5

Policy, Regulatory, and Societal Considerations for CO₂ Utilization Systems

This chapter introduces policy, regulatory, and societal considerations relative to the expansion of carbon dioxide (CO₂) capture and utilization. The chapter starts by providing broad policy considerations and continues with a presentation of the current regulatory framework for CO₂ utilization, storage, and transportation, highlighting challenges and proposing solutions. Policies meant to expand the CO₂ utilization economy could have societal impacts that negatively affect already disadvantaged communities. The chapter suggests that the environmental justice framework can help constructively reveal, manage, and resolve societal concerns.

5.1 POLICY AND REGULATORY CONSIDERATIONS

This section starts by laying out general guidelines for efficient regulation of CO₂ utilization. Cost-benefit analysis (CBA) rules can be applied to prioritize projects when regulators work with a predetermined budget. Emphasis is on policies that deal with both environmental and knowledge externalities, but potential economies of scale call for targeted policies. Regulation needs to be framed to reduce uncertainty, for example, from regulatory gaps, and must avoid unnecessary bureaucratic costs for private investors.

5.1.1 Cost-Effective Regulation of Environmental and Knowledge Externalities

In the current policy environment, insufficient investments in low-carbon technologies, emissions abatement, CO₂ utilization, and the supporting infrastructure are at least in part due to insufficient incentives for investors to make costly investments that have global benefits much larger than private costs (Nordhaus 2019). In other words, absent regulation, investors and consumers do not prioritize the societal cost of emitting CO₂ and other greenhouse gases (GHGs) when making their investment and consumption choices. Societal costs that are not borne by investors and consumers are called negative externalities (Tietenberg and Lewis 2018).

This misalignment between private and societal costs leads to a level of CO₂ emissions that generates more harm than good for society as a whole. For example, in the specific case of CO₂, the damage caused by emitting one additional ton of CO₂ is close to zero for the emitter, while the cost for the entire planet, also including future generations, is estimated to be equal to $50 per ton of CO₂ or higher (IWG 2021).

Similarly, individuals and firms invest in research and development (R&D), adoption, and diffusion¹ of technology less than what would be beneficial for society as a whole because they do not consider the full benefit of their private investment (Arrow 1962; Griliches 1957; Samuelson 1954). For example, if firms that invest in R&D cannot fully protect their innovation, a fraction of their investment has benefits for society but cannot be monetized. This pushes firms to invest less than what would be optimal for society as a whole (Romer 1990). The greater the extent of the public knowledge spillover, the greater the gap between private and socially optimal investment. This explains the important role of public grants for basic research that typically has large spillovers. Without government intervention, there would be much less innovation in science. Knowledge spillovers are an example of positive externalities. Similar problems arise when investment in new technologies generates cost reductions due to learning effects. Early investors pay a higher price, but late investors benefit from cost reductions. Thus, there is an incentive to wait for cost reductions, which leads to a slower adoption of the technology and slower cost reductions than if early investors were rewarded for their contribution to society. This is particularly important when early investments also reduce risk by generating more information on the new technology. For example, learning-by-doing explains a large fraction of the observed cost reduction in solar photovoltaic (PV) technology (Kavlak et al. 2018). Early investors in CO₂ utilization technologies will face similar burdens. Without investments that lead to societal benefits and a policy framework that rewards knowledge creation, investments in R&D and in new technologies are still possible but not as large as they otherwise could be.

The CO₂ utilization economy is currently at a disadvantage against incumbent products because present policies do not penalize CO₂ emissions and do not reward innovation and technology diffusion as it would be optimal to do. Ideally, policy would address simultaneously both negative and positive externalities.

For example, production of hydrocarbons from CO₂ will compete with production of those same units from fossil carbon (or biomass). At today’s costs of oil, CO₂, and hydrogen, in today’s regulatory environment, and with today’s technology, fossil carbon is the predominant source of hydrocarbon chemicals. Figure 5-1 shows the

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¹ Technology diffusion is defined as the process by which the market for a new technology changes over time and from which production and usage patterns of new products and production processes result (Stoneman and Battisti, 2010).

approximate feedstock cost to transform CO₂ and hydrogen into synthetic hydrocarbon products versus deriving hydrocarbons from petroleum.

Even with a future hydrogen cost of $1/kg hydrogen and a reduction in the cost of CO₂ suitable for Track 2 short-lived products (such as direct air capture [DAC]-derived CO₂) to around $250/tonne CO₂, sustainable pathways for CO₂ utilization remain challenging. The limited point-source, non-fossil CO₂ available at low cost ($40/ tonne) from bioethanol production is attractive at a low hydrogen price for synthetic fuels that competes with oil at $100/bbl; this is not true when oil is $50/bbl. This analysis excludes the option of making oxygenated products such as glycols from CO₂ and hydrogen, that is, incorporating oxygen from CO₂ into final products, which is an advantage of starting with CO₂ or biomass-based carbon feedstocks versus the fully reduced carbon in petroleum. CO₂ and hydrogen costs are not likely to diminish via further technology development to the point where these feedstocks will be more competitive than crude oil without an imposed use penalty on fossil carbon or an emissions penalty on fossil-derived CO₂ emissions.

