States look to attract CCS projects through laws shifting long term CO2 storage liabilities - Nixon Peabody blog

While rumors of a new clean energy tax credit package with an expanded and enhanced 45Q continue to circulate on Capitol Hill and legislation is floated in Congress that would require the federal government to remove carbon dioxide (“CO₂”) from the atmosphere, states are actively enacting legislation crucial to facilitating the development of carbon capture and sequestration (“CCS”) projects. On March 18, 2022, Indiana enacted a law clarifying the definition of “pore space,” outlining CO₂ injection rights, and providing a process by which the state would assume the responsibility and associated liability for stored CO₂ following a CCS project’s completion. Wyoming followed Indiana just three days later by enacting a law expanding its existing CCS framework so that the state would assume liability for stored CO₂ twenty years after an eligible CCS project’s completion.

Indiana and Wyoming’s recent actions add to a growing list of states that provide a process for relieving a party storing CO₂ from the long-term liabilities associated with such storage. Louisiana, Montana, and North Dakota have already adopted comprehensive CCS legislative frameworks that address this issue. Some states—such as Kansas and Texas—have established CO₂ storage funds from fees paid by sequestering parties in such state, but have yet to take the extra step in allowing the state to assume responsibility for stored CO₂. And legislation is purportedly being drafted in the Pennsylvania Senate that would specify the regulatory process for CCS projects in the state and establish a similar reserve fund.

A process—like the ones recently adopted in Indiana and Wyoming—for assuming the long-term liabilities associated with CO₂ storage is an essential policy component for states that are serious about attracting CCS projects. CCS projects are capital intensive. Although the sequestration and permanent storage of CO2 has thus far proved incredibly safe and effective as noted by the Intergovernmental Panel on Climate Change, it is nevertheless a long-term liability (California’s CCS protocol under its Low Carbon Fuel Standard requires CO₂ to be securely stored for 100 years) that the entities investing in CCS projects seek to minimize.

The programs adopted by Indiana, Wyoming, Louisiana, Montana, and North Dakota do not eliminate the long-term risk associated with CO₂ storage, but they do provide a book-end after which the risk will expire. These state programs share the same general framework in that the state assumes or provides a timeline for assuming responsibility and liability for a CCS project’s sequestered CO₂ once the injection of CO₂ stops by issuing a certificate of completion. But the criteria upon which a certificate of completion will be issued and the date upon which the state will step into the legal role of the party storing CO₂(the “Storage Operator”) to assume liability are unique to each state.

Indiana

Indiana’s recently passed CO₂ storage law provides that upon issuing a certificate of completion to the party storing CO₂, Indiana will assume ownership and responsibility for the storage facility, including any potential liability associated with the storage facility and all regulatory requirements. Indiana will issue the certificate of completion upon the Storage Operator’s demonstrating that it has met the following eight conditions:

It is in compliance with all applicable laws governing the storage facility;
The storage facility is reasonably expected to retain the CO₂ stored;
The storage facility is stable as demonstrated by either a showing that the stored CO₂ is essentially stationary or, if not stationary, is unlikely to migrate outside the boundaries of the storage facility;
All wells, equipment, and facilities still necessary after the CCS project’s closure are in good condition and retain mechanical integrity;
Injection wells have been plugged;
All equipment and facilities not necessary for long-term monitoring have been removed;
Site reclamation work is completed; and
Upon notice of intent of site closure and a site closure report being provided to the U.S. Environmental Protection Agency (“EPA”) or relevant state agency (in the event Indiana assumes primacy for Class VI wells), the EPA or relevant state agency has authorized site closure.

If the above conditions are met, Indiana will issue a certificate of project completion within 180 days of receiving a Storage Operator’s application relieving the Storage Operator of all liability associated with the stored CO₂.

As part of Indiana’s legislation, it established a fee of $.08 per ton of CO₂ sequestered for all CCS projects operating within the state. The fee payments are deposited in a CO₂ storage facility trust that shall be used only for costs related to the long-term monitoring and management of CCS projects.

Wyoming

Wyoming’s new CO₂ long-term liability law allows the Storage Operator to apply—twenty years after CO₂ injection has ceased—for a certificate of completion that will transfer responsibility and liability for the sequestered CO₂ to the state. Twenty years after CO2 injections end, Wyoming will issue a certificate of completion to the Storage Operator if the following conditions are met:

It is in full compliance will all laws governing the CCS project;
It has addressed any pending claims regarding the project’s injection and sequestration;
The CCS project’s storage or pore space is not expected to expand vertically or horizontally or pose a threat to human health, safety, the environment, or underground sources of drinking water;
The stored CO₂ is unlikely to migrate outside of its stored boundary;
All wells and facilities used to maintain and monitor the sequestered CO₂ are in good condition and will maintain mechanical integrity; and
Injection wells required to have been plugged have been plugged.

