Carbon Sequestration: A Liability Pathway to Commercial Viability
When someone uses the phrase "clean coal" to promote the burning of fossil fuels for energy, what goes unmentioned is that
producing energy from fossil fuels can be "clean" only if the carbon dioxide ( CO2 ) generated in the combustion process is kept out of
the atmosphere. One emerging technology accomplishes this by managing the CO 2 underground. "Burying" or injecting CO2 into
geologic reservoirs thousands of feet below ground is known as geologic sequestration of CO2 (GS). The highly pressurized CO2 will
reside deep underground as a liquid for hundreds or thousands of years before it eventually dissolves and is converted into a mineral
such as calcium carbonate. According to the U.S. Environmental Protection Agency (EPA), "given the United States' abundant coal
resources and reliance on coal for power generation, [GS] could be a key mitigation technology for achieving domestic emissions
reductions." Federal Requirements Under the Underground Injection Control Program for Carbon Dioxide Geologic Sequestration Wells;
Proposed Rule, 73 Fed. Reg. 43,492, 43,496 (July 25, 2008) (Proposed Rule).
EPA estimates that those "areas of the U.S. with appropriate geology could theoretically provide storage potential for over 3,000
gigatons of geologically sequestered CO2 ". Id. To put that in perspective, such capacity could be large enough to store a thousand
years of CO2 emissions from nearly 1,000 coal-fired power plants. While this technology appears promising from a climate change
perspective, yet to be resolved are the legal complexities of storing potentially millions of tons per year of a highly pressurized,
potentially harmful material underground for perhaps hundreds of years. The rule recently proposed by EPA deserves closer scrutiny. In
particular, the need to develop a mechanism to manage the long-term risks associated with GS is critical for this technology to move
from the concept stage to a practicable, commercially viable component of our CO2 solution.
This article discusses the need for a well-defined, long-term structure to manage and allocate the post-injection risk faced by CO2
generators and GS facility owners/operators. It also examines the financial assurance and other risk management mechanisms in the
context of the Proposed Rule and the suitability of those mechanisms within EPA's authority under the Safe Drinking Water Act
(SDWA). This article assumes uniform federal requirements for financial assurance and risk management and does not reference any
state-specific regulations, which may or may not be preempted based on forthcoming EPA guidance or federal legislation.
Because of the uncertainty of where financial responsibility lies for underground CO2 reservoirs after injection ceases, it is unlikely that
GS projects in the United States will be developed at a level that, collectively, could have a measurable impact on climate change in the
near future. "It is estimated that a commercial scale power plant equipped with current [GS] technology can easily cost over $2 billion.
Energy companies and financial institutions (including insurers) cannot risk capital of that magnitude without a clear understanding of
regulatory requirements, legal risks and long-term liabilities, before they commit the capital." U.S. CARBON SEQUESTRATION
COUNCIL, WANTED: A LEGAL AND REGULATORY FRAMEWORK FOR CARBON CAPTURE AND STORAGE, at 1 (Oct. 2008).
If government authorities required large emitters of CO2 to have GS at startup and a practical method of long-term risk management
was not employed, it would constrain energy supply, critical energy infrastructure investment, and development of this burgeoning
technology. The risks pertaining to well operations and injection of CO2 have been effectively managed by the oil and gas industries for
decades, most notably in the practice of Enhanced Oil Recovery (EOR); but the storage of CO 2 underground has not. The behavior of
CO2 stored over long periods is considerably less well understood. During an EOR operation, CO2 is injected into an oil reservoir to
increase oil production by both displacing the oil and lowering its viscosity to improve its flow rate. Much of the CO 2 comes out with the
oil and may be reinjected. Thus, in EOR, the CO2 is in the reservoir temporarily. Currently, the U.S. Department of Energy's Regional
Carbon Sequestration Partnerships are conducting GS demonstration projects to study long-term storage of CO2 in different geologic
strata and to understand these risks from a technological perspective. In general, the post-injection risks are three-fold: (1)
groundwater contamination through displacement of saline groundwater into potable aquifers, (2) seismic events triggered by pressure
changes, and (3) surface releases due to buoyant flow of CO2 upward through pathways in undetected faults or abandoned wells.
Alexandra B. Klass & Elizabeth ]. Wilson, Climate Change and Carbon Sequestration: Assessing a Liability Regime for Long-Term
Storage of Carbon Dioxide, 58 EMORY L.J. 103,119(2008).
