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Executive Summary

Opportunity in Texas

Texas is the source of about one-quarter of all energy-related carbon dioxide (CO₂) emissions in the US industrial sector and about one-eighth of all CO₂ emissions from the US power generation sector, with a significant proportion of emissions in both sectors located near the gulf coast. As such, Texas has the opportunity to capture significant economies of scale in carbon capture. Of course, there must be a viable option for either use or sequestration of CO₂ to stimulate investment in capture technologies. Fortunately, Texas is also endowed with tremendous geologic storage potential and a very deep talent pool that is well-versed in the operational and technical demands of the subsurface. This, along with an entrepreneurial and business-friendly environment, gives Texas an inherent advantage as it positions its nascent carbon capture, utilization and/or storage (CCUS) industry for growth and leadership in a rapidly evolving space.

Expanding CCUS stands paramount to efforts aimed at reducing CO₂ emissions, creates employment opportunities along a new value chain that sustains current economic activity, and fits squarely within the growing number of net-zero strategies announced by firms across the energy industry and beyond. However, for CCUS activity to achieve its full potential, it is incumbent that policymakers recognize the nascent opportunity, and take steps to remove obstacles to the development of a CCUS value chain. Concise and targeted action by policymakers can help Texas leverage its position as the world’s “energy capital” to capture a leadership role in the global effort to reduce CO₂ emissions.

CCUS Value Chain Development

Figure E1 — Simplified CCUS Value Chain

Figure E1 illustrates the three basic components of the CCUS value chain (capture, transport, and use or sequestration) and the premise that no single component functions without the others. This follows because each part of the value chain must develop and operate in coordination with the others. In this sense, value chain development is a coordination problem: if potential barriers to development exist for any part of the value chain, no part is developed. Similarly, incentives applied to any one part of the value chain will have
stimulatory effects for the other parts.

In Texas, coordination is particularly relevant for CCUS due to the existing legal and regulatory framework, which, in addition to commercial risks, can result in coordination failure thus unnecessarily impeding development and increasing costs. Policy can play a critical role in improving the legal and regulatory framework and, in doing so, create a pathway for successful development of the CCUS value chain. For example, clarifying agency jurisdiction for oversight of CO2 sequestration, can in short order, reduce permitting time, lower project uncertainty, and address an important barrier to project finance.

Challenges Facing CCUS Development

Beginning in June 2019, the Baker Institute convened a working group of stakeholders consisting of industry, academia and NGOs to identify and discuss challenges facing CCUS in Texas. A number of topics for consideration were identified by the working group, with broad but varying levels of agreement regarding resolution and timelines.

Near-Term

Class VI primacy and jurisdictional clarity – The US Environmental Protection Agency (EPA) oversees Underground Injection Control (UIC) program requirements that are in place to protect underground sources of drinking water.¹ States can apply for and receive primary enforcement authority (i.e.- primacy) to implement UIC programs provided they are able to meet certain requirements. Texas has primacy for UIC Class I-V wells; it does not yet have primacy for UIC Class VI wells for permanent storage of CO₂. Under current Texas law, depending on the type of well and subsurface characteristics, either the Texas Commission on Environmental Quality (TCEQ) or the Railroad Commission (RRC) has jurisdictional regulatory authority over wells where CO₂ is injected underground (UIC Class II and Class VI). There is broad agreement within the working group that the Texas legislature should grant jurisdiction over permitting of UIC Class VI injection wells to the RRC. Although Senate Bill 1387 (2009) directed the RRC to apply for primacy from the EPA to regulate Class VI wells, any application would likely have suffered in the absence of clear in-state regulatory jurisdiction. Clarifying and consolidating jurisdiction in a single agency will facilitate the application for primacy that, once achieved, could address some uncertainties regarding the permitting process. A bill that does this could move forward in the 2021 legislative session and would be a strong foundation for future action in Texas on CCUS. Importantly, sufficient resources must be in place to staff this activity.

Other Considerations

Regarding the remaining topics for consideration identified by the working group, consensus on a path to resolution did not emerge in the discussions. However, there is widespread agreement that policymakers need to be aware of these matters and, hence, be prepared to consider them going forward.

