UK: UK Carbon Capture And Storage Projects: Progress At Last?

Introduction

Doubts about the technical feasibility of carbon capture and storage (CCS) remain, but the United Kingdom has recently taken two concrete steps towards exploring CCS potential: CCS provisions in the proposed Energy Bill and the award of funds for developing technical plans for CCS demonstration plants. These have occurred in the context of a growing regulatory support framework for CCS in both the UK and the European Union.

Energy Bill – the 'CCS incentive'

The Energy Bill currently before the UK Parliament is part of the UK's low carbon transition plan for meeting its obligation to reduce carbon emissions 34% from 1990 levels by 2020 under the UK Climate Change Act 2008. If enacted the Energy Bill will implement a 'CCS incentive' to support the construction of up to four commercially viable CCS demonstration projects in the UK. The Energy Bill also provides for funding to retrofit additional CCS capacity to the demonstration projects if subsequently required.

The Energy Bill creates a framework for a financial incentive mechanism to support CCS demonstration projects. It empowers the Secretary of State to provide financial assistance for CCS demonstration projects directly, or to establish alternative 'assistance schemes' to be monitored and administered by others. Amongst other things the assistance schemes will be able to define what can be done under a CCS project, and how much assistance can be provided. The Energy Bill also provides for an electricity supply levy to raise the funds to be used for financial assistance for CCS demonstration projects. The Government expects to raise up to £9.5bn through the levy, which is likely to be added to consumers' electricity bills.

UK Government awards funds for two CCS design and development studies in competition

Launched in 2007, the UK Government's competition to select a project that will result in building one of the world's first commercial scale carbon capture and storage demonstration plants moved forward recently. On 12 March the Government announced it had awarded funds to E.ON and Scottish Power to support the Front End Engineering and Design studies required to develop the companies' designs for CCS installations at their coal-fired power plants. E.ON proposes to fit a pre-combustion demonstration plant to its new station at Kingsnorth. Scottish Power aims to retrofit a post-combustion plant at its existing Longannet plant. The FEED studies are being financed out of funds allocated in the UK's 2009 Budget, and will be completed within about twelve months. The Government will then determine the competition winner. If built, the project will aim to demonstrate CCS on a coal-fired power station with offshore storage of CO2, capturing CO2 from 300MW net (around 400MW gross) of the station's capacity.

If the Energy Bill is enacted, the UK Government says it intends to begin the competitive process for up to three additional CCS projects by the end of 2010, assuming the levy to support them is passed as part of the Energy Bill.

Additionally, in mid-March E.ON submitted environmental "scoping reports" outlining its plans for a CO2 pipeline for its proposed Kingsnorth coal-fired power station. If built, the pipeline would run across the Hoo Peninsula in Kent, and then in a trench on the seabed leading to depleted North Sea gas fields, where the CO2 would be stored. E.ON expects to submit its final proposals towards the end of 2010, as part of the full pipeline planning application.

Regulatory support framework for CCS – EU and UK measures

The CCS Directive (Directive 2009/31/EC, effective as of 25 June 2009) was passed as part of the EU's Climate Change and Energy Package of measures to reduce EU greenhouse gas emissions by 20% by 2020, and ensure that the EU meets 20% of its overall energy needs using renewable energy by 2020. The UK government believes that the provisions of the UK Energy Act 2008 are sufficient to enable the EU CCS regime set out in the CCS Directive to be implemented in the UK.

The CCS Directive includes a significant provision on carbon capture readiness. Under Article 33 of the CCS Directive, a combustion plant of 300 MWe authorised after 25 June 2009 within a member state's territory must carry out assessments concerning the plant's carbon capture readiness. In order for a plant to meet this condition, suitable storage sites must be available; transportation must be technically and economically feasible; and it must be technically and economically feasible to retrofit the plant for CO2 capture. The CCS Directive also requires member states to ensure that plants which meet these conditions set aside sufficient space to install the equipment necessary for CO2 capture. The UK Government has announced that these requirements will be implemented as part of the development consent process under Section 36 of the Electricity Act 1989.