It is possible to use a range of regulatory tools to penalize CO₂ emissions from traditional products (Tietenberg and Lewis 2018). At one end of the spectrum, “command-and-control” policies impose detailed and extensive rules that constrain private behavior to implement the desired solution for society. For example, the government can impose specific targets in terms of CO₂ utilization technology adoption. At the other end of the spectrum, regulation does not prescribe a specific behavior, or technology, but imposes sanctions on emissions. One way to do the latter is by imposing a carbon tax. Alternatively, an emission trading scheme, in which the price of carbon emerges from trading a fixed number of permits, can similarly achieve the same goal (Goulder and Schein 2013; Parry et al. 2022; Stavins 2019). In either policy case, transparency for consumers can be enhanced by the creation of a government-backed program to communicate the carbon intensity of a product. Similar to the Energy Star program (Energy Star 2022), a Carbon Star program could provide simple, credible, and unbiased information on the life cycle carbon content associated with a particular product.

Cost-effective (least cost) regulatory mixes ensure that marginal abatement costs are equal across all technologies and sectors (Tietenberg and Lewis 2018). Carbon pricing—using either carbon taxes or emissions trading—has the advantage over command-and-control in that it is cost-effective by design, because it puts all technologies on a level playing field while leaving investors and consumers the flexibility to choose the most convenient options (Tietenberg and Lewis 2018). Command-and-control regulation can be cost-effective, but it is usually not because regulators do not typically have all the information to choose the least-cost technology mix (Tietenberg and Lewis 2018).

While command-and-control policies can be more politically attractive, regulators need to carefully assess the added costs—or the missed mitigation potential—compared to carbon pricing. A large disparity of marginal abatement costs across technologies, sectors, and policies can be a signal of large cost inefficiencies. In the specific case of the United States, the advantages of a federal carbon price have been extensively documented in a large literature, and recently by Goulder and Hafstead (2018), Metcalf (2019), Parry et al. (2015), and Stavins (2020).

To enable optimal investment in technologies with significant knowledge spillovers, a second policy tool is needed. Subsidies—including grants for research, tax credits, and direct government purchases—can be used to stimulate R&D and adoption of CO₂ utilization technologies with positive knowledge externalities. To a large extent, the two externalities can be treated separately, and R&D support in carbon utilization technologies can be given equal weight to R&D support in other sectors of the economy (Nordhaus 2011).

Subsidies have to be calibrated to reflect the benefits of knowledge spillovers from R&D investment or from technology adoption, which is admittedly a difficult task. A growing empirical literature estimates the size of both knowledge spillovers and learning-by-doing effects in low-carbon energy technologies (Aghion et al. 2016; Popp 2002; Verdolini and Galeotti 2011). In general, societal returns to R&D are estimated to be two to three times the private returns (Mansfield 1996; Nordhaus 2011). Learning effects have been estimated for many energy technologies (Blanco et al. 2022), with central tendencies around 20 percent cost reduction for each doubling of deployment (McDonald and Schrattenholzer 2001). More information is needed to estimate the potential cost reductions in CO₂ utilization technologies.

Note that preferable use of subsidies in place of taxes or other policies aimed at reducing emissions is not optimal. Subsidies to finance reduction of emissions—such as tax credits for emissions reductions—are not efficient

in the sense that they are costlier for society than, for example, carbon pricing. Subsidies for emissions reduction may be the only politically feasible policy tool, but regulators need to be aware of their cost.

A subsidy for emissions reductions makes consuming or producing the polluting goods artificially cheaper than what it would be with carbon pricing. Without additional constraints, this results in excessive production or consumption. For example, a tax on gasoline increases the cost of driving, pushing some consumers to walk and reducing overall number of miles traveled, reflecting societal costs and benefits, while a subsidy to clean fuels that keeps the cost of driving unchanged does not have the effect of reducing driving. This occurs because the cost of the subsidy is borne by society at large, while the tax on gasoline is borne by the individual user. Another problem with subsidies is that they must be financed with either higher taxes or lower government spending, both of which generate net welfare losses for the community (Parry 1998). Carbon pricing can instead be used to raise revenue that can finance tax cuts that can stimulate the economy and employment (Bovenberg 1999; Bovenberg and Goulder 1994; Carraro et al. 1996; Goulder 1995; Parry 1995). Carbon tax revenues also can be used to alleviate the likely regressive impact of energy taxes on disadvantaged groups with direct transfers (Budolfson et al. 2021; Goulder et al. 2018). Finally, subsidies are particularly cost-ineffective if they require the use of specific technologies—as for other command-and-control regulation—because the solution chosen by the regulator may not be optimal for many investors and consumers.

In the context of CO₂ utilization, these policy indications suggest that the most cost-effective policy framework relies on an economy-wide carbon pricing signal that is not limited to traditional competitors of CO₂ utilization products (i.e., fossil-fuel–derived chemicals and materials). Targeted interventions need to be directed to support fundamental research and learning-by-doing in the most promising (in terms of cost reductions) technologies across all possible carbon mitigation technologies, including CO₂ utilization. In other words, government expenditure needs to support innovation with positive spillovers rather than subsidize emissions reductions. The optimal budget depends on the size of the optimal stimulus needed to support innovation across a wide range of technologies. These guidelines are useful to set a benchmark for cost-effective regulation, but in many cases, regulators have to work with a predetermined budget to support specific technologies. The following sections address the best course of action in this case.

