Tax Equity News

Post-IRA Tax Incentive Regime for Carbon Capture, Renewable Natural Gas and Clean Hydrogen | Norton Rose Fulbright - July 2023

Written by Gabrielle Jacques | July 17, 2023

The Inflation Reduction Act’s enhancements to carbon capture and sequestration tax credit and new tax credits for biogas investment and clean hydrogen production is creating novel opportunities for developers.  Project owners should model the economic benefits of the different incentive routes to see which credit (or, in some cases, stack of credits) makes the most financial sense.

Carbon Capture and Sequestration or Utilization

IRA Reduced the Minimum Annual Carbon Capture Requirement for Projects

  • Power-generation facilities: 18,750 metric tons (down from 500,000)
  • Industrial facilities: 12,500 metric tons (down from 100,000)
  • Direct air capture facilities: 1,000 metric tons (down from 100,000)
  • All carbon capture projects must “begin construction” before 2033.

45Q Tax Credit Overview

 

Base:

PWA* Compliant:

Credit Amount:

$12/metric ton for injection or utilization

$17/metric ton for disposal

$26/metric ton for direct air capture and injection or utilization

$36/metric ton for direct air capture and disposal

$60/metric ton for injection or utilization

$85/metric ton for disposal

$130/metric ton for direct air capture and injection or utilization

$180/metric ton for direct air capture and disposal

Credit Period:

12 years after placed in service

Direct Pay Eligible?

Yes; not limited to tax-exempt and state governmental entities during first five years of the credit period

Transferable?

Yes

Renewable Natural Gas

  • RNG is a term used to describe biogas that has been upgraded for use in place of fossil natural gas.
  • The biogas can come from a variety of sources including landfills, wastewater treatment plants, livestock farms, food production facilities, and organic waste management operations.
  • Biogas is now eligible for the section 48 ITC.
  • Converting biogas to RNG releases CO2. CO2 capture equipment can be added to an RNG plant.
  • There is nothing in the statute that precludes claiming an ITC on biogas property (i.e., wells, compressor, filter, blower) and section 45Q credits on the CO2 captured during the biogas to RNG refinement process.

48 ITC Tax Credit Overview

 

Base:

PWA* Compliant:

Credit Amount:

6%

30%

Credit Timing:

Upfront, in the year the project is placed in service

Direct Pay Eligible?

Yes; limited to tax-exempt entities

Transferable?

Yes

Two/ten percentage points bonuses for each of (i) siting in an “energy community” or (ii) satisfying “domestic content.”

Hydrogen

Hydrogen Tax Credit Details

  • Most hydrogen today is grey or blue hydrogen made from natural gas using steam methane reforming (SMR). Around 80 million tons of hydrogen are produced annually from SMR.
  • Green hydrogen start-ups are focused on electrolysis and processing organic waste.
  • It is important to move away from colors and think about carbon intensity. The IRA does not use colors.
  • Hydrogen production must be below 4 kg of CO2 emissions per kg of hydrogen to qualify for any tax credits and below 0.45 kg to maximize the tax credits.
    • CO2 emissions must be measured on a lifecycle basis “well to gate” using the GREET model.
  • All 45V hydrogen projects must “begin construction” before 2033.

45V Tax Credit Overview

 

Base:

PWA* Compliant:

PTC Credit Amount:

$0.60/kg (multiplied by an “applicable percentage” based on greenhouse gas emissions)

$3/kg (multiplied by an “applicable percentage” based on greenhouse gas emissions)

ITC Credit Amount:

6% (multiplied by an “applicable percentage” based on greenhouse gas emissions)

30% (multiplied by an “applicable percentage” based on greenhouse gas emissions)

Direct Pay Eligible?

Yes; not limited to tax-exempt and state governmental entities during first five years of the credit period

Transferable?

Yes

 

*Prevailing wage & apprentice.
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