From 9 November 2009, the UK has also required that any applicant who applies for (or who has sought but not yet obtained) consent under Section 36 of the Electricity Act 1989 to construct a new coal-fired power station of over 50MWe will have to produce evidence that the plant will be capable of demonstrating CCS on at least 300MWe net of its capacity from the outset. The same rule will apply to applicants for consent to upgrade existing power stations to allow for the installation of super-critical coal-fired boilers.

CRC Energy Efficiency Scheme

The CRC Energy Efficiency Scheme (CRC), formerly the carbon reduction commitment, is a mandatory emissions trading scheme designed to promote energy efficiency and reduce carbon emissions in the UK. It starts on 1st April 2010.

It aims to reduce carbon emissions in large organisations by 1.2 million tonnes of carbon over the next 10 years. The scheme will be enforced by the Environment Agency in England and Wales, the Department of the Environment in Northern Ireland and SEPA in Scotland.

The Environment Agency is responsible for managing an online registry for the scheme and administering the sale of carbon allowances for the whole of the UK.

Who will the CRC Energy Efficiency Scheme affect?

The CRC will affect mainly large private and public sector organisations. The CRC targets emissions not already covered by Climate Change Agreements (CCAs) or the EU Emissions Trading System (EU ETS). Organisations are likely to be covered by the CRC if their electricity is metered by at least one half hourly meter (HHM) and if they buy on the half hourly market.

The main criteria for an organisation to have to participate in the CRC is if its total supply of half hourly metered electricity in 2008 was at least 6,000 megawatt-hours (MWh).

If an organisation's half hourly metered electricity supply was below 6,000MWh in 2008 they will have to make an 'information disclosure' about their electricity supplies.

Seminar on the CRC Energy Efficiency Scheme

We are holding a breakfast seminar in our London office on 28 April 2010 on the effect of the CRC Energy Efficiency Scheme on the construction industry and infrastructure industry.

Many construction companies, FM organisations, SPVs operating PFIs, PPPs and JVs, schools and universities, central government departments, and local authorities will be included in the scheme.

Our breakfast meeting will cover:

• who will be liable under the new scheme,
• what your obligations are under the scheme,
• the business opportunities that the scheme will create for your organisation,
• the risks of non-compliance and issues that may arise,
• how you might mitigate the implications of the scheme and reduce your costs,
• how to maximise your opportunities to do well on the League Table of businesses affected by the scheme, and
• the role of the Carbon Trust Standard Assessors.

This is a significant topic for the construction and facilities management industries, and those involved in the operation of PFI /PPP projects. Georgina Crowhurst, Clyde & Co's environmental law specialist and Michael Gifford from the Carbon Trust will consider these issues and there will be plenty of opportunities for questions and answers and informal discussions. Please contact us for further details.

Insurance

Date of material damage in subsidence claim

Loyaltrend Ltd v Creechurch & Ors

The insured was a company trading as a fashion clothing retailer. By the late summer of 2003, cracks had started to appear to the front of one of its shops. The factual evidence was that the situation had deteriorated significantly by November 2003, with significantly more cracks appearing. The situation was said to have become much worse towards the end of 2004 (the insured talking of a "step change" in October 2004, with water regularly leaking into the property from that time and it no longer being possible to "patch up" damage). By March 2005, the insured had written to the landlord's agents demanding a suspension of rent, referring to loss of profits at the shop. It was found by the judge that notice to its insurers had not been given until August 2005.

The insured was insured by three different insurers from 11 December 2002 to 11 December 2006. When its claim for damage and business interruption arising from the subsidence was rejected, it pursued proceedings against only one of the insurers – Brit Insurance - which had written the policy covering the period 11 December 2003 to 11 December 2004.

