‘Phantom’ carbon credits or a transparent attempt to innovate?

In the past week, a story published by the Financial Times based on a report from Greenpeace claimed, inaccurately, that Shell had benefited from selling “millions” of Canadian carbon credits that were not traceable to a direct emission reduction. In fact, the carbon credits in question come from the gold standard for managing CO2 emissions, a carbon capture and geological storage project (CCS). There is a story to be told about this, but it isn’t the one you’d have read in this weekend’s article. It’s also a story that involves me.

The story dates back to the early 2010s as Shell (and its JV partners) was planning the construction of a first CCS facility both for Shell and Canada, but also one of the first of a handful to be operating in the world. The Shell-operated project is known as Quest (current Shell interest 10%), and since startup in 2015 it has been storing about 1 million tonnes per year of CO2 in a safe geological formation deep below the prairies in Alberta.

First, it’s crucial to understand the nature of CCS projects. They take years to be planned, engineered and constructed before capturing CO2 on a large scale. But they don’t come with an obvious business model that provides a return to investors, such as through the sale of a product or the provision of a service that is in high demand. Instead, innovative policy mechanisms and regulatory measures are needed to underpin a CCS project. This remains true in 2024. While some governments recognise the need and are rising to the challenge, the deployment of CCS technology is significantly behind the pace and scale needed to realise 2050 net zero targets, largely because of the absence of sustainable long term business models. The technology itself is well proven and ready to go.

Two main business models exist today; in the US there are tax credits ranging from $80 to $180 per tonne of CO2, depending on the exact nature of the project. In the EU there is the EU Emissions Trading System (EU ETS) and its prevailing carbon price that has reached as high as €100 in recent times. Even these robust mechanisms aren’t always enough for projects, but in the late 2000s there was far less in play to underpin CCS, so project developers and government policy makers had to get creative, which is what happened.

In 2008, a solution that had emerged in the EU in which I was involved used emissions allowances from the EU ETS as a source of funding for CCS projects. The idea targeted the notionally ‘spare’ allowances in the ETS New Entrant Reserve and 300 million of these were earmarked for sale for CCS funding (sadly, as the ETS carbon price collapsed to around €3 this mechanism never delivered as intended). In Canada, Shell brought this concept to the attention of Alberta policy makers, and they decided to use their own carbon credits in a related way.

At the time Quest was being considered, Alberta introduced its Specified Gas Emitter Regulation (SGER), which established a CO2 emission performance benchmark for large emitting facilities. The benchmark would decline by a set rate each year. Parties had to comply by either reducing emissions, buying “credits” from companies that had performed better than their benchmark, purchasing offsets from pre-approved programs, or else paying a fee into a technology fund. The regulation is now known as TIER, but the core concept remains the same. Quest was issued credits under Alberta’s CCS Protocol which could be used to comply with the regulation.

In 2011, the carbon price was low with an uncertain outlook, making the development of Quest uneconomic. To address this, the Government of Alberta and Shell agreed on a mechanism that would support the project in the initial phases, with the government issuing a second CCS credit for a maximum period of 10 years, or less if the project reached cost neutral status. Quest reached that milestone in 2022. There were limitations on how the additional credit could be used, including that it should primarily be used for regulatory compliance by affiliate company facilities. Then, as now, only the holder of the Base credit has the right to claim an emission reduction. Accordingly, these additional credits were not counted when determining Shell’s corporate greenhouse gas emissions.

To return to the claim in the Financial Times article, all the additional credits that Shell earned were used only to meet our own environmental obligations in Alberta. We did not sell them to any other company. Additionally, this program was not a secret. The government of Alberta described the mechanism in a 2011 press release and Shell acknowledged the same mechanism in the official project close-out report published by the Government of Alberta in 2016.

At the very least, Quest is an important proof of concept for Canada and the world, and it issues an annual knowledge sharing publication, which serves academic institutions, industry and regulators. But it’s much more than that: without innovative fiscal and regulatory frameworks in place that enabled the Quest investment, 8.8 million tonnes of CO2 that have been captured and stored by the project would otherwise have been released into the atmosphere.

For that reason, it is great to see more structural incentives, like Canada’s proposed Investment Tax Credit and Alberta’s proposed Carbon Capture Incentive Program, which could support the next wave of CCS investments. But it is also sad to see conceptual and innovative funding ideas, to get critical carbon management technologies up and running, facing undue criticism .

Cautionary note | Shell Global

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