Supply-Side Climate Policy

for Crude Oil Producers:

Exploring Policy Pathways for

Decarbonizing Fossil Fuels

Paul Zakkour and Wolfgang Heidug

August 2020

Doi: 10.30573/KS--2020-DP19

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

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Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

This paper provides an overview of supply-side climate policies, considers options for fossil fuel

producers to establish proactive and progressive approaches toward climate mitigation, and

assesses factors and challenges that could inuence their success. The following elements are

considered in these regards:

Supply-side measures are the ‘road less taken’ by climate policymakers worldwide. Historically, climate

policies have focused on demand-side measures that target fossil fuels users and the greenhouse

gases they emit.

Efforts to mobilize supply-side policies have so far tended to focus on measures to curtail fossil fuel

development and investment, with only limited attempts to engage fossil fuel suppliers in action to

address the greenhouse gas emissions arising from the use of their products.

In light of the risks posed to the resource endowments of fossil fuel producers by comprehensive and

sustained climate action, this paper explores potential new ways to incentivize fossil fuel suppliers to

decarbonize their products, and thereby sustain the continued use of an essential portion of fossil fuels.

The measures reviewed herein center on establishing a value for sequestering carbon in geological

reservoirs. Balancing the rates of carbon deposition and carbon extraction to and from the geosphere

can achieve the net-zero carbon dioxide (CO2) emissions goal of the Paris Agreement in the same way

as cutting emissions. It can also complement efforts to curb emissions through carbon pricing.

Employing a wide range of policy tools — covering both supply- and demand-side measures — can

mobilize the technical and nancial resources of fossil fuel producers in taking meaningful action,

thereby scaling up and enhancing climate ambition.

Key Points

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

This paper considers the potential for

supply-side climate policy to increase climate

action, with a focus on crude oil producers

and exporting countries. To date, supply-side

policies have not been widely used in efforts to

tackle climate change, and the emerging dialogue

on the topic tends to focus solely on measures

that can curtail and ultimately end fossil fuel

production. These strategies, in combination with

comprehensive and sustained demand-side climate

policy actions, pose a threat to the value of fossil

fuel resource endowments held by countries and

companies alike.

This paper takes an alternative look at the topic. We

frame supply-side climate policies as an opportunity

to establish pathways for decarbonizing fossil

fuels, based on producers sequestering carbon at

rates increasingly aligned to those at which they

extract it from the geosphere. We refer to these as

progressive and proactive supply-side policies, since

they seek to transcend the traditional, polarized

and binary, supply-side narrative where fossil fuels

must either be phased out or runaway climate

change will occur. In our view, targeted supply-side

climate policy can instead allow for the continued

use of an essential portion of decarbonized fossil

fuels, help fossil fuel producers maintain the value

of their natural resource endowments, catalyze

the deployment of near-market, climate-critical

technologies such as carbon capture and storage

(CCS), and ultimately enhance climate action

aligned with the net-zero emissions goal of the

Paris Agreement.

The paper provides a rapid overview of

supply-side policies, design features for progressive

supply-side policies, and the opportunities and

challenges involved in proceeding with their

development. The focus is on possibilities for

proactive and ambitious action by crude oil

resources holders, primarily the countries of the

Gulf region.

Executive Summary

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

Demand-side climate policies, such as carbon

taxes, emissions taxes and emissions

trading schemes, are the mainstream choice

of policymakers worldwide in attempting to control

atmospheric greenhouse gas (GHG) accumulations.

Measures such as the United Nations Framework

Convention on Climate Change (UNFCCC) and its

Kyoto Protocol, and underlying national and regional

policy actions such as the European Union’s (EU’s)

emissions trading scheme, all focus on pricing

GHG emissions arising from the consumption of

fossil fuel (i.e., scope 1 emissions from fossil fuel

users; Box 1). As a policy approach, it draws on the

principle of polluter or emitter pays, and thus targets

organizations and consumers that use fossil fuels.1

Supply-side climate policies, on the other hand,

target actions on the production and supply of fossil

fuels. Such measures can complement demand-side

climate policies, and therefore increase efciency

and decrease the cost of climate regulation (Fæhn

2017). To date, supply-side climate policies have

been ‘the road less taken’ by climate policymakers

(Lazarus and van Asselt 2018), but interest in the

potential of measures to curtail and end fossil fuel

production and use is increasing. Only limited

attention has been afforded to policies that seek to

engage supply-side actors in proactive efforts to

address the climate impacts of the fossil fuels they

produce (i.e., an extended producer responsibility

approach to address scope 3 emissions; Box 1). In

our view, this misses an important and substantial

opportunity to mobilize fossil fuel resource holders

in contributing to ambitious climate action.

1 Introduction

Box 1. Glossary of emissions terms

Various terms are applied to the GHG emissions associated with fossil fuel extraction, supply,

transformation and use. These include:

Scope 1 emissions: direct emissions associated with supplying a given product or service to

a consumer that are under the control of the supplying organization (e.g., emissions from fuels

combusted by the organisation).

Scope 2 emissions: indirect emissions associated with supplying a given product or service to a

consumer that are under the control of the supplying organization (e.g., emissions from bought-in heat

or power used by the organisation).

Scope 3 emissions: indirect emissions associated with the use of a product by a consumer that

occur outside the control of the supplying organization.

Embodied carbon: the carbon content embodied within a product. It can include only scope 1 and 2

emissions, scope 1, 2 and 3 emissions, or only scope 3 emissions.

Well-to-tank: emissions associated with the extraction, supply and transformation of crude oil up to

the point of use (scope 1 and 2 emissions).

Well-to-wheel: emissions associated with the extraction, supply, transformation and use of crude oil

products (scope 1, 2 and 3 emissions).

Tank-to-wheel: emissions associated with the use of crude oil derived products (scope 3 emissions).

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

1 Introduction

There are good reasons for the historical focus

on demand-side policies: adopting a polluter pays

principle is regarded as more equitable since it

focuses on the widespread use of fossil fuels,

rather than the small number of countries that

extract and export more carbon than they emit to

the atmosphere. On the other hand, supply-side

policies have the potential to reduce the complexity

of international climate action because they involve

fewer actors. They can also offer a pathway to

enhance climate ambition by complementing and

supplementing demand-side measures.

The advent and widespread deployment of carbon

dioxide (CO2) capture and geological storage

(CCS) technologies open up possibilities for

changing the supply-side climate policy narrative.

These technologies can put carbon back into

the geosphere alongside technologies that take

it out. Achieving equilibrium between rates of

carbon extraction and carbon sequestration in

the geosphere can deliver a net-zero emissions

outcome, aligned with the Paris Agreement,2 in the

same way as focusing solely on curbing emission

ows. Indeed, absent a comprehensive worldwide

ban on the production and use of fossil fuels, storing

carbon in non-atmospheric pools is a prerequisite

for achieving net-zero emissions.

Framing the climate mitigation challenge in these

terms could help move the supply-side climate

policy dialogue away from a focus solely on ending

fossil fuel production toward a more progressive

approach focused on balancing carbon extraction

and carbon sequestration. Moreover, mobilizing

oil and gas producers to decarbonize oil (Box 2)

also incentivizes rms with the nancial resources,

technical capabilities and know-how to establish

geological carbon stores.

As such, progressive, proactive, supply-side policies

can play a role in supporting ambitious climate action.

Box 2. Dening decarbonized fuels

A ‘decarbonized’ fossil fuel may be established either physically or virtually.

The fossil hydrocarbon fuel can be physically decarbonized though chemical engineering techniques

(e.g., reforming) to separate the hydrogen and carbon fractions. The resulting hydrogen is used as a

replacement for conventional fossil fuel energy carriers, and the carbon fraction may be geologically

sequestered to avoid being emitted to the atmosphere. The resulting hydrogen produces no emissions

upon combustion. The hydrogen can only be called a truly decarbonized fossil fuel if the carbon

produced during reforming is geologically sequestered by the producer. The development of the

approach is dependent on the widespread uptake of hydrogen (or ammonia) as a substitute for

conventional fossil fuels.

