How Regulatory Hurdles Could Hamper CCUS Buildout in the United States

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Photo by Maria Oswalt on Unsplash

Over the past two years, the US federal government has become an important driver of carbon capture, utilization and storage (CCUS) development. The 2021 Infrastructure Investment and Jobs Act provided billions of dollars in funding for federal agencies to promote research and development (R&D) and demonstration projects, and to streamline permitting procedures. The legislation appropriated $5 million per year through FY2026 to the Environmental Protection Agency (EPA) to permit Class VI wells (CO2 injection wells). In addition, the EPA received $50 million to distribute in grants to states, Tribes, and territories to develop and implement Undeground Injection Control (UIC) Class VI programs. While the funding is likely to facilitate federal reviews and permitting procedures, there are still significant regulatory (and in some cases policy) risks that could constrain the development of the CCUS sector across the country. 

EPA’s processes remain slow 

The streamlining of the Class VI permitting process will be crucial to accelerating CCUS project deployment at the federal and state levels. $50 million in federal funding is expected to encourage states to seek enforcement and permitting responsibility (primacy) for Class VI programs, which, when granted, will significantly cut permitting timelines. However, it is unclear whether the EPA will be able to timely process state requests for primacy and project developers’ applications for Class VI permits, even with increased funding. As of 16 March 2023, there were 47 pending applications for Class VI permits from projects in seven states, with most originating from Illinois, Louisiana, and California. More applications are likely to come over the near term as companies are seeking to capitalize on the enhanced 45Q tax credits under the 2022 Inflation Reduction Act. 

In the meantime, states applying for Class VI primacy would also put additional pressure on the federal agency as the EPA is still processing requests that were submitted before the enactment of the improvements to the federal CCUS fiscal incentives. Louisiana made required legislative and regulatory changes and filed its application to the EPA in 2020, and the federal agency is expected to finalize the review by May 2023, according to the latest update. Given the 60-day public comment period after the completion of the review, the EPA is now expected to grant Louisiana Class VI primacy in the second half of 2023. Other states are also pursuing amendments to their existing laws governing carbon storage to enable the transfer of primacy from the EPA (such as Alaska) and are likely to submit their applications to the EPA over the near term. 

The Biden administration could potentially improve the EPA’s ability to process applications by expanding its administrative capacity if and when Congress approves its FY2024 Budget Request, which includes the agency’s workforce increase by nearly 2,000 full-time equivalents (FTEs). However, in case House Republicans and Senate Democrats fail to agree on budget issues towards the end of 2023, leading to a government shutdown, states and companies would face delayed reviews of their applications. 

Uncertainty around CO2 pipeline regulations 

Robust regulatory framework to govern the construction and operation of CO2 pipelines will ensure that the required transport infrastructure is in place to connect capture and storage sites on schedule. However, the ongoing federal review could constrain the development of a CO2 pipeline network over the medium term. The Pipeline and Hazardous Materials Safety Administration (PHMSA) is working to update existing carbon dioxide safety regulations following a 2020 incident in Mississippi. The PHMSA is expected to release its draft in late 2024, and given the public comment period and subsequent revisions, the final version of new regulations is likely to be published sometime in 2025 at the earliest. However, project developers already have plans to build thousands of miles of CO2 pipelines, particularly in the Midwest, and it remains unclear whether they will be compliant with the upcoming requirements. If the PHMSA produces more stringent requirements, the operators of newly constructed pipelines would be hit by additional costs to bring infrastructure in line with updated regulations. Moreover, the situation could result in elevated litigation risks as environmental groups are likely to challenge pipeline operators in courts for alleged violation of federal safety regulations. 

In the meantime, some states could take a cautious approach to avoid such risks, although it will likely delay the development of CO2 pipeline infrastructure. In Illinois, state lawmakers would introduce a two-year moratorium on carbon dioxide pipeline approvals in the absence of updated regulations from the PHMSA. While the move would mitigate the above-mentioned risks, the fate of CO2 pipeline in Illinois will hang in the air if the PHSMA does not complete its regulatory review within two years after the moratorium comes into effect (if adopted). The complexity of CO2 pipeline issues underscores the need for close coordination between state and federal authorities as well as project developers to ensure smooth transition to more stringent regulations that will reduce the risk of higher costs and lawsuits. 

Offshore carbon storage is yet to come 

The 2021 Infrastructure Investment and Jobs Act authorized the Department of the Interior to develop and implement a regulatory framework that would enable offshore carbon storage by the end of 2022. However, the administration failed to comply with the deadline and the framework is now expected to be drafted in 2023-24. Under the FY2024 Budget Request, the Bureau of Ocean Energy Management (BOEM) would receive $72.3 million for its Conventional Energy Program, aimed at finalizing next 5-year leasing program in the Outer Continental Shelf (OCS). The funds would be also used to finance the development of regulations to enable the leasing of acreage for offshore carbon storage. When in place, the regulatory framework would unlock the storage potential of the US Gulf of Mexico, estimated at 20 billion tons of carbon dioxide in oil and gas reservoirs alone. Still, given relatively slow rulemaking under the Biden administration, the final version of offshore CO2 regulations is likely to be released at the end of 2024 or in early 2025. In the meantime, the Gulf Coast states are expected to promote prospective CO2 storage acreage in waters that fall under their jurisdiction.