The Future of Carbon Capture and Storage in Southeast Asia

Carbon capture and storage (CCS) is projected to play a significant role in the world’s energy transition, particularly in hard-to-abate sectors. Based on McKinsey Energy Solutions’ analysis, future CCS demand is anticipated to be driven by sectors such as power, hydrogen, iron and steel, cement, and refining. The conditions in these sectors that could increase demand for CCS include stranded coal assets, the need for a continuous flow of gas power to counterbalance intermittent renewable energy supply, hard-to-abate process emissions from cement and lime, and scaling the production of low-carbon hydrogen. By 2050, CCS of between 15 and 20 percent of current emissions would be required globally to reach net zero—amounting to between four and six gigatons per annum (GTPA) of carbon dioxide.

The CCS market is relatively small today, with a capacity of approximately 50 million tons per annum (MTPA) of carbon dioxide. In the past three to four years, though, projects have been announced that could bring about a step change. If these projects come to fruition, CCS capacity could increase by more than ten through 2030, driven by new projects in Europe and North America. Yet this falls short of the approximately one GTPA of CCS needed by 2030 to meet the International Energy Agency’s (IEA’s) 2050 net-zero road map.

Southeast Asia produces more than one gigaton (Gt) of point source emissions (emissions from a single source) annually. Capturing 10 to 20 percent of these emissions could create a revenue opportunity of $5 billion to $10 billion a year between 2030 and 2040. This is assuming that Southeast Asian countries’ carbon prices match what has been announced by Singapore, which is to achieve a carbon price of up to $60 per ton by 2030. With this sizeable opportunity, interest is increasing in the region. Countries with natural sink capacities, such as Malaysia, Indonesia, and Thailand, are indicating a willingness to become CCS hubs of the region.

To explore how to help unlock the CCS opportunity in Southeast Asia, we analyzed the inherent differences and maturity levels in the ecosystems of countries that have developed CCS. We have also identified technical, commercial, and regulatory levers that Southeast Asia could potentially take to build a bankable business case for this industry.

Driving the demand: Decarbonization in Southeast Asia

Climate action plans across Southeast Asia aim to either reduce absolute emissions or their intensity by 30 to 40 percent by 2030. Thailand, for example, has set an unconditional emissions reduction target of 30 percent and a conditional target of 40 percent by 2030. Malaysia intends to reduce its economy-wide carbon intensity by 45 percent in 2030 compared to 2005 levels. And Singapore aims to reduce its emissions to 60 million tons (Mt) of carbon dioxide equivalent by around 2030. Meanwhile, Indonesia has set an unconditional emissions reduction target of just over 30 percent by 2030. These aspirations mean that decarbonization levers such as CCS could come under the spotlight.

McKinsey analysis suggests that, of the more than one Gt of point source emissions per annum in Southeast Asia, 10 to 20 percent are in geographical proximity to CCS sinks. With these conditions, Southeast Asia is well-placed to develop different types of CCS hubs: storage-led hubs, large emitter-led hubs, and cross-industry-led hubs.

For example, several locations in Indonesia have the potential for large emitter-led or cross-industry-led CCS hubs. McKinsey analysis indicates that industrial clusters such as those in Cilegon, which account for more than 50 MTPA of point source emissions, and in a cluster in Baturaja, which has point source emissions of over 20 MTPA, could be served by potential CCS sinks that could store one to two Gt of carbon dioxide. The Cilegon cluster, in particular, could be suitable for developing a cross-industry-led CCS hub due to its good mix of high- and low-purity emitters. Similar factors exist in Rayong in Thailand. For large emitter-led CCS hubs, BP’s Tangguh carbon capture, utilization, and storage (CCUS) project in Indonesia and PETRONAS’ CCS project in Kasawari in Malaysia are possibilities.

Challenges to CCS adoption

Despite the opportunity, several factors currently slow down CCS adoption in Southeast Asia. First, the estimated cost of developing CCS in Southeast Asia at current carbon prices is prohibitive. The end-to-end cost of delivering CCS differs, with drivers of the cost being the purity of the emissions for carbon capture, the distance of the source from the sink, and the geological conditions of the storage site, including whether it is off- or onshore, the water depth, and the formation depth. McKinsey analysis projects that the cost of CCS in Southeast Asia would be $60 to $120 per ton of carbon dioxide stored, which could potentially increase up to $150 per ton if not optimally managed, a price that players are reluctant to pay.

Even if carbon prices in Southeast Asia reach Singapore’s announced carbon price of approximately $60 per ton by 2030, a gap of up to $90 per ton of carbon dioxide could potentially persist. This is especially true for harder-to-abate sectors, such as steel, cement, and refineries, which are likely to have a higher levelized cost of CCS, driven by the higher cost of capturing carbon from lower-purity carbon emissions.

