Loan guarantees most cost-effective way of incentivising early CCS projects

Publish date: October 20, 2010

Written by: Eivind Hoff

Government loan guarantees could have a surprisingly high impact on reducing the costs of CCS projects, according to a new paper from Harvard’s Belfer Center comparing different options discussed in the US for incentivising the first CO2 Capture and Storage (CCS) demonstration projects.

The paper ”Analysis of financial incentives for early CCS deployment” written by Mohammed Al-Juaied compares various tax incentives, loan guarantees, cost-sharing grants, ”bonus” emission allowances and contracting for difference on the CO2 emission price. It finds loan guarantees for CCS projects to be highly efficient because 1) they enable a higher debt to equity ratio (debt requires much lower returns than equity for such novel projects), 2) interest costs on debt are reduced thanks to the guarantee, and 3) the amortisation period of a guaranteed loan is longer than that of an unguaranteed loan.

Even when the project pays a 7.5% premium on the guaranteed loan as a credity subsidy premium to prevent a net cost of the scheme to the government, this would cut the CCS project costs 30% under the model’s assumptions.

The paper also finds that the lower discount rates of government compared to companies mean support will be most efficient from a project developer’s point of view if delivered upfront. On the other hand, this may create a moral hazard as it reduces the project’s incentive to deliver CO2 storage as planned.

The paper makes a case for a combination of incentives, with some provided upfront and others upon performance.

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