Europe is vying to take a global lead in carbon sequestration by introducing the world’s most comprehensive regulatory framework, offering significant economic incentives (both public and private) to build at least 10 demonstration plants by 2015. The goal of the E.U. Commission’s Directive, disclosed in late January, is to master carbon capture and storage (C.C.S.) technology and make it economically viable for all new fossil fuel plants by 2020. But the entire effort could be derailed over financing concerns and lukewarm support from member countries.

The Commission’s decision paves the way for financing a program that could build up to 12 full-scale, integrated demonstration plants throughout Europe at an estimated price of $9 billion to $15 billion (as much as $1.3 billion per plant).

The ambitious C.C.S. program is designed to help the E.U. meet its carbon dioxide reduction targets, widely believed to be out of reach without large-scale adoption of the technology. The E.U. also clearly hopes to gain an edge in new business opportunities and job creation by pushing the technology.

Analysts expect the Directive will get full government and E.U. Parliament backing next year. It relaxes restrictions to allow government funding for C.C.S. plants. Carbon sequestration projects were also included in a program to finance low-carbon technologies by earmarking 20 percent of the revenue from carbon credit auctions between 2013 and 2020 under the European Trading Scheme (E.T.S.). The plan foresees incorporating carbon capture in the E.T.S. system, thereby allowing companies to avoid paying for credits to offset their emissions, an incentive dubbed by private and public supporters as “the main instrument to implement C.C.S. on a wide scale.”

“It’s the first time a framework for C.C.S. has been created and the first time it has been recognized in a carbon market,” said Hæge Fjellheim, senior analyst at Norway’s Point Carbon, a leading think-tank on the European power, gas, and carbon markets. “That’s a positive and secure incentive, and an important signal.”

By year-end, the Commission will follow up with specifics on how the funding of low-carbon technologies, including C.C.S., will work. Spearheading this push are European industrial heavyweights such as E.On, Endesa, RWE, BP, Shell, Vattenfall, StatoilHydro, and Total. Joining them will be the E.U. Commission, scientists, and non-governmental organizations participating in the European Technology Platform for Zero Emission Fossil Fuel Power Plants.

E.U. Commission support means Europe has “set the scene to take the lead” on carbon sequestration, said Paal Frisvold, co-chairman of the Platform’s task force on policy and regulation.

One pilot plant is already being built, and at least 20 more projects are in the pipeline, in the first phase to master C.C.S. technology and then apply it to the demonstration plants. Norway and Great Britain have already announced they will fund full-scale plants in their countries. Germany is partially funding C.C.S. projects and several other countries have indicated their willingness to do the same. “I think companies are all sitting on the fence waiting to climb down, and they will climb down once they get the incentives later this year,” said Frisvold.

Although consumer electricity prices are still uncertain, private and public investments in the C.C.S. program are not expected to affect them. “However, if some countries choose to finance C.C.S. through feed-in tariffs, there could be a slight increase,” Frisvold said.

Despite the optimism, the E.U.’s directive didn’t earmark funding for the C.C.S. program, and instead left it to member countries to decide how to pay the bills.

Money allotted from E.T.S. auctions to invest in low-carbon technologies, which the Commission estimates could amount to $18 billion annually, will likely play a big part in C.C.S. research and development. Member countries will ultimately decide how much to allocate.

Still, most agree the Commission sent a clear signal that C.C.S. will play an important role in Europe. “We welcomed the Directive wholeheartedly,” said Juho Lipponen, head of energy policy in Eurelectric, a Brussels-based E.U. power-sector umbrella group. “It’s not going to solve all investment problems, but it will clear legal issues.”

European utilities, which will initially lead C.C.S. implementation, weren’t expecting full public funding. “Companies had recognized that the bulk would have to come from them. And they want to make it happen,” Lipponen said. Equally telling are the investments that some companies are making. Vattenfall is already building one pilot plant in Germany, while RWE, Endesa, Dong Energy, and E.On are also planning similar investments. Other companies, including Suez and Gaz de France, are also developing C.C.S. projects.

The energy companies’ enthusiasm comes from the appeal of reduced costs for carbon dioxide credits, and for prolonging the use of cheaper fossil fuels and cashing in on likely future revenue from the technology. “It can offer huge opportunities globally to do different ventures,” Lipponen said.

Companies are also keen to invest voluntarily, rather than waiting for the Commission to make it mandatory, which environmental groups are pushing for.

The E.U.’s binding goal is to reduce carbon dioxide emissions 20 percent by 2020, targeting a 50 percent reduction by 2050. More than a third of the block’s emissions come from its power sector, and within that, coal-powered plants, still one of the cheapest ways to meet energy demand, are responsible for the most. The Commission estimates that by 2030 C.C.S. could contribute up to 15 percent of the E.U.’s required carbon dioxide reductions. The new program’s estimate is even more ambitious, predicting that fully-implemented C.C.S., including the transport sector, could reduce CO2 emissions by over 50 percent by 2050.

The use of coal with C.C.S. technology will also improve Europe’s security of supply by allowing the block to fully exploit its indigenous reserves. Europe imports only a third of its coal demand. And although imports will increase into the future as local supplies are depleted, the world’s coal reserves, unlike oil and gas, are more abundant, spread out, and in more reliable countries like the U.S., Russia, China, and India. Most E.U. coal imports come from South Africa, Canada, and Colombia.

Dozens of potential C.C.S. projects have been identified by the E.U. but final selection is not expected until 2010. The proposed projects include all three carbon sequestration technologies of post-combustion, pre-combustion, and oxy-fuel plants. They are spread throughout Europe, although the likely locations are coal-intensive countries like the U.K., Germany, Spain, Netherlands, Italy, Denmark, France, and Poland. However, the most enthusiastic by far is Norway, not part of the E.U. but a member of the European Economic Area. Three initiatives are underway to identify the best geological sites for storing carbon dioxide in the E.U. countries; it appears that most storage potential is in the North Sea. The E.U. regulatory framework still needs to define the geological conditions for storing and transporting carbon dioxide.

Looking forward, the biggest challenge to C.C.S. will likely be rallying public support. Member countries are concerned that investing in C.C.S. could undermine efforts given to solar and wind power, which are proving profitable for a number of E.U.-based companies in Spain and Denmark, due to ongoing governmental subsidies.