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Energy Transition Commentary 12

Summary:

This commentary is about how we honestly address the fossil fuel elephant in the climate change room.  Instead of pretending that ‘dirty’ oil and gas will disappear as energy sources and manufacturing feedstocks, policymakers and consumers across the world need to accept that they will continue to be used in a major way for many decades to come. The expectation that we can introduce decarbonised alternatives at a rate and cost to completely displace them to achieve net-zero emissions by 2050, with CCS as a last resort sticking plaster, is unrealistic. However, oil and gas must be used in a decarbonised manner, with Carbon Capture, Utilisation and Storage and Carbon Dioxide Removal (CCUS/CDR) not being fringe activities but major industries. The resulting decarbonised fossil fuels need to play a significant role in ensuring that the net-zero carbon emissions transition is achieved by 2050, providing 20% (~10Gt CO₂ pa ) of the CO₂ emissions reduction required to reach this goal.  This requires a recognition that all centralised fossil fuel processing and use needs to be decarbonised, that negative emissions technologies in the form of CDR need to be operating at the level of 6-10 Gt CO₂ pa by 2050 and that they both need a robust, guaranteed and rapidly implementable universal funding mechanism to pay for their installation and long-term operation. 

For far too long consumers have been receiving oil and gas on the cheap; the real price should include the cost of their decarbonisation.  This cost has been hidden and ignored, by the fossil fuel producers and processors and indeed by policymakers. If ever there was a case for a windfall-like charge, it is here; there could be no more ethical justification than paying the real, hidden cost of decarbonised fossil fuel use. One mechanism for doing this that has been suggested for some time is the Carbon Takeback Obligation (CTO) and in this commentary we add our support for careful consideration of introducing this for all fossil fuel producers across the world, giving the arguments for its introduction and suggestions for how the cost may be distributed amongst all the polluters in the reservoir to end-user chain. This would be an honest and realistic approach to the continued use of fossil fuels as an integrated part of a just energy transition solution, alongside ramping up as quickly as possible renewable energy and (bio)feedstocks, energy savings and efficiency measures, nuclear, geothermal and other low-carbon energy sources, to ensure that we reach net-zero as close as possible to 2050.  We can then transition away from fossil fuels without endangering energy affordability and security for all countries, irrespective of geography, regional climate and natural resources.

Decarbonised fossil fuels – and the real cost of oil and gas

The onset of war in Iran and the spread of conflict across the Middle East has led to sharp rises in the price of oil and gas over the past couple of weeks.  The Brent Crude price has risen to above $100 per bbl and UK wholesale gas prices have risen by almost 80%, continuing to rise as we write.  Consequently, the cost of energy is now at its highest level since Russia invaded Ukraine in March 2022.  The effect of wars on the price of energy and hence of food and manufactured goods, even for people well away from the conflict, is considerable.  Yet we accept the rises as an inevitable consequence of world events and, disruptive though they are, we largely try to factor them into our lifestyle, alongside increased government financial support for those less able to cope.

Yet there is an additional energy cost arising from another war, which across the world we largely choose to ignore and hope it will remain hidden.  This is a consequence of the war against climate change, a chemical war to avoid the destructive consequences of the enemy, in this case carbon dioxide, CO₂.  To avoid catastrophic consequences of climate change, despite recent pull-backs in ambition and scepticism about what is feasible, we still need to strive to achieve net-zero carbon emissions by about 2050.  To do this we need to prevent the CO₂ emissions resulting from fossil fuel use being fly-tipped into the atmosphere. A major contribution to achieving this is, of course, to move as quickly as possible to replacing fossil fuels by renewable and nuclear sources for energy and sustainable feedstocks such as biomass for the manufacture of the materials on which our modern society depends.  However, all viable models of the energy transition show that fossil fuel use must continue at a significant level alongside these low-carbon sources at least until 2050 and probably way beyond. 

