In 2024, I visited the Norwegian Embassy in Copenhagen with a banker, a senior vice president in DNB’s energy division, in conjunction with a cross-border carbon transport and storage initiative. With his background in petroleum engineering, rather than purely finance, he has an ability to connect details that few others notice, and that is probably why he ended up responsible for evaluating project financing for the groups new international energy investments.

On our trip, he mentioned something to me that I didn’t really think about until the sudden push to reignite European industrial capacity in light of the current critical minerals embargoes. He described a sort of hidden pathology in the way large energy infrastructure gets financed: a risk framework written for one purpose, applied to another it was never calibrated for, making the infrastructure Europe has decided it needs more expensive to build. His example was the Mijnbouwwet, the Dutch mining act.

The Mijnbouwwet was written to govern onshore mining; subsidence, seismicity, groundwater in a densely populated river delta. Since a 2012 amendment it also governs the permanent storage of CO₂ in depleted offshore gas fields, where the physical risk is lower by orders of magnitude. The liability standards did not change to match. So a banker pricing a loan against an offshore storage project is pricing a category of risk that the law still treats as if it were onshore mining, and so the cost of that mismatch ends up being reflected as a higher interest rate.

That was his observation, and our conversation is the heart of this essay. What struck me afterwards is that the same project carries a second version of the same problem from a different angle; in the banking capital rules themselves. Those rules are called Basel IV, and they were designed in part to prevent another 2008 by standardising risk weights across banks. The question I want to ask is whether a framework built to make banks safer can, applied to strategic infrastructure, quietly raise the cost of the very projects Europe is trying to finance. The two frameworks were written by different people for different reasons, neither with the other in mind. Yet, both frameworks affect project balance sheets in much the same way.

Mispriced risk

Legally, banks have to maintain enough reserve capital to absorb losses when loans default, even large ones. Exactly how much capital is required gets determined internationally in Basel, Switzerland, by the Basel Committee on Banking Supervision (BCBS), ¹ which has operated under the Bank for International Settlements (BIS) ² since 1973. The standards it sets are not legally binding in themselves, but national regulators implement them in their binding form; in the EU through the Capital Requirements Regulation. ³

Basel IV and the output floor

The current regulatory standards come from dealing with very different global economic situations over time. In 1988, Basel I introduced a simple risk floor where banks had to hold capital equal to a minimum of 8% of their risk-weighted assets (including interest bearing loans like your mortgage). Then in 2004, Basel II allowed banks with sufficient in-house modelling skills to use their own internal models to evaluate credit risk and calculate how much capital any given loan required on an individual basis to be rated within safety limits. It seems logical that a local bank with detailed knowledge about its borrowers can price risk more accurately than a regulator working from a broad categorical perspective. At least, it allowed for lower capital expenditures, especially for large infrastructure projects.

When the 2008 financial crisis hit, banks had been using their internal models for about four years to justify holding relatively small amounts of capital against various financial instruments (like the infamous mortgage-backed securities and collateralised debt obligations) that turned out to be far riskier than modelled. Part of the problem was that models were not designed to anticipate how correlated failures might be, so when the housing market failed, everything began failing at once. ⁴ The diversification benefits the models assumed did not hold, and Basel III followed immediately after the crisis, raising reserve capital requirements across the board. Beyond capital levels being too low, there was a second problem with the internal models producing risk scores that were too variable to supervise or compare across institutions.

Now, Basel IV introduces an output floor that still lets banks use their own internal models, but bars those models from producing a capital requirement below 72.5% of what the sector’s standardised models would require. European Parliament and Council of the European Union_{2024, art. 122a} The floor came partially into force at 50% at the start of 2025 and rises to 72.5% by 2030. For larger corporations with revenues over €500 million, the option to use internal models is removed entirely; those exposures must use the standardised approach regardless of how well the bank knows the borrower. So any unrated company or project of that scale attracts a 100% risk weight, meaning the bank must hold capital proportional to the full loan value, irrespective of the borrower’s actual credit history. For project finance covering infrastructure, energy storage, and large-scale industrial investment, the standardised weights run as high as 130% before a project is operational, falling to 100% once it is running (European Parliament and Council of the European Union_{2024, art. 122a}).

Standardising risk scores across borders makes a lot of sense, but better comparability comes at a cost. To compare risk across institutions you need a common unit, and the unit the standardised approach uses is categorical, not historical. So, in short, a project with stable cash flows, a long operational life, and a government-backed revenue floor will get assessed in exactly the same way as a speculative project of the same size. This is workable in most cases, but it becomes overly expensive when a project carries a certain kind of liability the category was not designed for; which is precisely what my new banker friend was on about.