Alternatively, fossil fuels may be virtually decarbonized if the producer offsets, through the use of

carbon sequestration, either all the life cycle GHG emissions associated with the fuel (well-to-wheel,

or scope 1, 2 and 3 emissions), or just the carbon embodied in the fuel that is emitted upon its use

(tank-to-wheel, or scope 3 emissions). A ‘low carbon’ fossil fuel may also be produced where at least

a portion of the carbon embodied in the supplied fuel is offset. Similarly, a net-negative fuel could also

conceivably be supplied where the amount of carbon sequestered exceeds the embodied carbon.

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

1 Introduction

1.1 The opportunity of

supply-side climate policy for

fossil fuel exporters

For crude oil exporting regions, the incentive for

action is particularly acute because of the strong

linkage between exports and national economies.

Actions taken by crude oil exporters to reduce

or eliminate the climate-related impacts of the

products they sell (e.g., through decarbonizing oil)

can help maintain market access and preserve

the value of their natural resource endowments.

Furthermore, such measures can potentially help to

retain a portion of resource rents that are currently

collected by importers through demand-side climate

policies. This income could be channeled into

low-carbon technology endeavors that support

economic diversication away from fossil fuel export

dependence. They can also be more effective in

tackling global CO2 emissions.

Conversely, adopting local demand-side policies

focused on reducing the national GHG emissions

(scope 1 emissions) of crude oil exporters offers far

fewer possibilities to control global CO2 emissions,

and provides less insulation against the risk of

stranding natural resource assets. Rather, they may

only offer value if there are signicant structural

changes to crude oil exporting economies that

reduce their reliance on oil exports and increase

domestic value added (i.e., using fossil fuels to

manufacture export goods such as petrochemicals,

metals, cement, among others). National economic

strategies, such as Saudi Vision 2030, envisage

economic developments of this type occurring over

the coming years. However, in the near- to mid-term,

oil exporting countries will most likely continue to

rely on crude oil exports as a key source of national

earnings.

In reecting on opportunities for possible

progressive supply-side policies, this paper reviews

some options for establishing new types of policies

that support enhanced climate action by producers

and exporters of crude oil.

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

2 Supply-Side Climate Policy

2.1 Typology

Lazarus and van Asselt (2018), drawing

upon a classication scheme set out in the

Intergovernmental Panel on Climate Change’s

(IPCC’s) Fifth Assessment Report (AR5;

Somanathan et al. 2014), identify several variants of

supply-side climate policies. These broadly mirror

policies and measures applicable to demand-side

climate action, including:

• Priced-based economic instruments that

increase the relative costs of fossil fuel

production or supply with an assumed

demand-side response that lowers

emissions.

• Quantity-based economic instruments that

aim to incentivize or mandate the supply of

alternative, low carbon and/or non-fossil fuels.

• Regulatory and voluntary approaches that

seek to curtail and ultimately eliminate fossil

fuel development, production, supply and/

or investment, to compensate for forgone

revenues associated with restricting fossil

fuel development or production (Box 3), or to

promote the decarbonization of fossil fuels

(Box 2).

• Government-led programs that drive markets

for low carbon goods and services.

A summary of the various supply- and demand-side

climate policy approaches is set out below, according

to the typology described (Table 1).

In many cases the divisions presented in Table 1 are

somewhat arbitrary, and some types of instruments

could be considered as either regulatory approaches

or quantity-based instruments, depending on how

Table 1. Overview of supply- and demand-side climate policy approaches.

Source: Adapted from Lazarus and van Asselt (2018).

Supply-side climate policies Demand-side climate policies

Price-based instrument • Carbon production (wellhead) tax

• Carbon export tax

• Producer taxes

• Removal of fossil subsidies

• Carbon tax (embodied carbon in fuel)

• Emissions tax

• Carbon price border adjustments

• Subsidies for low-carbon technologies

Quantity-based instrument • Quotas for fossil fuel production rights

(with trading)

• Low-carbon portfolio standards (fuels)

• Emissions trading

• Mandatory emissions offsetting

• Low-carbon portfolio standards

(electricity, products)

Regulatory/voluntary

approaches

• Restricting fossil fuel development

• Restricting fossil fuel exports (quotas)

• Fossil fuel divestment

• Mandatory/voluntary offsetting

• Compensation for leaving assets in the

ground

• Emissions performance standards

• Low-carbon technology mandates

• Building codes

Government-led programs • Restricting the development of fossil fuel

reserves on state-owned lands

• Restricting government nance for fossil

fuel projects

• Capital incentives

• Public procurement

• Low-carbon infrastructure expansion

• Public nance (loans, grants, etc.)

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

2 Supply-Side Climate Policy

they are implemented. For example, mandatory

offsetting or sequestration could in practice also

be established through a quantity-based tradable

asset system, or compensation for leaving fuels

in the ground could be nanced by the generation

of sellable offset credits under a market-based

mechanism.

Furthermore, many of the measures described

are similar for both demand- and supply-side

approaches, with the differentiating factor being

the placement of the obligation in respect to

either the fossil fuel supplier or user. While these

overlaps suggest that either demand- or supply-side

policies can result in similar outcomes, modifying

the placement of regulations can drive signicant

behavioral changes from different actors involved in

the fossil fuel supply chain. Such a shift in emphasis

could be used to create new ways of looking at the

problem and new business models for delivering

meaningful and ambitious climate action.

2.2 Current usage

Historically, the use of supply-side climate policies

as set out above (Table 1) has been limited,

although it has seen increased activity over the past

few years.

Many jurisdictions around the world have introduced

upstream carbon taxes on fossil fuels (e.g., in

Europe, various states of the United States [U.S.],

in Canadian provinces, and in Chile and Mexico.

among others), while some are exploring the option

(e.g., India, the Philippines). However, these taxes

are applied at the point of supply or use of fossil

fuels (including imports), rather than directly on

producers. Therefore, they act as a demand-side

rather than a supply-side measure. Few, if any,

countries currently apply carbon taxes to fossil

fuel production or exports. Europe, the U.S. and

Canada have also implemented portfolio standards

for fuel suppliers, with the objective of lowering the

full chain (well-to-wheel) carbon intensity of liquid

fuels supplied and used in the region, primarily by

promoting biofuels (as discussed further below).

Measures focused on curtailing fossil fuel

development and investment, mainly centering

on coal, have also increased over recent years.

Planned coal projects have been subject to

grassroots activist efforts to prevent them from

going ahead3 and judicial rulings to stop their

development on the grounds of climate change

impacts.4 Shareholder activism to withdraw funding

from fossil fuel investments, such as ‘fossil fuel

divestment,’ ‘unburnable carbon’ and ‘keep it in the

ground’ campaigns, have also become increasingly

mainstream over the past few years.

Greater nancial disclosure of climate change

impacts of investment activities — guided by

initiatives such as the Bank of England’s Task-Force

on Climate-related Financial Disclosure (TCFD)

and the mandatory reporting of climate investment

exposure in France — also pose issues for

underwriting and nancing fossil fuel developments.

This, in turn, is driving investor concerns about the

risk of stranded assets in the fossil fuel sector. Most

multilateral development banks, in particular the

World Bank Group and its afliates, have pledged

to end funding for all forms of fossil fuel activity,

except in exceptional circumstances. Many private

banks have also made similar pledges, although

the implementation has been quite patchy (e.g., see

Bank Track).

Shareholder activists are also pushing for the oil

and gas industry to take greater responsibility for the

emissions arising from the use of its products. In an

open letter to the Financial Times in May 2018, sixty

of the world’s largest institutional investors called

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

on the sector to be “more transparent and take

responsibility for all of its emissions” (Mooney et al.

2018). Activist groups such as the Climate Action

100+ group5 (CA100+) and Follow This have been

successful in forcing enhanced corporate pledges

on climate action by several publicly listed oil and

gas companies, including Shell, BP and Equinor.