The absence of any regulation to effectively manage these risks means that industries and large-scale CO2 generators have no
incentive to develop GS technology, even on the level of a pilot project or small-scale operation. To incentivize development of this key
technology and encourage commercial use, limits on liability must be provided to allocate and distribute risk between those parties that
benefit the most from GS: the CO2 generator and the public. Accordingly, at some definite and predicable point, liability should be
transferred from the facility owner/operator to the state or federal government. The purpose of financial assurance is to spread the
costs and associated risks of long-term CO2 capture and to make sure that resources are available to ensure the safety of GS projects
through responsible, long-term monitoring and maintenance of GS sites. Facility owners/operators should demonstrate that they have
the financial resources to properly close a site at the end of its operational life, monitor the stability of the CO2 plume, and provide for
any corrective action necessary. But for how long? The need for an effective framework to address long-term care and management is
one of the significant legal barriers that has stymied development of commercial-scale GS projects. The Government Accountability
Office (GAO) recently released a report to Representative Edward Markey, Chairman of the House Select Committee on Energy
Independence and Global Warming, which examined this issue and actions that federal agencies are taking to overcome these barriers.
GAO, FEDERAL ACTIONS WILL GREATLY AFFECT THE VIABILITY OF CARBON CAPTURE AND STORAGE AS A KEY MITIGATION
OPTION, GAO-08-1080 (Sept. 2008). Long-term liability protection is identified as a significant concern for stakeholders because
responsibility for a GS project could extend into perpetuity. Id. at 24- The GAO found that
19 of the 20 stakeholders we interviewed told us that liability
related to CO2 storage was a large or very large barrier to
deployment of [GS] at a commercial scale, with some noting that
liability concerns have already negatively impacted companies' ability
to initiate [GS] projects. They noted specifically that insurers have
difficulty writing insurance policies because of the uncertainties
associated with and limited data available for [GS], while another
added that investors will not support projects like [GS] if they
expose them to unlimited and undefined long-term liabilities,
especially when future revenue streams are uncertain.
Id. at 25.
The Proposed Rule provides detailed requirements for many GS technical and operational aspects, such as well siting, monitoring of
injection activity and fluid location, well construction, mechanical integrity testing (e.g., monitoring of injection well operation), well
plugging to ensure that the well does not operate as a conduit for fluid movement after injection activities have ceased, and site
closure (as it relates to monitoring of the CO2 plume and post-injection pressures). These requirements are more stringent than those
imposed on other classes of underground injection control (UIC) wells (e.g., I through V) regulated under SDWA because of CO 2's
unique properties, such as its buoyancy, viscosity, corrosivity, and site-specific characteristics due to variability in geologic strata.
Yet EPA left the door open for developing a detailed financial assurance framework by proposing only a general duty of financial
responsibility. In fact, EPA is seeking guidance on many financial assurance issues, such as cost estimation, phased-in schedule (known
as pay-in period) for trust funds, insurance providers, and corporate self-assurance. The Proposed Rule, issued on July 25, 2008,
provides a context within which to assess financial mechanisms and recommend either (1) a scheme consistent with the Proposed
Rule's limitations and EPA's existing authority under SDWA or (2) a scheme that would require congressional action to either expand
federal authority (by assuming long-term liability) or transfer authority for financial responsibility to the states. While a transfer of
liability might entail some risk to the government entity, the risk decreases over time and is necessary to facilitate widespread
implementation of GS. Having the government bear some risk is the only way that GS technology will become a significant component
of the nation's scheme for combating climate change.
EPA's Post-Injection Time Line Incorporates Much Flexibility
Under the Proposed Rule, EPA envisions a hybrid scheme of a fixed time frame and performance standards for determining the length
of the post-injection site-care period, during which the facility owner/operator must demonstrate financial responsibility. The post-
injection site-care period begins after injection activities cease and wells are plugged in a manner to prevent migration of CO 2 through
the well and endangerment of underground sources of drinking water (USDWs). The purpose of this initial post-injection period is to
monitor the CO2 plume and pressure until there is little or no potential for the injected CO 2 to endanger USDWs. EPA chose' a fifty-year
post-injection period to account for site-specific considerations that make a more accurate period difficult to define. For example, each
site has its own geologic factors, including permeability, geochemistry, and degree of capillary trapping that influence slowing down or
cessation of plume movement. Also, EPA believes it may take longer than the typical thirty-year frame of reference for the CO2 plume
to stabilize because of the buoyancy and viscosity of CO 2 and large injection volumes associated with GS. EPA also considered a time
frame of one hundred years but determined that the plume would probably stabilize before that time. Indeed, EPA notes that the
presence of "trapping mechanisms is likely to reduce the mobility of CO2 over time and the pressure within the storage system will drop
significantly when injection ceases, thus decreasing the risks of induced seismic activity, faulting and fracturing and making storage
more secure over longer timeframes." 73 Fed. Reg. at 43,519.
