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How to calculate the economics of decarbonisation projects
10/8/2026
10 min read
Feature
From an individual energy company’s perspective, each potential decarbonisation project needs to be assessed from a value-adding and/or risk reduction perspective. Standard project investment measures such as net present value (NPV), internal rate of return (IRR) and the payback period can be used to measure project benefits. An example of how this might be calculated is shown below in a worked example of a theoretical proposed flare gas recovery system in a UK offshore oil and gas production facility. The example, using illustrative figures only, is included in new Energy Institute guidance EI 3620 Decarbonisation economics for emission reduction projects in oil and gas operations.
To determine the NPV, IRR and payback period of a given project, one should calculate a discounted cash flow for the duration of the project. This helps express the cash flow in terms of present-day value of the money invested.
Three factors are relevant. The first is the discount rate (real after tax), which is usually linked to the cost of capital or shareholder profit expectation. Typical values are 5–15%; in the hypothetical example below it is 8%. Second is the corporate tax rate: the amount of tax paid on profit made by the company. For the purposes of the discounted cash flow calculation, this would be taken on positive cash flow of the project in an annual period. In this example, it is 25%. The third factor is the depreciation rate: the reduction in value of an asset over time. For accounting and tax purposes, depreciation is treated as an expense, which reduces taxable income. The values will be specific to the individual company, the operating country and potentially the individual project; in this case it is 20%.
The sample project considered here involves a proposal from a UK offshore oil and gas production facility to install a flare gas recovery system (FGRS) to reduce emissions associated with routine flaring from the facility and complying with the zero routine flaring regulatory expectation from the North Sea Transition Authority (NSTA).