Many groups call for the oil and gas industry to take

greater responsibility for scope 3 emissions and to

align their business goals with those of the Paris

Agreement (see, for example, Follow This [2019]).

Recent moves by some rms, such as BP and Total,

suggest that changes are afoot in the sector at the

time of writing (BP 2020; Table 2).

Response measures, nancial support for economic

diversication, compensation for forgone revenues

and ‘just transition’ are high on the agenda of fossil

fuel producing and exporting countries within the

UNFCCC process. All of these activities aim to

soften the potential economic and social impacts

of a low-carbon transition for those countries,

regions and sectors highly dependent on fossil

fuel production. The Paris Agreement states

that mitigation co-benets resulting from Parties’

adaptation actions and/or economic diversication

plans can contribute to mitigation outcomes. A

supply-side policy response can be a pledge to

transition away from economic dependence on fossil

fuel extraction in return for compensation for the

potential economic and social impacts. Sentiments

such as these have been pledged in a number

of countries’ nationally determined contributions

(NDCs) under the Paris Agreement, including

Algeria, Bahrain, Iran, Qatar, Saudi Arabia, South

Africa and the United Arab Emirates. However, to

date, only one (unsuccessful) attempt has been

made to implement the compensation concept in

practice (Box 3).

Box 3. Compensation for ‘leaving it in the ground’

In 2007, Ecuador attempted to implement a policy based on receiving compensation for leaving

fossil fuels in the ground. Ecuador’s Yasuní National Park is underlain by approximately 920 million

barrels of crude oil in the Ishpingo-Tiputini-Tambococha (ITT) reserves. The Yasuní ITT Initiative was

launched by the government in 2007 to prevent the development of the ITT — and thus avoid the

production of 410 million tonnes of embodied CO2 — in return for US$ 3.6 billion compensation from

international donors (about half of the forgone expected revenues).

The initiative received some high-level backing, and several governments made pledges, including

Germany, Italy, Spain and Chile. However, a lead proponent — Germany — withdrew its support in

2010, citing concerns about whether it would be setting a precedent for other governments and noting

a preference to pursue active policies for active countries, rather than paying them to do nothing. By

mid-2013 only around US$300 million had been pledged by various donors.

Following a review by President Raphael Correa, the initiative was abandoned in August 2013.

Exploratory drilling began in the ITT elds in 2016.

2 Supply-Side Climate Policy

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

Much of the scholarly literature on supply-side

climate policy tends to offer only blunt options to

drive a rapid retreat from fossil fuels. Piggot et

al. (2018), for example, in reviewing options for

UNFCCC Parties to address supply-side climate

policies under the Paris Agreement, were dismissive

of the potential of CCS and instead summarized the

following options.

“Nations could embed supply-side strategies in

their NDCs [nationally determined contributions] in

various ways. Alongside their emissions reduction

targets, countries could include targets for a fossil

fuel production phase-down (e.g., production

reduction targets). In addition, they could include

commitments to constrain investment in fossil fuel

supply, such as by pledging to remove subsidies

to fossil fuel producers (van Asselt and Kulovesi,

2017). Alongside existing descriptions of mitigation

activities, Parties could include measures such as

moratoria on new fossil fuel infrastructure or taxes

on fossil fuel exports. Countries could also discuss

policy measures to ensure a just transition for

extractive-industry workers, such as job-retraining

programmes.” (Rosemberg 2017, 1991)

A consequence of this singular focus is that choices

and outcomes are framed in binary terms: either

fossil fuels will be phased out, or runaway climate

change will occur because fossil fuel suppliers

will be driven away from mainstream climate

action. Such binary terms ignore the potentially

large opportunity to put the technical and nancial

resources of fossil fuel producers to work in nding

new ways of delivering ambitious and meaningful

climate action. Presently these actors are widely

viewed as ‘part of the problem’ and are mainly

forced to react to emerging demand-side climate

policies rather than being proactively engaged in

nding solutions.

Measures that seek to promote the supply of

decarbonized fossil fuels seem to warrant a place

within the supply-side policy debate. Such measures

could be highly effective in supporting both the

temperature limitation goals and longer-term

net-zero emissions objective of the Paris Agreement.

Achieving net-zero emissions will require recalcitrant

emissions sources with limited non-fossil

alternatives, such as load-following electricity, heavy

goods transportation and aviation (Davis et al. 2018)

to be offset by sequestration activities in order to

maintain the net-zero balance. This indicates a

need in all cases for the advent and widespread

deployment of carbon sequestration technologies,

including commercially viable, low-cost, CCS, direct

air capture (DAC), CO2 utilization and

nature-based solutions. It also suggests a need for

new methods by which to create value for depositing

carbon into planetary carbon stocks other than the

atmosphere, to complement measures that price

CO2 emissions.

Based on this backdrop, the following sections

consider options for ‘smarter’ supply-side policies

and measures that could promote fossil fuel

producing companies and countries to decarbonize

their fossil fuels and drive enhanced investments

into sequestration technologies.

2 Supply-Side Climate Policy

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

2.3 Policies That Support Decarbonized Fuels

2.3.1 Production (wellhead)

or export-based carbon taxes

Taxes on fossil fuel production (e.g., wellhead or

mine-mouth taxes) or exports based on carbon

content are price-based economic instruments that

can raise the price of fossil fuels and, therefore,

elicit a demand response with resultant emission

reductions.

Presently no fossil fuel production anywhere in the

world is subject to taxes or royalties tied to the fuel’s

carbon content.

Many importers, on the other hand, impose taxes

on fossil fuel supply at the point of sale, as outlined

previously. This suggests that there is scope for

producers to recover at least part of that rent and

use it locally to support low-carbon technology

deployment and economic diversication goals

(Peszko, van der Mensbrugghe and Golub 2020).

For example, revenues could be cycled directly into

CCS schemes to decarbonize fossil fuel supply.

2.3.2 Low-carbon portfolio

(fuel) standards

Low-carbon portfolio standards are quantity-based

economic instruments that set target emission rates

for the well-to-wheel GHG emissions of a portfolio of

fuels. These fuels are supplied by organizations into

a specic market, and the portfolio standards cover

domestic and imported alternative fuels, crude oil

and rened products.

The policy approach can be used to reduce

emissions and promote low carbon technology

deployment across the liquid fuel supply chain in

ways that transcend national borders. Several fossil

fuel producing and importing countries and regions

around the world employ these types of policy

instruments, usually referred to as ‘renewable’ or

‘low-carbon’ fuel standards (LCFS). They include:

• The U.S. (at a federal level under the

Renewable Fuel Standard);

• The EU (formerly under the Renewable

Energy Directive I and the Fuel Quality

Directive, and now transitioning into the

Renewable Energy Directive II);

• The U.S. states of California, Oregon and

Washington (e.g., the California Low Carbon

Fuel Standard; the Oregon Clean Fuel

Standard); and,

• The Canadian Province of British Columbia

(the BC Renewable and Low Carbon Fuel

Requirement).

In practice, these policies usually involve setting

a standard for either an increasing portion of

‘renewable’ fuels or a decreasing average GHG or

carbon intensity of fuels in the supply portfolio. The

rst type of policy mechanism uses a percentage

supply target for a list of approved fuel pathways;

the second uses a ‘lifecycle’ or well-to-wheel GHG

emissions intensity target for all fuels supplied,

measured in kilograms of CO2 equivalent (kgCO2e)

per megajoule (MJ) of fuel supplied. In either

system, the target portfolio rate is usually associated

with achieving an implicit or explicit GHG reduction

against a fossil fuel comparator baseline or

benchmark.

Implementation involves assigning a credit or tag

to approved renewable/low carbon fuels per unit

supplied, for example, a renewable identication

number (RIN) per MJ or volume of approved fuel.

Obligated entities (suppliers) must surrender these

credits or tags to the regulator in proportion to their

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

2.3 Policies That Support Decarbonized Fuels

emissions intensity target to demonstrate compliance.

Entities with surpluses and decits can trade credits

— either with or without the associated physical fuel

product — to help meet their obligations.

