Some carbon capture projects will continue to stall, because while the IRS has answered some of investors’ and developers’ most-pressing questions, plenty still remain.
The IRS plans to issue additional guidance in the “near future” after it took the first step with a notice and a revenue procedure. That could especially benefit companies like Naturcycle LLC that are looking for the IRS to clarify how they can claim tax credits if they’re capturing carbon dioxide from the atmosphere and using it to create products like compost, cement, or plastic.
That’s an area where the IRS needs to develop “rules of the road,” said Kurt Waltzer, managing director of the Clean Air Task Force, which is part of the Carbon Capture Coalition and a proponent of providing incentives for capture projects. Carbon capture and storage is the process of trapping waste carbon dioxide from power plants and industrial facilities and depositing it in a place where it won’t enter the atmosphere.
The guidance that the IRS issued Wednesday came more than two years after Congress extended tax incentives for carbon capture projects. It clarified how to structure partnerships to finance projects and how to satisfy a requirement to begin construction before 2024.
This guidance will help many projects move forward, but the success of some depends on the questions that have yet to be addressed, said Keith Tracy, president of Cornerpost CO2 LLC and a former executive for the oil and gas company Chaparral Energy.
Until the IRS provides more guidance, companies wanting to claim credits for converting carbon dioxide into products—sometimes referred to as “beneficial use” or “utilization"—won’t know how to calculate how much they’re reducing carbon dioxide emissions through their projects, Tracy said.
“Nothing the IRS has issued to date has addressed the beneficial use community,” he said.
Recapturing Credits, Secure Storage
Congress in 2018 extended and expanded the tax credits companies can get under tax code Section 45Q for projects that use carbon capture technology. The amount of the credit varies based on the type of storage employed but, for companies, the total value can equal millions of dollars.
That’s part of the reason why these projects have captured the attention of large oil and gas companies like
The guidance is a useful template for taxpayers to develop and finance carbon capture and storage projects, even though it’s not comprehensive, said Jim Cole, a Latham & Watkins LLP tax partner in Houston with experience advising clients on the credit. The second phase of guidance is expected to bring the clarity they still need, he said.
Investors and developers want to know when they’ll be required to return credits they’ve received if there’s a stored carbon dioxide leak. They’re hoping the IRS will provide exceptions to this “recapture” provision in cases, for example, where the leak is the result of an event that’s out of the taxpayer’s control, such as an earthquake or other natural disaster.
The industry also wants clarity on what qualifies as “secure geological storage.” The agency in a 2019 notice asked whether criteria beyond those required by the U.S. Environmental Protection Agency should be considered, specifically naming the International Organization for Standardization.
Companies can use different types of methods to store carbon dioxide. Two of the most well-known are saline storage, which involves pumping it into briny or salty water formations deep underneath the Earth’s surface, and enhanced oil recovery, which involves injecting it into existing oil reservoirs.
The Wednesday guidance is “certainly a start,” said Steven Carpenter, director of the Enhanced Oil Recovery Institute at the University of Wyoming. But final development, financing, investment, and engineering decisions must be made before 2024, and that won’t happen until the government answers remaining questions.
“The IRS indicates that it will issue said guidance in the ‘near future,’” Carpenter said. “Not sure what their definition of near future is, and Dec. 31, 2023 is rapidly approaching.”
—With assistance from Lydia O’Neal.