Proposed Liability Framework for Geological Sequestration of Carbon Dioxide

Introduction

In our 2009 paper, "Proposed Roadmap for Overcoming Legal and Financial Obstacles to Carbon Capture and Sequestration" (the "Roadmap"), we outlined legal and financial incentives necessary for the rapid demonstration of geological sequestration. In this paper, we expand one set of ideas presented in the Roadmap, namely, our ideas regarding clarification of the liability regime for sequestration sites. Our liability proposal would apply to sequestration in secure geological formations onshore and beneath the seabed of the oceans. (Our proposal is not designed for terrestrial sequestration or sequestration of captured carbon dioxide in the water column of the ocean.) This liability framework will protect public health, property, and natural resources while removing barriers to carbon capture and sequestration ("CCS").

Numerous barriers impede the demonstration of large-scale CCS projects (those that capture and sequester at least 1.5 million tons of carbon dioxide annually). First and foremost is the absence of any national price on or restriction of carbon dioxide ("CO2") emissions in the United States. Other key barriers include uncertainty about liability; the dearth of pipelines to transport captured CO2, requiring significant investment in infrastructure; and the transaction costs and impracticality associated with acquisition of huge swaths of pore space, making access to sequestration sites difficult.

Many argue, we believe convincingly, that the prospect of unknown liabilities far in the future is an impediment to getting CCS demonstration projects financed. To overcome this barrier, and because we believe that immediate large-scale demonstration of CCS is necessary to determine if this technology can help mitigate climate change, we propose a limit on liability for initial demonstration projects. The purpose of this liability limit is two-fold: to overcome barriers and to provide incentives for these projects.

However, while we believe such an incentive is a necessary condition for demonstrations to proceed at the scale necessary, we do not believe that this incentive needs to be funded by the federal government. Instead, we believe that site owners/operators will be willing to pay predictable per-ton sequestration fees during the operational period, in exchange for limits on liability during the operational period, and a transfer of all liability for the project post-closure. Under our proposal, these per-ton fees will be paid into a trust fund, which will be available to cover liability claims that exceed the limit during the operational period and all liability claims post-closure. In sum, without a price on CO2 (the stick) or a fund to backstop uncertain future liability (the carrot), demonstration of sequestration is not going to happen at the scale necessary to address climate change. The industry-financed trust fund we propose will also help to overcome another barrier to CCS: significant public uneasiness regarding sequestration of captured CO2.

Until more data are available on the actual (not just predicted) long-term risks of CO2 sequestration, there is significant public concern regarding CCS. An industry-financed trust fund will help to address these concerns by ensuring that a readily accessible source of funding will be available in the event of a major problem at a sequestration site. For post-demonstration projects, uncertainty regarding long-term liability may remain a barrier to project financing and to public perception. While liability incentives are not appropriate for these post-demonstration projects, it is appropriate to remove barriers.

We therefore propose using the same, industry-financed trust fund for these projects. Liability would not be capped for these projects; rather, the cost of liability claims above a certain threshold would be shared with the industry-financed trust fund, and all postclosure liability would be paid out of the trust fund, as with the demonstration projects. This approach to managing liability should provide certainty and clarity for operators and the public without providing the additional incentive of liability caps, which will no longer be needed for post-demonstration projects. In sum, the system proposed in this paper uses an industry-financed fund to provide the appropriate incentives, clarity, and removal of barriers, without providing unnecessary incentives or government subsidies.