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INSIGHT: Carbon Capture Tax Credits—A New Tool in the Climate Change Arsenal

July 15, 2020, 8:01 AM

Carbon capture and sequestration is a process by which carbon is seized at the point of emission—at power plants, for example—or from the air and then permanently stored, or sequestered, deep underground in secure reservoirs or via afforestation (that is, enhancing CO2 uptake in coils and vegetation) or in the ocean.

The aim is to reduce the amount of greenhouse gases in the atmosphere that contribute to climate change.

As part of the Bipartisan Budget Act of 2018, Congress passed legislation originally introduced as the FUTURE Act (Furthering carbon capture, Utilization, Technology, Underground storage, and Reduced Emissions). Among its provisions, Congress expanded the tax credit for carbon sequestration projects under Section 45Q of the federal tax code. While it’s been over two years since this statutory change, most investors have been waiting for the Internal Revenue Service to lay out the rules before embarking on expensive carbon capture projects.

In May, the IRS released proposed rules governing the applicability of the expanded tax credit for capturing carbon dioxide before it enters the atmosphere. The proposed rules are largely based on similar guidance for other renewable energy credits. The guidance from the IRS details how carbon capture projects can show they meet the law’s requirement that carbon oxides be securely stored deep underground in facilities such as salt deposits, oil reservoirs and unminable coal seams in order to qualify for the credit.

The revamped federal 45Q tax credit provides a foundational policy for incentivizing carbon capture deployment in multiple industries, much like the roles the federal production tax credit and investment tax credit have played in wind and solar development, respectively.

The tax credit’s value depends on the date equipment was placed in service—either before or after Congress’s enactment of the Bipartisan Budget Act—and the type of treatment projects that apply to the carbon. The proposed rules also provide details on the procedures for companies to allow third parties to claim the credit and for the agency to recapture the credit when carbon is not securely captured or disposed. The proposed rules offer more clarity on when the agency thinks projects actually started and when they qualify for the tax benefit. Projects must start construction before 2024 to qualify for the credit.

Generally, tax incentives are a government policy tool to stimulate innovation and certain business investments. They reduce the marginal cost of technology development and engineering and ultimately reduce the cost to bring such technologies to economywide application.

The new Section 45Q rules increase certainty that the credit will be available once the performance objective of the rules are met and expands eligibility for the credit to more industries (e.g., cement, steel and ammonia makers) by lowering the annual carbon capture threshold (e.g., 25,000 metric ton minimum).

What this means in the short term is that entrepreneurs and scientists may take risks, fund innovative technologies and projects to test the limits of thermodynamics science and implementation of carbon capture and sequestration projects, and set up commercial engineering ventures necessary to bring these technologies to scale. Eligible projects that begin construction before January 2024 can claim the credit for up to 12 years after being placed in service.

Carbon Capture Needs to Remain a Tool

Many environmental groups continue to consider carbon capture as a false hope—a mechanism to allow more fossil fuel production rather than to legitimately address climate change. Views on the legitimacy of carbon capture as a tool to address climate change often correspond to luddite versus optimistic views of technology and the power of human innovation to improve the world.

But practically speaking, even if one’s policy preference is that we move to 100% renewable energy and to also eschew nuclear energy, then until we no longer need fossil fuels for energy and transportation, carbon capture—removing excess carbon from the atmosphere and storing it under the ground—needs to be among the tools we use to reduce greenhouse gas impacts on the atmosphere.

Currently, continued global population increases mean concurrent increases in demand for food, goods and energy. And as much as we may hope it, the technologies, infrastructure and political support for renewables, grid-scale batteries or hydrogen are not yet ready to replace coal and gas in power generation.

Carbon capture and sequestration may be an important tool in the toolbox in keeping the lights on. In fact, it may be essential to buy us the time we need until we develop reliable, affordable, low-carbon energy storage and transportation systems.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Maureen Gorsen is a partner in Alston & Bird’s Environment, Land Use & Natural Resources group, where she provides enforcement defense and regulatory compliance counsel. She is the former director of the California Department of Toxic Substances Control and former general counsel of the California Environmental Protection Agency.

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