Stalled carbon capture projects started advancing again after an IRS revenue ruling on July 1.

The United States offers large tax credits under section 45Q of the US tax code for capturing carbon oxide emissions and putting them to one of three uses. The three uses are secure storage underground, use for enhanced oil recovery and permitted commercial uses.

The tax credits are currently $34.81 a metric ton for carbon emissions stored permanently underground and $22.68 a metric ton for captured carbon emissions put to other uses. The amounts increase annually and will reach $50 a ton for underground storage and $35 a ton for other uses in 2026. (For more detail, see “Tax Credits for Carbon Capture” in the February 2021 NewsWire.) Congress is considering increasing them as well as making other changes. (For more detail, see “Wyden Bill and Tax Credits” in the April 2021 NewsWire.)

The tax credit was originally enacted in 2008, but it was hard to count on the credits when planning a project because total tax credits nationwide were subject to a 75-million-ton cap. Thus, no industrial company or tax equity investor could be certain for how long it would be able to claim tax credits.

Congress increased the dollar amounts and eliminated the cap in early 2018. (See “Tax Equity and Carbon Sequestration Credits” in the April 2018 NewsWire.)

No tax equity deals have closed yet involving the new credits. However, a number of deals were moving forward after the IRS issued final regulations in December 2020 to implement them.

Two issues have come up since then that put deals into a holding pattern.

The tax credits belong to the party who owns the carbon capture equipment. The IRS defined carbon capture equipment in the regulations to include gas separation units inside factories that separate carbon dioxide and other gases as part of the manufacturing process.

This equipment is part of the factory. It is hard to isolate and transfer ownership to a tax equity investor so that it can claim tax credits.

The other issue is the time period for claiming tax credits. It is 12 years from when the capture equipment first went into service or, if later, 12 years after February 9, 2018.

The fact that part of what the IRS considers capture equipment is already in place means that as much as half the tax credit period will already have run for anyone planning a new project today. It takes two to three years to get permits for, finance and build CO2 pipelines and wells to bury emissions underground.

The IRS said in Revenue Ruling 2021-13 on July 1 that the legal entity claiming tax credits does not have to own all of the capture equipment. It is enough for it to own just “one component” of the carbon capture process train, as long as the entity is legally responsible for disposing of the CO2.

It is unclear where tax equity counsel will draw the line ultimately, but most people are unlikely to feel comfortable relying on ownership of just a small piece of the process train.

The IRS also said that the 12 years will start to run when the “new components of capture equipment are added” to allow the carbon emissions to be captured, processed and prepared for transport to a disposal site or other use.

Section 45Q credits cannot be claimed in a year unless a minimum amount of CO2 is captured. At least 500,000 metric tons of CO2 a year must be captured at a power plant to qualify for any tax credits. The minimum is 100,000 metric tons a year for other industrial facilities. However, for industrial facilities that emit fewer than 500,000 tons a year, the minimum threshold is treated as having been reached if at least 25,000 metric tons of CO2 a year from the facility are put to permitted commercial uses.

Direct air capture facilities must capture at least 100,000 tons a year.

According to EPA figures, 54% of power plants and 75% of industrial facilities fall short of these minimums.

The Senate Finance Committee voted the last week in May to replace the volumes with percentages. A power plant would have to capture at least 75% of emissions that would otherwise go uncaptured. Industrial facilities would have to capture at least 50%. These percentages work for factories in some industries, but not others.

The committee also voted to increase tax credits for direct air capture to $175 a metric ton. A paper by a professor at the University of California, Riverside, Mihri Ozkan, calculated that a plant using liquid-solvent direct air capture would require 300 megawatts of electricity on a constant basis to capture one million tons of CO2 a year. If solar electricity were used with storage, it would cost between $430 and $690 per ton of CO2 captured to run the direct air capture facility. Geothermal energy would bring the cost down to as little as $250 per ton of CO2 captured.

Other analyses have put the cost of direct air capture at between $100 and $232 per ton of CO2 captured once the technology is better established.

Separately, the Senate Energy Committee voted in July for $500 million in grants in each of the next five fiscal years, starting with the fiscal 2022 year that begins in October 2021, to be made through the US Department of Energy to fund “new or expanded commercial large-scale carbon sequestration projects and associated carbon dioxide transport infrastructure, including funding for the feasibility, site characterization, permitting, and construction stages of project development.”

Priority will be given to projects with “substantial” underground storage capacity or that store emissions from multiple carbon capture facilities.