California’s focus on the climate crisis has created new opportunities for landowners to passively generate revenue through Carbon Capture and Sequestration (“CCS”) projects. CCS is the process of capturing CO₂ from a stationary source, e.g., an oil refinery, or a steel, glass, or cement plant, or directly from the atmosphere, and then compressing and transporting the captured CO₂, typically via pipeline, to an injection well where it is injected deep underground into a geologic formation that permanently sequesters it. In California, those geologic formations typically are found in depleted natural gas fields, including those in the San Joaquin Basin and Sacramento Delta.

A Critical Component of the Climate Solution

California has set an aggressive goal of carbon neutrality by 2045. Removal of CO₂ from the atmosphere will aid the state in attaining that goal by capturing emissions from hard-to-decarbonize industries. According to the U.S. Department of Energy, the United States has between 2 and 22 trillion metric tonnes of underground carbon storage space. Even if the most conservative estimate is correct, experts predict that the U.S. has enough storage space to sequester all emissions from the domestic generation of electricity for centuries to come (Congressional Research Service, 2022). California’s complex, heavily faulted geology makes it a somewhat less attractive location for CCS projects than the large sedimentary basins in Texas and the other parts of the mid-continent, but there are nonetheless significant opportunities here.

The Economics of Carbon Capture and Sequestration

CCS projects are expensive, time-consuming, and involve rigorous permitting processes with EPA and the State of California. Additionally, the projects will not generate revenue in and of themselves.  Governmental incentives are necessary to make them “pencil.”  At the federal level, Congress has established the so-called “45Q” tax credit, which presently provides a direct tax credit of up to $85 per metric tonne for CO₂ that is captured from stationary sources, and up to $180 per tonne of CO₂ which is captured directly from the atmosphere.  The California Legislature has expanded the long-standing Low Carbon Fuel Standard (“LCFS”) to include CCS projects.  LCFS requires emitters of greenhouse gases, including CO₂, whose emissions exceed specified thresholds to purchase emissions credits through a public “cap and trade” auction process.  Certain types of CCS projects qualify for LCFS credits, and those credits can be sold at these auctions.  In some states, captured CO₂ can also be injected into hydrocarbon-bearing formations, known as Enhanced Oil Recovery (“EOR”) projects, to maintain or increase the pressure in the reservoir and aid in the production of oil.  In 2022, however, the California Legislature enacted a law prohibiting the use of captured CO₂ in EOR projects within the state.

How California Landowners Can Benefit

45Q and LCFS credits are available to the “owners” of permitted CCS projects, i.e., the parties that operate the wells and facilities that sequester the CO₂. Project owners typically obtain the right to inject and sequester CO₂ into the land by way of “sequestration easement” agreements with landowners. Those agreements usually provide the landowner with an upfront “bonus” based on the acreage covered by the agreement, plus some kind of royalty or sequestration fee based on the tonnes of CO₂ that are injected each year once the project is up and running.  CCS projects will typically have limited surface impacts—basically consisting of injection well locations and pipeline corridors, but it is also possible that the operator’s compression facilities might be situated on the surface.  Risks to groundwater are mitigated by the fact that sequestration zones usually are far below the base of the potable water aquifer, and rigorous federal and state permitting criteria, including constant monitoring of the sequestration formation and a requirement that the sequestered CO₂ remain in place for at least 100 years, will reduce risk of harm to the surface and groundwater, and to any oil and gas bearing reservoirs the land.

The potential benefits of CCS projects come at a critical time when farmers and ranchers in California are under increasing pressure from labor, water, and regulatory issues. For those landowners whose land includes suitable subsurface geology, CCS projects could be a new and welcome income stream.

This is the first in a series of periodic articles that will explore the economic benefits, development processes, and legal issues arising from CCS in projects in California.  For more information about Carbon Capture and Sequestration, or to learn how we might be able to help you navigate your way through a CCS project, please reach out to us at 805-557-8081, email us at dossentjuk@oandblawyers.com, or visit our contact page.