Unlike Indiana, Wyoming’s liability is capped at the amount that is the balance of Wyoming’s geologic sequestration special revenue account. Fees, which may include a per ton of CO₂ sequestered as in Indiana, will be paid into Wyoming’s geologic sequestration special revenue account as established by the Wyoming Department of Environmental Quality.

It is unclear whether Wyoming’s liability cap would mean all such liability is capped—both for the state and the Storage Operator—at the amount in its geologic sequestration special revenue account or whether the cap would only apply to the state’s liability and the Storage Operator could still be liable for damages in excess of the cap.

Louisiana

Louisiana’s long-term CO₂ liability law splits the difference between the time frames offered by Indiana and Wyoming and provides a process for the state to take title to sequestered CO₂ ten years after injections cease. Louisiana will issue a certificate of completion upon a mere showing by the Storage Operator that “the reservoir is reasonably expected to retain mechanical integrity and the carbon dioxide will reasonably remain emplaced….” Upon the issuance of the certificate of completion, Louisiana law is clear that the Storage Operator and any owners having interest in the storage facility are released from any and all liabilities associated with the storage of CO₂ at the site.

However, Louisiana’s law comes with an important caveat: the last owner or operator of the CO₂ storage facility may remain on the hook for liabilities arising that are in excess of the state’s carbon dioxide geologic trust fund. Louisiana’s law does cap liability—regardless of the trust fund amount—against “the owner or operator of a storage facility, carbon dioxide transmission pipeline, or the generator of the carbon dioxide being handled by either the facility or pipeline,” for non-economic compensatory damages at $250,000 or $1 million depending on the nature of the tort. But such cap is only for non-economic damages.

Montana

Montana’s law for assuming the long-term liability associated with CO₂ storage was enacted in 2009 and provides that a certificate of completion may be issued by its Board of Oil and Gas Conservation no earlier than twenty-five years after CO₂ injection ends. The six conditions that Montana requires be met for a Storage Operator to receive a certificate of completion largely mirror the six requirements adopted by Wyoming except that Montana requires the Storage Operator to provide bonding or other surety for an additional twenty-five years following issuance of a certificate of completion. In addition to this requirement, Montana’s law requires that the Storage Operator to continue to accept liability related both to the storage reservoir and sequestered CO₂ for an additional twenty-five years following issuance of the certificate of completion. The law allows the Board, in consultation with other federal and state agencies, to adopt rules that allow for a Storage Operator’s liability to end in a period of time less than fifty years, but it appears that the Board has yet to adopt any such rules.

Thus while Montana’s law provides an off-ramp for a Storage Operator’s liability, it is an off-ramp that is significantly longer than any other state that has adopted similar legislation. The fifty-year time frame following the cessation of CO₂ injection is unlikely to provide most CCS project developers much comfort.

North Dakota

North Dakota’s long-term CO₂ liability law allows a certificate of completion to be issued to a Storage Operator ten years after CO₂ injection ceases. The North Dakota Industrial Commission may issue a certificate of completion based on six nearly identical criteria to those established in Wyoming and Montana. But unlike Montana, it does not require the Storage Operator to provide bonding or other surety and, in fact, explicitly provides that any bonds posted by the operator be released. Additionally, the Storage Operator is released from all regulatory responsibilities and North Dakota takes title to the stored CO₂ along with the associated responsibility.

North Dakota does require Storage Operators to pay a fee on a per ton of CO₂ sequestered basis but leaves the determination of that fee up to the North Dakota Industrial Commission. The fee is deposited in the state’s CO₂ storage administrative fund and may be used for defraying expenses the Commission incurs in long-term monitoring and management of a closed storage facility. Unlike other states, North Dakota does not cap its own liability at the amount in its fund.

Illinois

Unlike the states addressed above, Illinois’ law passed in 2011 for assuming liability of CO₂ sequestration relates only to a particular consortium of entities potentially sequestering CO₂ at a particular site. More specifically, the Illinois law provides that the operator of the FutureGen Project—which it defines as the public-private partnership among the U.S. Department of Energy, certain investor-owned utilities, and coal companies to construct and operate a power plant utilizing “clean coal” technology and CCS at the Tuscola or Mattoon site in Illinois—will transfer sequestered CO₂ to the state including all liabilities associated with such sequestered CO₂. The Illinois law also provided that the State’s Attorney General would defend against certain actions related to the FutureGen Project and its sequestered CO₂.

While Illinois’ law will not—in its current form—be of use to non-FutureGen CCS project companies looking to develop a CCS project in Illinois, it does provide a roadmap for states looking to provide an attractive regulatory framework for the development of specific, large-scale CCS projects. Indeed Texas passed a similarly targeted law around the same time as Illinois.

While CCS legislation outside of the bipartisan Infrastructure Investment and Jobs Act appears to have stalled in Washington, these laws show that states are continuing to lay the legislative groundwork necessary for increased deployment of CCS projects that will play an important role in addressing climate change. Nixon Peabody continues to monitor important CCS policy developments in the states, D.C., and around the globe.