Final Carbon Capture Regs Seeks to Boost Development, but Challenges Remain

Seeking to clarify the incentives available to developers of projects that capture carbon emissions during emission, the U.S. Treasury Department and the Internal Revenue Service (IRS) released final regulations for Section 45Q of the Internal Revenue Code in early January.[1]

Section 45Q incentivizes tax equity investors to invest in carbon capture and sequestration (“CCS”) by making financing easier through liberalization of several concepts and provisions.[2] Notwithstanding Section 45Q, though, various costs, inconsistent public support, and transportation and storage challenges remain barriers to implementing CCS.[3]

Carbon capture is the process of capturing carbon oxides created during industrial processes and power generation, then storing it in a way that keeps it from entering into the atmosphere.[4] IRS Code Section 45Q provides for up to $50 per metric ton of carbon captured in tax credits for qualifying facilities.[5]

According to then-Treasury Secretary Steven Mnuchin, the regulations “provide taxpayers and the American energy sector with needed clarity on utilizing the section 45Q credit.”[6] The regulations provides clear procedures for security measures, clarifies who qualifies for the credit, how taxpayers may elect to authorize third-parties to claim the credit, how carbon capture equipment is defined, and the standards associated with utilization of qualified carbon oxides.[7]

Notably, Section 45Q allows smaller carbon facilities to aggregate into one project to qualify for the credit, dependent upon factors such as common ownership and location.[8] The carbon capture tax credit was created in hopes of reducing greenhouse gas emissions by encouraging companies to capture carbon oxides during emission.[9]

Three ways in which taxpayers may qualify are: sequestration, enhanced oil recovery, and utilization.[10] Sequestration is a process by which captured carbon is extracted and stored deep underground, permanently and securely.[11]  During enhanced oil recovery, carbon is captured, used for subsequent oil extraction, and then finally stored. Utilization means using captured carbon in commercial contexts and is defined broadly by Section 45Q.[12]

The Global CCS Institute’s 2019 Status Report reveals that 40 million metric tons of carbon dioxide (“CO₂”) may be captured and stored each year by the nineteen CCS facilities currently operating or under construction.[13]

Ten of the world’s nineteen operational large-scale CCS facilities are located in the U.S.[14] Large-scale facilities, as defined by the Global CCS Institute, are power plants that capture at least 800,000 metric tons of CO₂ per year or industrial facilities that capture at least 400,00 metric tons of CO₂ a year.[15] In the U.S., six states are actively partaking in CCS incentives and progression: California, Louisiana, Montana, North Dakota, Texas, and Wyoming.[16]

More recent CCS technological developments include the Department of Energy’s $8 million grant for research, development, and testing of technology for algae-based utilization as well as up to $15 million for direct air capture.[17] Section 45Q was also successful in encouraging the progress of various CSS projects around the U.S.; currently, there are more than thirty carbon capture, utilization and sequestration projects in various stages of planning and development in industrial, direct air capture, power, and storage sectors. [18]

Significant barriers to carbon capture that impede CCS notwithstanding Section 45Q include costs of implementation, uncertain public support, and transportation and storage challenges.[19]  The largest costs are usually for equipment and energy for carbon capture during the capture and compression phases.[20] Capture of carbon dioxide, for example, increases water use while decreasing efficiency.

Additionally, financial returns for CSS are riskier given the technology’s relative lack of maturity and consequent higher risk premiums imposed by investors, raising the private cost of needed capital.[21] Section 45Q focuses on mitigating cost barriers for CSS through tax credit. Even with these various barriers in place, research suggests that Section 45Q has led to the more than thirty carbon capture and storage projects, and, as a result, potentially doubled existing global CCS capacity.[22]

A handful of states feature additional policies that support and encourage the use of CSS technology. Apart from the national tax credits created by Section 45Q, state level tax and other crediting mechanisms are available in California, Louisiana, Montana, and North Dakota, and Texas.[23]

[1] Press Release, Treasury Department and Internal Revenue Service Release Final Rule on Section 45Q Credit Regulations, U.S. Department of the Treasury (Jan. 6, 2021), https://home.treasury.gov/news/press-releases/sm1227 [hereinafter “Press Release”].

[2] Douglas Banghart, Robert da Silva Ashley, Jeffrey Gaulin, James Salerno & and Todd Wallace, Final Section 45Q Regulations Make Carbon Capture Deals Easier, JD Supra (Mar. 1, 2021), https://www.jdsupra.com/legalnews/final-section-45q-regulations-make-1067108/#:~:text=The%20policy%20purpose%20of%20the,requirements%20of%20the%20Paris%20Agreement.

[3] Vincent Gonzales, Alan Krupnick & Lauren Dunlap, Carbon Capture and Storage 101, Resources for the Future (May 6, 2020), https://www.rff.org/publications/explainers/carbon-capture-and-storage-101/.

[4] Id.

[5] Joshua Rosenberg, 3 Lingering Concerns About The Carbon Capture Tax Credit, Law 360 (Feb. 25, 2021), https://www.law360.com/energy/articles/1358420/3-lingering-concerns-about-the-carbon-capture-tax-credit?nl_pk=02c1059e-20b6-4aa1-8c8c-afb32f000976&utm_source=newsletter&utm_medium=email&utm_campaign; https://www.govinfo.gov/app/details/USCODE-2011-title26/USCODE-2011-title26-subtitleA-chap1-subchapA-partIV-subpartD-sec45Q/summary.

[6] Press Release, supra note 1.

[7] Id.

[8] Id.

[9] Rosenberg, supra note 5

[10] Id.

[11] Id.

[12] Id.

[13] Brad Page, Guloren Turan Alex Zapantis Lee Beck, Chris Consoli, Ian Havercroft, Harry Liu, Patricia Loria, Annya Schneider, Eve Tamme, Alex Townsend, Lucy Temple-Smith, Dominic Rassool & Tony Zhang, The Global Status of CCS 2019, Global CCS Institute (Dec. 09, 2019), https://www.globalccsinstitute.com/wp-content/uploads/2019/12/GCC_GLOBAL_STATUS_REPORT_2019.pdf

[14] Id.

[15] Gonzales et al., supra note 3.

[16]Page et al., supra note 13.

[17] Dept. of Energy Office of Fossil Energy, DOE Announces $8 Million for Projects to Develop Algae-Based CO2 Utilization, Dept. of Energy (Jan. 20, 2021), https://www.energy.gov/fe/articles/doe-announces-8-million-projects-develop-algae-based-co2-utilization; U.S. Department of Energy Announces $15 Million in Funding Opportunities for Direct Air Capture Technologies, Department of Energy (Jan. 20, 2021), https://www.energy.gov/fe/articles/us-department-energy-announces-15-million-funding-opportunities-direct-air-capture-0.

[18] Deepika Nagabhushan, Interactive Map of CCUS Projects in Development in the U.S., Clean Air Task Force (July 27, 2020), https://www.catf.us/2020/07/ccus-interactive-map/.

[19] Gonzales, Krpunick and Dunlap, supra note 3.

[20] Id.

[21] Id.

[22] Nagabhushan, supra note 18.

[23] See Gonzales, Krpunick and Dunlap, supra note 3 (“[S]everal proposed policies could impact the rate of development for CCS, including the Launching Energy Advancement and Development through Innovations for Natural Gas Act, Enhancing Fossil Fuel Energy Carbon Technology Act, and the Fossil Energy Research and Development Act of 2019.”).