Some wish to avoid this by banning the use of fossil fuels, but this is not a practical route if we are to maintain the quality of life in both developing and developed economies, because they are needed to meet demand for essential materials, if not energy, and will continue to be used by countries with indigenous oil and gas reserves to protect security of supply and maintain affordability. Others feel that imposing a carbon tax will eventually force the transition to low-carbon alternatives, but the evidence is that universal adoption and large enough carbon prices are not likely to happen on the timescales necessary to bring carbon emissions down to net-zero.  Therefore we might as well accept, sooner rather than later, that fossil fuels will continue to be used up to 2050 and beyond – but we have to ‘decarbonise’ them so that they have the same low carbon footprint at point of use as other ‘zero-carbon’ energy vectors and feedstocks.  This concept of ‘decarbonised fossil fuels’ is an essential component of achieving net-zero by 2050 and one that needs communicating much more widely and clearly to policymakers, technologists, climate campaigners and the general public as part of an honest debate about future energy and manufacturing routes capable of achieving a just energy transition to net-zero emissions…and the trade-offs needed for this between energy security, affordability and decarbonisation.

Given this inevitable continued use of some fossil fuel, to reach net-zero in time we must adopt a responsible, managed approach to disposing of CO₂ waste securely rather than dumping it into the atmosphere. It is indeed possible to decarbonise fossil fuels used in centralised facilities at point of use using Carbon Capture and Storage (CCS, or CCU if the captured CO₂ is used rather than stored underground).  Where CO₂ in exhausts cannot be captured readily, as in air or sea transport for example, then the sister technology Direct Air Capture (DAC) can be used to remove CO₂ from the atmosphere, or using a variation of CCS called BECCS where the feedstock is biomass; collectively these technologies are called carbon dioxide removal (CDR).  This is where the additional costs of our war against climate change arise: there is a cost associated with capturing and storing CO₂. Since both in practical and ethical terms we can only use ‘decarbonised fossil fuels’, the real price of oil and gas to the customer (be it refiner, processor, company or household consumer) should cover not only the lifting, transport and availability costs but also the CO₂ abatement costs.  For the current state of CCS technologies, this means that for every tonne of CO₂ removed from the system there is an additional cost of about $50, equivalent to $20 on a barrel (bbl) of oil – larger than normal market and tax fluctuations but smaller than changes often introduced by wars in oil producing regions.  For gas, the equivalent figure would be about 0.6 cents/kWh (0.5p) for CCS (~20% on top of 2025 retail prices cf 60% recent increase due to the Iran war). If we have to resort to CDR to decarbonise aviation and shipping fuels and hard to abate manufacturing processes, the cost currently is about $600 per te CO₂ or $240 per bbl of oil; this is a large surcharge compared with normal oil prices but should come down significantly between now and 2050. 

These ‘abatement costs’ will probably fall over time as the economies of scale and learning-by-doing come into play as more plants are built across the world and technology improvements are made.  However, the fact is that the costs are significant and this has contributed strongly to the relatively slow introduction of CCS, in the UK and globally. This is despite them being unavoidable as we must use decarbonised fossil fuels as a component of the energy transition. This leads to a number of key questions: how do we make sure we are paying the real cost of continuing to use fossil fuels (who pays and how?) and what do we really mean by ‘decarbonised fossil fuels’, or ‘abated oil and gas’ as they are often referred to?

Recently Bataille, Al Khourdajie and co-workers¹ have considered the importance of defining ‘abatement’ in the context of fossil fuels for both power and industrial process emissions.  Fitting CCS technology does not automatically ensure that that plants have no, or minimally low, levels of carbon emissions.  Facilities may capture less than the maximum technically possible, or the economically effective, rate; as technology improves over time, the fraction of carbon that can be cost-effectively captured should increase; carbon storage or usage mechanisms that are not permanent might be employed – geological storage should last for tens of thousands of years whereas CO₂ captured in products has much shorter storage times: cement and aggregates for centuries, plastics for decades and fuels for only a few days or months.  In addition, upstream fugitive emissions of methane associated with the extraction of oil and gas (accounting for about 20% of GHG emissions from energy supply) may continue unless prevented by improved operational efficiency, regulation and monitoring.