Schemes vary in the way targets are established

and must be met, which affects scheme designs and

their implementation. Consequently, there are subtle

differences in the way fossil fuels are considered

within each scheme; in particular, the way the

benchmark intensity of the fossil fuel comparator is

incorporated. This affects the schemes’ potential to

promote low-carbon or decarbonized fossil fuels.

Portfolio standards that set a target only for

increasing the volume of biofuels in the transport

fuel portfolio do not provide a basis upon which to

promote decarbonized fossil fuels (e.g., the U.S.

Federal Renewable Fuel Standard). This is because

they focus solely on increasing the share of biofuels

in the transport sector energy mix.

On the other hand, schemes using a GHG or

carbon intensity target potentially offer greater

latitude because the approach is, in theory,

technology-neutral rather than specic in dening

eligible fuel types (e.g., the California Low-Carbon

Fuel Standard and the EU Fuel Quality Directive).

However, this is not how they are being implemented

in practice. Presently all schemes focus only on

promoting the use of biofuels, electricity, hydrogen

and other gaseous and waste-derived fuels

(including CO2) as substitutes for petroleum-based

products (Box 4). The one exception is the treatment

of DAC under the California Low Carbon Fuel

Standard, which does offer a pathway to directly

using geological sequestration as an offset against a

fuel’s entire well-to-wheel emissions (Box 4).

Box 4. Treatment of fossil fuels and CCS in low-carbon fuel standards

Both the California low-carbon fuel standard (C-LCFS) and the EU’s Fuel Quality Directive (FQD)

apply a GHG or carbon intensity standard as the metric for setting targets for fuel supply portfolios.

The C-LCFS aims to reduce the carbon intensity (CI) of fuels supplied to the California transport

sector by at least 10% from 2007 to 2020. Suppliers must calculate the CI of all fuels supplied and

compare their results against annual CI benchmarks. Exceeding the CI benchmark creates decits,

which must be offset through the purchase of credits from suppliers falling below the CI benchmark.

Crude oils from all sources are given an average CI for upstream emissions (scope 1 emissions

from extraction), which is then added to the rening and end-use emissions to arrive at the life cycle

(well-to-wheel) emissions. Because the CI is calculated on an average crude oil, differential upstream

GHG performance for different crude oils is not counted within the scheme.

The introduction of a CCS module under the C-LCFS in 2018 now means that emission reductions

achieved through CCS at fuel extraction sites and at reneries can be awarded ‘credits’ under the

C-LCFS (respectively, under the Innovative Crude and Renery Investment Credit provisions). The

C-LCFS covers only scope 1 emissions in the production and rening of the fuel products used in

California. Since these emission sources are insufcient to offset the entire well-to-wheel emissions of

the fuel product (i.e., including scope 3 emissions), the scheme cannot presently incorporate a virtual

low-carbon or decarbonized fossil fuel as dened herein (Box 2). Hydrogen with CCS can be counted.

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

Notably, DAC projects capturing and geologically storing more than 100,000 tonnes of CO2 (tCO2) per

year, located anywhere in the world, are able to generate credits under the scheme. DAC projects can

thus count such activities as direct offsets against a fuel suppliers’ well-to-wheel portfolio emissions.

The EU’s FQD adopts a similar system to that of the C-LCFS, where upstream emission reductions,

including from CCS, may be incorporated into the fossil fuel comparator benchmark. As it is currently

set out, the FQD allows the emission reductions arising from the use of CCS within the crude oil

production system to be deducted and counted toward the fuel supplier’s portfolio GHG-intensity

target . However, similar to the C-LCFS, this cannot currently extend into offsetting scope 3 emissions

and promoting virtual decarbonized fuels, as described in Box 2. Moreover, the FQD will end in 2020

and will be replaced by the EU’s revised RED II Directive. Under RED II, the fossil fuel comparator

benchmark is xed at 94 kgCO2e/MJ, meaning that innovations in fossil fuel supply will no longer be

counted in the scheme. This therefore prevents the introduction of a virtual low-carbon or decarbonized

fossil fuel within the system, as currently set out in EU law.

2.3 Policies That Support Decarbonized Fuels

2.3.3 Voluntary offsetting

Companies and countries involved in fossil

fuel production may consider the introduction

of a voluntary pledge to increase the supply

of decarbonized or low-carbon fuels as a

way to promote enhanced GHG-removal

activities, including nature-based solutions and

geosequestration.

Presently, most oil and gas companies — and

the alliance of companies under the Oil and Gas

Climate Initiative (OGCI) — have formulated

pledges to reduce their methane emissions and

other internal operational emissions (i.e., scope

1 emissions). Pledges to address their scope 3

emissions have been more variable, and many

companies are seemingly still considering their

accountability in these respects.

In light of increasing pressure from shareholders,

as outlined in section 2, there is an emerging

movement toward more progressive positions and

the adoption of targets for, and investments in,

offsetting that are more closely aligned to emissions

from product end use (covering well-to-wheel and/

or tank-to-wheel emissions). The current positions

of several major oil and gas companies are

summarized below (Table 2).

Nearly all of the oil and gas industry’s corporate

offsetting actions to date are mainly linked to the

use of nature-based carbon sinks (Table 2). So

far, actions on geosequestration have been largely

restricted to joint demonstration projects with

government or enhanced oil recovery (EOR). For

example, Shell’s Quest project was undertaken

in conjunction with nancial support from the

Canadian Federal Government and the Government

of Alberta. Both the Clean Gas Project and the

Northern Lights project are, to an extent, contingent

on governmental support from the United Kingdom

and Norway, respectively. There is a likelihood that

as supply-side climate action pressure grows, there

will be an increasing need to move toward more

direct linkages between CCS and the offsetting

of fossil carbon emissions, particularly scope 3

emissions.

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

No fossil fuel producing or exporting country has

yet proposed a voluntary pledge to offset emissions

from its produced volumes in its NDC under the

Paris Agreement.

Table 2. Examples of corporate positions on emissions and offsetting.

Sources: Corporate websites of Shell, BP, Equinor, ENI, Reposl, Total and ExxonMobil (accessed July 2019 and July 2020).

Company Corporate position Offsetting activities

Shell

• Reduce the ‘net carbon footprint’ (NCF) of the

energy products it sells by 65% in 2050, based on

the full lifecycle (well-to-wheel) emissions

• Interim NCF target of around 30% by 2035

• Set specic NCF targets each year on a rolling

basis for shorter-term periods (three or ve years),

covering the period 2020 to 2050

• Establish, by 2020, a link between energy

transition goals and long-term staff remuneration

• US$300 million into natural ecosystems between

2019-2022 to address CO2 emissions from

customers using its products

• ‘Shell Go+’ and ‘Carbon Neutral’ V-Power petrol

and diesel products in the UK and Netherlands

(customers automatically contribute to an offset for

the fuel’s well-to-wheel emissions via nature-based

investments)

• Roll out the scheme to other countries

Equinor

• Reduce the net carbon intensity, from initial

production to nal consumption, of energy

produced by at least 50% by 2050

• Address own emissions through the emitter pays

principle

• Invest in forest protection to meet offsetting pledge

• Net-zero emissions by 2050 or sooner for all

operations, and a 50% reduction in intensity in

traded products

• Net-zero strategy and near-term plans to be

unveiled in September 2020

• Target Neutral program for BP customers

• Various forestry investments under Target Neutral

Occidental

• ‘Carbon Neutral Aspiration’ to reduce and

offset total carbon impact, including products

(scopes 1-3)