5.1.1.1 Working with Fixed Budgets

When a budget has been predetermined for interventions in a specific sector, economic theory suggests prioritizing policies and projects for funding using well-established rules for CBA. This requires estimating benefits and costs of all projects under examination and selecting the combination of projects that can be funded with the available budget and gives the largest total benefit (Boardman et al. 2017). Benefits and costs include monetized values of avoided negative externalities, positive knowledge spillovers, and all other positive market (e.g., labor) and nonmarket (e.g., health) impacts, during the entire lifetime of the project, discounted following standard rules. The benefit from reducing CO₂ emissions or storing carbon can be monetized using the Social Cost of Carbon (IWG 2021). Current regulation requires that CBA is done for all projects with spending estimated to be larger than $100M (Clinton 1993), but it can be beneficial for projects of smaller magnitude as well.

Limitations of CBA are well known and widely documented in the literature (Boardman et al. 2017). This includes the inability to validly monetize at least some nonmarket impacts and address normative considerations about the weight attributed to future generations and to different sectors of society. However, despite these limitations, CBA can provide useful guidance to constrain arbitrary allocation of limited budgets (Sunstein 2014, 2017).

5.1.1.2 Further Regulatory Needs

Although the major impediments to investment in CO₂ utilization technologies are the lack of regulation of CO₂ emissions and the lack of support for positive knowledge spillovers, other policy interventions are warranted for the following reasons.

5.1.1.2.1 Economies of Scale

Technologies and markets that rely on networks—such as pipelines to distribute CO₂ from capture to utilization sites—may exhibit economies of scale: As the investment in the network increases, the value of the network grows more than proportionally to its cost. These are called natural monopolies because it is optimal to concentrate all investments into one single project. For example, there is a clear economic case in favor of only one natural gas pipeline distribution network in cities. The standard prescription is to regulate the natural monopoly so that prices can provide fair profits for investors and fair costs for consumers, as in many privately owned electric power distribution networks. Alternatively, the government can retain ownership of the natural monopoly, as in the case of the federal interstate highway system. If technologies necessary for CO₂ utilization exhibit economies of scale, regulators will need to choose whether to own and operate the technology or to regulate its owners and operators.

5.1.1.2.2 Regulatory Uncertainty

Policy uncertainty—especially over the long term like the net-zero-emissions-by-2050 target—hinders investment and adoption of technologies for carbon capture, utilization, and storage (CCUS). This uncertainty may limit investments that would otherwise be profitable if investors perceived the government commitment to net-zero targets as fully credible. Public investment in infrastructure that supports CO₂ utilization may signal a policy commitment to create a market for low-carbon technologies, thus spurring private investment in related technologies. It is crucial here to understand that the problem stems from regulatory uncertainty rather than technological uncertainty. Public investments to reduce private risks, if not motivated by positive knowledge spillovers, are essentially subsidies, and the same caveats discussed above apply. Finally, regulators have to be careful to keep technological options as open as possible. One example might be using CBA to assess the benefits of flexible systems that can be adjusted progressively as new information becomes available.

5.1.1.2.3 Regulatory Costs

Regulation is needed to create market conditions for the diffusion of CO₂ utilization technologies and to account for other societal goals, such as safety measures. Regulators must carefully fill any regulatory gap that may induce uncertainty or lead to unintended consequences; at the same time, they need to be wary of imposing regulatory costs that do not generate clear societal benefits because such costs would unnecessarily constrain the CO₂ utilization economy. To provide insights on useful regulatory reform, Section 5.2 presents the current regulatory framework for CO₂ capture, transportation, utilization, and storage.

5.2 CURRENT REGULATORY FRAMEWORK FOR CARBON CAPTURE, UTILIZATION, AND STORAGE

5.2.1 Facilities Permitting

Permits are typically necessary for building and operating industrial facilities, for example, permits for construction or to discharge waste; permitting requirements for such facilities are generally well established. This is already true for carbon capture and hydrogen production facilities, both of which are envisioned to be used extensively as part of a carbon management strategy that includes CO₂ utilization. Table 5-1 was adapted from the White House Council on Environmental Quality (CEQ) Report to Congress on CCUS and a study examining the prospects for CCUS in the state of California (CEQ 2021; EFI 2020). The table outlines the general set of permits, authority, and agency or entity that has jurisdiction over issuance for a notional carbon capture facility (including one that is part of a retrofit to an existing industrial process) and a notional hydrogen production facility. Hydrogen production via water electrolysis and via methane reforming with carbon capture are included. Depending on the facility and industrial process(es) contained within it, multiple permits may need to be obtained.

TABLE 5-1 Authorizing Actions That May Be Necessary to Construct Facilities: Carbon Capture Including Retrofits and Hydrogen Production

^a CC = carbon capture, WE = water electrolysis, SMR + CCS = steam methane reforming with carbon capture and storage.

^b Where pure/filtered water is used within the electrolysis process to produce hydrogen, the only by-product is O₂. In this case, no criteria pollutants are produced, and therefore there is no requirement to obtain air permits.

SOURCE: Adapted from Council on Environmental Quality, 2021, Report to Congress on Carbon Capture, Utilization, and Sequestration, Washington, DC, https://www.whitehouse.gov/wp-content/uploads/2021/06/CEQ-CCUS-Permitting-Report.pdf; and Energy Futures Initiative, 2020, “An Action Plan for Carbon Capture and Storage in California: Opportunities, Challenges, and Solutions,” https://energyfuturesinitiative.org/reports/an-action-plan-for-carbon-capture-and-storage-in-california.