Long-term liability – Senate Bill 1387 established a fund for long-term stewardship of onshore sequestration sites and named the RRC in charge of the fund. However, no transfer of ownership or liability has been established for onshore sequestration to date. Offshore, Senate Bill 1796 designates the School Land Board as the site owner and grants it the ability to set fees for storage. The bill provides that operators who manage projects on behalf of the state retain liability, but it relieves emitters of CO₂ from liability for CO₂ stored offshore. No clear consensus emerged from the working group about how to govern liability post-site closure. For example, some working group members view liability as resolved through the site selection and approval process, while others indicate there should be explicit rules on the matter. Nevertheless, despite the range of
views shared, there is broad agreement that liability is an issue that merits consideration. Sufficient data collection and long-term monitoring of CO₂ plume activity in the post-injection phase could be a welcome first step toward fully understanding any potential issues and their consequent resolution.

Access to pore space – For onshore sequestration, pore space access and use is currently a negotiated right. Some working group members voiced concern that the negotiated process to secure sufficient legal right to store CO₂ beneath private lands in Texas is hampered by a failure to legislatively or judicially resolve the question of pore space ownership as it pertains to CO₂. However, it was generally viewed that potentially affected owners of surface and subsurface rights would be receptive to contract negotiations with firms seeking access to pore space for CO₂ storage. This necessarily also implicates questions of unitization. Sequestration sites located offshore in state waters may be simpler, since access is administered by the General Land Office (GLO).

Unitization for geologic storage of CO₂ – It is not yet known whether a compulsory CO₂-specific unitization bill could garner widespread support in Texas. Legislative efforts at mandatory unitization directed at oil and gas extraction have historically been construed as erosive of the rights of surface and subsurface owners, and they have failed as a result. Any future consideration of a unitization bill may be possible only if its scope is limited to geologic storage of CO₂ and it addresses matters such as conflicting use, compensation and lien provisions.

Fiscal incentives – There is agreement that fiscal incentives can stimulate investment in a CCUS value chain. But extent, timing and manner of stimulus are viewed differently by various stakeholders, with the cost-benefit analysis of any proposal fitting squarely into the discussions. 45Q is a federally administered tax credit per ton of captured CO₂. Although immensely helpful, it does not always provide sufficient commercial certainty to large scale projects. Moreover, the 45Q tax credit will expire January 2026, which, given the timeline for full project development and time to address state/local legal and regulatory uncertainties, means some projects in their initial planning phase may not be able to qualify. Therefore, legislators and state officials in Texas are encouraged to actively support a 45Q extension. There are some interesting opportunities in Texas that could, if leveraged, provide a return to the state. One such opportunity involves CO₂ storage offshore, where leasing of pore space would provide a return to the State Education Fund, the size of which would depend on the agreed lease parameters.

Research and development (R&D) – Robust R&D activities are critical to the long-term health of any industry. The US Department of Energy has established a number of programs through direct funding and its national labs, but these are national rather than regional in scope. In Texas, various R&D programs such as the New Technology Innovation Grants (NTIG) program under the Texas Emissions Reduction Plan (TERP) can serve as examples of funding vehicles that could be streamlined to facilitate targeted R&D funding. Given the importance of hydrocarbons to the Texas economy, a robust R&D portfolio that focuses on efficiency improvements in existing CCUS technologies, new combustion processes, expanded uses of hydrogen produced from hydrocarbon feedstocks, new carbon-based materials, and new uses for CO₂ in industrial processes and power generation can contribute greatly to the health of Texas’ economic and environmental future.

Concluding Remarks and a View to the Future

There is precedent for the role of policy in accelerating new energy value chains. Over the past two decades, strong policy frameworks and incentives, such as subsidies and portfolio standards, have played a central role in advancing renewable energy value chains associated with wind and solar. Policy can play a similar key role in advancing CCUS, and resolving legal and regulatory uncertainties will remove barriers to the development of a CCUS value chain. At the front of the list is to establish jurisdictional clarity over permitting and regulation as this will help to advance greater numbers of CCUS projects in the state. Consideration of each of the other areas of concern – liability, pore space, unitization, fiscal terms, and research and development – will also
be important as the CCUS industry advances. Indeed, a clear and sustained commitment from state regulators and elected officials to resolve legal and regulatory uncertainties and provide supportive commercial frameworks will determine whether a robust and long-term CCUS industry in Texas will emerge.

Although the research undertaken here was not intended to include a quantitative evaluation of the costs and benefits of expanding CCUS, there is a strong need for additional work on that front, especially as it pertains to any potential justification for state and local fiscal support. Texas has a significant comparative advantage in deploying and expanding CCUS projects. With sustained action and engagement by policymakers, Texas can fully leverage its comparative advantage and assume its role on the global stage as a leader in the CCUS industry.

Endnote

1. A detailed summary of the UIC program is available at https://www.epa.gov/uic.

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.