• No specic timeframe as yet

• CCUS core part of carbon-neutral pledge

• Oxy Low Carbon Ventures LLC focused on CCS

for enhanced oil recovery (EOR) use. Investing in

CCS/DAC tech

Repsol

• Aims to achieve net-zero emissions by 2050 • If necessary, offset emissions through reforestation

and other natural climate sinks to achieve zero net

emissions

ENI

• Obtain by 2050 an 80% reduction in net scope

1, 2 and 3 emissions, with reference to the entire

lifecycle of the energy products sold and a 55%

reduction in emission intensity compared with 2018

• Net-zero carbon footprint by 2030 for scope 1 and

2 emissions from upstream activities

• Net-zero carbon footprint for scope 1 and 2

emissions from the Eni group by 2040

• Purchase offsets from forestry, capturing more

than 20 MtCO2e to achieve ‘net-zero.’ Projects in

the DRC, Indonesia, Mexico and Ghana

• Two REDD (Reducing Emissions from

Deforestation and forest Degradation) initiatives in

Ecuador and Ghana

Total

• Net-zero across Total’s worldwide operations by

2050 or sooner (scope 1 and 2)

• Net-zero across all its production and energy

products used by its customers in Europe by 2050

or sooner (scope 1, 2 and 3)

• 60% or more reduction in the average carbon

intensity of energy products used worldwide by

Total customers by 2050 (less than 27.5 gCO2/MJ),

with intermediate steps of 15% by 2030 and 35%

by 2040 (scope 1, 2 and 3)

• Various ongoing sequestration initiatives

ExxonMobil

• Expand natural gas supply

• Create lightweight plastics

• Develop high-efciency fuels and lubricants

• Not mentioned

2.3 Policies That Support Decarbonized Fuels

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

2.3.4 Mandatory offsetting

Rather than employing an LCFS (Section 2.3.2),

or relying on voluntary offsetting by exporters and

suppliers (Section 2.3.3), countries may impose

mandatory requirements for fuel suppliers to

offset scope 3 emissions associated with their

products. Switzerland takes such an approach to

decarbonizing liquid fuel use in the country, albeit

linked to more general emissions reduction offsets

rather than sequestration per se (Box 5).

Box 5. Mandatory offsetting road transport emissions under the Swiss CO2 Act

Under the 2011 revision of the Swiss CO2 Act, since January 2013 all fossil fuel producers and

importers have been required to compensate for at least 10% of the CO2 emissions caused by road

trafc by 2020. The target has been raised incrementally over the period, from 2%, to 5% and then 8%

for the period 2014 to 2019.

Compensation is achieved by the use of offsets supplied by emissions reduction projects,

implemented either directly by fuel suppliers or by them acquiring offset attestations from third party

project developers. Only domestic projects validated by the Swiss administrative ofce may provide

relevant attestations. Presently the scheme explicitly excludes CCS projects from generating offsets/

attestations, and it therefore cannot promote the types of decarbonized fuels described herein.

2.3.5 Mandatory sequestration

On the supply side, fossil fuel producing and

exporting countries could mandate producers to

use CCS or other technologies to offset some

or all of the carbon embodied in produced and/

or exported volumes. The sequestered adequate

fraction extracted (SAFE-carbon) concept proposed

by Myles Allen and colleagues (Allen et al. 2009;

Box 6) outlines the basis of such an approach.

Alternatively, a more generalized mandate for CCS

deployment could be established based on different

types of outcomes (Section 2.4.2).

For fossil fuel producing countries, the most rational

and practical pathway to operationalize a mandatory

sequestration approach would be to create laws that

enact a country-level voluntary pledge within, for

example, an NDC to offset all or part of the scope

3 emissions associated with national fossil fuel

production (Section 2.3.3). Such a law as described

would, in practice, pass on a government’s voluntary

pledge as an obligation on fossil fuel producers in

the country. Alternatively, CCS deployment could be

mandated by a fossil fuel producing country through

a xed national target without necessarily linking it

to a voluntary pledge (Section 2.4.2).

On the demand side, fossil fuel importers could

also impose a requirement for offsetting, via CCS, a

certain proportion of the carbon content of imported

fuels. For example, calls have been made in the

Netherlands for a carbon take-back obligation for

fossil fuel suppliers, following similar principles to

that of SAFE-carbon (Box 6; Kuijper 2019). Such

approaches could potentially be fullled either

through a low-carbon portfolio standard approach

or a mandate as in Switzerland (Box 5). In either

case, the rules applicable in the existing schemes

would need to be modied to accommodate

decarbonized fuels.

2.3 Policies That Support Decarbonized Fuels

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

Box 6. The sequestered adequate fraction extracted (SAFE-carbon) concept (after Allen et al.

[2009])

Allen and colleagues, in considering atmospheric carbon budgets in 2009, proposed a novel but

straightforward concept for mandatory sequestration, which they termed the ‘sequestered adequate

fraction extracted’ (SAFE). Their idea involves placing a global mandate on all fossil fuel producers

to sequester an amount of carbon corresponding to the amount of carbon they extract from the

geosphere. The adequate fraction is recalculated over time according to cumulative emissions. As the

remaining atmospheric carbon budget is taken up by CO2 emissions, the adequate fraction eventually

reaches 100%, meaning a sustained balance is maintained thereafter between carbon extraction and

carbon sequestration.

A useful insight from the work of Allen and his colleagues is that a net-zero emissions outcome can be

equally framed as a carbon stock or an extraction management challenge as much as an emissions

control and removals — or carbon ow management — problem. Allen et al. suggest that such a

reframing may be more palatable than focusing on reducing carbon emissions, with the attendant

implications of restricted energy consumption and constrained economic development.

Box 7. Japan’s Hydrogen Strategy

Japan is exploring the potential to convert various fossil fuels, including Saudi Arabian crude oil,

Australian coal and Norwegian and Bruneian natural gas, into hydrogen for export to Japan. While

Japan’s Hydrogen Strategy could potentially operate without CCS and still decarbonize Japan’s energy

mix (see Box 9), it clearly foresees a key role in using CCS to decarbonize the complete hydrogen

production cycle (Ministry of Economy, Trade and Industry 2017).

The draft Saudi-Japan collaboration roadmap, for example, outlines the need for CCS in

decarbonizing hydrogen imports (Nagashima 2018). The collaboration therefore will require Saudi

Arabia and others to use CCS to sequester the carbon fraction arising from any future manufacture

and supply of hydrogen to Japan.

An alternative option is to establish a similar

approach through collaborative bilateral

arrangements between exporters and importers.

An example would be Japan’s national Hydrogen

Strategy and its cooperation plans with Australia,

Brunei, Norway and Saudi Arabia (Box 7).

2.3 Policies That Support Decarbonized Fuels

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

2.3.6 Technology mechanism

A technology-specic mechanism could be used

as a quantity-based economic instrument to

establish a direct incentive to deploy CCS under a

market-based framework.

Generally, technology mechanisms are built around

a portfolio standard like an LCFS, but are specic

to one single technology group. An example

of such a mechanism is a renewable energy

portfolio standard, where electricity producers

are mandated to supply a specic and increasing

proportion of electricity from renewable sources

(wind, solar, etc.). The system works by attaching

a ‘credit’ to generated renewable power (e.g., a

renewable energy certicate or REC attached to

each megawatthour), which can be traded between

Box 8. Piloting storage credits and supply-side policy under the Paris Agreement (after Zakkour

and Heidug [2019])

A paper published by KAPSARC in April 2019 proposed that a storage crediting mechanism could be

introduced by a group of Parties to the Paris Agreement with mutual interests in decarbonizing fossil

fuels using CCS. Article 6.1 of the Paris Agreement provides latitude for Parties with common interests

to participate in voluntary cooperation. Article 6.2 provides the basis for establishing mechanisms

through which cooperative actions could ow. The paper proposed that a club of countries with

interests in CCS could develop a storage crediting system under Article 6.2.

The paper notes that, because of the current focus of climate policy on demand-side measures and

emissions ow-based accounting, in the rst instance the system would be best operated in isolation

from current climate policy systems to avoid double counting emission reductions (Box 9). It proposes

to therefore initially implement the approach through a results-based nance (RBF) framework. This

would require the club of cooperating countries, in the rst instance, to pool their nancial resources

in a fund that is used to offtake and cancel storage credits from operational CCS projects. This would

also have the added benet of providing a complementary and supplementary layer of nancing to

demand-side carbon pricing policies, without the risk of double counting the emissions reduction.