One regulatory gap focused on hydrogen relates to standards associated with on-site storage. The National Fire Protection Association Rule 2: Hydrogen Technologies Code provides standards for setbacks and protections for storage facilities containing up to 175,000 gallons. However, currently there are hydrogen storage facilities in the United States that far exceed this volume, whereby the developer establishes its own setback and safe zoning criteria.

5.2.2 Pipeline Permitting

Permitting and compliance requirements for pipelines are well established (see Table 5-2). Pipelines have been built, utilized, and maintained to transport materials for over a century. While large-scale transportation of CO₂ is somewhat novel, pipeline transport of CO₂ has occurred safely for approximately 50 years. In fact, according to recent analytical work (Hawkins et al. 2021), CO₂ pipelines were determined to be among the safest in the industry. Despite their record of safety, no technology is perfect, and CO₂ pipelines would benefit from increased rigor in their compliance, inspection, and enforcement programs (PHMSA 2019). The Pipeline and Hazardous Materials Safety Agency (PHMSA) currently has no regulations applicable to pipelines transporting CO₂ as a gas, liquid, or in a supercritical state at concentrations of CO₂ less than 90 percent. However, they do have the authority to make such regulations. PHMSA recently published its intent to develop new safety measures to strengthen oversight of CO₂ pipelines (PHMSA 2022), and the U.S. Department of Energy (DOE) plans to incorporate these measures in their CO₂ pipeline research, development, and demonstration (RD&D) projects (DOE 2022). Added safety measures would provide even greater safety for those that may be impacted by pipeline incidents.

5.2.3 Regulatory Frictions or Uncertainties

Permitting a CCUS project is similar to the process for permitting any industrial activity. The pathway for regulating CCUS projects is established, and the precise mixture of permits, reviews, and approvals needed for a particular project will be determined by the specific details of the project (CEQ 2021). Indeed, some combinations of capture and utilization processes may have relatively little permitting friction beyond that of any other kind of industrial facility. This is especially true of relatively small-scale, discrete processes involving new or modified industrial facilities, for example, a slipstream capture of a small portion of the pure CO₂ emitted from an ethanol plant, transported by truck, and utilized as part of a concrete curing process. The cost of capture, coupled with incentives to geologically sequester captured CO₂, may induce consideration of larger capture facilities, where only a portion of CO₂ captured is being diverted to utilization. In this case, where CO₂ utilization is only a sub-process within a larger CCUS project, regulatory frictions may arise. It is well documented that full-value-chain CCUS, including transportation, suffers from long lead times due to the integrated nature of the project and the fact that it covers multiple regulatory boundaries across various authorities having jurisdiction (CEQ 2021; LEP 2021). Often, there is no lead agency charged with “owning” the process, coordinating the basket of permits and approvals in collaboration with the project sponsor. The lead agency would normally be the agency with general governmental powers, such as a city or county, rather than an agency with a single or limited purpose (e.g., state agency). Lead agencies also can be a district that will provide a public service or public utility.

Projects that trigger a federal nexus (e.g., utilize federal lands or significant federal funds) may have additional permitting complexities. In 2022, CEQ recognized the permitting complexities surrounding the end-to-end carbon capture value chain, especially given the relative nascence of CCUS as a commercial endeavor. CEQ produced guidance to facilitate reviews associated with the deployment of CCUS and to promote the efficient, orderly, and responsible development and permitting of CCUS projects at an increased scale in line with the Biden administration’s climate, economic, and public health goals (CEQ 2022). The vast majority of this guidance applies to CCU projects alone and aims at establishing clear, consistent rules within agencies to reduce coordination frictions, given that CCUS represents a new form of industrial organization that current agencies have to accommodate. Guidance includes directing agencies to consider developing programmatic environmental reviews to increase the efficiency and effectiveness of the CCUS permitting process and developing interagency memoranda of understanding to facilitate collaboration on CCUS activities, as well as CEQ facilitation of interagency collaboration between the

TABLE 5-2 Authorizing Actions That May Be Necessary to Construct Pipelines

various federal and state agencies involved in the pipeline regulatory process. While these recommendations could reduce the permitting time and complexity, to what extent they will do so is unclear. Often, processes like these improve iteratively through successive applications by sponsors seeking to develop projects. The Infrastructure Investment and Jobs Act (IIJA, Public Law 117-58) includes authorization and funding that expands an existing DOE program for carbon storage validation and testing to include commercialization and associated CO₂ transport infrastructure. The commercialization program is intended to facilitate new or expanded CCS and associated CO₂ transport infrastructure and includes funding for feasibility, site characterization, permitting, and construction, giving priority to those storing substantial amounts of CO₂ or those collecting from multiple capture facilities (IIJA § 40305).

