STATES PUSH FORWARD WITH CO2 STORAGE PLANS AHEAD OF EPA UIC DECISION

Even before EPA decides how to regulate geologic sequestration of carbon dioxide (CO2) under the Safe Drinking Water Act, a slew of states are pushing forward with legislation to provide a framework for state-run sequestration regulations and funding for sequestration testing initiatives.

The growing state effort to bolster their sequestration authorities could help states maintain delegated authority from EPA to run their underground injection control (UIC) programs -- an issue that many oil and gas states have made clear they believe EPA should continue to provide. "If they give states primacy, everything will be OK," a Kansas state source says.

The growing state effort comes as federal officials are still working to determine how they plan to regulate CO2 sequestration in the future. While EPA recently issued guidance urging permit writers to regulate CO2 injection as "experimental," they are also considering several other options, including the possibility of creating a new category of UIC wells. However, EPA is not expected to finalize a decision until around 2012 (see related story).

Before EPA issued its guidance, state groundwater and oil industry officials urged the agency to make changes to a draft version of the guidance that would make it easier for states to give their oil and gas regulators a larger role in drafting permits (Water Policy Report, Dec. 11, 2006, p4).

But at least nine states have already considered legislation on everything from tax breaks to permitting guidelines, with Kansas the latest state to enact a geo-sequestration law. One industry source says more states are likely to follow.

Illinois and Texas, are finalists as sites for Department of Energy's (DOE) experimental FutureGen power plant, which the Bush administration is proposing to test carbon sequestration and other low-carbon technologies and have passed legislation to pave the way for the project in their states.

And New Mexico has created a tax credit for certain coal-fired power plants that employ carbon capture and sequestration. Several other states have pending legislation, including Montana and California.

"Certainly it is going to accelerate in states where they clearly have the right geological context to do geologic sequestration," the source says.

Key governors are also pushing for sequestration as a way to ensure their states, particularly Western states like Montana, who will be able to sell low-carbon electricity to California and other states that already have CO2 emissions caps. The National Governors' Association (NGA) is calling on Congress to bolster funding for state sequestration activities. NGA officials are meeting in Salt Lake City April 15-17 to discuss their energy policy priorities, including sequestration.

The states' efforts come just as the Massachusetts Institute of Technology has issued a high-profile report, The Future of Coal, which calls on the United States to urgently step up its research on carbon sequestration, and to answer outstanding technical questions and address outstanding risks associated with CO2 storage, which include possible drinking water contamination.

The contamination could stem from high-pressure CO2 gas displacing geologic pollution, such as briny water, oil or other pollutants. In some cases, CO2 can also increase acidity levels in water. Pollution is a "recognized issue that needs to be addressed, but I don't think that means leakage [from underground storage wells] is likely," the source following the issue says.

However, the states are pushing ahead with their efforts despite long-standing concerns about the environmental safety of CO2 sequestration. Last year, members of Congress and DOE grappled with the question of liability in the event of a leak in the FutureGen project, which concerns some groundwater activists.

Environmental groups are split on the issue, with groups such as Natural Resources Defense Council and the Clean Air Task Force supporting carbon sequestration, while Greenpeace wants states to move towards wind and solar energy, noting that longterm carbon storage is a complete unknown.

In Kansas, Gov. Kathleen Sebelius (D) signed the Carbon Dioxide Reduction Act, H.B. 2419, March 28. The law requires the state corporation commission to adopt regulations governing permits for sequestration by July 1, 2008, including requiring permit holders demonstrate financial assurance to pay for closure and post-closure activities, creating an injection well and underground storage fund, and laying out rules and guidelines activities related to a statewide underground injection of CO2 for sequestration purposes. Relevant documents are available on InsideEPA.com. See page 2 for details.

The state law acknowledges the possibility of soil or groundwater contamination from CO2 sequestration but does not define who is liable for any contamination that may result.

However, a source with the state corporation commission -- which is drafting rules to implement the law -- says regulators are unsure who will face future cleanup liability. The source says state lawmakers probably did not provide explicit details on liability "because they anticipate us drafting rules and regulations" to deal with it.

The source says the state will likely pattern its sequestration rules after its oil and gas injection well regulation, "which puts the onus on the owner of the site." But the new regulations could also say the liability rests with the owner of the CO2 or with the state, the source says. "We're completely in the dark" about the best approach, the source says.

One of the bill's authors says the liability would be with the owner of the CO2. "There is no intent for the state of Kansas to take responsibility for any pollution," the source says.

The state source says "EPA is trying to draft rules to help the state," but they will not be developed before the July 2008 deadline.

The Kansas law also exempts all CO2 sequestration plants from property taxes for the next five years, through April 2012. Environmentalists testified on behalf of the Kansas legislation, but a source with the Sierra Club says activists are "lukewarm" on the approach. "The biggest way to keep CO2 out of the air is not to create it," the source says, adding that "the tax break is like giving another break to the people who are creating it."

Tax breaks are a key component to a Montana bill, S.B. 218, which allows the Board of Environmental Review (BER) to adopt rules for a CO2 sequestration program and permit system. After a number of revisions, the bill made it through the state Senate, but has been tabled in the House since April 3, state Rep. Greg Lind (D), the bill's sponsor, says.

Opposition to the Montana bill comes from disagreements over the regulatory rights of the BER, with other bills providing a tax break without regulatory controls, Lind says.

But the Montana House sent a carbon sequestration study bill, H.B. 828, to the Senate last week, which a source following the issue says may be the only one to pass. The bill creates a subcommittee to conduct a study of carbon sequestration possibilities in the state.

New Mexico also included tax breaks in a law signed by Gov. Bill Richardson (D) April 3 to encourage carbon sequestration projects to come to the state. The Advanced Energy Tax Credit, S.B. 994, which becomes effective July 1, gives a tax credit of up to $60 million for a coal-fired power plant with carbon capture and sequestration emitting less than 1,100 pounds of CO2 per megawatt hour.

An Arizona bill that would have required the Department of Environmental Quality to develop recommendations for carbon sequestration, but provided no incentives or funding, recently died in committee.

And several CO2 bills in Minnesota were folded into a budget action last week when the Senate energy committee met to go over the bill April 10.

In the draft version of the Minnesota legislation, obtained by Water Policy Report, the Department of National Resources is allocated $475,000 to complete a report and study on possible terrestrial and geologic sequestration. Most of that money will go to the University of Minnesota to complete a terrestrial study, but the legislators plan to appropriate $90,000 to the Minnesota Geological Survey for a geologic carbon sequestration assessment. The bill passed the Senate and was sent to the House last week.