Additional layers of nance as described would provide much-needed nance for CCS in its early

deployment stage, which could drive down costs for its longer-term roll-out. It would also create a price

signal for CO2 storers, and thereby unlock opportunities for commercial transactions of physical CO2

between CO2 emitters, shippers and storers.

Over the medium-term, experiences from RBF could be reviewed, and decisions made in respect of

transitioning the RBF approach into a systematic means of creating demand for storage credits. This

could be based on using either:

• Stock-based, supply-side, policies and measures based on embodied carbon; or,

• Flow-based, demand-side, policies and measures based on carbon emissions

(e.g., carbon pricing instruments)

There may also be the option of using both measures, depending on how accounting and MRV were to

be applied in future to avoid double counting.

2.3 Policies That Support Decarbonized Fuels

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

electricity producers to collectively meet their

obligations. A similar system could be implemented

for CCS, either as a supply- or demand-side

policy instrument.

In a supply-side approach, oil producers could

be mandated to store an increasing portion of the

carbon they produce, similar to the SAFE-carbon

proposal (Box 6), albeit built around a exible quota

system. Storage certicates — representing a

veried tonne of CO2 securely stored or sequestered

in a geological reservoir — could provide a basis

for producers to trade so as to meet their targets.

Such a storage crediting system could be introduced

on a regional basis by a group of countries with

common interests, such as the countries of the Gulf

region. Alternatively, it could be introduced through

a multilateral or global system using mechanisms

under Article 6 of the Paris Agreement. Such a

proposal was recently made by researchers at

KAPSARC (Zakkour and Heidug 2019; Box 8).

Zakkour and Heidug’s proposal could provide a

coherent strategy for supporting CCS deployment

by fossil fuel producers over the near term. A key

factor at this stage is whether the yet-to-be-agreed

rules on Article 6 of the Paris Agreement will leave

sufcient latitude for a storage crediting system to

be developed in the future. Expectations are that

the Article 6 rules will be nalized at the postponed

2020 UN Climate Change Conference (COP 26), due

to take place in the United Kingdom in late-2021.

2.4 Design aspects of

progressive supply-side

climate policy

The previous section outlined how different

supply-side climate policy approaches could be

used to promote and deploy CCS and decarbonize

fossil fuels. It should be noted, however, that not

all of the proposed options are mutually exclusive,

as noted when describing the potential link, above,

between a country’s voluntary pledge and a local

or regional mandate placed on operators. Indeed,

most of the policies described previously could

be mixed and matched. A wellhead carbon tax

could be linked with a storage mandate to provide

ring-fenced capital to recycle back to operators to

invest in CCS, a storage crediting approach could

be linked to a low carbon fuel standard, and so on.

Consequently, some careful thought will be needed

regarding the most appropriate mix for fossil fuel

exporting regions.

Mindful of these similarities, the following sections

set out some strategic, technical and economic

factors to consider for policy design associated

with going beyond reducing a company or country’s

own emissions (scope 1 and 2 emissions) and

extending into customer emissions occurring

outside the control of the fuel supplier (i.e.,

scope 3 emissions) under an extended producer

responsibility framework.

2.4.1 Strategic factors

For crude oil exporting countries, climate action

presents strategic choices for maintaining the value

of regional resource endowments, export earnings

and market access for products. Assuming a desire

to sustain current levels of production irrespective of

the point of end use, two possible outcomes can be

envisaged under scenarios of comprehensive and

sustained climate action globally. In the near future,

fossil fuel exporters could be required to either:

• Find volumes of CO2 to sequester in order to

decarbonize crude oil supplies and maintain

market access; or

2.3 Policies That Support Decarbonized Fuels

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

• Undertake greater domestic value additions

of fossil fuel resources to compensate for

falling international demand, and use CCS to

manufacture decarbonized energy-intensive

products for export (e.g., petrochemicals, steel,

cement, etc.).

Taking into account both near-term ambitions of

crude oil producers in maintaining market access

for exports, and longer-term regional ambitions

for economic development into more value-added

activities, near-term policy choices need to offer

value both now and in the future. This suggests

a short-term focus on considering supply-side

policy approaches, but also longer-term exibility

in order to offer similar pathways for decarbonized

energy-intensive value-added products at some

future point, as economic circumstances and

priorities change.

Irrespective of the choice of policy instrument,

or combinations thereof, the actual amount of

CCS needed under both scenarios would likely

remain broadly consistent over time, since the

amount of carbon in produced fuels would remain

broadly constant. Consequently, the tonnes of CO2

emissions captured, avoided or stored — and their

associated costs — could ultimately be similar under

either policy scenario: either CCS is needed to

offset scope 3 emissions from fuel exports, or CCS

is needed to reduce scope 1 emissions from local

value-added activities. It is therefore only the point

in the value chain where the reduction is counted —

either on the supply- or demand-side — that makes

a difference to how different types of products

may be decarbonized. A deep understanding of

the full implications of these subtle allocation and

accounting aspects is needed to help fully inform

strategies and choices.

2.4.2 Technical factors

In designing an offset pledge, both countries and

companies need to carefully consider what portion

of the total embodied carbon in their products they

would seek to offset in the rst instance. As noted

previously, a low carbon fuel can be differentiated

from a decarbonized fuel on the basis of having

part or all of its carbon content offset (Box 2). Shell

and Equinor, for example, both limit their pledges to

around 50-65% of the energy intensity of their entire

portfolio fuel products (Table 2).

Using a country- or sector-specic approach can

also limit the level of offsetting/sequestration

required in early phase piloting. This would mean

only a portion of production or supply, rather than

the entire portfolio, would need to be offset. For

example, Shell has so far limited its offsetting

activities to drivers in the Netherlands and the

United Kingdom, with plans for a wider roll-out in

the future (Table 2). Alternatively, sector-specic

actions could focus on, for example, jet fuel supply,

perhaps in cooperation with the International Civil

Aviation Organization’s (ICAO) Carbon Offsetting

and Reduction Scheme for International Aviation

(CORSIA) program.6

A mandatory sequestration target could also

be formulated in ways indirectly linked to

produced carbon. For example, establishing one

demonstration or large-scale CCS project, a xed

fund dedicated to CCS projects, or a target for a

mass of CO2 to be stored by a xed point in time.

However, such approaches would not necessarily

align pledges or policies with long-term climate

mitigation goals of the Paris Agreement.

2.3 Policies That Support Decarbonized Fuels

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

2.4.3 Economic factors

Economic factors are a major consideration in

the design of any supply-side policy, particularly

those developed by producers and exporters. For

example, any production or export tax would need to

consider the following:

• The level of taxation that might be applied

• The ability to pass costs to importers

• The willingness and capacity of the fossil

fuel exporting government to hypothecate

revenues

• The design of schemes through which to

recycle revenues (disbursement method,

eligible technologies and activities, etc.)

A detailed review of these issues is beyond the

scope of this paper, but they would need to be

worked through on a case-by-case basis, taking

account of local circumstances and priorities.

Cost pass-through presents a particular challenge in

the absence of universal application of supply-side

policies across the sector. The willingness of fossil

fuel importers to pay a premium for decarbonized

fuels is likely to be heavily inuenced by the

accounting rules applied to such products, as this

determines how emissions from their use will be

recorded (Box 9). Further policy developments are

needed to fully support the approach, as discussed

further below.

2.4.4 Conditionality

Taking into account the economic factors described

above, the impacts could be limited by introducing

conditionality into any proactive supply-side pledge

or policy. A pledge or policy could therefore be

predicated on other factors being in place such as:

• Linking the offsetting pledge to the level of

action being taken by other producers and

suppliers.

• Linking the pledge to continued unfettered

access to markets (e.g., limiting demand-side

actions).

• Linking the level of decarbonization or

offsetting to the remaining atmospheric

carbon budget or the recorded rate of

temperature increase, mindful of the

long-term objectives of the Paris Agreement

(see also the ‘SAFE-carbon’ concept in

Box 6).