5.2.4 Economic Policy Friction or Uncertainties

The signing into law of the Inflation Reduction Act (IRA) in August 2022 significantly enhanced the magnitude of the Section 45Q Carbon Capture Credit. Notably, provided a project adheres to prevailing wage and apprenticeship requirements, the tax credit has been increased from $35/tonne to $60/tonne for utilization. This value can effectively cover the cost of capture and transportation of CO₂ applied to such point sources as gas processing facilities and ethanol production in a generic project setting. Moreover, the IRA lowered the threshold of eligibility for a facility to qualify for the tax credits, namely 12,500 tonnes of qualified CO₂ during the taxable year for non-electricity generating facilities and 18,750 tonnes for electricity generating facilities. These values are important for CO₂ utilization projects, since initially the amount utilized presumably would be relatively small, especially as a stand-alone project not connected to a large injection (sequestration) project. Finally, the IRA allows for tax credit transferability and refundability provisions, thereby increasing not only the number and type of potential investors in carbon utilization (CU) projects, but also increasing the value of the tax credits because credit monetization in some cases may largely avoid the use of complex tax equity deals. Taken together, the IRA has materially reduced the cost barrier to some CU processes. Coupled with the $310 million made available through Section 40302 of the IIJA for carbon utilization market development (a grant program for state and local governments to procure and use products derived from captured carbon oxides), CU product economics will benefit from these supply-side and demand-side provisions.

As it stands today, the 45Q tax credit for CO₂ utilization allows for any commercial market (new or existing) that can demonstrate a net reduction in CO₂e (carbon dioxide equivalent) without restriction, net reduction sufficing in the short term to support early development and knowledge spillover on the way to achieving net-zero. While some may have preferred a narrower definition of commercial markets for CO₂, it is important to recognize the interaction that carbon capture, utilization, and storage incentives such as 45Q and the California Low Carbon Fuel Standard have with traditional markets for CO₂, such as food and beverage, the third largest market for CO₂ in the United States today. Allowing CO₂ emitters that demonstrate a net reduction in CO₂e, such as ethanol plants, to qualify for 45Q enables those lower CO₂e sources to be used by existing markets, like food and beverage companies. These markets would otherwise continue to obtain CO₂ from fossil or other higher-CO₂e sources, undermining the net CO₂e reduction goal of 45Q. Notwithstanding the previous argument, it is critical to note that the structure of the 45Q tax credit incentivizes geologic storage over utilization ($85/tonne versus $60/ tonne), which may encourage facilities located near favorable geologic formations to sequester CO₂ underground as opposed to supplying industry.

Beyond the magnitude of the 45Q tax credit is its duration, currently set at 12 years. Typically, industrial facilities are long-lived assets designed for at least 25 years, with depreciation and business plans scaled accordingly. While it is possible to develop investment cases with attractive returns under a 12-year regime, those facilities would cease to operate in year 13 if they are unlikely to yield sufficient revenue without the 45Q credit. Essentially, the duration of the 45Q tax credit and the activities that it intends to induce may be mismatched, thereby causing an underinvestment in viable CO₂ utilization projects. This case may be obviated if there is a sufficient price on carbon or some other support mechanism present at the time of potential closure, but this future uncertainty acts as an inhibitor to investment. It is important to continue studying the market impacts of and obtain input from industry on different incentives for CO₂ utilization.

Relatedly, the IRA established a 45V Clean Hydrogen production tax credit (PTC), eligible for direct pay, valued at $3/kg if the life cycle GHG emissions rate is less than 0.45 kg CO₂e per kilogram of hydrogen, and adjusted proportionately downward for greater life cycle GHG emission rates. The 45V credit may have a material effect on the cost competitiveness of products that use clean hydrogen as an input to CO₂ utilization. One potential friction with the current 45Q and 45V tax credits is their exclusivity: A single taxpayer cannot benefit from both the clean hydrogen PTC and the 45Q credit, thereby requiring joint ventures or other project structuring to attempt to benefit from both, which adds a layer of complexity.

Specific to CO₂ transportation, the IIJA authorizes and appropriates $2.1 billion for grants and loans to build CO₂ common carrier infrastructure for eligible projects expected to cost $100 million or more. Loans aim to help eligible projects attract investment and begin earlier than would otherwise be possible. Grants are targeted to cover the cost of constructing a facility capable of accommodating future growth due to demand for CO₂ transport. The law calls for the Secretary of Energy to prioritize projects that are large-capacity, have common-carrier infrastructure, have demonstrated demand for infrastructure from CO₂ capture facilities, represent geographic diversity, and have site infrastructure within existing corridors to minimize environmental disturbance and other siting concerns (IIJA 2021, § 40305).

The cost of input electricity creates an additional challenge for developers of CO₂ utilization technologies. Electricity is a critical component for many CO₂ utilization processes and, in a net-zero future, must be carbon-emissions free, either directly or indirectly through a power purchase agreement. Electricity unit cost might be relatively high if facilities making use of the captured CO₂ (or producing input hydrogen) do not have access to wholesale electricity prices. This may be the case for facilities located outside a deregulated electricity market and/ or those required to purchase electricity at retail rates from a utility or electricity retailer due to projected small demand. In this case, unless there is a low-cost industrial rate, or a specially designed rate (TPU 2021) that accommodates the operational characteristics of small consumers—for example, small electrofuels producers—then the relative cost of the product based on captured CO₂ would be affected adversely.

A final economic policy friction relates to the interstate movement of hydrogen through pipelines. The Federal Energy Regulatory Commission (FERC) regulates interstate commerce related to natural gas, electricity, and oil. FERC has broad authority under the Natural Gas Act (NGA 2006) to regulate the construction of interstate natural gas pipelines, as well as the rates and tariffs governing the interstate transportation of natural gas. However, hydrogen is not natural gas or an artificial gas, and therefore the NGA is silent on hydrogen and does not grant FERC jurisdiction to regulate interstate pipelines transporting pure hydrogen. As an aside, FERC may have jurisdiction to regulate hydrogen introduced into interstate natural gas pipelines to supplement or displace natural gas. Until this question is resolved, perhaps through an amendment to the NGA, then project sponsors will be hesitant to plan for such pipelines, which could work against the cost competitiveness of products attempting to use hydrogen as an input to CO₂ utilization processes unless hydrogen production can occur on demand on-site.

