energy & environment

Unlocking Europe’s potential in carbon management

Every aspect of our lives is intertwined with carbon, from powering our daily commute to manufacturing the products we rely on. That’s why forward-thinking businesses intend to seize the opportunity to lead the charge in carbon management, not just as a moral imperative but as a pathway to innovation, efficiency, and enduring success in an increasingly carbon-conscious marketplace. However, despite companies’ eagerness to advance the creation of a carbon market supporting their decarbonisation, the absence of clear guidelines and incentives from regulatory bodies poses a significant hurdle to fully unlock Europe’s potential.

While nations like the Netherlands, the United Kingdom, and Norway are frontrunners in developing adequate frameworks, other countries, such as Germany, are significantly lagging behind. The Dutch government, for example, has set up comprehensive legal and regulatory structures for CO2 storage, defining criteria for site selection, risk evaluation, monitoring, and liability.

Similarly, the U.K. has instituted the Offshore Petroleum Regulator for Environment and Decommissioning (OPRED) to oversee the licensing and regulation of offshore CO2 storage activities, ensuring adherence to environmental and safety standards.

Norway has taken similar steps, introduced the Offshore CO2 Storage Regulations and established the Norwegian Environment Agency (NEA) as the regulatory body responsible for permitting and supervising CCS projects.

Most recently, in April 2024, Belgium, Denmark, the Netherlands, and Sweden concluded agreements with Norway for cross-border transport and geological storage of captured CO2. This will advance North Sea cooperation on CCS, but one wonders why Germany is not part of such a crucial agreement.

As opposed to the frontrunners, Germany’s regulatory landscape has lacked clarity. This gap is particularly notable given the country’s sizeable industrial clusters in hard-to-abate sectors. These industries face significant hurdles in decarbonisation due to their high emissions and reliance on entrenched processes and technologies. However, only recently has Germany begun to address these shortcomings by introducing its first strategic outlook on carbon management. This signifies a crucial step towards aligning regulatory frameworks with the imperatives of carbon reduction and fostering innovation and investment in decarbonisation technologies.

In April 2024, Belgium, Denmark, the Netherlands, and Sweden concluded agreements with Norway for cross-border transport and geological storage of captured CO2 in the North Sea.

State of Play: Germany

This year, on 26 February, the German Federal Ministry for Economic Affairs and Climate Protection (BMWK) presented key points for a Carbon Management Strategy on Carbon Capture and Storage and Utilisation (CCS/U) based on the evaluation report on the German Carbon Dioxide Storage Act (KSpG). It also introduced a draft bill to amend the KSpG to create a clear legal framework for establishing a CO2 pipeline infrastructure. The full Carbon Management Strategy setting out guidelines is expected to be presented by the end of June.

Additionally, the German government is working on a Strategy for Negative Emissions (LNe) as a sister strategy to the Carbon Management Strategy. This second strategy considers Co2 extraction separately from approaches for the capture, utilisation, and storage of Co2 from the atmosphere and is aimed at negative emissions via natural and technical carbon dioxide removals (CDRs).

The key points for a carbon management strategy make clear that the use of CCS, including offshore storage and CCU and CO2 transport, is made possible. However, they also demonstrate that the strategic focus of the strategy for CCS will be on emissions that are difficult or impossible to avoid, such as in the chemicals, cement, and steel sectors. In this context, Germany’s Minister for Economic Affairs and Climate Protection, Robert Habeck (the Greens), explained that it is unavoidable for Germany to capture and store CO2 so that industries can continue to exist in the country while achieving climate targets.

This development constitutes a great step towards effective carbon management in Germany.

Only since the current government coalition took office in 2021 and the climate and industry portfolio was entrusted to Robert Habeck the development of a carbon management strategy has progressed. Considering that the Greens were long opposed to CCS/U, the current development marks a notable shift in political discourse towards acknowledging the importance of these technologies as climate solutions. For instance, MP Felix Banaszak (the Greens) perceived the recently introduced key points as “an important step in the direction of a climate-neutral business location, which many companies have long been waiting for”.

Similarly, MP Lukas Köhler (FDP) described the recently introduced key points as a “historic milestone on the road to climate neutrality”. Likewise, the SPD acknowledged in their position paper from May 2023 that “there will continue to be emissions in the future, which (…) are unlikely to be avoided” and that it is, therefore, necessary to “develop a long-term strategy for dealing with (…) residual emissions”, which is “reflected in the announcement (…) to develop a Carbon Management Strategy.” Moreover, from the ranks of the opposition, MP Andreas Jung (CDU) highlighted that the “CDU is clearly in favour of CCS/U” and demanded that ‘’the German government must no longer delay the Carbon Management Strategy” but instead “make bold progress and utilise the potential”.

