CCS in Australia - a legal guide

1.1 Introduction

Australia’s potential for developing carbon capture and storage (CCS) projects has been touted for some time — legislation for CCS projects has been in place in Victoria and Queensland for over a decade.  However, the only commercial CCS facility developed in Australia to date is the Gorgon CCS project in Western Australia.

More recently, CCS projects have been gaining increased levels of attention due in part to Australia’s commitment to reach net zero emissions by 2050.[1]  There is general federal and state government support for CCS, as recently evidenced by the Western Australian government announcement on 9 March 2022 that it will draft a Greenhouse Gas Storage and Transport Bill to facilitate CCS projects.

Over the past 7 months, at least four major CCS projects have been announced, and the Commonwealth has released five off-shore acreage areas for CCS bids.  The new Australian projects appear to be primarily driven by a desire to:

• capture by-product CO₂ produced by the gas industry; and
• produce ‘blue’ hydrogen from fossil fuels and capture the by-product CO2.

There now seems to be a groundswell of support for CCS projects that may see them being developed across the country in various settings.  These projects will be of great interest to CO₂ emitters, gas infrastructure operators and investors, and carbon traders.  This article outlines the following key issues for CCS projects:

• the status of current projects;
• government funding;
• carbon credits and carbon tax;
• regulation: and
• liability for leakage.

1.2 Current CCS projects

While CCS demonstration projects in Australia are not new, the following recent project announcements highlight the growing urgency to develop CCS projects:

1. (Bayu Undan CCS Project) On 9 March 2022, Santos announced it had commenced the front-end engineering and design (FEED) phase for its Bayu Undan CCS project;
2. (Moomba CCS Project) On 1 November 2021, Santos and its joint venture partner, Beach Energy, made a final investment decision to proceed with the Moomba CCS Project;
3. (Karratha CCS Project) On 4 November 2021, Woodside, BP and Japan Australia LNG (MIMI) Pty Ltd announced the formation of a consortium to progress feasibility studies for a large-scale, multi-user CCS project near Karratha in Western Australia;
4. (NT Hub) On 28 September 2021, the Northern Territory Government announced that it is assessing the viability of a CCS project in Darwin that will support the oil and gas and hydrogen industries; and
5. (CarbonNet Project) In January 2022, the world’s first shipment of liquid hydrogen was made from the Hydrogen Energy Supply Chain (HESC) pilot project, a project that will rely on the CarbonNet CCS Project for the production of clean hydrogen.

A summary of Australia’s major publicly announced CCS projects is provided below.

1.3 Federal government funding

Special purpose grants

Historically, CCS projects have relied heavily on federal government funding through specific mechanisms and grants.  For example, in 2021, the Federal Government established the following two funds to provide grants for CCS projects:

1. the $50M Carbon Capture, Use and Storage (CCUS) Development Fund, from which applicants were entitled to seek grants between $500,000 to $25 million.  Grants were awarded to a number of applicants, including $15 million for the Moomba CCS Project.
2. The $250M CCUS Hubs and Technologies Program, from which applicants were entitled to seek grants between $500,000 to $30 million.  The recipients of the grants from this program are yet to be announced.

Both funds are now closed. 

However, as part of the federal budget released on 29 March 2022, the federal government announced there will be $300M in funding made available for the NT Hub “to support low emissions LNG and clean hydrogen production at Darwin, together with associated carbon capture and storage infrastructure”[2].  The process for allocating that funding is yet to be announced.

The availability of future funding may also be impacted by the outcome of the pending federal election that is due to occur in May 2022.  While the current Federal Coalition Government is supportive of CCS projects, historically, the federal Labor Party has been inclined against the use of public funds for CCS projects instead of renewable energy projects. 

Two other current avenues of federal government funding for CCS projects are:

1. finance from the Low Emissions Technology Commercialisation Fund, administered by the Clean Energy Finance Corporation (CEFC); and
2. grants from the Australia Renewable Energy Agency (ARENA).

CEFC Finance

The $1 billion Low Emissions Technology Commercialisation Fund was announced on 10 November 2021.[3]  The Fund combines $500 million provided by the Federal Government with $500 million provided by the private sector.  The Fund has not yet been formally set up and will be established by legislation to be introduced in the current term of parliament.  Upon establishment, CCS project developers will be entitled to seek finance from CEFC for their projects, including by way of debt and equity finance.  Such finance will be provided on favourable terms but is nevertheless expected to earn a positive return for taxpayers.

Grants

Since July 2021, ARENA’s funding scope includes CCS projects, with the particular goal of reducing the mean cost of carbon dioxide compression, hub transport and storage in Australia to below $20 per CO₂ tonne.[4]  The size of grants that are available may vary.  However, under the applicable regulations, ARENA must make reasonable efforts to ensure that the mean total amount of financial assistance provided for “priority low emissions technologies” for each financial year from FY22/23 to FY 2029/30 is $60 million or more.[5]  This includes grants for technologies that relate to clean hydrogen, energy storage and low emissions aluminium and steel production. 