Open-ended liability of the Dutch mining act

The Dutch Mining Act, the Mijnbouwwet, was passed in 2003, more than a decade before the BCBS began finalising Basel IV. It was also written by someone thinking about geology, seismicity, and environmental liabilities rather than capital ratios. Its job is to regulate subsurface activities in the Netherlands like oil and gas extraction, salt mining, geothermal energy, and since a 2012 amendment, the permanent storage of carbon dioxide (Rijksoverheid₂₀₀₂).

Storing carbon dioxide in offshore well is, in physical terms, much safer than onshore mining. For instance, depleted North Sea gas fields are very stable geological formations with proven containment records; industry analysis expects over 99.99% of injected carbon dioxide to remain in the subsurface, putting the probability of a significant leak below 0.01% or less than one project in ten thousand (Zero Emissions Platform_{2019, pp. 51}). But the mining act does not apply different standards to offshore CO₂ storage. Instead, it applies the same conservative framework developed for onshore mining (stricter scrutiny on soil movement, seismicity, groundwater effects) to a context within the subsurface category where the risks are materially different.

Getting an offshore CO₂ storage licence is hard, but, lenders only care about insuring against the liability they are financing. Furthermore, the borrower’s obligations do not end when injection stops and the well is closed, and that is a price that cannot be pinned to a number when the loan is signed, and it can be expanded by the regulator at any point if the agreed upon subsurface science changes. That combination of open-ended, unbounded, and mutability is structurally different from almost anything else a bank finances, and it makes it very hard to price risk given the the following Rijksoverheid₂₀₀₂ provisions:

• Article 31h requires the minister to withdraw or amend a licence if there is leakage, non-compliance, or “new scientific findings and technological progression”. There is no temporal limit on this trigger. A storage operator whose site is performing well can still face a mandatory licence change because the science around geological storage has moved on. This is entirely reasonable as environmental policy. It is very difficult to price as a financial liability.
• Article 31j means the licence cannot be transferred to the state until at least 20 years after injection has stopped, and only then if the operator has pre-funded 30 years of subsequent monitoring costs.
• Article 31k adds that even after state handover, the previous licence holder remains potentially liable for costs the state later incurs. The total liability tail runs to 50 years or more, with a final cost that is indeterminate at origination.

The act also maintains what is known as an ALARP ⁵ standard which means that risk must be reduced to a level where further reduction would be considerably disproportionate relative to the benefit. Note, this is not a fixed standard because as technology and science advance, what was considered acceptable in 2025 may no longer be acceptable in 2035.

You might be surprised when I say this is good law. I’m not going to argue it’s bad because for onshore mining in one of Europe’s most densely populated countries, conservative long-tail liability provisions are entirely defensible. The problem isn’t the mining act on its own terms. It’s that the same miscalibration appears from the other direction in Basel IV where a sound risk model is doing a job in a context it was not designed for.

Regulation out of step

Regulation is almost never in total unison with the thing it tries to govern. Sometimes it lags, like when a law written for one activity gets stretched over a newer one it was never drafted for, the way the mining act was stretched from onshore mining to offshore storage. Sometimes it runs the other way, like when a framework arrives with a fixed, forward looking template and imposes it regardless of the specific case, just like the way Basel IV’s output floor does by design. One is regulation catching up, and the other is regulation deciding in advance. These are different types of systemic failures, but they both lead to lead to risk scores being disconnected from the material risks a project actually carries. A CCS hub and storage well in the Netherland is unlucky enough to sit where both apply at once, and neither framework is built to notice the other. This is also partly why CO₂ storage in the Netherlands is more expensive that in other European countries, and will likely remain so for the foreseeable future.

From a corporate perspective, a CCS hub is typically set up as an unrated SPV (a special-purpose vehicle/company with no previous credit history of its own) which places it in the 100% risk weighted bucket under the standardised approach, or 130% before operations begin (as mentioned above). So, Basel IV’s category based model sees an unrated project vehicle and assigns maximum capital, regardless of the project’s actual cash flow stability or revenue structure. Meanwhile, the mining act has already required the operator to provide substantial financial securities (insurance, parent-company guarantees, monitoring funds) against the long-tail liability the licence creates. None of that security reduces the bank’s capital requirement. Under the CRR’s credit-risk-mitigation rules, only protection that runs to the lender and can be claimed on the borrower’s own default, insolvency, or bankruptcy counts as mitigation, and only for a closed list of valid collateral (European Parliament and Council of the European Union_{2024, arts. 194, 197}). The mining act security fails on both counts. It is set aside for the State rather than the bank, so if the borrower defaults the bank cannot touch it. And it exists to pay for cleaning up a CO₂ leak, not to repay a defaulted loan, so it does nothing about the only risk the capital rules are measuring. Wrong pocket, wrong purpose. As far as Basel IV is concerned, all that security might as well not exist, and the bank holds full capital regardless.

