Summary slide pack of the report: IEAGHG 2023. Integrating CCS in international cooperation and carbon markets under Article 6 of the Paris Agreement. 2023-01, January 2023.

1. CCS under Article 6 of the Paris Agreement
Paul Zakkour
Representing
Gregory Cook, Andrew Howard, Samantha Neades and Tim Dixon
22 March 2023
IEA GHG Webinar

2. Introduction | Overview
2
 Article 6. Foundation for international carbon market that allows Parties to cooperate to achieve
their NDCs:
 Article 6.2 signals voluntary approaches by using internationally transferred mitigation outcomes
(ITMOs)
 Article 6.4 establishes a new mechanism for project-based crediting (similar to CDM under Kyoto)
 Provides an opportunity to revisit incentives and finance available for CCS
 Paper seeks to address several questions:
 How might A6 mechanisms facilitate wider deployment of CCS than achieved to date?
 What sort of models for A6 cooperation and financing could support CCS deployment?
 To what extent might these models confront and overcome previous challenges for CCS deployment?

3. Outlooks for Cooperation | Outlook for Article 6
3
Key factors: (i) types of future carbon market(s)
under Article 6, and (ii) types of units used for
offsetting.
Cooperation may be implemented under:
 Compliance markets: e.g crediting linked to
various compliance schemes (ETSs, C-taxes) and
offsetting quotas (e.g. CORSIA)
 Voluntary markets: rising demand coming from
corporate climate pledges, although ongoing
questions around validity of corporate offsetting
(i.e. SBTi guidance and TSVCM)
Considerable uncertainty around the respective roles
and interactions of both; entwinement of voluntary
markets into UN system also raises some accounting
concerns
Source data: Forest Trends’ Ecosystem Marketplace 2021
Transacted voluntary carbon market volumes and average prices

4. Outlooks for Cooperation | Outlook for Article 6
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 Outlook around types and quality of units that can and should be used for offsetting is uncertain
 Under Kyoto, emphasis was on emissions reductions, but Paris embeds net zero concept
 Emphasis on both emission reductions at sources and removals by sink enhancements
 Accounting also requires total amount of CO2 generated to be balanced by an equal amount of CO2
storage
 Current markets include mix of approaches and credit types - limited distinction between whether
activities are reductions/avoided emissions, removals… or a combination
 What types of net zero claims can countries make using Article 6 credits?
 Many observers suggest net zero strategies should be geared towards removals (Shopify, Strip,
Microsoft offsetting activities; Puro-earth, Nori; Climeworks sales of DAC-based removals)
 Others question a focus on removals: does it create “mitigation deterrence”?
 Target separation could provide greater transparency on targets and different credit types

5. Outlooks for Cooperation | CCS and international cooperation
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 Most analysis still suggests CO2 geostorage will be critical for Paris goals
 IEA net zero scenario by 2050 envisages annual global storage of 7.2 GtCO2 in 2050
 IPCC 1.5°C aligned mitigation scenarios in Special Report on Warming of 1.5°C have large role for geostorage
 Article 6 potentially offers a variety of routes to incentivize CCS:
Trading of units based on the avoided
emissions or removals from CO2 capture
Very little CCS implementation achieved
over the past 15+ years
Focusing incentive on CO2 capture poses
challenges including cross-chain risk
More novel cooperation models based on
carbon storage and producers of fossil
carbon?
Several proposals for establishing
international cooperation and trading of
storage credits or units (“CSUs”)
Supply-side offsetting based on storage
quotas (countries, companies, both)

6. Methodology | Models for CCS cooperation
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 Entity targets based on government
emission targets
 Unified global carbon market place
for trading mitigation outcomes
 Trading between businesses,
underpinned by government
accounting
 Trading of carbon reduction/removal
units (CRRUs)
Model 1: Linked carbon pricing
policies between countries
 Voluntary, unilateral (or sectoral),
pledges to offset production through
use of carbon storage units (CSUs)
 Could be underpinned by a limited
patchwork of mandatory national
policies and targets (e.g. storage
obligations by importers)
 CSU volume tied to company
production and pledges
 CSU origination governed by
companies or countries
Model 2: Voluntary storage
targets for fossil fuel producers
 Based on government targets for
sink/storage enhancements
 Club of countries: first-movers
perhaps evolving into a long-term
programme
 CSU volume tied to country
production and pledges
 CSU origination governed under
international system
Model 3: Multilateral “club”
arrangement among govts

