June 1, 2020

By Carlos Anchondo, E&E News Reporter

A proposed rule issued by the Treasury Department last week to incentivize carbon capture and storage projects is getting mixed reviews from analysts, as questions linger about how the oil crash and coronavirus pandemic will affect the technology.

The regulation outlines implementation of a federal tax credit for carbon storage under Section 45Q of the tax code, including what qualifies as an industrial facility and how secure geological storage is defined (Energywire, May 29). The tax credit currently is considered the key financing mechanism for CCS projects. Congress passed expanded 45Q incentives two years ago, but the industry had been awaiting additional guidance from the executive branch.

Supporters of carbon capture and storage said the proposed regulation gives critical information to advance CCS projects on energy and industrial facilities nationwide, but they said the window to take advantage of the credit is too small. Industrial facilities, power plants and other emitters seeking to use the 45Q tax credit must start project construction by the end of 2023 — a deadline CCS proponents are pushing Congress to extend.

The "unprecedented" economic crisis triggered by the coronavirus pandemic has put added strain on an already tight time frame for CCS projects and developers looking to use the credit, said Brad Crabtree, the director of the Carbon Capture Coalition, a group of companies and organizations supporting CCS.

"Project developers now face an aggressive and rapidly closing window to plan, engineer, permit and finance potential projects amidst an unprecedented economic crisis caused by the COVID-19 pandemic that has constrained tax equity markets, a major source of needed private investment," he said in a statement.

The timing of the rule also raises questions on how the oil crash will affect CCS development, considering that many earlier projects were tied to enhanced oil recovery at a time when higher oil prices contributed to financing.

According to Crabtree, current low oil prices aren't as big a factor in the CCS projects moving forward as is the broader economic downturn in the United States.

"I don't want to understate the impact of oil prices on the oil and gas industry, but in terms of decisions about actual projects, I think the oil prices are less significant than the economic crisis more generally, because companies involved in carbon capture and enhanced oil recovery are used to dealing with low oil prices," Crabtree said.

If U.S. economic troubles continue, he said, it will also be important for Congress to provide the option of direct pay to provide a cash payment in lieu of the tax credit. Fewer projects will be realized — particularly in industries where there isn't as much experience with carbon capture technology — if a credit extension does not happen and the economy continues to suffer, he said.

Dipka Bhambhani, Director of Communications for the U.S. Energy Association, said that although USEA does not comment on oil prices directly, the group believes CCS projects can move forward regardless of the current situation.

"As long as the world's appetite for energy continues to grow, we need to explore and deploy all types of energy, and decarbonization is critical and that rests on innovation like CCS technology," Bhambhani said.

Similarly, Kurt Waltzer, managing director of the Clean Air Task Force, said what's more important is where oil prices will be once a project is built and operational.

He said having proposed rules also allows companies to move forward on a host of activities that need to happen before companies can break ground. While the proposal will help to advance some CCS projects, it is not enough on its own to overcome current economic headwinds, he said.

"To really increase the chance of success for seeing CCS projects move forward, we need to build on what the Treasury's done," Waltzer said.

Charles Hernick, vice president of policy and advocacy at Citizens for Responsible Energy Solutions, noted that projects tied to oil are one part of broader CCS opportunities. The expanded 45Q tax credits signed by Trump in 2018 included air capture — where carbon dioxide is pulled directly from the atmosphere — as an eligible technology.

EPA and secure storage

John Noël, a senior climate campaigner for Greenpeace USA, questioned whether CCS projects that move forward will prove whether captured CO2 is secured safely underground.

He pointed to an April report from the Treasury inspector general for tax administration that determined that roughly $900 million had gone to companies that lacked approved monitoring plans called for by law (Greenwire, April 30).

"This guidance doesn't necessarily answer any of those questions or doesn't outline any enforcement actions to update the oversight and accountability measures that are critical to ensuring that carbon is safely underground," Noël said.

Sen. Bob Menendez (D-N.J.), who initiated the investigation with the inspector general, did not provide a comment before press time, but his office said it is reviewing the proposed regulations.

Under the proposed rule, secure geological storage of CO2 can be demonstrated through a published standard by the International Organization for Standardization (ISO). Previously, to receive 45Q tax credits, secure storage needed to be demonstrated through Subpart RR of EPA's greenhouse gas reporting rule, which required an agency-approved long-term monitoring plan. Companies will still have the option to use the EPA protocol.

Noël said the ISO standard opened the door for a third-party verification process around secure geologic storage. The oil and gas industry has waged "an intense lobbying effort" around the guidance, he said, so it could have a third party verify that all of its information is correct instead of "having a conversation" with EPA.

"This update cuts out that MRV [monitoring, reporting and verification] process and cuts EPA out and enables an oil company to hire a third-party verifier to say they're doing it correctly," Noël said.

"What you'll probably see is a flood of companies going to the ISO process because it will be easier to comply with and that's why the industry wanted it," he said.

Crabtree said that although the ISO standard is "as or more rigorous" than current EPA requirements, it's a management standard — not a reporting program.

The Carbon Capture Coalition called on the IRS to "affirm the existing [monitoring, reporting and verification] pathway to claim the 45Q tax credit under EPA's Subpart RR rule of the federal Greenhouse Gas Reporting Program" and provide for an "additional and equivalent" monitoring, reporting and verification program based on the recently approved ISO standard.

While February guidance from the IRS makes clear that the EPA requirements will still be an accepted pathway to qualify for 45Q tax credits, the additional pathway based on the ISO standard needs to be "equivalent," Crabtree said.

"To be equivalent, you need to also have public reporting and transparency provisions in addition to compliance with the management standard itself," Crabtree said.