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Incentives Spur Investors to Pick Up Pace on Low-Carbon Projects

Nov. 30, 2020, 10:30 AM

A mix of federal and state environmental incentives are drawing investors towards low-carbon, climate-friendly projects, an encouraging sign for President-elect Joe Biden’s call to drastically cut U.S. carbon emissions.

Companies for decades have used tax credits to drive down the cost of wind and solar power. More recently, similar credits have reduced the cost and risk to private capital of investing in projects to capture and store carbon dioxide emissions. More than 30 carbon capture projects in the U.S. were announced in the wake of a 2018 budget law that boosted a federal tax incentive.

Investors are now looking at projects that could benefit from that credit and a far more generous incentive available under California’s Low Carbon Fuel Standard. Some projects could even qualify for a third incentive, awarded by the EPA under the Renewable Fuel Standard for ethanol and other biofuels blended into the fuel supply.

“It’s as if the private equity world and hedge fund world has finally realized how much money there is to be made, because we are seeing an increasing number of investors entering the market who would not otherwise be looking at this space in the past,” said Jean-Philippe Brisson, an attorney with Latham & Watkins LLP specializing in low-carbon projects.

“These transactions aren’t completely new,” said Brisson, who helped establish Goldman Sachs’ U.S. carbon trading efforts. “But the pace they are entering the market? That is definitely new.”

Greenpeace and other environmental advocates have argued carbon capture projects, particularly those used to produce oil and natural gas, will hinder efforts to rapidly combat climate change. However many scientists say wide-scale carbon capture and newer technologies to directly capturing emissions from the air will be crucial to meet the goals of the Paris climate accord: keep global temperatures from rising no more than 2 degrees Celsius (3.6 degrees Fahrenheit) this century—and if possible, under 1.5 degrees Celsius.

Biden’s campaign platform includes a pledge to achieve net-zero emissions by 2050 and invest $400 billion over 10 years in clean energy research—which the campaign touts as twice the amount invested in the Apollo moon landing program in today’s dollars. He also vowed to advance carbon capture research funding and tax incentives in pledging to make U.S. electric power carbon pollution-free by 2035.

Tax Incentive Trifecta

The primary tax credit for carbon capture projects, which Congress expanded in 2018, is available under tax code Section 45Q.

Mac McLennan, CEO of Minnkota Power Cooperative in Grand Forks, N.D., said the co-op’s roughly $1 billion carbon capture project is wholly dependent on the 45Q credit. The project calls for retrofitting a coal-fired power plant with technology that could capture more than 90% of carbon dioxide emissions and store them more than a mile underground.

“The tax credit really serves as that bridge to get to the next step of what we’re doing here,” he said. “No one is going to build a billion dollar project on the idea that you don’t know where the return is going to come from for that.”

Minnkota isn’t alone in using the 45Q credit: the Treasury Department’s watchdog reported to Congress this spring that more than $1 billion in 45Q credits were claimed from 2010 to 2019.

A Texas project jointly developed by Occidental Petroleum Corp. and White Energy Co. Ltd. is going a step further, combining eligibility for the federal credit with an available state incentive.

The plan is to capture carbon dioxide from White Energy’s ethanol facilities in Hereford and Plainview. The emissions would be transported to the massive Permian Basin for use by Occidental in enhanced oil recovery options. The injected carbon dioxide, used to release hard-to-reach oil deposits, would then be sequestered permanently, thus reducing White Energy’s carbon footprint for producing ethanol.

Ethanol from the Occidental-White project, when sold in California, would be eligible for a separate credit under the state’s Low Carbon Fuel Standard, part of its broader effort to cut its planet-warming greenhouse gas emissions.

The fact that both credits are available is somewhat an accident of history, Brisson said. The Trump administration backed the 45Q expansion to benefit the oil and gas industry, but has repeatedly clashed with California’s efforts to go it alone on cap and trade, tighter vehicle standards, and other climate efforts.

“It’s a perfect example of the Trump administration and California not talking to each other,” Brisson said, “and what you end up with at the end of the day is two policies” that can be applied to the same project.

Coupling ethanol production with carbon capture and storage (CCS) technologies is ideal for meeting both the 45Q credit and the California credit because it offsets significant emissions from heating biomass to make the renewable fuel, said Deepika Nagabhushan, program director for decarbonized fossil energy at the Clean Air Task Force.

“This is a lucrative way to get access to state and federal CCS tax incentives—it’s really an opportunity for states to take advantage with their own policies when federal incentives are available,” she said.

‘Urgently Needed’ Extension

But time is running out for companies to take advantage of the 45Q carbon credit, which is only available to projects that start construction by the end of 2023.

More than two years of that eligibility were lost due to a lack of IRS guidance implementing the 2018 credit expansion. The guidance was finally released in February, just in time for economic uncertainty from the Covid-19 pandemic to compound worries that new capital-intensive projects won’t get off the ground.

“If you are at this point in 2020 and just starting off, you are not even going to be able to close your financing deals” in time to break ground in 2023, Nagabhushan said.

McLennan said that while the pandemic hasn’t had a huge impact thus far on Minnkota’s CCS project, a 45Q extension from Congress would provide a valuable “buffer” if something doesn’t go according to plan.

The Carbon Capture Coalition, which includes project developers, energy and industrial companies, and some environmental groups, has asked Congress to extend the credit and offer an option to receive the credit as an estimated payment on their tax return—something they say would provide projects with much-needed liquidity.

The coalition recently cautioned the House Ways and Means and Senate Finance panels that Congressional action is “urgently needed” to avoid the cancellation of many of the 30 or so projects under development.

The Occidental-White Energy project is on track to start construction before the end of 2023, when projects must begin to get the current 45Q credit, said Adam Hankiss, a partner at the King & Spalding law firm for corporate, finance, and investments.

“It should be almost operating in 2023, so that’s not a concern,” Hankiss said.

Other groups are seeking additional action to ensure carbon capture projects are more widely deployed, such as revamping permitting requirements.

Extending the credits “would have a dramatic impact on lowering carbon dioxide emissions,” said Rich Powell, executive director of ClearPath, a conservative clean-energy group.

“But if we combine it with improved infrastructure and streamlined permitting,” he said, “we are talking about one of the best and fastest paths to net-zero by 2050.”

—With assistance from Lydia O’Neal.

To contact the reporter on this story: Dean Scott in Washington at dscott@bloombergindustry.com

To contact the editors responsible for this story: Rebecca Baker at rbaker@bloombergindustry.com; Patrick Ambrosio at pambrosio@bloombergtax.com

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