7. Methodology | Models for CCS cooperation
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 Entity targets based on government
emission targets
 Unified global carbon market place
for trading mitigation outcomes
 Trading between businesses,
underpinned by government
accounting
 Trading of carbon reduction/removal
units (CRRUs)
Model 1: Linked carbon pricing
policies between countries
 Voluntary, unilateral (or sectoral),
pledges to offset production through
use of carbon storage units (CSUs)
 Could be underpinned by a limited
patchwork of mandatory national
policies and targets (e.g. storage
obligations by importers)
 CSU volume tied to company
production and pledges
 CSU origination governed by
companies or countries
Model 2: Voluntary storage
targets for fossil fuel producers
 Based on government targets for
sink/storage enhancements
 Club of countries: first-movers
perhaps evolving into a long-term
programme
 CSU volume tied to country
production and pledges
 CSU origination governed under
international system
Model 3: Multilateral “club”
arrangement among govts
Effectiveness Financing
Environmental
integrity
Policy
performance
Progression

8.  Effectiveness in accelerating CCS
deployment (tCO2 stored)
 Model 1: highly uncertain; current Article 6
activities and voluntary markets mainly
focused on avoided emissions
 Model 2: targeting CO2 storage offers
greater certainty for CCS deployment and
can complement Model 1
 Model 3: expanding supply-side pledges
from firms to countries extends scope of
obligations to include national oil
companies (NOCs)
 Supply-side offsetting approaches based on
CSUs could greatly reduce uncertainty within
carbon markets for CO2 storage
Results | Effectiveness
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Source: extracted from TSVCM 2021 (p. 61)
CCS only
really in
this wedge

9.  Effectiveness in accelerating CCS
deployment (tCO2 stored)
 Model 1: highly uncertain; current Article 6
activities and voluntary markets mainly
focused on avoided emissions
 Model 2: targeting CO2 storage offers
greater certainty for CCS deployment and
can complement Model 1
 Model 3: expanding supply-side pledges
from firms to countries extends scope of
obligations to include national oil
companies (NOCs)
 Supply-side offsetting approaches based on
CSUs could greatly reduce uncertainty within
carbon markets for CO2 storage
Results | Effectiveness
9

10. Results | Environmental Integrity
10
 Ensuring robust MRV and accounting
 No significant MRV issues anticipated for any of the models
 Further work needed to clarify some accounting issues for Model 2 and Model 3 (carbon production
inventories of firms and countries against which CSUs would be counted; compliance points)
 Avoidance of double counting
 Models 2 and 3: Two different credit types (CRRUs and CSUs) gives rise to double counting concerns
 All models require corresponding adjustments to be applied to transfers of CRRUs or CSUs for ITMOs
 For ITMOs, CSUs to be used only once; CSUs can be also accommodated in CSO/CTBOs
 Avoidance of perverse incentives (‘carbon lock-in’)
 Typically concerns incentivizing CO2 enhance oil recovery (CO2-EOR)
 Model 2 and Model 3: awarding CSUs for CO2-EOR purposes does not compromise integrity - any
incrementally produced crude oil would need to be added to the compliance metric subject to storage quota

11.  Financial and commercial challenges have curtailed anticipated scale-up of CCS in most parts of the world
(factors include e.g. volatile carbon prices, cross-chain risk etc.)
 Model 2 and Model 3 have some potentially important benefits over Model 1 associated with the ‘agency
problem’ posed for deploying CCS
 Multi-party CCS projects involving two or more parties across the full chain of operations needs sufficient
alignment of incentives and interests to ensure commercial viability
 From the storage site operator’s perspective, the risks of the project (e.g. the residual liabilities for stored
CO2) likely outweigh the potential rewards; operator has insufficient “agency” to act in the principal’s
interest
 Storage site operator therefore motivated to increase costs (e.g. a gate fee) reflective of the risk-reward
proposition, perhaps to a point where the project becomes commercially unviable
 Policies and measures that establish clear and separable incentives for geological storage of CO2
independent of the principal’s interest could help alleviate “agency” type problems
Results | Commercial and financial viability
11