Mackie J held that the claim against Brit failed because the insured had breached a condition precedent in the policy requiring notice to be given within 30 days of "the happening of any damage in consequence of which a claim is or may be made under this Policy". That is an objective test (see Laker Vent v Templeton [2009]). In this case, although the judge accepted that there was a "step change" in October 2004 (in the sense of the witnesses' sudden perception of a change in what was a gradual process), that did not detract from the seriousness of what was already apparent in December 2003, which the insured should have notified to insurers. Accordingly, the insured was in breach of the CP and the claim failed on that basis.

The judge also went on to state that, if he was wrong on the CP issue, "it would be surprising if Brit, who insured only the middle of three years over which the relevant events occurred, was liable for the entirety of the loss sustained". Although the picture of when material damage occurred was confused, the position was materially worse in autumn 2004. He stated that "it is inaccurate to express the progressive deterioration caused by subsidence in terms of a series of sudden changes. The appearance of "step change" is the result of inspection and testing necessarily occurring only at intervals". The trigger for business interruption loss was not the subsidence but the material damage to the shop and on the evidence available the judge could only conclude that there must have been some material damage during Brit's year but less than in the other two relevant years. Although subsidence was continuing throughout Brit's year of cover, most of the material damage was in 2005.

Flooding of New Orleans during Hurricane Katrina - Massive Liability Claim - Second Circuit Appeal favours American Club

On March 15, 2010, the Second Circuit issued its decision in In re: Lafarge North America, Inc., (08-5504-cv, 2d Cir Mar. 15, 2010). A central issue concerned the liability of the American Steamship Owners Mutual Protection and Indemnity Association (the "American Club") for losses arising from a barge that allegedly broke away from Lafarge's New Orleans terminal during Hurricane Katrina. Claims brought in the Eastern District of Louisiana by residents of the Lower Ninth Ward seek damages from Lafarge that may run to billions of dollars arising from the flooding of New Orleans during Hurricane Katrina. The claims are based on allegations that the barge had hit and breached the levee in the New Orleans Industrial Canal during the storm. The claim amount is due to be determined in a trial set to commence June 21st in New Orleans, which will also determine the amount of Lafarge's liability, if any.

Lafarge had P&I coverage for its own fleet of vessels through its entry in the American Club. At the time of the incident the barge in question, ING 4727, was not owned by Lafarge but rather by Ingram Industries. The American Club had brought a declaratory judgment action against Lafarge, arguing that the barge, given its third party ownership, was not entered with the Club. The Second Circuit examined whether the District Court had correctly determined that the barge was not automatically entered with the American Club under the Chartered Barges Clause contained in Lafarge's Certificate of Entry with the American Club.

In upholding the District Court's grant of summary judgment in favour of the American Club (albeit on different grounds from the District Court), the Second Circuit found that this case was one of those rare instances where although contract language was ambiguous, summary judgment in favour of the insurer was still appropriate because of the uncontroverted extrinsic evidence regarding the parties' intended meaning of the clause.

The decision is of significance not only for the American Club but also for the International Group of P&I Clubs, given the significant potential impact of the claim under its Pooling Agreement.

Lead partner John Woods commented, "In the District Court Judge Haight had found that the Chartered Barges Clause was unambiguous, applying certain rules of construction. On appeal, the Second Circuit affirmed on other grounds, finding that the clause was in fact ambiguous, but that the interpretation given to it by Lafarge could not possibly be right. In this case a U.S. court found that a clause was ambiguous and yet ruled in the insurer's favour - and on summary judgment no less. This is a significant and welcome result for not only the American Club but also the International Group as well, since Lafarge's liability, which has yet to be determined, is potentially very large."

Clyde & Co US LLP acted for the American Club in this litigation.

Shipping

The Copenhagen Accord: silence on marine issues

The Copenhagen climate change summit (the Fifteenth Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC) (COP15) held in December 2009 took only a "decision to note" a non-legally binding Accord. The Accord "recognises" the scientific case for keeping temperature rises to no more than 2C but does not contain commitments to specific emissions reductions to achieve that goal.

The Accord does not address marine emissions or the question of setting global sectoral targets for international marine emissions, because there was neither agreement on whether the UNFCCC or IMO should set them, nor the level of cuts required.

