Using European Carbon Dioxide Emission Allowances for Investments in Storage Technologies

Using European Carbon Dioxide Emission Allowances for Investments in Storage Technologies

Domagoj Vulin (Faculty of Mining, Geology and Petroleum Engineering, University of Zagreb, Croatia), Maja Arnaut (Faculty of Mining, Geology and Petroleum Engineering, University of Zagreb, Croatia), Lucija Jukić (Faculty of Mining, Geology and Petroleum Engineering, University of Zagreb, Croatia) and Daria Karasalihović Sedlar (Faculty of Mining, Geology and Petroleum Engineering, University of Zagreb, Croatia)
DOI: 10.4018/978-1-7998-1196-1.ch018
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European Trading Scheme should encourage the idea of CO2 utilization and/or underground storage. Despite the large estimates of CO2 storage capacities, cost-effective storage has not been performed in the EU. As EU ETS went through several phases and is tested to the level that it can be called mature, the trends of CO2 allowance market prices can be analyzed. CO2 reduction can be achieved by simultaneous injection for CO2 Enhanced Oil Recovery (EOR) commercially, which is proved outside the EU. The technology is well developed as a part of the oil and gas business, and the mover for implementing such technologies might be CO2 allowance price. As investments in those technologies are long-term and extremely capital intensive, this chapter discussed CO2 utilization and storage in the context of EU ETS. Additionally, the chapter presented statistical analysis that helps long-term CO2 price understanding; the connection of CO2 price with oil, gas, and electricity price; and guidelines for risk mitigation in assessing the feasibility of applying CO2 utilization and storage (CUS) technologies.
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European Trading Scheme (EU ETS) has been established to encourage projects for CO2 emission reduction. This represent cap and trade method of CO2 pricing. The opposing method to ETS is carbon taxation.

By combining cap and trade with carbon taxation, the companies can be (1) sources of CO2, without a possibility to cost effectively capture or significantly reduce CO2 emission, (2) large point sources that already separate CO2 or are able to implement CO2 capture during the production process and (3) those who can physically reduce CO2 by utilization in production process.

The EU ETS can include about 50 percent of CO2 emissions from the power sector and other energy-intensive industries, and should have the following features:

  • EUAs are allocated for free

  • EUAs can be auctioned

  • Emitters are encouraged to lower the reduction costs below the EUA price

  • Heavy GHG emitters can buy EUAs and postpone the CO2 reduction

Buyers and sellers at EU ETS should be allowed to trade directly (without brokers) through exchanges

Trading with CO2 emissions makes the idea of CO2 utilization and/or storage underground an attractive option for the research community and companies to consider different technologies and to make underground storage of CO2 feasible. However, through the history of EU ETS, it can be concluded that CO2 price volatility i.e. the market stability is the key issue for stopping CO2 investments (Figure 1). The implementation of EU ETS is planned in three phases, which are in the literature followed by criticism (Borghesi & Montini, 2016; Karpf, Mandel, & Battiston, 2018):

  • 1.

    2005-2007. First Phase that was considered as testing phase. It ended with price collapse because of over-allocation.

  • 2.

    2008-2012. Second phase coincided with the Kyoto Protocol commitment period of 2008-2012. National allocation plans overcome over-allocation issues but determined allocation cap on the EU level. Traded market volume increased several times as well as the market liquidity.

  • 3.

    Third phase is ongoing and active from 2013-2020.

Figure 1.

EU ETS market fluctuations (the figure arranged according to Borghesi & Montini, 2016; Karpf et al., 2018)


Allowance trading is dominated by demanders and EU ETS, whilst supply and demand are vulnerable to the distribution of the free allocation as static parameter (Y. P. Liu, Guo, & Fan, 2017).