12.  Promotion of mitigation ambition, transformative change and NDC progression
 Linkage of carbon markets envisaged under Model 1 represents a technology neutral mitigation pathway
based on cost containment.
 Absence of a clear pathway for CCS deployment and financing may lead to conservative NDCs
 Countries with no CCS experience may not commit to its use without a clear support framework
 Model 2 and Model 3 could help drive ambition in NDCs; provide greater clarity for CCS support
 Supporting transition pathway to net-zero
 Use of CSUs under Model 2 and Model 3 can provide a coherent unit for net zero policy design
 Under net zero pathway, allocations of allowances and crediting of avoided emissions (Model 1) will need
to end and be entirely replaced by crediting based solely on removals/storage
 Ambitious NDCs should therefore be seeking to include a carbon storage target at some stage
Results | Progression
12

13.  Ability to facilitate broad participation, coherence with other policy instruments and political viability with
governments, private sector and civil society
 Model 1: Market-based instruments have so far failed to deploy CCS at scales anywhere near envisaged
by the IPCC, IEA etc. Difficult business case for storage operators.
 Model 2 and Model 3 could provide a direct incentive for storage site operators to source CO2 to fill
geological storage sites, working in parallel with incentives under Model 1
 Model 2 in particularly offers a high degree of “sectoral alignment”: O&G industry has the skills and
knowhow to build storage infrastructure, and greatest incentives for CCS to succeed
 Model 3 offers political benefits arising from its nature as a ‘club’ of relatively small # of countries
 Literature indicates political economy benefits of clubs in designing, agreeing, and implementing
effective international agreements
 “CCS club” could be formed within or outside the auspices of the UNFCCC, depending on political
expediency, but in clear alignment with its aims.
Results | Policy performance
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14.  Our evaluation suggests:
1) Without targeted measures to support geological carbon storage, the outlooks for CCS deployment
through conventional carbon market cooperation remain uncertain over the mid-term (at least to 2030)
2) Implementation of supply-side offsetting approaches based on CSUs – operating in parallel with
conventional carbon markets – may be effective in driving cooperative actions towards the permanent
geological storage of CO2
3) Supply-side offsetting approaches offer the potential to address issues for NDC progression, overcome
commercial challenges for CCS, and offers strong sectoral alignment in policy design
 Model 1 represents the mainstream climate policy approach receiving most attention
 Model 2 and Model 3 receiving growing interest…. but remain someway from implementation
 Greater efforts needed to raise awareness of the risks posed to net zero in current market arrangements, and
the opportunity to address these risks through supporting policies such as CSUs
Conclusions | Key findings
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15.  Our evaluation suggests:
1) Without targeted measures to support geological carbon storage, the outlooks for CCS deployment
through conventional carbon market cooperation remain uncertain over the mid-term (at least to 2030)
2) Implementation of supply-side offsetting approaches based on CSUs – operating in parallel with
conventional carbon markets – may be effective in driving cooperative actions towards the permanent
geological storage of CO2
3) Supply-side offsetting approaches offer the potential to address issues for NDC progression, overcome
commercial challenges for CCS, and offers strong sectoral alignment in policy design
 Model 1 represents the mainstream climate policy approach receiving most attention
 Model 2 and Model 3 receiving growing interest…. but remain someway from implementation
 Greater efforts needed to raise awareness of the risks posed to net zero in current market arrangements, and
the opportunity to address these risks through supporting policies such as CSUs
Conclusions | Key findings
15

16. Paul Zakkour
Email: paul.zakkour@carbon-counts.com
Tel: +44 (0)3603 8146
Mob: +44 (0)7834 161016
Twitter: paul.zakkour
16
Thank you
www.carbon-counts.com

17. CCS under Article 6 of the Paris Agreement
Paul Zakkour
With inputs from co-authors
Gregory Cook, Andrew Howard, Samantha Neades and Tim Dixon
IEA GHG Webinar
22 March 2023