The Accord has since been widely criticised, not least for failing to include even aspirational targets for greenhouse gas emission reductions.

Shipping industry observers had expected that at a minimum the Copenhagen summit would reach a political agreement on bunker fuels, perhaps together with an emissions trading scheme. It was envisaged that the International Maritime Organisation (IMO) and its Marine Environment Protection Committee (MEPC) would be assigned responsibility for working out the details. But the Bunker Fuels Working Group at Copenhagen was unable to reach consensus, thus avoiding laying the foundations for a bunker fuel tax on shipping. Indeed, the Accord merely refers to innovative sources of finance.

Going forward: what to expect

No new regulatory requirements have been imposed on the shipping industry's greenhouse gas emissions as a result of the Copenhagen summit, so the Kyoto Protocol's provisions will continue to operate unchanged until 2012. Under Article 2.2 of the Kyoto Protocol reductions in greenhouse gas emissions from the marine industry will continue to be pursued through the IMO, which has focused on three areas: technical measures applied to new ships; operational measures valid for all ships; and what the IMO calls "market-based reduction measures to provide emission-cutting incentives". Formally, the IMO's role will remain unchanged through the end of the first commitment period of the Kyoto Protocol in 2012.

However, there are signs that despite the shipping industry's support for the IMO's efforts, if the UN climate change process stalls further in the wake of the Copenhagen debacle, regional initiatives may supersede this work – with the resulting patchwork of regulation creating headaches for the industry. In particular the EU emission trading scheme (EU ETS) could be modified to include shipping. The EU Directive which implements Phase III of the EU ETS (Directive 2009/29/EC) requires the European Commission to develop proposals for including international maritime emissions in the EU ETS system by 2013, if no progress is made via the IMO or the UNFCC.

However, even the more straightforward inclusion of the aviation sector in the EU ETS has met with difficulties, including a recent lawsuit (see below). This should make the European Commission think long and hard about how to include shipping in the EU ETS.

Meetings planned this year

The next UN Climate Change Conference will take place towards the end of 2010 in Mexico, preceded by a negotiating session in Bonn (from 31 May to 11 June 2010). However, many observers expect that due to political pressures no legally binding agreement will be reached at the Mexico conference.

The next round of IMO discussions about marine emissions will take place at the IMO's 60th MEPC meeting (MEPC 60) from 22-26 March 2010 in London. Negotiators at MEPC 60 will discuss market-based instruments for regulating greenhouse gas emissions from international shipping, including an emissions trading scheme and a global vessel efficiency system.

The Committee plans to be in a position by October 2010 (at MEPC 61) to indicate clearly which market-based measure it wishes to evaluate further and identify the elements that could be included in this measure. If things go to plan, in 2011 at MEPC 62, the Committee should be able to report its progress on the issue to the IMO's 27th Assembly, to identify possible future steps.

But this work-plan leaves a wide degree of latitude and offers no certainty that a marketbased approach to regulating emissions will be accepted by the IMO. In short, measures aimed at reducing emissions still seem to be the way of the future for the shipping industry. Post-Copenhagen the difficulty is that significant uncertainty still surrounds the key questions as to who will impose the necessary regulation, how, and when.

Aviation

Update on the EU Emissions Trading Scheme

Directive 2008/101/EC (known as the Aviation ETS Directive) came into force on 2 February 2009. The UK Government (and all other Member States of the EU) were legally required to transpose the Directive in full by 2 February 2010, in other words they have to pass legislation to implement the Directive in their own jurisdiction.

The Department for Transport (DfT) and Department of Energy & Climate Change (DECC) launched a public consultation on 11 December 2009. This was to seek views on the UK's draft second set of implementing Regulations to transpose the Directive to include aviation in to the European Union Emissions Trading Scheme (EU ETS).

The second stage Regulations that have recently been the subject of the consultation will complete the UK transposition of the Directive.