5.3 SOCIETAL ACCEPTANCE AND ENVIRONMENTAL JUSTICE

Widespread deployment of carbon capture and utilization will lead to diverse environmental, economic, and societal impacts. The application of CBA, as recommended in Section 5.1, ensures that all these impacts are considered and, whenever possible, monetized. However, the recommendation to select projects to maximize societal net benefits does not take into consideration the distribution of costs and benefits among different groups in society. Although quantifying the distributional effects of a project should be part of CBA, there are no objective rules to rank projects based on their distributional effects (Boardman et al. 2017). To assess equity issues, policy makers have to use additional normative criteria that reflect society’s views and preferences about justice.

5.3.1 Distributional Effects

Impacts of CO₂ utilization projects can vary among regions, demographic groups, and communities. Even if society as a whole will benefit, some groups—for example, those residing near production facilities—may be negatively affected. These distributional impacts can be complex. For example, consider the case of mitigating CO₂

emissions from vehicles via either converting the fleet to electric vehicles and decarbonizing the electric system, or retaining an internal combustion engine fleet and producing synthetic net-zero carbon fuels for use in internal combustion engine vehicles. Both technologies could have the same net reduction in global CO₂ emissions, but the impact on local pollution is likely to be different across communities, within the country, and internationally. Carbon capture and fuel production may have local pollution impacts. Using the fleet of internal combustion engine vehicles with synthetic fuel will produce health-harming criteria pollutants from vehicle tailpipes, while electric vehicle fleets will not emit pollution at the tailpipe. Electric vehicles have higher manufacturing energy requirements than internal combustion engines with potentially negative impacts in terms of pollution and resource use. Extraction of minerals used for batteries is highly polluting. Because low-income households and historically disadvantaged groups live in areas more environmentally fragile and more exposed to pollution, the local impact of either technology may disproportionately fall on groups that already suffer disproportionately from pollution, despite benefits experienced globally. The different nature of pollution from the two technology solutions will generate different impacts within these very same disadvantaged communities that need further consideration.

Regulators, in cooperation with affected communities and CO₂ utilization project developers, need to assess these distributional impacts, including consideration of equity and justice for historically disadvantaged groups. One way to address disproportionate impacts is for the project beneficiaries to provide compensation to those who are affected negatively. Compensation can facilitate acceptability of the project but also may be rejected by the parties involved. Based on careful assessment of benefits, costs, distributional effects, and potential compensatory measures, regulators might choose not to invest in projects that would generate a net benefit for society but have unavoidable and unacceptable equity implications.

5.3.2 Environmental Justice

The environmental justice movement aims to ensure that all environmental benefits and costs are shared equally and that historical damages to disadvantaged communities are addressed. This movement intersected the civil rights movement (IEP n.d.); Title VI of the Civil Rights Act of 1964 (42 U.S.C. § 2000d et seq.) enabled disadvantaged communities to sue on the basis of environmental discrimination, as Title VI prohibits discrimination on the basis of race, color, or national origin in any program or activity that receives federal funds or other federal financial assistance. In subsequent decades, the disproportionate environmental impacts felt by underrepresented communities continued to be exposed, and federal environmental legislation advanced, including passage of the National Environmental Policy Act (NEPA, 42 U.S.C. §§ 4321–4370h) and the Clean Air Act (CAA, 42 U.S.C. § 7401 et seq.). In 1991, the 17 Principles of Environmental Justice were adopted at the First National People of Color Environmental Leadership Summit as a foundation for grassroots efforts (Principles of Environmental Justice 1996).

Prompted by advocates of justice, federal and state governments have worked to implement processes to address environmental justice in laws, regulations, and policies (see, e.g., Biden 2021; Clinton 1994). Recent federal efforts to advance environmental justice include the Justice40 Initiative (Justice40 2021), which was established in 2021 and codified in Executive Order 14008 (Biden 2021). The U.S. Department of Energy’s implementation of Justice40 focuses on improving parity and opportunities for disadvantaged communities, including decreasing energy and environmental burdens and increasing access and adoption of clean energy technologies (DOE-OEID n.d.). To improve disadvantaged communities’ opportunities for clean energy, DOE prioritizes access to low-cost capital, increased enterprise creation and contracting, jobs and training, energy resiliency, and energy democracy. Box 5-1 outlines concepts of environmental justice.

Environmental justice comes into play for CO₂ utilization both in siting of potentially polluting industrial processes in and around communities, and in including CO₂ utilization as a part of climate change mitigation, in which CO₂ utilization technologies may be in competition with other options for reducing climate pollutants. From an equity perspective, many environmental justice organizations view CO₂ utilization as a means of perpetuating industries that have caused and continue to harm disadvantaged communities, and they have significant concerns about the techno-economic viability and safety of the attendant infrastructure (see, e.g., Amsalem and Bogdan Tejeda 2022; Climate Justice Alliance 2022; Flores-Jones 2022). Specific industrial or power plant facilities in

impacted communities, which might otherwise be phased out of use under a net-zero carbon emissions scenario that limits or does not allow CO₂ utilization, may continue operation and production of the attendant pollution. Such facilities even may expand operations, given the increased need for energy to capture CO₂. Additional infrastructure needs, such as pipeline siting or development of hubs around existing industrial facilities, similarly are a health and operational safety concern to surrounding neighborhoods. Specific impacts of different facets of CO₂ utilization technologies and infrastructure can be found in Chapter 4.