In terms of the nal bullet point, linking a voluntary

pledge to Paris Agreement targets could align

corporate strategies with the demands of

shareholder groups such as CA100+, and bring

companies in line with the Science-Based Target

initiative.7 Coordinated action could also take place

at the sectoral level, for example through the OGCI.

2.3 Policies That Support Decarbonized Fuels

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

Lazarus and van Asselt (2018) suggest that

supply-side policies offer the potential to

“widen the mitigation cost curve” by allowing

greater emission reductions at the same or lower

cost than demand-side policies. This view suggests

that the main challenge facing policymakers is

simply one of scale or coverage, rather than the

carbon price level itself. We tend to agree with the

sentiments of Lazarus and colleagues insomuch

as complementary supply-side policies can widen

the number of actors contributing — rather than

only reacting — to climate policy actions (i.e.,

fossil fuel producers). However, we also consider

that progressive supply-side policies provide a

means of blending mitigation policies to leverage

supplementary climate nance, rather than solely

using demand-side measures.

A recognized shortcoming of carbon pricing

policies is their limited ability to promote and deploy

emergent, near-market, low-carbon technologies

like CCS. Novel technologies will have early-phase

deployment risks and costs that exceed the

compensation on offer through emissions pricing,

even though they may be critical for meeting

long-term climate mitigation goals. These long-run

future benets are not visible in carbon pricing

policies, which tend to clear at a price equivalent to

short-run marginal abatement costs. The Carbon

Pricing Leadership Coalition — a cross-sectoral

group that is promoting the expansion of carbon

pricing policies around the world — notes this

limitation when it states that:

“Carbon pricing by itself may not be sufcient to

induce change at the pace and on the scale required

for the Paris target to be met, and may need to

be complemented by other well-designed policies

tackling various market and government failures,

as well as other imperfections” (Carbon Pricing

Leadership Coalition 2017, 3).

Similarly, the International Energy Agency also

suggests that:

“Without targeted support, it is unlikely that the

current momentum in [CCS] project deployment

will be maintained, with progress likely to stall by

2020. This will substantially inhibit the availability of

CCS to contribute to medium and long-term climate

targets.” (IEA 2016, 46)

There is generally broad agreement that a series

of interacting policy instruments is often needed

to correct such market failures and drive the

deployment of technologies like CCS (Krahé et al.

2013), and also that the choice of the instrument is

often jurisdiction specic.

So far, only the Norwegian CO2 Tax — a

highly-focused sectoral carbon pricing scheme

applied to Norway’s offshore oil and gas industry

— has offered a sufciently high and stable

emissions price signal to promote the deployment

of two captive CCS projects by Equinor, namely

Sleipner and Snøhvit. The narrow scope of the tax

means that it functions as a supply-side climate

policy. Similarly, the carbon pricing policies in

Alberta, Canada were modied to offer a double

credit alongside government grants to support the

development of Shell’s captive Quest project. The

EU’s GHG emissions trading scheme, which applies

only to CO2 emitters, has so far failed to deliver any

CCS projects in its 15 years of operation.

Deploying integrated CCS projects involving multiple

entities across the capture, transport and storage

chain has largely proved all but impossible, except

in situations where there is also an incentive for

CO2 storers, as is the case with CO2-enhanced oil

3 Opportunities and Challenges For

Decarbonized Fossil Fuel Policy

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

recovery (EOR) projects in the U.S. and Canada.

Indications are that, although all components of the

CCS chain are technically mature, the business

models and policy approaches of the chain are not.

Extraordinary innovations in, and cost reductions

of, renewable energies over the past 10 years have

been delivered through a combination of explicit

supply-side technology support measures in the

electricity sector (e.g., feed-in tariffs and obligations),

often coupled with the implicit price signals created

by carbon pricing in some jurisdictions. These

experiences suggest that supply-side policy

measures in the fossil fuel supply sector, coupled

with demand-side policies on emitters, could offer

a way of increasing deployment, driving down

costs through technology learning effects, and

ultimately supporting the longer-term widespread

roll-outs of CCS technologies to deepen global

climate ambition.

Creating value for sequestering carbon alongside

pricing carbon emissions also enhances the

exibility for developing and deploying CCS.

Typically, CCS is seen as a single chain of activities

from capture to transport to storage, with all the

value created at the point of capture. The carbon

emissions price must then be passed down the

CCS chain from the capture entity in order to

compensate the shippers and storers of CO2. This

has hampered the development of business models

for CCS outside of captive situations and EOR.

The introduction of new types of instruments that

value storage independently of CO2 capture offers

opportunities to establish business models that

are not conned to this single-chain linear project

architecture. Rather, CO2 storers can be incentivized

to nd sequestration opportunities linked to a set

of policy drivers that are independent of those

applicable to emitters. This indicates possibilities

for driving the CCS business model in new

directions, with structures that promote efciency

in deployment, and, ultimately, the scaling-up

of ambition.

Creating a market that supports commercial

transactions of physical CO2 between capturers,

shippers and storers will also be key to unlocking

the potential of CCS without the need for excessive

government intervention. In addition, prospects for

CO2 removal technologies, such as DAC, would

be enhanced by supply-side policies that establish

incentives for action independent of CO2 emissions

sources. Distributional issues associated with

storage capacity could be overcome by using

DAC in crude oil exporting regions as a means to

offset the scope 3 emissions from fuels supplied

to regions that are constrained in their available

geologic storage capacity. Policymakers in California

are clearly thinking along these lines, where DAC

deployed anywhere in the world can be used to

offset well-to-wheel emissions of the fuels sold in

the state (Box 4).

The advantages described notwithstanding,

accounting rules pose a challenge for supply-side

climate policy approaches. The pervasiveness of

demand-side policy means that the accompanying

measurement, reporting and verication (MRV) and

GHG accounting rules are also based on measuring

emission ows. National GHG inventories submitted

by Parties to the UNFCCC and Paris Agreement are

compiled on an annualized basis, according to the

level of emissions and removals occurring within each

country’s territory. Stock- or extraction-based GHG

accounting is only implemented in the forestry and

land use sectors. Consequently, as noted by Piggot

et al. (2018), the current system rewards actions

taken domestically, but is unable to recognize actions

that reduce emissions outside of national boundaries,

bioenergy excepted. This has ramications for the

way decarbonized fuels might be effectively rewarded

and counted within the UNFCCC framework (Box 9).

3 Opportunities and Challenges For Decarbonized Fossil Fuel Policy

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

3 Opportunities and Challenges For Decarbonized Fossil Fuel Policy

Box 9. GHG accounting and the MRV of decarbonized fuels

When a decarbonized fuel is supplied to a user, emissions from its combustion may or may not be

‘zero-rated’ depending on applicable GHG accounting and measurement, reporting and verication

(MRV) rules (i.e., respectively recorded, or not recorded, as an emission in the relevant GHG

emissions inventory).

In the case of hydrogen, its combustion does not create CO2 emissions and, therefore, the country,

organisation, sector or project activity using hydrogen may record zero emissions in the relevant GHG

emissions inventory. However, unless the separated carbon fraction is geologically sequestered at

source, there is no net global emissions reduction. In cases where there is a transboundary movement

of the hydrogen, the accounting rules of the UNFCCC’s global climate regime (IPCC 2006) allow the

importing country to benet at the expense of the producing/exporting country. The importer will be

able to zero-rate the emissions while the producer will be required to report emissions from production

in its national GHG inventory. As such, the importing country will have simply shifted its fossil fuel

emissions outside its jurisdictional control and reporting boundary. A system of tagging and tracking

the CO2 fraction, such as storage credits, may therefore be needed in order to call hydrogen a truly

decarbonized fuel.

In the case of a virtually decarbonized fuel, zero-rating of product emissions is dependent on a

few factors.

First, implementation relies on establishing a system that can be used to ‘tag’ the decarbonized fuel

product, based on recording and verifying deposits of carbon to the geosphere (or biosphere); for

example, a storage crediting system (as described in Box 8).

