Carbon Capture Projects Face Significant Financing Gap Despite Policy Support, Report Warns

Carbon capture, utilization, and storage, commonly referred to as CCUS, has become a central pillar of many national net-zero strategies. Governments in Europe and North America have introduced new funding mechanisms, tax incentives, and contractual models to accelerate deployment. However, a new industry report highlighted by BusinessGreen warns that projects continue to face a significant financing gap.

While policy frameworks are strengthening, private capital has not flowed at the pace required. Developers report that securing debt and equity financing remains difficult, particularly for first of a kind commercial scale facilities. High capital costs, long construction timelines, and uncertainty around future revenues are cited as key constraints.

High Capital Costs and Revenue Uncertainty

CCUS projects require substantial upfront investment in capture technology, compression facilities, transport infrastructure, and geological storage sites. In many cases, these assets must be built simultaneously, creating complex project structures that increase perceived risk.

Although carbon pricing mechanisms and government-backed contracts aim to provide revenue stability, investors remain cautious. Future carbon prices, regulatory changes, and long-term liability frameworks can materially affect project returns. In addition, inflationary pressures and supply chain constraints have driven up engineering and construction costs over the past two years, further complicating financial modelling.

In the United Kingdom, the government has developed business models intended to reduce revenue volatility for carbon capture operators and transport and storage providers. Cluster sequencing initiatives are designed to prioritize industrial regions and create shared infrastructure networks. Despite this progress, some projects are still awaiting final investment decisions as negotiations over risk sharing and cost recovery continue.

International Support Mechanisms

Other jurisdictions are also attempting to close the financing gap. In the United States, the expansion of the 45Q tax credit under the Inflation Reduction Act has significantly increased the value of incentives for carbon capture and storage. Higher credit levels for permanent storage and direct air capture have improved project economics, particularly for industrial emitters and hydrogen producers.

Across the European Union, funding instruments such as the Innovation Fund and national subsidy schemes are supporting early-stage development. Norway continues to advance large-scale storage infrastructure through its Longship project, which aims to provide open access transport and storage capacity for European emitters.

However, the report suggests that while public support mechanisms are essential, they are not yet sufficient to crowd in the volume of private investment required for rapid scale-up. Investors are seeking greater long-term policy clarity, streamlined permitting processes, and standardized contractual structures.

Complex Risk Allocation Across the Value Chain

One of the most significant barriers identified is risk allocation. CCUS value chains involve multiple counterparties, including industrial emitters, pipeline operators, and storage providers. Aligning commercial agreements across capture, transport, and storage segments requires careful coordination.

Lenders typically demand predictable cash flows and clear liability arrangements, especially regarding long-term storage monitoring and potential leakage risks. Questions about who bears responsibility for stored CO2 decades after injection remain a concern in some markets. Without well-defined regulatory frameworks, financial institutions may apply higher risk premiums or decline participation altogether.

Shared infrastructure adds another layer of complexity. While clustering emitters can reduce per tonne costs and improve economies of scale, transport and storage networks require significant upfront capital before full utilisation is achieved. Governments may need to underwrite early capacity or provide guarantees to unlock private participation.

Implications for Hard-to-Abate Sectors

CCUS is widely regarded as essential for decarbonising sectors such as cement, steel, chemicals, and refining, where direct electrification is often not feasible. It is also a key enabler for low-carbon hydrogen production, particularly in regions pursuing blue hydrogen strategies.

If financing barriers persist, these sectors could face slower decarbonization pathways. Companies may delay investment decisions or prioritize jurisdictions with stronger support mechanisms. This could create uneven regional progress and increase the risk of carbon leakage in internationally traded industries.

The International Energy Agency has repeatedly stated that global carbon capture capacity must expand rapidly this decade to align with net-zero scenarios. Although the project pipeline has grown substantially in recent years, only a fraction of announced facilities have reached construction or operational status. Bridging the financing gap will therefore be critical to translating announcements into tangible emissions reductions.

Potential Solutions to Unlock Capital

The report points to several measures that could improve bankability. Blended finance structures combining public grants, concessional loans, and private capital could reduce overall risk exposure. Government-backed revenue guarantees or floor price mechanisms may also provide greater certainty for investors.

Standardizing contracts and clarifying long-term storage liabilities would help address lender concerns. Transparent measurement, reporting, and verification systems are equally important to demonstrate the integrity of captured and stored carbon.

Regional cluster models offer another pathway. By aggregating multiple emitters and sharing transport and storage assets, clusters can reduce costs and improve utilization rates. Continued collaboration between governments, industry, and financial institutions will be necessary to refine these models and accelerate deployment.

Outlook for Net-Zero Targets

The financing challenges facing CCUS underline a broader tension within the net-zero transition. Ambitious climate targets require rapid scale-up of capital-intensive technologies, yet investors demand clear and stable policy environments before committing long-term funds.

Closing the carbon capture financing gap will require coordinated action across policy design, infrastructure planning, and financial innovation. Without further progress, the pace of CCUS deployment may fall short of what is needed to meet mid-century climate goals.

Source: www.businessgreen.com