Environmental justice is about equitably apportioning both risks and benefits. Carbon180, a nonprofit organization focused on equitable carbon removal solutions, lays out guiding principles for just application of carbon removal (Kosar and Suarez 2021), which are also relevant to CO₂ utilization technologies:

• The benefits of carbon removal solutions must be equitably distributed.
• Public engagement must be robust and involve seeking input from groups throughout the development and deployment of carbon removal solutions.
• Safeguards are needed to ensure that adverse impacts are not borne by disadvantaged communities.
• The socioeconomic consequences and distributional impacts of carbon removal solutions need to be evaluated alongside their technological and economic attributes.
• Carbon removal is seeking to address a challenge that is both local and global, and therefore should incorporate justice across temporal and spatial scales.

Justice considerations for CO₂ utilization infrastructure differ from those of carbon removal in favorable and unfavorable ways. While both utilization and removal solutions can mitigate climate change and locally reduce criteria pollutants, CO₂ utilization differs in that it additionally results in goods with monetary and other value, which can provide advantages to potential host communities of utilization infrastructure over that of carbon removal infrastructure. On the other hand, CO₂ utilization can have disadvantages in comparison to carbon removal, such as a tendency to co-locate with existing industrial facilities, likely in communities already bearing adverse impacts. In both cases, it is important to implement a justice-oriented process when siting and developing this infrastructure. The next section highlights current approaches for equitable community engagement.

5.3.3 Current Approaches to Communication and Productive Community Engagement in Planning

Current public engagement standards and guidance for just implementation of industrial development have been described as insufficient and lacking in rigor to address current challenges (Kosar and Suarez 2021). The core issue is the existence of a power imbalance between developers/operators and impacted communities, particularly communities composed of historically underrepresented groups. Local and national government officials, as well as scientists and nongovernmental organizations, have varying levels of agency and economic and social stake in the outcome. Implementing a process that will allow underrepresented communities to have their needs fairly considered is important in light of this imbalance.

Early community engagement is critical to any large-scale infrastructure project. Absent community engagement, a project almost certainly will fail, encounter delays, or require expensive reworking. Community engagement could mean a project will not move ahead in its originally proposed form but could establish the viability of a project, as well as avoid false starts and costly adjustments down the line. For this process also to be just, each community would have its needs given equal consideration regardless of relative representation and power. Project developers likely will see the most success if they are honest about the impacts, site projects in communities that want them, and show or share the benefits with the impacted community (Nielson et al. 2022). Individual community engagement activities can take different forms depending on the goal (see Table 5-3), for example, whether to inform or receive direct feedback, and might vary throughout the project planning and development process. Communities also see value in sustained engagement, ensuring that facilities or infrastructure in their neighborhoods achieve and maintain the agreed-upon, long-term outcomes (Romero-Lankao 2022).

Numerous governmental and nongovernmental organizations have developed frameworks for community engagement (Brooks 2022; CEQ 2021, 2022; Cochran and Denholm 2021; EPA 2021b; Forbes et al. 2008; Kosar

TABLE 5-3 Participatory Governance Styles: Los Angeles Department of Water and Power and Other Examples

SOURCE: Adapted from J. Cochran and P. Denholm, eds., 2021, LA100: The Los Angeles 100% Renewable Energy Study, NREL/TP-6A20-79444, Golden, CO: National Renewable Energy Laboratory, https://maps.nrel.gov/la100.

and Suarez 2021; Tollefson et al. 2017). Common among these approaches is the need to involve communities early, evaluate and provide information on potential impacts to the affected communities, establish trust, and allow community engagement to materially change the outcome of the proposed project. An example of such community engagement that has been used predominantly in siting of nuclear waste storage facilities is termed consent-based siting (DOE-NE n.d.).

Another example of community engagement requirements for siting industrial facilities is the New Jersey Department of Environmental Protection (NJDEP) Environmental Justice Rule Proposal, released in June 2022. It lays out the process by which permit applicants seeking to renew, open, or expand pollution-generating facilities in overburdened communities assess the facility’s potential impact and engage with the community. Applicants must complete an Environmental Justice Impact Statement and demonstrate that they either avoid disproportionate impact on overburdened communities or serve a compelling public interest in said communities while still minimizing impact. For direct community engagement, applicants are required to hold a public hearing and respond to comments, which will be considered by NJDEP when determining whether to authorize the applicant to proceed (NJDEP 2022).

This committee will address environmental justice approaches further in its subsequent report.

5.4 FINDINGS AND RECOMMENDATIONS FOR POLICY, REGULATORY, AND SOCIETAL CONSIDERATIONS FOR CO₂ UTILIZATION

FINDING 5.1 Economic Tools to Support CO₂ Utilization. The most cost-effective way to promote the diffusion of CO₂ utilization technologies is to internalize the carbon externality (e.g., with a carbon tax or emissions trading scheme) and to subsidize knowledge creation in CO₂ utilization technologies. For knowledge creation, grants can promote fundamental research (learning by researching), while tax credits and procurement subsidies can stimulate incremental knowledge generation from the construction and operation of pilot plants and demonstration units (learning by doing).

