CCS in the US has over the past decade or so been primarily linked to enhanced oil recovery (EOR) as its main driver. The recently passed Bipartisan Budget Act of 2018, however, includes a number of changes to the tax provisions which could prove to be a significant game changer for CCS developments in the US, by providing high-enough incentives for investments into CO₂ capture and permanent storage.

Lack of financial incentives for permanent storage of CO₂ has been one of the main inhibitants for CCS developments, in the US and elsewhere around the world. This has resulted in enhanced oil recovery (EOR) being the main driver for CCS developments in the US.  The inclusion of the bill on Furthering carbon capture, Utilization, Technology, Underground storage, and Reduced Emissions Act (FUTURE Act) in the recently passed Bipartisan Budget Act of 2018 (hereinafter referred to as the Act), however, could result in an increased shift towards CO₂ capture for permanent storage.

The changes

Essentially, the new Section 45Q, within the Act, increases the amount of the credit received, the time window for carbon capture projects, and the number of years to claim the credits. Before the passage of the Act, Section 45Q provided a $10 credit for each tonne of CO₂ either used for EOR or other use, and $20 credit for permanent storage.

The changes now provide for a tax credit, starting at $12.83 (for EOR) and $22.66 (for permanent storage) per tonne of CO₂ in 2018, which is set to increase in a linear fashion to $35 and $50 per tonne of CO₂ by end of 2026 respectively. After 2026, these amounts would be multiplied by inflation adjustment factor for a particular calendar year.

In addition, whereas before, the amount of CO₂ eligible for receiving credits was capped at 75 million tonnes, this has now essentially been removed, as it allows for receiving credits for any qualified facility for up to 12 years beginning on date the equipment is placed in service.

It is worth noting that the applicable new amounts of tax credits refer to the CO₂ captured using equipment which was put in place on or after enactment of the Act. For the CO₂ captured from facilities with CO₂ equipment in place before the enactment of the Act, the old tax credit levels apply. However, in case qualified facilities which have been capturing CO₂ before enactment of the Act install additional capture equipment, the total amount of CO₂ captured is eligible for the higher tax credits. In addition, any facility which captures not less than 500,000 metric tonnes of CO₂ during a year can be deemed, for the purposes of receiving tax credits, as having been in service on the date of the enactment of the Act.

Finally, the eligibility threshold for receiving the said tax credits has now been reduced from 500,000 to 100,000 tonnes of CO₂ captured and stored on an annual basis. This change is particularly important as the higher threshold is believed to have prevented smaller industrial projects from using the tax credit incentives.

The table below shows some of the changes in tax credits brought about the new Act.

Table 1: The pre- and post-Act tax credits for EOR and geologic sequestration

Source: Hunton & Williams, 2018.

It is worth noting that the captured CO₂ that is eligible for receiving the credits applies to CO₂ captured from power plants, industrial sources and direct air capture facilities. However, the CO₂ used for EOR and natural gas recovery process that is then recaptured, recycled and re-injected as part of these processes is not eligible to receive these credits.

In 2014, 64% of the CO₂ captured from industrial processes (mainly from ethanol, natural gas processing, ammonia production) and 91% of CO₂ produced from natural sources was used for enhanced oil recovery. The remainder of the captured CO₂ is also used in food and beverage manufacturing and/or pulp and paper manufacturing, fire-fighting equipment and metal fabrication. In addition, it is worth noting that in 2014 there was approximately 64 million metric tonnes of CO₂ received for underground injection from close to 100 facilities, of which 63 million metric tonnes was intended for enhanced oil recovery.

Recognising CCS in the context of climate change and energy security have been the main drivers behind the new changes to the tax credit system, receiving wide support on both sides of the political spectrum in the US. In this respect, Senator Shelley Moore Capito (R-WV), notes that these changes will lead to the US becoming a leader in developing and exporting carbon capture systems. Senator Sheldon Whitehouse (D-RI) sees the expansion of 45Q tax credits as “…a big win for our climate and the promising new carbon capture and utilization technologies looking to gain a foothold in the market…[and] a key step forward in combatting climate change by putting a dollar value on reducing carbon pollution.”

In any case, it appears that the changes to the tax credit system described above are expected to provide both an increased certainty and incentive to potential project developers, thereby spurring development of carbon capture and storage in the US. Only time will tell, however, whether the proportion of CO₂ intended for storage, as opposed to EOR, will increase.

Concerns remain

The captured CO₂ has in the past, and is likely in the future to be used in EOR for shale oil production. This has raised questions on the implications this would have on the residual CO₂ storage associated with EOR and the integrity of the geological structures. In this respect, the strict monitoring and reporting regulations are envisaged to mitigate the risk of any adverse events occurring.

Sources:

Bipartisan Budget Act of 2018, H.R.1892 C.F.R. (2018).

EPA. (2015). Capture, Supply, and Underground Injection of Carbon Dioxide. Retrieved from https://www.epa.gov/ghgreporting/capture-supply-and-underground-injection-carbon-dioxide

Heitkamp. (2018). Heitkamp, Capito, Whitehouse, Barrasso Announce Bipartisan Carbon Capture Technology Bill Signed in to Law. Available at: https://www.heitkamp.senate.gov/public/index.cfm/press-releases?ID=56B568EE-C05D-4DB1-B731-C343957AC83F

Hunton & Williams. (2018). Section 45Q Tax Credit Enhancements Could Boost CCS. Available at: https://www.huntonnickelreportblog.com/2018/02/section-45q-tax-credit-enhancements-could-boost-ccs/#_ftn2