The consultation ran from 11 December 2009 until 5 March 2010 and can be accessed at the following page on the DECC website: http://decc.gov.uk/en/content/cms/consultations/euets_aviation/euets_aviation.aspx

The DfT and DECC are now considering the responses to that consultation.

The first stage Regulations, which were laid before Parliament on 27 August 2009, are now in force.

Definition of an aircraft operator

The regulations define an aircraft operator as a person who is a UK specified operator (i.e. allocated to the UK for regulation under the EU ETS, by means of the European Commission's list allocating aircraft operators to Member States) and performs an aviation activity (as defined in Annex I of the EU Directive) in that year.

Revised Commission list of operators

The Commission published a revised list of aircraft operators to be administered by Member States in the Official Journal of the European Union on the 29 January 2010. This replaces the version of the list published on 22 August 2009.

The link to the list is: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:025:0012:0120:EN:PDF

An operator can get its allocation to the UK changed to another Member State where it flies to more frequently, if during the first two years of the trading period an operator makes no flights to the UK, then the operator will be reassigned to the Member State with the greatest proportion of attributable emissions during those two years.

If a person becomes an aircraft operator after the regulations came into force, they must apply to the regulator for an emissions plan within eight weeks of becoming an aircraft operator.

Additional guidance on the meaning of 'UK operator', 'aircraft operator', and 'aviation activity', in accordance with the UK regulations, has been produced to assist operators compiling their emissions/benchmarking plans. This can be found on the following page on the Environment Agency's website: http://www.environment-agency.gov.uk/static/documents/Business/Guidance_on_operator.pdf

The cap

For the period 1 January to 31 December 2012, the total quantity of allowances to be allocated to aircraft opertaors will be equivalent to 97% of the mean average of annual emissions in the calendar years 2004, 2005 and 2006, as determined by the European Commission. Of these allowances 15% shall be auctioned, with the remaining allocated as "free" allowances.

For the eight year period beginning on 1 January 2013, the total quantity will be equivalent to 95% of historic aviation emissions. Of these allowances 15% shall be auctioned, 3% set aside in a special reserve (for new entrants or expansions) with the remaining allocated as 'free' allowances.

Calculation of "free" allowances

Each Member State shall determine the total number of free allowances to be distributed to aircraft operators. The amount of allowances apportioned to each operator shall be calculated from the product of the 'benchmark' (allowance per tonne-kilometre) and an operator's verified 'activity' (expressed in tonne-kilometre (TKM)).

The benchmark shall be determined by the Commission using the following formula:

Benchmark = Total number of allowances to be allocated free of charge Sum of all tonne-km data

The special reserve

The Directive provides for allowances to be made available to operators as the industry expands.

As explained above, for the period beginning in 2013, 3% of the total quantity of allowances will be set aside in a special reserve for aircraft operators (in accordance with Article 3(f) of the Directive). If an operator is eligible they may apply for a free allocation of allowances from the reserve by making an application to the Competent Authority of its administering member state. The eligibility criteria for making an application for allowances from the special reserve are:

• An aircraft operator who starts performing an aviation activity falling within annex 1 after the monitoring year for which tonne-km (benchmark) data was submitted (i.e. ` after 2010)
• An aircraft operator whose tonne-km data increases by an average of more that 18% annually between the monitoring year for which tonne-km data was submitted and the second year of that period (i.e. the period between 2010-2014).

Any application to the special reserve shall be made by the 30th June in the third year of the period (i.e. 30th June 2015).

Monitoring and reporting emissions

All aircraft operators included in the EU ETS and allocated to the UK for regulation, were required to apply to the Environment Agency for an emissions plan by 12 November 2009.

Many airlines have been submitting their monitoring plans "under protest" to the Environment Agency. Once the monitoring plans have been approved by the Environment Agency, aircraft operators are expected to monitor and report their CO2 emissions and benchmark emissions data in accordance with the approved plan and the European Commission's Monitoring and Reporting Guidelines.