FINDING 5.2 Limitations of Subsidies. Policies that subsidize the adoption of specific mitigation technologies—including policies related to carbon capture, utilization, and storage—can lead to excessive use of the subsidized technologies if not accompanied by a hard limit based on level of technology diffusion. Without such a limit, a subsidy such as tax rebates (e.g., tax code 45Q) can create perverse incentives to continue operating inefficient technologies with high emissions, or even the creation of emissions that would not otherwise exist. Similarly, credits to capture CO₂ for enhanced oil recovery can result in a subsidy for fossil-fuel production.

FINDING 5.3 Impacts of Policy Uncertainty. Investment and adoption of technologies for CO₂ capture, utilization, and storage are hindered by policy uncertainty, especially over the long term, as in the global target of net-zero emissions by 2050. This uncertainty may limit investments that would otherwise be profitable if investors perceived the government commitment to net-zero targets as fully credible. Public investment in infrastructure that supports CO₂ utilization may signal a policy commitment to create a market for low-carbon technologies, thus spurring private investment in related technologies.

RECOMMENDATION 5.1. Efficient regulation of CO₂ emissions by the U.S. Environmental Protection Agency and state agencies should rely on a mixture of policy tools that uniformly and credibly penalize all greenhouse gas emissions across all sources over the entire policy horizon (such as a CO₂ emissions tax or a carbon trading scheme) and a mixture of policy tools that subsidize knowledge creation at all stages (such as research investments). Subsidies for emissions reduction technologies (perhaps partially offset from revenues collected via a carbon penalty) may help create learning externalities and may signal a strong policy commitment for the long term, but they should be used carefully to avoid perverse incentives from excessive investment in the targeted technologies (i.e., avoid subsidies that encourage continued emissions where they would otherwise be eliminated and avoid incentivizing new negative externalities).

FINDING 5.4 Regulatory Considerations. Complex regulatory frameworks, which are necessary to define markets, protect public safety, and achieve societal goals such as environmental justice, may generate costs that reduce or potentially even prevent investment in infrastructure supporting CO₂ utilization markets and can slow down the diffusion of CO₂ utilization technologies needed to support a net-zero future.

RECOMMENDATION 5.2. All states should craft regulation that is efficient and clearly communicated to achieve public policy goals while providing a usable framework for participation in CO₂ utilization markets without unnecessarily penalizing the deployment of CO₂ utilization projects across the value chain.

RECOMMENDATION 5.3. The U.S. Department of Energy should develop a CarbonStar program that labels products based on their carbon intensity to create transparency for buyers.

FINDING 5.5 Permitting Landscape. The many permits necessary for CO₂ utilization projects typically are processed through multiple federal, state, and local agencies, and each individual permit can require involved analyses.

RECOMMENDATION 5.4. A single agency or entity should be appointed to coordinate the permitting and authorization process for CO₂ utilization projects, guiding developers through the process of dealing with the multiple states and localities to obtain the required permits.

FINDING 5.6 Regulations for CO₂ Transportation. The Pipeline and Hazardous Materials Safety Administration currently has no regulations applicable to pipelines transporting CO₂ as a gas, liquid, or in a supercritical state at concentrations of CO₂ less than 90 percent. However, they do have the authority to make such regulations.

FINDING 5.7 Regulations for Hydrogen Transportation. The Federal Energy Regulatory Commission does not have authority under the Natural Gas Act to regulate pure hydrogen across state boundaries.

RECOMMENDATION 5.5. Congress should require the U.S. Department of Energy and the U.S. Department of Transportation to research and report on the full spectrum of regulations required to site, develop, and operate large-scale, interstate hydrogen infrastructure for transportation and storage.

FINDING 5.8 Cost-Benefit Analysis. Widespread deployment of CO₂ utilization may lead to diverse environmental, economic, and societal impacts. Cost-benefit analysis applied to a CO₂ utilization project, as to other government projects and policies, can provide the appropriate framework for dealing with a multidimensional problem, choosing how to invest scarce public resources to maximize aggregate total societal benefits, including nonmarket impacts such as pollution damages and employment benefits. Cost-benefit analysis rules can be used to estimate distributional impacts, but cannot be used to judge if an action is fair or not. On the basis of careful assessment of benefits, costs, distributional effects, and potential compensatory measures, regulators may choose not to invest in projects that would generate a net benefit for society but have equity implications that are deemed unavoidable and unacceptable.

FINDING 5.9 Community Engagement. Disadvantaged communities have not had substantive agency in affecting development of infrastructure that often negatively impacts them. Community engagement is a process that can enable just and equitable outcomes for those populations. Early and ongoing community engagement is important for a project’s ability to move forward with community support. Absent such early and ongoing community engagement, infrastructure projects are likely to fail, encounter delays, or require expensive reworking.

RECOMMENDATION 5.6. Regulatory authorities in charge of siting infrastructure should account for distributional impacts of CO₂ utilization projects through a process that considers equity and justice for disadvantaged groups, engages impacted communities early and throughout the project planning, and allows for alteration of project design and implementation.

5.5 REFERENCES