Second, unlike CCS markets such as Europe and the United States, Southeast Asia is still developing carbon pricing, regulatory clarity and support, and access to lower-cost green financing.

Third, there is a lack of technology breakthrough options in the near term. Our analysis shows that the cost of CCS is largely driven by the cost of capture, which accounts for approximately 70 percent of the end-to-end cost of CCS, and the technology for capture—using amine solvents to absorb carbon dioxide—is already mature. Few cost savings are likely to be achieved from this. Meanwhile, the cost of other technology that is used to capture carbon dioxide, such as cryogenic technology, is inherently higher. According to McKinsey analysis, learning curves can likely only bring this cost down by 20 to 30 percent by 2030, which would only put it on par with amine solvents technology.

Lessons from front-runners

Countries that have implemented CCS display a similar characteristic: Progress has been driven by regulatory incentives that support a relatively high effective carbon price. For example, countries in the European Union, the United Kingdom, and the United States all have effective carbon pricing in place. These vary from $60 to $90 per ton for the European Union Emissions Trading System (EU ETS) from 2021 to 2023, about $40 to $90 per ton in the United Kingdom ETS (UK ETS) from 2022 to 2023, and up to $85 per ton in tax credits from the 45Q tax credits in the United States, strengthened by the US Inflation Reduction Act (IRA) since 2022.

Furthermore, government policies and regulations to support CCS scale-up are consistent across these countries, with relative clarity on matters such as site permit and assessment, ownership and reporting, and cross-border carbon mechanisms. Policies and regulations of this nature are still maturing in Southeast Asia, with Indonesia leading the region on CCS policies and Singapore on carbon markets.

Building a bankable business case

To build a compelling bankable case for CCS in Southeast Asia, a tailored approach from a technical, commercial, and regulatory point of view is needed.

Technical levers

Costs could potentially be reduced by 10 to 20 percent post-2030 by using levers related to design, delivery, scale, and finance.

Design: Technological improvements could increase efficiency and drive costs down. For example, McKinsey analysis shows that raising energy efficiency could potentially reduce costs by 5 to 10 percent in more mature capture technologies such as amine solvents. Cryogenic capture could deliver cost savings of between 20 to 30 percent after 2030. Other design-to-value measures include repurposing transport and storage assets, such as pipelines, wells, and platforms. The Acorn Project in Scotland, for instance, uses existing natural gas pipelines to transport and store industrial carbon dioxide. These could create cost savings of between 5 and 10 percent.

Delivery: Innovative delivery mechanisms, such as modular capture units, could lead to potential cost savings of up to 5 percent. Clarity on specifications, such as plume migration—the movement of pollutants trapped in air bubbles or in water—and allowable carbon dioxide release limits, could help prevent overdesign, and the efficient use of analytics and capital management could help reduce delivery delays.

Scale: Shared compression, transport, and injection facilities could potentially create cost efficiencies and thereby provide an advantage when trying to scale. On capture, for example, a minimum capture volume of 0.5 to 1.0 Mt per annum is typically required to achieve economies of scale. These could further create cost savings of between 5 and 10 percent.

Commercial levers

Technical measures alone are unlikely to make CCS economically viable in Southeast Asia after 2030. Commercial and regulatory enablers are also needed to create a more effective case.

While several factors relating to effective carbon pricing are universal, the CCS industry in Southeast Asia cannot be approached in the same way as it is in Europe and the United States. Conditions in this region are unique and, hence, require a tailored response. Several key levers could help bridge the funding required for CCS, which include unlocking carbon pricing regulation and support, utilizing cross-border mechanisms, green premiums, green financing, and government funding.

Carbon pricing regulation and support: In Southeast Asia, the development of carbon pricing lags behind regions such as Europe and the United States. With the exception of Singapore, carbon pricing remains minimal. Currently, Indonesia’s compliance market imposes a carbon price of approximately $5 per ton for coal-fired power plants. This is significantly lower than the estimated cost per ton for CCS of $60 to $120. According to McKinsey analysis, to incentivize the viability of CCS without relying on additional commercial, technical, or regulatory initiatives, carbon prices would need to rise to around $75 to $100 per ton.

An ecosystem-based approach is essential, incorporating frameworks for carbon crediting methodologies, third-party verifications, accounting standards, and the broadening of compliance markets. One recent example is an initiative pioneered by the Monetary Authority of Singapore (MAS) along with its partners in the Transition Credits Coalition (TRACTION), in which high-integrity transition credits were used to serve as a complementary financing mechanism to accelerate and scale the early retirement of coal-fired power plants (CFPPs). In this spirit, countries in Southeast Asia can individually broaden the scope of these markets according to sectors while setting progressive and ambitious carbon pricing targets to drive decarbonization.