Thus, it appears that a fragile consensus on the topic seems to be slowly developing, reflected in the key points of Germany’s upcoming Carbon Management Strategy. Yet, as this strategy will merely provide guidelines and given the interdependence of European countries in this sector, an overarching EU regulatory framework is imperative to ensure coherence and predictability for hard-to-abate sectors seeking to decarbonise with CCS and infrastructure developers.

Germany’s sizeable industrial clusters in hard-to-abate sectors make a strong carbon management strategy essential.

An EU Regulatory Framework for Carbon Management and Measures Fostering a Market for Low-Carbon Products – the Holistic Approach to Industrial Decarbonisation

As the new European Commission is expected to adopt its Work Programme in January 2025, an EU-wide regulatory framework creating a harmonised market for carbon management can be expected, at the earliest, around the end of 2026.

The Net Zero Industry Act (NZIA), recently adopted by the European Parliament, aims to support the business case for CCS technology by setting an annual target of 50 million tonnes of CO2 storage capacity by 2030. The Act further recognises the challenges to the creation of a CCS market.

While the EU ETS price of CO2 supports the economic viability of CCS projects, several uncertainties exist. For starters, the ETS price is fluctuating, and while it passed the 100 EUR mark per ton of CO2 in February 2023, a minimum level needed for CCS projects to be economical, its current level dropped to 65 EUR in March 2024. Moreover, industrial companies planning investments in carbon capture could encounter difficulties accessing CO2 transport and storage infrastructure (see here a map provided by Clean Air Task Force visualising the unevenly spread storage capacity across Europe).

At the same time, CO2 storage developers face upfront costs and need commitment from potential customers. This is the classical ‘chicken-and-egg’ paradox. As rightfully noted in the NZIA: “To avoid stranded assets and to ensure that economically viable injection capacity leads to CO2 reductions, a business case along the full value chain should be built.”

It is commendable that the EU released an Industrial Carbon Management Strategy (ICMS) in February, aiming to address all aspects of carbon management, including the capture, removal, transport, utilisation, and storage of CO2. With this, the Commission signalled its intention to consider the entire value chain of CCS projects, including investment strategies, management processes, and access to CO2 infrastructures.

However, one crucial puzzle piece for the creation of a robust business case to scale the nascent CCS market was insufficiently addressed in the ICMS: fostering demand for low-carbon products, e.g., products based on renewable and low-carbon hydrogen. While the strategy recognises “the need for extra attention for matching supply and demand for low-carbon products”, it does not provide a vision of how to address this need in future legislation.

A joint open letter by several industry and civil society organisations called for a “holistic approach to industrial decarbonisation” and an announcement of concrete measures. As detailed by the signatories, such initiatives could include a dedicated Low-Carbon Products Strategy, incentives for producers and users of low-carbon products, EU assistance in setting up private buyers’ alliances to quickly ramp up demand for green basic materials, science-based common certification for low-carbon products, and public procurement rules including sustainability requirements.

These measures could reduce investment risks associated with the still higher production costs of clean hydrogen and the niche demand for such products. This would, in turn, have a positive spillover effect on industry commitments to CCS projects and visibility for infrastructure developers.

Support from industrial heavyweights like Germany, as well as CCS frontrunners like the Netherlands, is crucial to giving the EU debate much-needed impetus. To reach our EU target of 55% emissions reduction in 2030 and ultimately have a shot at climate neutrality by 2050, the time is now to set up the regulatory framework for harmonised industrial carbon management at the EU level in close coordination with partners such as Norway and the U.K.

The 2025 Commission Work Programme must prioritise releasing a proposal for such a framework and announce measures to spearhead a low-carbon products market. Such measures for end-products based on renewable and low-carbon hydrogen could advance industrial decarbonisation and the CCS market. Beyond this, they could have a positive effect on the development of a European clean hydrogen economy and, in the case of products based on renewable hydrogen, also support reaching our targets for renewable fuels of non-biological origin (RFNBO) in industry under the Renewable Energy Directive (RED III).

This would finally show the EU institutions’ capacity to devise holistic strategies aligning EU climate and energy objectives with a vision of maintaining a competitive industrial base in Europe.

Vesela Dimitrova
Lilli Ann Maicher
Junior Consultant

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