Conference recap: Putting a price on carbon is the key to market investment in carbon storage and utilisation
The need for a clean-energy transition and shareholder expectations on ESG are increasing market interest in carbon capture storage and utilisation, according to leading energy analysts.
Speaking at the recent Australian Carbon Capture Utilisation & Storage Conference, James Hood, senior energy analyst at Regal Funds Management and Saul Kavonic, head of energy research Australia at Credit Suisse outlined the industry’s desire to consider CCUS technology - even though it can have a higher cost than other emission reduction options, such as offsets or carbon farming.
Mr Kavonic said there is growing interest from Australian and global equity markets in carbon markets and carbon pricing especially in the context of emission reductions targets. And that interest is driven by the question of how companies and industries position themselves for a green facing future and the upside from energy transition.
The next big thing
Listed oil and gas players in Australia are involved in carbon farming projects at the moment - including Woodside. But according to Mr Hood the ‘big thing’ at the moment is storage or carbon sequestration. He said that almost every single listed entity he covers in the energy supply chain is taking the energy transition seriously. Most of them have scope one and scope two emissions reduction targets now over a 20 or 30-year timeframe.
“You can't be seen to be a laggard in the energy transition. That's almost equity market suicide nowadays, if you have no strategy on how you're going to do this in the long term,” he says of the focus on carbon storage projects.
For Mr Kavonic, that motivation can be broken down in two ways. Firstly, risk mitigation where companies are preparing for tough carbon policy in the future. And secondly, ESG pressure coming from investor demands. At this point in time, he argued, it’s about perceptions rather than economics.
“I think it's still seen more as a risk mitigation and ESG optics measure at this point,” he said. “This could be moved from just a risk mitigation to a value accretive opportunity over the next decade, it's just I think premature to be there quite yet.”
But for those like Mr Kavonic, who believe the current pricing is going to rise, there is cause for optimism. There’s an opportunity for those industries that have a footprint on the carbon offset market already, in terms of carbon farming and CCUS, to establish long carbon positions.
Breaking down barriers
The leap to large scale projects is being held back by economics. There’s no regulatory mandate, Mr Kavonic said, and no pricing on carbon instruments to shift companies to invest. “You need to see the carbon pricing actually being there. That's not there yet. So we're all positioning, but we're not actually doing,” he argued. And he has noticed some industry participants aren’t going for the cheapest emission mitigation option - they are going for CCUS of even higher cost carbon farming, because of the optics.
In the case of CCS, he described a “double dipping phenomena” where, even though it might be a higher cost abatement, you also get to cite the direct reduction or your business emissions, versus just an offset.
“Why would we look at a CCS project that requires $100 a tonne offshore in Australia, where you can plant trees at $25 a tonne? Economics say don't do it, but the reality is industry is looking at it, and that's because of the near-term optics of that on an ESG lens. It requires industry to show that they are biting their own emissions, physically, and not just relying on offset,” he said.
Despite the government’s renewed focus on low emission technologies and CCUS, Mr Kavonic argues the market is still coming to terms with how to treat carbon storage and use - on the cost side and the value side. There is a growing recognition that every project is specific, with different economics, risk profiles and technical needs. And that’s thinking that applies at a global level too.
For that reason, Mr Hood outlined two elements to how the market sees CCUS - whether it’s for existing projects or new projects. For those existing projects, they are already venting CO₂ into the atmosphere so the option of storage is clearly a preference from an ESG and energy transition perspective. For new projects, he says, the question is more philosophical - you can sequester CO₂, but the very creation of emissions can “perpetuate the business lifecycle of fossil fuel companies for the next 20 or 30 years.”
“I think it is good, definitely, if you're doing it for existing projects and reducing your existing footprint. Question mark, in terms of how the market is going to think about that long term for you,” Mr Hood says.
Price check on carbon
One of the core questions about the current market attitude to CCUS is whether a price on carbon is needed to make it work.
There is definitely a need for a price signal, Mr Kavonic told the conference, whether that is direct subsidies or incentives. The government is currently exploring the qualification of CCUS for Australian Carbon Credit Units (ACCUs), which are currently earned for actions such as energy efficiency and avoidance of land clearing. While he believes a carbon price is the most efficient option, the government seems committed to developing that ACCU market, and that is essentially the emergence of a carbon pricing system, he says.
“We've already got the architecture of a carbon pricing market in place, and it's going to develop over the next 10 years,” Mr Kavonic said. “I know it's a dirty word on the kind of public political landscape, but the truth is, the architecture is there and it was actually set up by the Coalition Government, who continue to support it.”
In the current global environment, every single entity in the energy supply chain is thinking about how it can reduce the scope one and scope two emissions at a minimum, Mr Hood said. You're just going to get greater demand from corporates, over time and voluntary demand, “regardless of whether there is a carbon price or not.”
James Hood is Senior Energy Analyst, Regal Funds Management
Saul Kavonic is Head of Energy Research Australia, Credit Suisse
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