1.4 State and territory government funding

Aside from the direct support provided to the CarbonNet, NT Hub and South West Hub projects, we are not aware of any current state or territory funds that are available to the private sector for CCS projects.  Nevertheless, state and territory government funding may potentially be made available on an ad hoc basis for particular projects where they are commercially viable and support local industries (e.g. oil and gas and/or hydrogen industries).

1.5 Carbon credits

Additional financial incentives apply to CCS projects in Australia in the form of Australian Carbon Credit Units (ACCUs).  Under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act), companies that meet the specified thresholds of greenhouse gas emissions must register and report their emissions and energy consumption to the Clean Energy Regulator.  Large facilities that emit > 100,000 tonnes of CO2 per financial year must not exceed the baseline set by the Clean Energy Regulator for the facility.  This enables the Australian Government to meet its emissions reduction obligations under the UN Framework Convention on Climate Change, Kyoto Protocol and Paris Agreement. 

If a facility exceeds the baseline, it may acquire ACCUs to offset that exceedance.  The ACCUs must have been issued by the Clean Energy Regulator in respect of accredited carbon offset projects.  The creation of ACCUs is governed by the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth).  Under the legislative framework, a broad range of accredited greenhouse gas abatement methods or “offsets projects” may be eligible for carbon credits, including avoidance of land clearing, energy efficiency methods and alternative waste treatment methods.[6]

ACCUs generated from CCS projects

In October 2021, the Federal Government developed a new Emissions Reduction Fund method to create ACCUs from new CCS projects.[7] This enables CCS projects to generate ACCUs, which can then be sold to entities wishing to offset their greenhouse gas emissions as an additional revenue stream.  The value of ACCUs may vary greatly over the term of a CCS project.  At the time of writing, the spot price is approximately $30.50/ACCU (per tonne of CO2).[8]

To be eligible, a CCS project participant must (in summary):

1. (application) submit an application demonstrating the project’s compliance with the approved method and legal requirements, and including a project plan;
2. (fit and proper person) be a fit and proper person with the capabilities needed to run the project;
3. (regulatory approvals) demonstrate that all regulatory approvals have been obtained, provided that projects may be conditionally approved subject to receiving outstanding approvals;
4. (hold legal right) have the legal right to undertake the project, including all necessary contracts with third parties (including the CO₂ capture point owner and third party pipeline owners);
5. (pre-FID) not have commenced implementation of the project – i.e. a final investment decision must not have been made for the project;
6. (not legally required) not be required to carry out the project under the law of the Commonwealth, a state or a territory;
7. (no government funding) not be substantially funded by a government program —however, projects that have received pre-operational funding from ARENA or from the special purpose grants outlined above will still be eligible to generate ACCUs;[9] and
8. (new project) be involved in a new project to capture CO₂ for permanent storage (i.e. pre-existing projects are not eligible). 

This would include new CCS projects that capture and store CO₂ from existing gas fields.  In addition, where a CCS project expands to include a new storage site, then that new site will be permitted to produce additional ACCUs.  The same applies to new sources of CO₂.  Each individual CCS project (including each additional CO₂ capture point and storage site within the same project) has a “crediting period” of 25 years during which the Clean Energy Regulator may issue ACCUs in respect of that project.

Santos and Beach Energy have successfully registered the Moomba CCS Project with the Clean Energy Regulator, which will enable the project to earn ACCUs that they can use themselves to offset their emissions or sell to third parties.

1.6 Carbon tax

While Australia currently has no carbon tax, the Federal Coalition Government’s Long-Term Emissions Reduction Plan includes a less than $25 per tonne “voluntary incentive” to help ensure that Australia achieves net zero emissions by 2050. However, the Government maintains that the incentive will be voluntary rather than a mandatory tax.  Nevertheless, such incentive may increase demand for CCS projects in Australia by encouraging CO₂ emitters to reduce their emissions.  The federal Labor Party has ruled out introducing a carbon tax if elected in the 2022 federal election.

Even if the federal government does not introduce a carbon tax, the European Union’s proposed carbon border adjustment mechanism (CBAM) will tax Australian businesses exporting carbon-intensive products to Europe.[10] The US, Canada, Japan and the UK are also looking at similar initiatives.  Therefore, it is likely that major emitters of CO₂ in Australia will become more incentivised to utilise CCS projects given the potential for exposure to such taxes.

1.7       Federal regulation

Legislation

Federal legislation applies to CCS projects that utilise greenhouse gas storage reservoirs between 3 and 200 nautical miles (270km) from the coastline.  The federal legislation provides a framework for licensing, regulatory oversight, and applicable environmental standards for CCS projects in Commonwealth waters.  The principal piece of legislation that regulates CCS projects in Commonwealth waters is the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGSA).