EPA's selection of a fifty-year time frame, however, does not offer predictability for the well owner/operator's financial obligation
because it contains a performance-standard component that states that the director, either the EPA regional administrator or the
director of a delegated state, territorial, or tribal UIC program, has the discretion to shorten or lengthen the period based on remaining
potential endangerment of USDWs or monitoring and modeling of plume stability. In other words, "post-injection site care
requirements could be extended for 100 years (or longer) if monitoring and modeling information suggest that the plume may still
endanger USDWs throughout this period." 73 Fed. Reg. at 43,520.
It is unlikely that any insurer would be enthusiastic about underwriting a century-long policy for a facility owner/operator that might
not outlive its GS financial obligations. For third-party liability coverage, such as bonding or insurance, to be effective, the coverage
period must be clearly defined and commercially practicable. Also, reliance on the discretion of the director may present too much
uncertainty for commercial facility owners/operators and discourage investment in and lending to GS projects. Instead of being held to
a performance standard, which could either shorten or lengthen the post-injection site-care period, a site owner/operator should have
financial obligation and risk exposure limited to a maximum of twenty to thirty years. This approach would provide an incentive for
good site selection, impose on site owners and operators the financial obligation of proper site operation, and provide a known
maximum period for financing, insurance underwriting, and bonding. Such a time frame would also strike a balance between providing
enough time for problems to be encountered and a time frame familiar to the insurance industry.
Limiting the financial assurance responsibility of the owner/operator to a twenty- to thirty-year period, however, would require the
government to take on liability arising beyond that period, and the ability to quantify and anticipate long-term risk could be uncertain.
Thus, GS projects should have a fund that provides for any required future monitoring or corrective action to which all GS
owners/operators contribute up front through a pay-in period. A governmental entity, by its very nature, would be best suited for
administering such a fund for a lengthy period. If an event were to occur after the post-injection site closure period with costs in
excess of the available funds, the government entity would have financial responsibility for any remediation.
Sound cost estimation is the underpinning of most financial assurance mechanisms. It is assumed that EPA will require that a financial
assurance mechanism or insurance policy be fully funded; thus the owner/operator is likely to pay an insurer up front or fully fund a
trust during a pay-in period. This expected future cost stream must include post-injection activities, such as well plugging, well
flushing, mechanical integrity testing, post-injection site care, and plume and pressure monitoring. If not all post-injection expenses are
included in the cost estimate, however, the financial assurance will be undervalued. If the facility owner/operator becomes insolvent,
funds will not be available for site-care activities or corrective actions. Thus, an estimate of expenses, such as labor, overhead, and any
third-party participation in post-injection activities will need to be included. As an example, an audit of the financial assurance program
under Resource Conservation and Recovery Act (RCRA) revealed that most long-term costs had been underestimated. OFFICE OF
INSPECTOR GENERAL (OIG), RCRA FINANCIAL ASSURANCE FOR CLOSURE AND POST-CLOSURE, AUDIT REPORT, at 46 (Mar. 30,
2001). In that context, EPA subsequently implemented measures to ensure more accurate cost estimates, resulting in an increase in
the amount of financial assurance required at some RCRA facilities. The UIC program could follow RCRA's example by developing
uniform methods for cost estimates. Also, emphasis could be placed on including all post-injection activities, including the cost of
retaining a third party to conduct covered activities, such as well plugging, which is contemplated by the Proposed Rule.
EPA Seeks Guidance on Financial Assurance Mechanisms
It is unlikely that commercial GS projects will ever become practical, feasible, and a significant part of our CO 2 management strategy
without structured liability protection for GS owners/operators. It is recognized that some aspect of the "polluter pays" principle is
important for the safe deployment of this developing technology, so as to ensure that owners/operators properly characterize potential
GS sites and safely and properly operate GS facilities.