Now, it is fair to push back on this a little bit. When the European Banking Authority modelled the full impact of these rules, it found the aggregate effect on EU bank capital to be modest (a tier 1 requirement rising by under 8% by full implementation, comfortably raised over the phase-in) and CRR3 even contains a dedicated infrastructure supporting factor that lowers the risk weight on qualifying infrastructure exposures (European Banking Authority_{2024, pp. 9}). So where is the problem? The answer is that an aggregate is an average, and the average hides exactly the distribution that matters. The output floor bites hardest where internal models previously produced the lowest weights: on the safe, long-dated, well-modelled exposures—which is to say the very projects this essay is about. A retail-heavy bank barely moves; a bank financing an unrated infrastructure SPV feels it sharply. The supporting factor softens the edge but does not reach past the €500 million revenue cliff, beyond which internal models are barred outright. The system-wide number being small is not evidence against the friction. It is the statistical signature of a real cost concentrated on a narrow category and washed out of the total.

The result is that the bank holds maximum capital against a project already legally required to provision for its own worst-case outcomes. One framework reads the project through a law that predates it; the other through a category built to ignore it. Neither is calibrated to the thing in front of it, and because both apply at once the gap between priced risk and real risk widens rather than closes—leaving a cost nobody actually decided to impose. And that cost has to go somewhere.

Risk migrates

When the cost of financing exceeds what a project’s economics can absorb, the risk does not go away, it migrates or gets pushed onto someone else.

Porthos and Aramis

In the Netherlands this is visible in how CCS infrastructure actually gets built. Porthos, the first large-scale offshore CCS hub in the EU, reached a final investment decision only with a combination of a €102 million EU grant, SDE++ subsidies covering the gap between storage costs and the EU carbon price, and state support through permitting delays; the Dutch Court of Audit, reviewing the project in 2024, found its economics dependent on continued public funding, with the government committed to grants of up to €2.1 billion (Netherlands Court of Audit_{2024, pp. 5}). The financial security the Mining Act demands sits inside that cost. Industry analysis puts the probability-weighted risk cost of a North Sea storage project below €1 million, against the roughly €589 million of worst-case security operators are nonetheless required to set aside—a gap of several orders of magnitude that the subsidies ultimately have to cover (Zero Emissions Platform_{2019, pp. 35}).

Aramis, the larger follow-on hub, gives a sharper signal. Shell and TotalEnergies—two companies with investment-grade ratings, large balance sheets, and direct commercial incentives to decarbonise—scaled back their commitments after the initial phase, and in April 2025 the Dutch government stepped in with roughly €640 million to keep the project viable. I should be careful with this. A pullback by two oil majors has many possible causes—the carbon price, demand uncertainty, internal capital allocation—and I cannot prove that Basel IV and the Mining Act are the reason. But when two of the largest energy companies in the world find the commercial terms unattractive on a project of explicit strategic importance, it is at least a reasonable proxy for what the wider lending market is pricing.

Danish tender failure

In Denmark, the dynamic has taken a different form where the 2025 CCS tenders effectively placed post-closure liabilities onto public waste-to-energy companies; municipal utilities are not designed to carry long-tail geological risk and their ultimate backstop is the taxpayer. The tender required the bidding party to absorb the long-term, whole-chain risk of capture, transport, and storage, backed by delivery deadlines and penalties payable if storage fell short—and most would not take it. Of the ten prequalified bidders for the 28.7 billion kroner pool, eight declined to submit a final bid; a KPMG review of the withdrawals found that “more than half of the actors were not willing to take on the tender’s contractual obligations given the overall risk picture”, with risk allocation and the penalty regime among the decisive barriers Eskerod_{2026, pp. 6}. Conventionally, in a state-backed project the government bears the risk directly. In a conventional commercial project, a private entity bears it in exchange for adequate compensation. So, what the Danish CCS tender structure created is a third category: quasi-public entities holding liabilities they lack the mandate or capitalisation to absorb, and mostly walking away from them. The pattern is the same in each case, and the risk does not go away when commercial banks price it too high. Instead, it shifts onto public balance sheets, state subsidies, and entities not built to hold it.