At the end of each monitoring period, aircraft operators will need to collate data on their CO2 emissions for the period and must have the report and its data verified by an accredited verifier i.e. a verifier which is accredited on the list to be published by the Competent Authorities. It is likely that the Competent Authorities will publish a list of accredited verification bodies in early 2010.

The verified emissions reports must be sent to the Environment Agency before 31 March each year. Failure to submit an emissions report could result in a civil penalty being served. The first such report for data collected during 2010 will need to be submitted by 31 March 2011.

Those operators who voluntarily applied for an allocation of free allowances (those who met the deadline of 31 December 2009), must collect data on flight distances and payloads for the monitoring period 2010. The report must similarly be verified by an accredited verifier and submitted to the Environment Agency on or before 31 March 2011. Failure to submit the report by this date could result in no free allowances for the period 2012-2020.

The first monitoring period for annual emissions and benchmark data commenced on 1 January 2010 and will end on 31 December 2010.

Other future key dates:

1 January 2011

Start of second monitoring period for annual emissions

31 March 2011

Final submission date for 2010 Annual Emissions data and 2010 Benchmark data

30 June 2011

The UK will submit benchmark data to the Commission

30 September 2011

The Commission will calculate the tonne-km benchmark

31 December 2011

UK will publish the allocation for each operator

1 January 2012

Start of the third monitoring period for annual emissions

28 February 2012

The UK will issue allowances for 2012 to those operators that successfully applied

31 March 2013

Final date for receipt of the 2012 Annual Emissions report

30 April 2013

Final date for surrender of allowances against reportable emissions.

Litigation

The US Air Transport Association (ATA) and 3 American carriers, American, Contiental and United Airlines, have issued proceedings in the Adminstrative Court in London on 16 December 2009 against the Secretary of State for Energy and Climate Change's planned implementation of the EU ETS.

They argue that a flight from the UK to the US would occur almost exclusively outside EU airspace and claim that the UK's implementing Regulations (which transpose the EU Directive) represent a breach of both the Kyoto Protocol and the 2007 US-EU bilateral agreement on air transport.

The ATA and US carriers have chosen to launch their court action in London as the UK is the first EU country to implement the early stages of the ETS.

The Adminstrative Court could decide to refer the matter to the European Court of Justice for an interpretive ruling.

The Copenhagen Accord: no mention of aviation issues

In December 2009, at the end of the Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC) (COP15), in the absence of unanimity (five states, Bolivia, Cuba Nicaragua Sudan and Venezuela blocked the consensus needed to "adopt" the Copenhagen Accord) the so-called High Level segment of the Conference decided to "take note of" the non-legally binding Accord, drawn up by a limited group of countries.

The Accord does not mention aviation emissions. It also does not address the question of setting global sectoral targets for international aviation emissions because there no agreement was reached on whether the UNFCCC or ICAO should set them. A number of developing countries signaled that the EU's proposed 10% cut for aviation over 2005 levels was too steep. Australia, beset with political difficulties with its green legislation at home, never followed through with specific numbers on its call for Copenhagen to set the cap. Norway sided with the US, Canada, Japan and potentially Australia in proposing no mention of targets in Copenhagen, calling instead, for medium and long term goals to be set in ICAO.

The International Air Transport Association (IATA) has announced that it "welcomed the Copenhagen Accord as an important step in the right direction for climate change". The fact that aviation emissions were not addressed specifically in the Accord is a reflection of both the pro-active measures the industry has taken to set challenging targets for itself as well as the aggressive strategy to achieve them. IATA notes the industry will continue to work towards global targets that were recognized by the Member States of ICAO at its High Level Meeting on Environment in October 2009 and which were commended by UN Secretary General Ban Ki-moon at a meeting with Giovanni Bisignani, IATA's Director General and CEO, in New York later that month. IATA is committed to cooperating closely with ICAO to develop a global framework for managing aviations emissions.

Partly as a result of efficient IATA lobbying, the Bunker Fuels Working Group at Copenhagen was unable to reach consensus, so no further progress was made towards establishing the framework for a bunker fuel tax on aviation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.