The Environment Protection and Biodiversity Conservation Act 1999 (Cth) (EPBC Act) is also relevant to CCS activities, regardless of whether they fall within Commonwealth or state and territory jurisdiction.  EPBC Act approval will be required where CCS projects concern matters of national environmental significance.

Permits

In order to undertake appraisal and storage operations under the OPGGSA, the following permits are required:

Trailing liability

Since 2 March 2022, the OPGGSA imposes a trailing liability regime which allows the regulator to hold current and previous title holders (and their parent entities) liable for remediation and decommissioning obligations.  As a result, offshore CCS projects that are owned by joint venture participants may need to consider entering into a Decommissioning Security Agreement (DSA).  The DSA may provide for periodic payments into trust during the operational phase to cover the cost of rehabilitation.

1.8 State and Territory regulation

Of the states and territories, Victoria, Queensland, and South Australia currently have specific legislation that governs CCS projects, which provide a higher degree of certainty for project developers.  The CCS licensing regimes vary from state to state, but the relevant permits are broadly similar to those under the OPGGSA and include exploration, retention and injection and storage licences.  As noted above, the Western Australian Government is currently drafting a Greenhouse Gas Storage and Transport Bill to facilitate CCS projects within the West Australian jurisdiction.

Tasmania, New South Wales and the Northern Territory do not have specific legislation, which makes it less certain for developers of CCS projects in those jurisdictions.  It is likely that, as CCS projects progress, legislation will be introduced in those jurisdictions to regulate CCS projects, or specific legislation may be passed for particular projects, as was done for the Gorgon CCS project.[11]

1.9 Liability for CO2 leakage

Liability for emissions of CO₂ from storage facilities is a key risk for CCS projects because of the long-term nature of such projects and the potential for CO₂ storage reservoirs to leak long after the project has ceased.  To guard against this, the relevant federal and state legislation requires regulators to be satisfied that CCS project proponents have demonstrated that the storage reservoirs can receive the target volume of the GHG without leaking.[12]

Federal government indemnity

For offshore CCS projects within Commonwealth waters, a closing certificate must be submitted when injection operations cease.  The certificate holder is responsible for any issues within the first 15 years after closure.  If, no less than 15 years after the date the site closing certificate is issued, the Minister is satisfied that there is no significant risk of significant adverse impacts, the Minister may declare such period to be a “closure assurance period”, after which the Commonwealth indemnifies the certificate holder against any liability for damages.[13]  However, there is no guarantee that the Minister will declare the closure assurance period, or when it will be declared, which may lead to additional security being required to be provided by project owners, if the liability is not adequately covered by insurance. 

Other states

The legislation in Queensland, Victoria and South Australia does not provide project owners with an indemnity for leakage post-closure of the CCS project.  This potentially exposes project participants to liability for leakage for an indeterminate period.  We expect the issue of liability will be the subject of further policy and legislative development as more CCS projects are developed.  

Ultimately, the risk of leakage is an important one to consider and quantify for potential investors.  The availability of insurance to cover these risks will be a key issue for CCS project developers.

References 

[1] The 2021 International Energy Agency’s Net Zero by 2050 Road Map assumes the widespread adoption of CCS to achieve net zero.  

[2] See: https://www.minister.industry.gov.au/ministers/taylor/media-releases/2022-23-budget-backs-australian-industry-energy-security-and-net-zero-emissions

[3] See Minister for Industry, Energy and Emissions Reduction, ‘Billion Dollar Fund to Drive Low Emissions Technology Investment’ (Media Release, 10 November 2021) <https://www.minister.industry.gov.au/ministers/taylor/media-releases/billion-dollar-fund-drive-low-emissions-technology-investment>.

[4] Australian Renewable Energy Agency (Implementing the Technology Investment Roadmap) Regulations 2021 (Cth) r 7.

[5] Ibid.

[6] See Australian Government, Department of Industry, Science, Energy and Resources, Methods for the Emissions Reduction Fund (Web Page) <https://www.industry.gov.au/regulations-and-standards/methods-for-the-emissions-reduction-fund>.

[7] See Minister for Industry, Energy and Emissions Reduction, ‘New ERF Method and 2022 Priorities Announced’ (Media Release, 1 October 2021) <https://www.minister.industry.gov.au/ministers/taylor/media-releases/new-erf-method-and-2022-priorities-announced>.

[8] See: https://www.accus.com.au/

[9] It remains to be seen whether projects that are funded by CEFC will be disqualified from receiving ACCUs.

[10] See European Commission, ‘Carbon Border Adjustment Mechanism: Questions and Answers’ (Questions and answers, 14 July 2021) < https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3661>.

[11] Barrow Island Act 2003 (WA).

[12] See, e.g,, Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) s 21 and 312; see also Greenhouse Gas Geological Sequestration Act 2008 (Vic) s 83.

[13] See Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) pt 3.4 divs 7–8