Bataille, Al Khourdajie et al ¹ conclude that to be Paris Agreement compatible, the GHG emissions from ‘abated fossil fuels’ should be net-zero on a lifecycle basis and that to achieve this, plants using fossil fuels should meet four criteria:

• The CO₂ capture rate should be at least 95% (though initially regulators could permit a lower capture rate provided plants are designed to enable eventual 95%+ capture through process learning and technology improvements)
• Permanent geological storage must be used to sequester captured emissions, with adequate monitoring and verification
• The level of upstream fugitive emissions must be less than 0.5% of gas production, moving with time towards 0.2%
• Any residual emissions not captured and stored must be counter-balanced through permanent CDR

This provides a framework for accrediting process + CCS systems as capable of enabling the fossil fuels used within them to be described as ‘abated’ or ‘decarbonised’.

The question then arises who should pay for the costs of transforming fossil fuels into this ‘net-zero compatible’ state, and how?  For the past few years,  there has been a recognition by the UK government of the critical role CCS and decarbonised fossil fuels must play in achieving the 2050 net-zero emissions target embodied in the 2008 UK Climate Change Act and its 2019 amendment.  A number of low-carbon industrial clusters have been created, incorporating CCUS, designed to produce power and manufactured products from fossil fuels with near-zero emissions (Teesside – East Coast, Merseyside – HyNet, Humberside – Viking, Grangemouth – Acorn). Two of these have reached financial closure with construction completion and operations start-up targeted for 2028, with the others following closely behind.  They are funded by a combination of government upfront investment and long-term, inflation-indexed, and strike-price-based contracts, notably Industrial Carbon Capture (ICC) contracts and Carbon Contracts for Difference (CCfD), guaranteeing revenues for carbon capture and prices for decarbonised power and products such as blue hydrogen.  Similar arrangements are being put in place in other regions, such as for the Norwegian Northern Lights project.  The model is that government reduces the initial investment risks for private operators through subsidies and guarantees and as the business grows it becomes self-supporting and all the financing is eventually provided by the company and its investors, with the government providing some long-term liability guarantees such as those covering secure storage in the subsurface.  However, such approaches are complicated, take a long time to put together and are unattractive to many governments and potential CCUS investors and contractors.

There are alternative ways by which the costs of implementing CCUS could be provided, one of which recognises that the companies best placed to provide the money required, the experience in obtaining capital loans needed to underwrite projects and the engineering expertise to decarbonise fossil fuels are the oil and gas companies and the broader fossil fuel industry. A mechanism for mandating the industry to pay for the cost of removing and safely storing the carbon embedded in fossil fuels, proposed by various authors including Myles Allen (Oxford) and Stuart Haszeldine (Edinburgh), is the Carbon Takeback Obligation (CTO)².  This reflects the principle now embedded in environmental and safety legislation in the UK and many other countries that ‘the polluter, or the hazard creator, pays’.  In this case, the ownership of the pollution is a shared problem between the fossil fuel producers, the refiners and processors that convert oil and gas into products and the corporate and domestic users of these products (and of oil and gas directly) who provide the demand and the market.  So this should be reflected in deciding who pays, and how.

We contend that the ethical approach to the future energy portfolio is to accept openly the reality that most parts of the world will continue to use oil and gas, This means that their real cost to consumers of all types must reflect not only the cost of production from the subsurface (‘lifting costs’), transportation and market costs concerning availability, but also the costs of conversion to decarbonised products, be they fuels or materials.  This can be done on a phased basis, mandating oil and gas producers to pay for capture and storage of CO₂ as a licensing condition for extraction and selling of fossil fuels.  To prevent a sudden hike in the real price of fossil fuels, this additional decarbonisation cost could be phased in, much as proposed by Jenkins et al², so that it was paid by the producers on each barrel of oil or cubic metre of gas sold, at a rate, say, of 5% of the prevailing CCUS costs in 2030, rising to 100% of the relevant cost by 2050.  At first this will be within the noise of taxes, normal market fluctuations and certainly the large increases resulting from wars and political difficulties in key oil and gas supply regions (witness the current rises in fuel prices arising from hostilities in the Middle East), but making the prices charged for oil and gas ultimately reflect the true cost of ensuring their use does not continue to impact climate change will act as an incentive