At present, EPA's Proposed Rule envisions that GS well owners/operators will demonstrate financial assurance through third-party
instruments, including surety bonds, financial guaranty bonds, performance bonds, letters of credit, or irrevocable trust funds. "If a
trust fund is used, owners/operators are required to deposit money according to a pay-in period. At the end of the pay-in period, the
facility should have enough money set aside to cover its financial assurance requirements." OIG, AUDIT REPORT, supra at 3. EPA
recommends a short pay-in period of three years for GS projects to account for the possibility that the well owner/operator will face
financial distress prior to the trust being fully funded.
EPA is also considering the use of insurance, even though insurance is rarely used for the purpose of demonstrating financial assurance
for other injection wells regulated under the SDWA. Insurability requires a sufficient number of similar and uncorrelated events for risk
pooling, a clear cost estimate, a well established time period, frequent enough losses to calculate premiums, and no incentive to cause
loss on the part of the owner/operator. Klass & Wilson, 58 EMORY L.J., supra, at 163. In general, given that GS is a relatively new
technology and has yet to be well tested on a commercial scale, it is unlikely that many private insurance providers have the expertise
to understand and quantify the risks involved, much less allocate and price those risks. Lack of experience with GS, site-specific
considerations, and the long time frame necessary for GS to operate may make insurance an unsuitable financial assurance
mechanism. Mark Anthony de Figueiredo, The Liability of Carbon Dioxide Storage (Jan. 2007) (unpublished Ph.D. dissertation, MIT),
available at http://sequestration.mit.edu/bibliography/policy.html.Insurance,if underwritten on a claims-made basis, would not cover
losses occurring outside the policy term. Other insurance products, such as environmental impairment liability (EIL) coverage, a
relatively recent insurance product used for some sites under RCRA and the Comprehensive Environmental Response, Compensation,
and Liability Act, may address some of these issues by independently evaluating sites for risk. See Klass & Wilson, 58 EMORY L.J.,
supra, at 163. EPA could further evaluate risk-management tools, such as EIL, for purposes of underwriting GS projects.
EPA's Proposed Rule does not, in a practical sense, promote or encourage the use of private insurance. If EPA were to adopt a twenty-
to thirty-year time frame as an upper limit for site owner/operator responsibility, calculating potential risk would be considerably easier
because the risk would not be open ended. Also, preoperational phase activities, such as site characterization/selection, should be used
to estimate the risk because appropriate premium estimates could be developed early in the site characterization process or injection
stage when the risk is highest and expected to decrease over time.
An alternative form of financial assurance is the corporate financial test, which may allow corporations to satisfy financial assurance
obligations solely based on their financial condition. If a corporation does not meet the financial test, it may demonstrate a corporate
guaranty by showing that a closely related corporation meets the financial test requirements on its behalf. Here again, uncertainty in
the length of time required for such assurance creates estimation issues, and the longer the time frame, the less likely it is that the
assuring entity will be available or have the necessary resources.
Limitations of Liability Coverage under SDWA
In addition to the uncertainty regarding the financial assurance framework, one of the most problematic aspects of EPA's limited
authority under SDWA is that the Proposed Rule covers only risk to USDWs. The Proposed Rule does not contemplate risks to terrestrial
ecosystems, public health, or air quality. Thus, owners/operators face other potential liabilities after the post-injection site care period
has ended. These risks may, on an incremental basis, be limited, especially in the context of those addressed under SDWA. If these
risks cannot be managed through an appropriate management program, however, the facility owner/operator faces liability outside of
EPA's proposed SDWA scheme. In addition, EPA's authority under SDWA does not cover the transfer of liability to other governmental
entities. Consequently, this liability remains with the owner/operator indefinitely. These are significant shortcomings of EPA's limited
authority under SDWA.
Further, congressional action is clearly required to ensure a comprehensive liability protection program for CO2 generators and facility
owners/operators and to encourage private, commercial-scale development of GS projects. Facility owners and operators should retain
financial responsibility at a site for a fixed period of twenty to thirty years after injection activities cease and injection wells are
plugged. Legislation should establish a federal trust fund with a pay-in period during the operational phase of a facility based on
quantity injected and site characterization so that the government can assume liability, long-term care, and stewardship from the
facility owner/ operator after the plume has stabilized or a fixed twenty- to thirty-year period, whichever is shorter.
EPA's Proposed Rule envisions that GS well owners/operators will demonstrate financial assurance through third-party instruments,
including surety bonds, financial guaranty bonds, performance bonds, letters of credit, or irrevocable trust funds.
Given that GS is a relatively new technology and has yet to be well tested on a commercial scale, it is unlikely that many private
insurance providers have the expertise to understand and quantify the risks involved, much less allocate and price those risks.