The UN Climate Change Conference in Cancun added a new dimension to the CDM: Carbon capture and storage technologies in geological formations shall now be allowed to qualify under the CDM. This decision has been hailed as a victory by oil companies across the world, which could not believe their luck.

Enhanced Oil Recovery (EOR) is a generic term referring to the techniques used to increase the amount of crude oil that can be extracted from an oil field. It is achieved by injecting a gas, for example CO₂, into an oil reservoir. By using EOR, 30-60 % or more of the reservoir’s original oil can be extracted compared with 20-40% using primary and secondary recovery. Oil reservoirs are favoured sites for underground CO₂ storage, notably because under the CDM they are the only sites where CO₂ capture could produce additional income to that generated by the credits awarded for CO₂ storage.

There are huge costs associated with CCS: the additional energy used for the capture is enormous and referred to as the “energy penalty.” According to the Hamburg Institute of International Economics this can range from 15-40% of energy output, pushing the cost of CO₂ avoided up to somewhere in the range of €24–€52/t. However, the right mix of capture, transport and storage options – with enhanced oil recovery at the top of the list – can generate enormous profits per avoided tonne of CO₂.

In Canada, a CCS-EOR project was recently set up by Cenovus Energy at the Weyburn Oil Field in southern Saskatchewan. The project is expected to inject a net amount of 18 million tonnes of CO₂ in order to recover an additional 130 million barrels of oil over an anticipated lifetime of 25 years. Assuming this plant were a CDM project generating carbon credits for a price of €12 per credit and producing profits of €60 a barrel, this project would make €216 million from carbon credits plus about €7,8 billion from the additional oil recovery, which can be cut down to an average profit of €445 per tonne of CO₂. Although this calculation is based on average numbers and disregarding the carbon credits that would have to be deducted based on large volumes of CO₂ released into the atmosphere through the extraction and burning of more oil, it shows that CCS-EOR in the CDM is more likely to be seen primarily as a new cash cow rather than a means for reducing emissions.

The prospect of huge potential profits also rings an alarm bell when talking about the additionality of any CCS-EOR CDM project: it is hard to believe that fossil fuel producers will truly depend on CDM incentives to be able to carry these types of projects forward.

Earlier this year a farming couple, whose land lies over the Weyburn Oil Field in Saskatchewan, complained that CO₂ seeping from the soil had killed their livestock and contaminated their groundwater. Directly related to the actual CCS plant or not, these fears touch upon the very concerns that have kept CCS out of the CDM so  far: a long list of potential pitfalls including the risk that CO₂ storage is not permanent and could leak from underground geological formations has not yet been resolved. Other environmental and public health risks, and the issue of legal liability in the case of leaks or damage to the environment, ecosystems, affected communities, property and public health remain to be addressed.

But these concerns are not shared by a  oil producing and technology exporting countries such as Norway, Saudi Arabia, Australia and the United Kingdom which have pushed hard for the introduction of CCS in the CDM over the past few years. In a late night decision on the last day of negotiations at the Cancun conference, the inclusion of CCS was hastily rubberstamped. This decision came to the surprise of many because some countries such as Brazil and the Alliance of Small Island States (AOSIS) have always been firm opponents in the past. However, a recent conference that took place in early February 2011 in Trinidad & Tobago, a member of AOSIS, seems to have cemented a new friendship that might have been initiated the same night the decision to include CCS in the CDM was taken. One of the key topics at the conference was carbon capture and storage as well as CDM investment, generously supported by partners such as BP, Repsol and GDF Suez, an indication that AOSIS could have finally found its interest in CCS technologies.

Cancun saw also another decision that could generate additional support for oil recovery for some of the richest oil countries: A new scheme will provide loans to cover the costs of the development of CDM projects in countries which host fewer than 10 registered projects. These include not only least developed countries but also countries such as Saudi Arabia, a potential place to host future CCS CDM projects.

Supporting CCS under the CDM provides incentives to increase the share of fossil fuel power plants in developing countries while leading to a reduction of efforts to support energy saving policies, renewable energies and other safe and sustainable low carbon technologies, both in research and financial terms. But most worryingly of all, CCS is not a credible mitigation option as it does not establish long-term liability for future releases.

In order to account for non-permanence in the case of storage in non-Annex I countries, several options, e.g. temporary credits similar to those issued for forestry credits or rules for actual occurring releases, are under consideration but all come with serious pitfalls. Discounting could be another option, but discount factors would have to be estimated ex ante for the entire storage period while reservoir operators might plan to release CO₂ after “permanent” credits have been issued and to refill the same reservoir to receive more credits.

We are now looking ahead to the next climate change conference in Durban that will clarify whether CCS can be supported by the CDM or whether environmental and social concerns can prevail over financial interests.