Blind rulesets

Basel IV is a reasonable response to a real problem: it was built to address the mispricing of correlated financial risk in a highly interconnected banking system. But it is calibrated for the risks of 2008, and Europe now faces an entirely different category of systemic risk.

Strategic risk, invisible to credit

The closure of the Strait of Hormuz and the critical minerals embargoes are not credit events. They do not appear in any risk weight. A bank holding a loan to a CCS infrastructure project in the Netherlands—a project enabling European heavy industry to decarbonise without relocating—faces higher regulatory capital requirements than a bank holding a loan to an unrated importer of Chinese industrial inputs, despite the geopolitical logic pointing in the opposite direction.

This is not an argument that the importer’s loan is riskier in credit terms. Under the standardised approach, they may carry identical risk weights, and the financial credit risk may genuinely be similar. The argument is narrower: the standardised approach’s unit of measurement is credit default probability, and credit default probability is blind to strategic dependency, supply chain concentration, and the long-term cost of industrial capacity erosion. These are real systemic risks. They just do not show up in the output floor.

The United States, through the Inflation Reduction Act, has partially addressed this asymmetry for its own industrial base. IRA tax credits—the §45Q sequestration credit for carbon storage, the clean-electricity production and investment credits for power—create a government-backed revenue floor for qualifying projects, structured in a way that banks can factor into their underwriting (Internal Revenue Service_{2022, §13801}). A bank financing a comparable CCS or battery storage project in the US is looking at a meaningfully different risk profile, because the revenue support is designed to be bankable. European equivalents—the SDE++ subsidy in the Netherlands, competitive tender schemes elsewhere—are valuable but less straightforwardly bankable as collateral. Basel IV’s standardised approach does not distinguish between these two situations.

Development-finance objections

The natural objection is that development finance exists for exactly this. The European Investment Bank, KfW, and national promotional banks have long provided financing for complex infrastructure that commercial banks cannot efficiently price. If Basel IV pushes commercial banks toward the exit on CCS and industrial infrastructure, perhaps the answer is simply more development finance.

This argument has real force. Development banks play an essential role, and there is a defensible case that the division of labour—commercial banks for standard credit, development banks for complex long-dated infrastructure—is broadly sensible. The difficulty is scale. The Clean Industrial Deal, the Net-Zero Industry Act’s 50-million-tonne CO₂ storage target for 2030, the Critical Raw Materials Act’s processing ambitions (European Commission₂₀₂₅): these require a volume of financing that development bank balance sheets alone cannot supply. A market for strategic infrastructure that depends entirely on public institutions is itself a form of concentration risk: political constraints, sovereign borrowing limits, and the absence of the commercial discipline that comes from private capital at stake.

The question is not whether public finance should play a role; it clearly should and does. The question is whether the current framework is producing the right balance, or whether the unintended consequences of Basel IV are pushing it further toward public dependence than either the banking regulators or the industrial policymakers intended or would choose.

Strategic autonomy

The banker was not making a political argument during our trip to Copenhagen. He was describing a technical friction from his own work where a risk model carefully designed to measure one thing, but applied to something else, produces financing costs that nobody explicitly intended. And, both the Dutch mining act and Basel IV, which I discussed with him, contain the same pathology reaching the same projects from the banking side.

Basel IV was indeed a very reasonable response to a massive failure of the banking sector, and the Dutch mining act is a reasonable framework for managing the long-term risks of subsurface intervention. Both of them were designed by someone trying to be responsible, but neither of them was designed with the other in mind, and neither was calibrated for a moment in which Europe’s industrial capacity has become a question of strategic autonomy.

Risk frameworks are a bit like maps. A map only ever shows what it was drawn to show, and leaves off the rest—sometimes because the terrain had not appeared yet when it was made, sometimes because it was drawn at too coarse a scale to register what is actually there. The Mining Act is the first kind of map; Basel IV’s output floor is the second. Either way, what the map omits does not stop existing. The cost of that gap is not abstract. It shows up in state subsidies for projects that should be commercially viable, in public utilities holding liability they were not built to carry, and in CCS hubs that reach construction only after governments step in to make the numbers work. None of it appears in the Basel IV output floor—a risk that has been standardised out of sight, and out of mind, just when it matters most for future European industrial capacity.