‘User pays’ carbon storage levy to be introduced in UK once market is self-sustainable

The UK’s North Sea Transition Authority (NSTA) has revealed its intention to introduce a levy on carbon storage licenses in the future, once the carbon capture and storage (CCS) industry begins operating on a more self-sustaining basis.

The NSTA ran a call for evidence between December 4, 2023, and January 26, 2024, on the potential principles, design and timing of a possible future levy on UK carbon storage licenses, which will help inform thinking about how the industry could, in the long term, move towards a “user pays” model for the services the authority provides.

After reviewing the submissions, the NSTA stated that it intends, unless there are major external developments, to introduce a carbon storage levy once the CCS industry is on a more self-sustaining footing.

BP, Athena Exploration, Spirit Energy Limited, Carbon Capture and Storage Association (CCSA), Mineral Products Association (MPA), OEUK, Scottish Government, Subsurface Taskforce, and Summit Energy Evolution Ltd. (SEEL) responded to the call, of which the vast majority supported the concept of a carbon storage levy, in line with the “user pays” principle.

The respondents were supportive of any levy being informed by clear principles and generally agreed that the broad principles for the NSTA’s existing petroleum levy – “user pays”, reflecting actual costs and providing funding certainty – should also be used to inform a potential carbon storage levy, but this should happen when the CCS industry is operating on a more self-sustaining basis, rather than immediately.

It was also recognized that the UK’s CCS industry has a different business model from the petroleum industry and the government’s wider policy framework for CCS is still evolving.

The NSTA identified and sought views on several levy design options, including a single levy rate for all carbon storage licenses, differing levy rates for different categories of license holders, combined single levy for petroleum licenses and carbon storage licenses, as well as potential carbon storage levy based on acreage or amount of CO2 stored.

The respondents generally supported different levy rates for different project phases, recognizing differences in cost and income between a project before and during carbon injection. There was little support for a single levy rate for all users, recognizing the likely disadvantage to license holders at an early stage of project development, while some respondents expressed preference for a combined carbon storage and petroleum levy, to support certainty of funding, and others considered such a combined levy could be perceived as one sector subsidizing the other.

The participants further made several suggestions on possible categories of eligible licensees, including in particular, different rates based on whether or not carbon dioxide injection is occurring.

The NSTA notes that the UK CCS industry is currently in its infancy, and determining when the industry might be sufficiently mature or established for a potential levy requires careful consideration, depending on a range of factors, including the overall policy and regulatory framework and how well established the industry can be considered.

The respondents had broad agreement that the timing of any levy introduction would need to align with the market-based transition of the CCS industry. In terms of determining when this could be, there were suggestions around linking it to the injection rate or to developments in the UK Emissions Trading Scheme (ETS) price. Several respondents suggested the introduction of any future carbon storage levy should align with the timeframes for market transition set out in the government’s CCUS Vision, published December 2023 – which states the creation of a CCS market is expected this decade – to establish a competitive market for CCUS.

The NSTA said it would continue monitoring the commercial and regulatory developments in the CCS industry and will ensure that the industry is given sufficient notice before introducing a future levy. It is intended that any levy would follow the principles outlined in the call for evidence, though the design and timing of introduction require further consideration. Any future levy would be preceded by formal consultation.

In the absence of a carbon storage levy, the NSTA’s work on carbon storage will remain funded through existing fees and a government grant. Therefore, there are no new impacts at this time.

The UK Government last year set out its vision for the carbon storage industry pledging up to £20 billion investment and suggesting that it has the potential to store the carbon equivalent of taking 6 million cars off the road, and support 50,000 jobs, by 2050.

In 2023, a number of steps were made in developing the UK’s CO2 transportation and storage industry, including the award of 21 licenses following the UK’s first-ever carbon storage licensing round, the establishment of a dedicated NSTA carbon storage development team to work with operators in the sector, significant progress made by the Track 1 and 2 projects on permit applications with decisions on four Track 1 applications expected to be taken in 2024, as well as a consultation to determine what carbon storage data should be shared and to what timescales is also underway and will assist the development of future sites.

The NSTA recently published two sets of guidance expected to help the industry prepare for first carbon storage injection.