Observed in general, EU ETS should negatively affect the energy-intensive industries. However, some analyses show that there is not significant impact on management and profitability of companies in EU (mainly Germany and France) and that power companies profited from freely allocated EUAs (Jaraite & Di Maria, 2016; Y. Liu, Tan, Yu, & Qi, 2017; Martin, Muûls, & Wagner, 2016; Y. J. Zhang & Wei, 2010). What is confirmed in many cases, such companies response to EU ETS system by paying for insufficient EUAs at the end of each reporting period.

Key Terms in this Chapter

Emission Reduction Unit (ERU): The right to emit the same amount of carbon dioxide equivalent (metric tons) achieved through emission reductions accomplished in Joint Implementation projects.

Carbon Capture and Storage (CCS): The most used term for technologies where large amounts of CO 2 are captured from point sources (like coal-fired thermal power plants), transported and permanently stored in deep geological structures, such as depleted oil and gas fields or large deep saline aquifers. The strict criteria is applied for CCS regarding CO 2 leakage to the shallow formations with potable water, which the reason that CO 2 storage site must be selected carefully, and the CO 2 injection must be monitored for eventual leakage, which makes such projects cost-expensive. Regarding leakage risks, depleted oil and gas fields should be more reliable because they already contained fluids (produced oil or/and gas) for thousands of years.

Carbon Dioxide Equivalent (CO2e): The equivalent of the mass of carbon dioxide with the same global warming potential as the emitted weight of one (or more) of the greenhouse gases (evaluated by its estimated global warming potential).

Greenhouse Gas (GHG): Six natural or anthropogenic gases that are mostly affecting the atmosphere are defined as GHG: Water vapor (H 2 O), carbon dioxide (CO 2 ), methane (CH 4 ), hydrofluorocarbons (HFC), nitrous oxide (N 2 O) and ozone (O 3 ). GHG absorb and emit radiation within the thermal infrared range and contribute to the greenhouse effect and global climate change. According to the Greenhouse Gas Protocol, the most important GHGs produced as a result of human activities are: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorinated compounds (sulphur hexafluoride, nitrogen triflouride, perfluorocarbons, fluorinated ethers, perfluoropolyethers, chlorofluorocarbon, and hydrochlorofluorocarbon.

Enhanced Oil Recovery (EOR): A tertiary oil recovery method that can yield additional oil recovery by injecting gas, polymers, surfactants etc. into oil reservoir. If CO 2 is injected and mixed with oil, the oil becomes more mobile. CO2-EOR method is attractive as CUS technology, supporting the feasible CO 2 storage, because the retention of the most of injected CO 2 in the oil reservoir and cost-effective oil recovery. About 90% of CO 2 projects is implemented commercially in USA, because of a well-developed CO 2 pipeline network, i.e. the CO2-EOR feasibility largely depends on CO 2 availability.

Certified Emission Reduction (CER): CO 2 (i.e. GHG CO2e) reduction units (measured in metric tons) that can be transferred under the EU ETS because it is generated from a clean development mechanism project activity.

Enhanced Geothermal Systems (EGS): Geothermal energy is usually produced from high-temperature geothermal water reservoirs. Even though the technology is detected early, there is increase of research of using CO 2 as geothermal fluid (by continuous injecting, heating underground and producing injected CO 2 ). Due to very high mobility compared to water, CO 2 might extract more geothermal energy, while some of CO 2 retention occurs, i.e. some of CO 2 is “lost” in the reservoir. There is also first period when injected CO2 is moving to the production well (during that period CO 2 is not produced) and that period can be considered as pure CO 2 storage.

Carbon Utilization and Storage (CUS): A more focused range of CO 2 capture, transport and storage technologies that is supported with some cost-effective method of underground (Energy) exploitation. Considered state-of-the-art technologies are enhanced oil recovery, enhanced gas recovery, and CO 2 -enhanced geothermal systems.

CO2 Benchmarking: Workflow and system of protocols (usually implemented in larger companies) used to determine possibilities to improve energy efficiency or reduce CO 2 emissions, resulting with low-emission production and, possibly, free allocation in the EU ETS.

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