Cross-border mechanisms: CCS host countries can gain from mechanisms that let them trade emissions reduction rights for a higher storage price, appealing to countries that appear to have limited carbon storage capacity, such as Japan, Singapore, and South Korea. This would allow for the growth of CCS infrastructure as an industry to support external demands while the host country’s internal market adjusts to higher carbon price levels.

Green premium: Imposing a green premium on products whose emissions are reduced by CCS can further bolster its financial feasibility. In Southeast Asia, this primarily concerns exports such as steel and cement, where premiums could be about 10 to 15 percent and 20 to 30 percent, respectively. This applies mainly to export-driven industries in sectors impacted by mechanisms such as Europe’s Carbon Border Adjustment Mechanism (CBAM). For example, a Southeast Asian steel or cement producer exporting to Europe could benefit from CBAM-driven higher prices, helping mitigate some CCS costs.

Green financing and fiscal policies: Securing low-cost or green financing is pivotal for reducing the overall cost of CCS projects. Currently, CCS is not well-integrated into green financing taxonomies and has limiting funding options. Establishing financing platforms such as blended finance could lower capital costs, enhance returns, and mitigate project risks.

Our evaluation indicates that even with effective cost and revenue levers in place, direct government funding of approximately $20 to $30 per ton remains essential to ensure the viability of CCS in the short- to medium-term.

Regulatory and infrastructure enablers

From a regulatory perspective, establishing clearer regulations for CCS activities, such as cross-border operations, emissions-sharing frameworks, and accounting standards, can strengthen investor confidence. Additionally, a conducive regulatory environment is crucial to facilitate the growth of CCS deployment, such as forming a carbon credit market.

Several actions can promote the advancement of CCS. Implementing liability management frameworks, especially concerning potential leakages, would provide much-needed guidance. Developing a regulatory framework for cross-border carbon dioxide transport would encourage CCS deployment in regions with limited domestic carbon capture needs, enabling them to meet external demand. A mechanism for allocating credits at the asset level rather than the country level could further enhance this process alongside benefit-sharing schemes such as credit allocations, royalties, and cross-border CCS compliance incentives.

Clear guidelines and permits at the site level can streamline the carbon storage resource assessment by establishing transparent risk assessment criteria while introducing risk mitigation strategies for operators throughout the value chain.

In terms of infrastructure, the development of midstream infrastructure for carbon dioxide transport and handling to storage locations is largely missing both in Southeast Asia and globally. To address this gap, CCS project developers need to work collaboratively with governments to explore opportunities for establishing necessary infrastructure, such as liquefied carbon dioxide (LCO₂) ships or pipeline networks.

The viability of CCS in Southeast Asia depends not only on technical measures that could reduce costs by 10 to 20 percent by 2030 and beyond but also on a range of commercial levers essential for bridging the existing gap between CCS’s overall costs and market willingness to pay. Particularly, a cross-border mechanism is vital to attract emitters outside Southeast Asia with a greater readiness to invest, given the region’s largely underdeveloped carbon pricing ecosystem.

Despite these measures, direct government financial support will likely remain necessary in the short- to medium-term. Crucially, regulatory and infrastructure prerequisites must be established to create a conducive environment for CCS projects, characterized by clear guidelines on everything from permitting to specific issues such as carbon-leakage monitoring protocols.

Conclusion

As CCS starts to play an increasing role in the global path toward reducing emissions to achieve net zero, it potentially creates a significant opportunity for Southeast Asia—with a possible bankable business case to match. Business builders, emitters, technology providers, and regulators could already act on the opportunity while monitoring the signposts to accelerate (or decelerate) CCS deployment, keeping in view metrics such as access to carbon prices and the cost of CCS. This collective endeavor could help Southeast Asia countries reach their climate action goals on target and on time, assisting in the global energy transition.

FAQ

1. What is CCS?
– Carbon capture and storage (CCS) is a technology used to capture carbon dioxide emissions from sources like power plants and store them underground to prevent them from entering the atmosphere.

2. How can CCS benefit Southeast Asia?
– By implementing CCS, Southeast Asia can reduce its carbon emissions, meet climate action targets, and potentially create a new revenue stream through carbon capture and storage initiatives.

3. What are the key challenges to CCS adoption in Southeast Asia?
– Challenges include high costs, lack of regulatory support, and the need for technological advancements to make CCS economically viable in the region.