• for suppliers and the wider industry to minimise the costs of CCUS and CDR;
• for users to help fund the actual climate mitigation costs when they have no choice other than using fossil fuel based energy and materials but, where they do have a choice, to switch to other low/zero carbon sources of energy as the price curves of fossil fuel and renewable/nuclear energy cross more quickly, due to the cost of CO₂ removal being built into the former.

How might such a CTO work?  In 2021 Jenkins et al² suggested that ramping up the CTO charge be achieved through two components: by producers paying for the storage of only a fraction, S(t), of the CO₂ embedded in the oil or gas they sold or imported, where S(t) increased quadratically from a small value initially to 100% by 2050; and a CO₂ disposal charge starting with the 2020 CCUS cost (C₁) increasing linearly with S to the anticipated cost of CDR (C₂) in 2050.  So in their model

      CTO charge per te CO₂ sold = S(t) [C₁ + (C₁ - C₁)S(t)]

In a variant of this model, we can recognise that C₁ and C₂ should decrease over time and build this into the CTO charge. Also, even if the principle of a CTO becomes widely accepted, because its value as a viable mechanism for accelerating the growth of commercial scale CCUS/CDR is recognised by policymakers and governments, it is unlikely to be in operation even regionally until 2030.  So the required storage fraction S(t) probably needs to increase linearly rather than quadratically, to ensure that sufficient infrastructure is in place by 2040 to store the 10-20 Gt CO₂ pa storage needed from 2040 to 2050 and beyond.  Jenkins et al² did show that a slower (cubic) ramping of S(t) should still enable the 2050 net-zero target to be met if a CTO started in 2020 but the current value of S, less than 0.01, indicates that we are behind even that curve and that more ambitious, but still modest, CTOs are now required.

If we assume that CCUS/DAC systems are accredited as meeting the ‘abatement’ criteria set out by Bataille et al¹, that such abatement will be via 100% CCS in 2030 (say ~$50 per te CO₂), that CDR is phased in over the period 2030 to 2050 and that CCS at source is completely in place by 2050 so that in 2050 and beyond abatement will be via CDR, then a phased implementation of the full-chain CO₂ disposal charge could be bookended by 5% of the CCUS cost in 2031 to 100% of the CDR cost in 2050.  In a linear model for S(t), for the year 20xx S(t) will be (20xx-2030)/20 and since one bbl, 160 litre, of oil produces about 400kg of CO₂,  the CTO charge in 20xx would be:

     (CTO per bbl oil equiv sold in 20xx) x 2.5/S  =

     (1-S) x (Cost CCS per te CO₂ in 20xx) + S x (Cost of CDR per te CO₂ in 20xx)                     

Here the cost of CCS in 2031 will be ~$50 per te CO₂, falling to ~$20 per te CO₂ by 2050, and the cost of CDR in 2030 will be ~$600 per te CO₂, falling maybe to ~$250 per te CO₂ by 2050 (or even lower if BECCS can be implemented sustainably and at large scale).  Such a CTO in 2031 (S=0.05) would cost far less than the current UK floor price (~£45 per te CO₂) and by 2050 (S=1) add about 60p per litre to the cost of fossil-based fuel.

