A Year After Tax Credit Win, Carbon Capture Backers Wait for IRS

Source: By Abby Smith, Bloomberg News • Posted: Thursday, April 11, 2019

Investors are still sitting on the sidelines more than a year after Congress passed bipartisan tax incentives for carbon capture technology, and it’s not for lack of interest.

It’s because investors—along with coal companies, oil and gas companies, industrial manufacturers, and startups focused on using captured carbon—are waiting on federal tax regulators to lay out the rules for how to claim the credits.

The Internal Revenue Service has yet to move forward with guidance to implement the so-called 45Q tax credits for carbon capture technology, extended and expanded by Congress in a bipartisan budget bill in February 2018.

Without that guidance, investors might be hesitant to invest in carbon capture projects, particularly those paired with power plants or large industrial manufacturing plants that require large upfront capital investment.

“It really has the risk of stalling out this very important policy, and it’s doubly unfortunate given the breadth of political support,” Brad Crabtree, vice president for carbon management at the Great Plains Institute, told Bloomberg Environment. The Great Plains Institute helps coordinate an alliance of more than 50 companies and groups supporting carbon capture.

The Senate environment committee on April 10 will vote on a bipartisan bill to boost carbon capture research and technology, meant to build on the 45Q credits.

Holding Back

The incentives aim to “spur innovation and bring down costs” for carbon capture, Crabtree said.

The danger is that without IRS guidance to clarify how to claim the credits, “project developers and investors hold back and wait, and at some point they may not have enough time to proceed” and take advantage of the incentives, he added.

The carbon capture incentives represent a policy with significant greenhouse gas reduction potential that President Donald Trump has signed his name to, but it could be difficult to tout ahead of the 2020 election without projects to show for it.

Carbon capture separates the greenhouse gas carbon dioxide from emissions of power plants and other industrial facilities to be permanently stored or used, rather than released into the atmosphere.

‘Actively Working’

The IRS says it is “actively working” on the guidance. The next step, according to the IRS, is for the agency to seek comment—which is expected to last 90 days.

The move comes despite the IRS already receiving model guidance from a large coalition of carbon capture supporters and detailed input from companies and other groups.

Members of Congress and the Energy Department are also ramping up pressure on the IRS. Energy Secretary Rick Perry wrote to Treasury Secretary Steven Mnuchin in December urging prompt action.

Game Changer

The credits could significantly spur the technology, which has struggled to commercialize because of high costs.

In the power sector alone, the tax credits could led to the capture and storage of nearly 50 million metric tons of carbon per year by 2030, the Clean Air Task Force found in a February report.

International climate and energy institutions say deploying carbon capture technology is critical to meeting the Paris agreement’s goal to keep global warming to 1.5 degrees Celsius (2.7 degrees Fahrenheit).

Carbon capture, utilization, and storage would account for 7 percent of emissions reductions needed globally by 2040, according to a scenario from the International Energy Agency.

And the Intergovernmental Panel on Climate Change projects that any pathway to meet the 1.5-degree target would require carbon dioxide removal of 100 gigatons to 1,000 gigatons of carbon dioxide through the 21st century. A gigaton is a thousand million tons.

That removal goal includes not only decarbonizing fuels and industrial processes, but also achieving negative carbon emissions through technologies like direct air capture.

Back Before Congress

But the inaction from the IRS might require carbon capture advocates to request that lawmakers push back the Jan. 1, 2024, deadline by which projects must begin construction to qualify for the credits.

“We’re on the crux of getting some projects that could demonstrate this sort of large-scale deployment of [carbon capture and storage] is economically viable,” Myles Culhane, managing counsel at Occidental Petroleum Corp., said during recent remarks at a Global CCS Institute forum. But if there isn’t further guidance, “we’ll have to be back in front of Congress on 45Q looking for another extension.”

Houston-based Occidental announced in June 2018 it was exploring a partnership with White Energy, a major biofuel producer, to deploy carbon capture at two ethanol facilities. The partnership was the first major project announcement since the tax credits passed. Few others have followed.

‘Uncertainty Kills’

The IRS guidance is so important because it will establish a predictable environment for investors to make decisions in, carbon capture supporters say.

“Uncertainty kills projects,” N. Hunter Johnston, a partner with Steptoe & Johnson LLP who has worked closely on the carbon capture tax credits, said.

Implementing guidance for tax incentives for wind and solar energy helped create confidence for investors and the basic structures of those markets, he added.

“It’s all about building a tax equity market for 45Q,” Johnston said. “In order to move carbon capture projects, there needs to be a robust demand for the carbon capture tax credits.”

Clear Rules

It isn’t clear when the IRS will release its notice for comment, but the agency might not offer much detail on several vital issues. Those include the rules around transferring the tax credit to other entities, which advocates say is a critical element to building a bigger market for the technology.

Under the new 45Q law, the incentives can be transferred among several parties, opening up the possibility for projects to have multiple investors taking advantage of the credits.

The 45Q law also requires project developers to demonstrate carbon is being captured and stored in order to receive the per-ton tax credit. If a project falls short of that expectation, the IRS can take away the incentive.

The IRS therefore needs to provide clear rules for when the government can reclaim the incentives, carbon capture advocates say.

“If a tax equity investor is at risk of losing a credit it claimed years in the past, that presents an impediment to investment,” Keith Tracy, president of Cornerpost CO2 LLC, a carbon capture consulting firm, said.

Investor Interest

The mere passage of the tax credits got investors interested in how to play in a new market and talking to technology and project developers, Shannon Angielski, executive director of the Carbon Utilization Research Council, said. The council is a group of coal companies, oil and gas producers, labor unions, utilities, and other organizations.

Those conversations can continue even while waiting on the IRS guidance, but financiers aren’t likely to officially close on investment loans until they understand the rules of the road, she added.

“That’s where the IRS guidance will be particularly important,” Angielski said. “Those timelines can take a while to get to project close.”