In February 2018, the U.S. Congress passed the Bipartisan Budget Act, which included the expansion and extension of the 45Q tax credits for carbon capture utilization and storage (CCUS.) The updated incentive was designed to be much more effective in driving new CCUS projects and immediately generated private sector interest. Just a few months later, we saw the first major CCUS project announcement – Occidental Petroleum & White Energy – and the number of publicly announced CCUS projects has grown to more than twenty since then.
CATF is tracking newly announced CCUS projects in order to better keep up with this rapidly changing landscape. Here is the link to CATF’s current CCUS PROJECT TRACKER that we aim to keep updated to include new announcements and additional information about projects that are made publicly available.
As the Intergovernmental Panel on Climate Change has noted, if we are to limit temperature rise to less than 1.5 degrees Celsius, then we would likely need to geologically store between 350 billion metric tons and more than one trillion metric tons of CO2 cumulatively by 2050. This is in addition to deploying every other technology we have in our toolbox including renewables and nuclear. In comparison, the CCUS projects listed in the tracker collectively represent, based on available public information, the potential to capture and store around 40 million metric tons of CO2 on an annual basis.
Given the scale we need to reach for CCUS deployment, it is CATF’s goal to see that the initial project interest can turn into real projects as rapidly as possible. If all the CCUS projects under consideration right now to break ground soon, then the U.S. could start reducing millions of tons of CO2 emissions across multiple sectors of the economy, and CCUS would experience technology cost reductions as a result of learning by doing. And when the technology costs decline, more projects can be deployed, creating a virtuous cycle.
To learn what barriers developers continue to face in getting projects off the ground, CATF has been holding in-depth discussions with several CCUS project developers. One of the key concerns across the board was the uncertainty in timing and delay in the U.S. Treasury’s issuance of detailed guidance on eligibility requirements to claim 45Q tax credits. The good news is that, in February this year the Internal Revenue Services (IRS) issued guidance on two topics – commence construction requirements and how tax credits will apply to a partnership between investors, capturers & off-takers of CO2 that will allow developers to form investment partnerships and execute contracts. Additional guidance is expected soon on other issues, including rules for recapturing credit in the case of leakage during the storage process.
Another key barrier to CCUS deployment that CATF’s discussions have helped us understand is one that applies to larger projects on sources such as cement kilns, steel plants, and power plants and those that will want to store CO2 in saline formations. There is not enough time available to successfully develop these projects within the current commence construction deadline set at January 1, 2024. Counting from the time the IRS guidance was issued, developers only have four years to meet the requirement for eligibility. Whereas larger CCUS projects can take up to five years to begin construction of any kind, thereby missing the commence construction deadline by a minimum of five years and not making the cut for the tax credits. See Figure 1.
Projects of this type that have already initiated engineering studies may still be able to meet this deadline. But unless the commence construction deadline for 45Q eligibility can be extended by at least five years, it will likely freeze out these new larger CCUS projects that target saline storage. Click here for CATF’s detailed fact sheet highlighting the need to extend the commence construction window.
Finally, exacerbated by the COVID-19 pandemic, the ability to finance projects through investors that value the tax credits has contracted substantially, thereby significantly increasing risk to CCUS. CATF believes that modifying the existing 45Q tax credit and turning it permanently into a “direct pay” incentive will make it possible to monetize the tax credit without tax equity investors. A direct pay incentive acts a tax reimbursement, which helps ensure the taxpayer can monetize the full value of the credit and access general investing and lending markets, instead of relying on the specialized and shrunken tax equity investment market. A direct pay incentive would provide cash flow certainty to investors, enabling several CCUS projects to achieve financial close up front and commence construction in time to become eligible for the incentive. It is important to note that since solar and wind projects also depend on the tax credits, and as a result the equity market, they also face the same challenge and a direct pay incentive would work the same way for those projects too.
In summary, if the IRS releases further guidance on the 45Q, and if the U.S. Congress votes to extend 45Q’s commence construction deadline and to convert 45Q into a direct pay incentive, then the CCUS projects in the pipeline will have a stronger chance to realize CO2 reductions at the expected levels and get CCUS technology on track to achieving cost reductions.