The carbon takeback obligation
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UK Government approval for new oil and gas production licenses in the North Sea should be conditional, according to an open letter from Carbon Balance, a think-tank founded by Oxford University. Fossil fuel extraction, the letter outlines, should only be allowed if licensees face an obligation to develop an increasing amount of long-term geological CO2 storage.
Among the signatories to the letter (sent to the UK Government in late August, ahead of its final decision on the Jackdaw and Rosebank fields) was Myles Allen, part of a team of academics who in 2021 published a paper calling for a carbon takeback obligation (CTBO).
The CTBO hopes to resolve the carbon capture and storage (CCS) paradox.
This is when CO2 storage operators are loath to invest unless they see sufficient demand for CO2 capture, while emitters are reluctant to bolt on facilities to capture CO2 unless they have sufficient guarantees that it can be transported and permanently sequestered.
As a form of extended producer responsibility, a pipeline of future compliance driven demand for CCS should align the whole supply chain to achieving that objective. As the open letter explains, a storage obligation on licensees would "help unlock private capital needed for CCS and CDR at a scale public funding alone is unlikely to match, allowing government to step back from a direct subsidising role sooner."
Allen's work suggests that the economy-wide costs of a CTBO are comparable to those indicated in integrated assessment models (IAMs) that employ a global carbon price, all the while delivering the same ambitious climate goals. Furthermore, the cost could be even lower "if the perceived policy risk cost associated with a CTBO is lower than that associated with a politically determined carbon price."
Yet the CTBO also involves a paradox.
The obligation must be set deliberately low if oil and gas producers (especially those developing new licenses) are expected to absorb the costs. However, this means very little carbon storage capacity will be built during a time when output from new fields is supposed to be ramping up. On the flipside, if the obligation is set too high then fossil fuel developers forgo a large share of the profits, making the development far less likely to go ahead in the first place, and pushing them to explore opportunities in jurisdictions elsewhere instead.
And it has other drawbacks too.
As with any climate policy, there are also questions on the willingness and method by which governments will enforce it, and of consumers to accept higher fossil fuel prices because of it. But perhaps the main criticism is that CCS could invoke moral hazard, reducing the incentive to limit fossil fuel use. This could come to the fore if CO2 storage fails to materialise at sufficient scale and reasonable cost to cover the associated emissions, a particularly high risk during the short to medium term as the CO2 storage infrastructure is being developed.
Europe introduced its own version of a CTBO in 2023 as concerns emerged that CO2 storage was the bottleneck to the blocs industrial decarbonisation. The outlook for CO2 storage capacity development was judged to be insufficient to meet expected demand for carbon capture.
As we'll see, recent developments in Europe mean the UK Government is unlikely to apply its own CO2 storage conditions on Rosebank and other new developments in the North Sea, but they could still have huge implications for the basins oil and gas producers in the long-term.
