035. The Climate Change Committee suggested a small amount of unabated gas may still be needed to provide electricity on rare occasions (up to two percent of annual electricity production in 2035), thereby achieving a 78 percent reduction in the country’s GHG emissions, in line with the timeline of IEA's Net Zero by 2050 roadmap. These mandatory emission reduction policies will effectively drive suppliers of coal and even gas-fired electricity to switch to hydrogen or install CCUS facilities to ensure a low-carbon, flexible and secure electricity supply.

Although CCUS will not be the main method for emission reduction in China in the short term, it will certainly play a crucial role in the latter half of the country’s journey toward carbon neutrality. The CCUS industry in China is still in its infancy and needs government policies and matching public funding for commercialization.

• First, China should put forward a targeted policy for CCUS industry development. The current CCUS-related policies are scattered in different policy areas with various focuses and are not synergized. The emission reduction path and positioning of CCUS in key sectors should be clarified as soon as possible. Moreover, a targeted policy for CCUS industry development with corresponding goals and positioning, industry standards, technological innovation, incentives, and restraints should be created while considering the current stage, future prospects, and potential of CCUS, DACCS, and BECCS.

• Second, China should encourage CCUS-specific investment and financing instruments, such as green funds and equity investment. Although many green loans, funds, bonds, equity investments, and other financial instruments have been introduced under the "dual-carbon" target (China’s goal China to reach carbon peaking by 2030 and carbon neutrality by 2060), most of the green funds have gone to low-carbon fields, such as renewable energy where short-term returns are easier to obtain, rather than to CCUS.

• Third, there should be synergy between the upstream and downstream segments of CCUS for a well-planned industry mapping. The central government should encourage the development of a well-thought-out industry chain, while local governments can support matching the upstream and downstream sectors along the industry chain.

• Fourth, China should facilitate international exchanges and collaboration on CCUS. The industry’s technology is still developing around the world, particularly around capture and utilization. The industry is constantly evolving, and China should encourage international exchanges and collaborations on CCUS regarding the latest CCUS technologies, policies and investment trends across the globe, which can effectively promote the commercialization of CCUS in China.

• 1. 中国二氧化碳捕集利用与封存年度报告（2021）-中国CCUS路径研究, 生态环境部环境规划院，中国科学院武汉岩土力学研究院，中国21世纪议程管理中心  China Status of CO2 Capture, Utilization and Storage (Annual Report 2021) - China CCUS Pathway Study, CAEP of the Ministry of Ecology and Environment, Institute of Rock and Soil Mechanics of Chinese Academy of Sciences, the Administrative Center for China’s Agenda 21
• 2. CCUS Projects Explorer, IEA, 2023 https://www.iea.org/data-and-statistics/data-tools/ccus-projects-explorer
• 3. Carbon Capture, Utilisation and Storage, IEA, Sep 2022 https://www.iea.org/reports/carbon-capture-utilisation-and-storage-2
• 4. Scaling the CCUS industry to achieve net-zero emissions, McKinsey & Company, Oct 2022
• 5. Why carbon capture just became an economic fastball, Ernst & Young, Nov 2022
• 6. The Inflation Reduction Act Includes Significant Benefits for the Carbon Capture Industry, Gibson Dunn, Aug 2022