Secondly, regardless of its implementation, the emissions reduction effect must not be double counted.

Double counting can occur when the stored CO2 is credited and used to create a virtually decarbonized

fuel, and the emissions reduction effect of capturing and storing the same CO2 is counted as an

emissions reduction or avoided emissions by the entity or country where the CCS activity occurs.

Counting and claiming the effect twice compromises the environmental integrity of either or both the

supply- or demand-side measures.

The current emissions accounting and MRV rules

mean that the global climate policy architecture is

not fully geared up to credit nations for supply-side

actions. The use of stock-, extraction- or

production-based accounting systems would

help to address this gap by ensuring actions by

producers can be recognized accordingly, similar to

the current rules for bioenergy (Box 10). Concepts

such as SAFE (Box 6) and storage crediting

(Box 8) are predicated on the evolution of carbon

stock-based accounts that can monitor and reward

climate actions relating to the management of

carbon in the geosphere, at least over the longer

term. In the near term, double counting remains a

challenge. Recognizing the need to address this

limitation, Piggot et al. (2018) proposed that parallel

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

Box 10. Stock-based accounting and zero-rating emissions from fuel use

A useful analogue for framing supply-side and stock-based accounting issues are the IPCC guidelines

(e.g., IPCC, 2006) and their application to bioenergy resources (IPCC Guidelines are mandated for use

by UNFCCC Parties when compiling their national GHG inventories as reported to the UNFCCC). The

IPCC Guidelines apply a carbon stock accounting approach to land use, land-use change, and forestry

(LULUCF) accounts, meaning that changes in land carbon stocks due to harvesting and biomass

growth are measured respectively as either a net emission by a source or a net removal by a sink. As

a result, a country’s LULUCF account is reported either as an emissions source or sink, depending

on the balance between the two activities. This arrangement means that the LULUCF account must

assume that biomass is instantaneously oxidized to CO2 upon harvesting (i.e., is an emission) —

harvested wood products aside — so, consequently, downstream CO2 emissions arising from the

combustion of produced biogenic fuels must be zero-rated in the energy sector account to avoid

double counting.

A similar approach would be necessary to fully integrate supply-side policies for promoting

decarbonized fuels as described herein. This would mean that net-carbon stock changes in the

geosphere resulting from extraction (production) and deposition (sequestration) activities are measured

and regulated, allowing the emissions resulting from the use of the produced fuel to be zero-rated.

or “shadow” extraction-based carbon accounts

could be created, alongside emissions-based

accounts, as a means of supporting the early

adoption of supply-side climate policy frameworks.

The overriding consequence of these arrangements

is that supply-side approaches will no doubt require

some time to mature in order to build condence

and provide certainty over how double counting

will be avoided. As suggested in our previous

research (Zakkour and Heidug 2019), the bottom-up

architecture of the Paris Agreement does offer some

latitude to move toward supply-side climate policy

in parallel with demand-side measures. A piloting

phase that blends both approaches could offer

near-term benets for enhanced climate action,

while also offering opportunities to gain experience

and identify the means to scale up (Box 8).

3 Opportunities and Challenges For Decarbonized Fossil Fuel Policy

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

4 Conclusions

Oil-producing companies, and, in particular,

oil-producing countries, face the risk

of diminishing market shares for their

products as carbon constraints are increasingly

applied by oil-consuming countries. CCS is a

technology that can mitigate this risk by allowing for

the continued use of fossil fuels in some essential

applications while signicantly reducing their

associated emissions.

The large-scale deployment of CCS is contingent

on a policy framework that enables and supports

the development of business models for its use in a

carbon-constrained world. While both demand- and

supply-side climate policy instruments could drive

CCS deployment, the latter provide a more attractive

option for fossil fuel exporting countries in the near

term because of their signicant co-benets, such as:

• Supporting their ambitions to diversify and

de-carbonize their economies.

• The increasing exibility to allocate emissions

reduction from CCS to decarbonized oil or

value-added products, which can optimize

the value of CCS. This exibility is essential

to accommodate the changing nature of

these economies.

• The potential to generate new industrial

activities and new sources of revenue driven by

climate action.

Presently, the small number of supply-side policies

implemented by crude oil importing regions, such

as LCFS and the Swiss CO2 Law, do not include

provisions to incentivize decarbonized fuels as

described herein, except for DAC in California.

This seems like a missed opportunity to drive

deeper climate ambition. Further efforts to raise

awareness of the possibilities for decarbonized

fuels could help to encourage the introduction of

more progressive supply-side climate policies within

these frameworks.

With the important provisions of Article 6 of the

Paris Agreement still under negotiation, a window

of opportunity exists through which to open up and

establish a wider debate on progressive supply-side

climate policy frameworks involving decarbonized

fossil fuels using CCS. Action could be built around

the alignment of interests between oil-producing

countries and key international and national oil

companies, such as members of the OGCI. The

establishment of an international tradable certicate

mechanism for CCS based on carbon storage could

provide a catalyst for action. The alternative would

be for a continued focus on supply-side actions that

increasingly question the legitimacy of fossil fuels in

a carbon-constrained world.

As noted throughout, many of the concepts for

supply-side policy and decarbonized fossil fuels

discussed herein need time to further mature.

This paper provides some early building blocks

upon which to further consider the choices

and challenges.

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

Endnotes

1 Demand-side policies and measures may also apply to scope 1 emissions from fuel producers and suppliers at

various stages of the fuel cycle (e.g., during extraction, transportation and/or rening).

2 Article 4.1 refers to achieving a balance between anthropogenic emissions by sources and removals by sinks of

greenhouse gases in the second half of this century. This goal is often referred to as ‘net-zero emissions’ or ‘carbon

neutrality.’

3 For example, the 2018 protest in the Hambach Forest against RWE’s lignite mine expansion.

4 The February 2019 ruling on Gloucester Energy’s Rocky Hill coal mine project in New South Wales, Australia.

5 The Climate Action 100+ is a collection of more than 320 institutional investors that are seeking to drive changes

in 161 “focus companies” through investor engagement and the active promotion of climate-related shareholder

resolutions. Its strategy consists of three elements: implementing a strong governance framework that includes

board accountability and oversight of climate risks; taking action to reduce GHG emissions across the value chain

consistent with the Paris Agreement’s goal; providing enhanced corporate disclosure in line with the TCFD on climate

related risks.

6 The ICAO is presently considering options for using ‘low-carbon fuels’ under CORSIA.

7 Scheme operated by the Climate Disclosure Project, World Resources Institute and the Worldwide Fund for Nature

(WWF) https://sciencebasedtargets.org/.

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

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Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

Notes

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels

About the Authors

Wolfgang Heidug

Paul Zakkour

Wolfgang is an expert on low-carbon energy technology policy with

in-depth knowledge of the science and technology of CO2 capture

and storage. Prior to joining KAPSARC, he was a senior adviser

at the International Energy Agency in Paris. Wolfgang has over 20

years’ experience working with Shell International. He obtained his

Ph.D. in Engineering from the U.S. and holds an M.S. in Physics and

Economics from Germany.

Paul Zakkour is a director of the consultancy Carbon Counts and

a visiting researcher at KAPSARC. He has more than 17 years’

experience in the eld of climate change policy, regulation and

economics. Paul has extensive expertise in carbon dioxide capture

and geological storage, having advised on the design of the

European regulations in 2007/08 and on the UNFCCC’s CCS rules

under the clean development mechanism in 2010/11, among other

experience. Paul has a Ph.D. in Environmental Technology from

Imperial College London, and lives and works in Frankfurt, Germany.

About the Project

This study is part of a project examining opportunities for Saudi Arabia to apply Carbon

Capture, Utilization and Storage technologies (CCUS) in an increasingly carbon-constrained

world and the role that CCUS could play in the Saudi economy. The project assesses policy

options and analyzes related regulatory and commercial issues affecting the development and

deployment of CCUS.

Supply-Side Climate Policy for Crude Oil Producers: Exploring Policy Pathways for Decarbonizing Fossil Fuels