We also need to consider who should pay the abatement costs – who is the polluter?  Many argue that this is the supplier of fossil fuels, the oil and gas producers, or the chemical and materials manufacturers who process oil and gas (or other CO₂-embedded raw materials such as limestone for cement manufacture) to produce the fuels and products essential to daily needs and current expectations of quality of life. But the polluter is also the consumer of energy, when this has an unabated fossil fuel contribution, and of products made from oil and gas, limestone etc, which will continue to be used, certainly to 2050 and probably way beyond.  Thus, the costs need to be shared in some equitable way, with the producers being required to absorb some of these costs but being allowed to pass a proportion of them on to the consumer. After all, it is the consumer that drives the demand for the products (electricity, fuels and materials). In between the producer and the sonsumer are the processors who convert the fossil fuels into electricity, fuels and materials, and in doing so generate the CO₂. They have the responsibility for ensuring that the centrally generated CO₂ is captured and stored by working with the emerging CCUS and CDR industries.  The CTO charges can be directed through them to pay for the capture, transport and storage costs, along with the smaller revenues from captured  CO₂ sales to the carbon utilisation sector using it to produce products such as building materials, beverages, chemicals, and synthetic fuels.  As the need for CDR grows, the supply-side CTO charges directed to the DACCS and BECCS operators will accelerate implementation and bring costs down, through operating at scale and learning-by-doing, far more quickly than waiting for carbon prices to rise to high enough levels to drive investment and growth.

As well as funding the decarbonisation of fossil fuel electricity and manufactured products, the CTO needs to drive behaviour change for everyone in the pollution chain. A simple approach would be to share the costs equally between primary producers and end-use consumers.  Producers would be incentivised to work closely with the processors and the CCUS industry to drive down the CCS/CDR costs and consumers would have an incentive to switch to non-fossil fuel based energy, fuels and materials where these are available, but be required to pay the real decarbonised product cost where not.  The CTO charge can be collected from the primary producers in much the same way as wine and spirit producers pay alcohol duty at the point of production or importation. It forms part of their social licence to operate.  They pay the CTO on selling the oil or gas and this is passed on to the processors to fund the CCUS/CDR costs in the country/region where the centralised processing CO₂ emissions are created and captured.  The oil and gas primary producer can pass on an agreed proportion of the CTO to the purchasing processor(s) (say 50%) who can in turn recover that from the consumer, providing they are delivering decarbonised fossil fuel products – electricity, liquid fuel such as so-called sustainable aviation fuel (SFA), chemicals or materials.  Once individual countries adopt a CTO approach to fossil fuel extraction and imports, the challenge will be to expand this to regions and to grow an international market that requires exported fuels and products to be ‘CTO-compliant’ as a condition of trading.

In this way, everyone in the chain from reservoir to end-user is brought face-to-face with the responsibility for ensuring that fossil fuels are used in the only way that is really ethical, by producing decarbonised products, and is exposed to the reality of paying collectively the real cost of using fossil fuels responsibly.  We encourage governments, policymakers and the fossil fuel industry to urgently consider such an approach to enable and accelerate the installation and operation of the huge CCUS/CDR capacity required during the 2030s and 2040s, reaching 10-20 Gt CO₂ pa globally by 2050.  This decarbonisation industry will be as large as the current oil and gas industry and, as well as enabling fossil fuels to be used responsibly, will produce hundreds of thousands of jobs and stimulate local economies as a major contribution to ensuring that the net-zero transition really is a just and fair one for us all.

References:

1. Bataille, C., , de Coninck, H., de Kleijne, K., Nilsson, L.J., Bashmakov, I., Davis, S.J., & Fennell, P.S. (2025). Defining ‘abated’ fossil fuel and industrial process emissions.Energy and Climate Change 6 (2025) e100203. .
2. Jenkins, S., Mitchell-Larson, E., Ives, M.C., Haszeldine, S., and Allen, M., "Upstream decarbonization through a carbon takeback obligation: An affordable backstop climate policy". Joule (2021). .

Professor Martin Blunt, Professor of Flow in Porous Media

Professor Paul Fennell, Professor of Clean Energy

Professor Niall Mac Dowell, Professor of Energy Systems Engineering

Professor Geoffrey Maitland, Professor of Energy Engineering

Professor Ann Muggeridge, Professor of Subsurface Physics

Professor Ronny Pini, Professor of Multiphase Systems

Professor Martin Trusler, Professor of Thermophysics

ÌìÃÀ´«Ã½, Transition to Net Zero Group