A Big Lift for Carbon Capture

The Inflation Reduction Act provides substantially enhanced benefits to U.S. carbon capture, utilization and sequestration projects. It should be ample incentive for developers to get more dirt moving.
By Katie Schhroeder | October 19, 2022

The landmark Inflation Reduction Act is expected to have major impacts throughout the renewable energy industry, including carbon capture, utilization and sequestration (CCUS). The legislation increased the existing 45Q tax credits and extended the window of time for CCUS projects to take advantage of these credits. Lee Blank, CEO of Summit Carbon Solutions, outlines the impact the provisions in this legislation have on the company’s planned pipeline.

“It is great certainly for Summit Carbon Solutions, but I think more importantly it’s really a statement about the overall industry and, as I think about what the Inflation Reduction Act has done, it’s really given a landscape for carbon sequestration and storage of carbon, it’s really given it a framework and the ability to do something very substantial,” Blank says.

Elizabeth Burns-Thompson, vice president of government and public affairs with Navigator CO2, explains that the increase in 45Q tax credits may help stimulate interest in CCUS, while further helping facilities that have already signed on to aggregation projects like Navigator’s planned Heartland Greenway pipeline. “I think it’ll help provide stimulant to the handful of plants left in the space that haven’t committed to one type of an aggregate project like ours, or those that happen to be on top of the geology to be able to do this type of sequestration on site,” she says.

Although the increase in CO2 valuation per pound is increased, Burns-Thompson explains that the uptick in tax credits will go solely to the plants shipping their CO2 on the Heartland Greenway. The financial opportunity for Navigator is found in the potential for additional shippers due to increased interest in CCUS.

IRA Overview
Brian Jennings, CEO of the American Coalition for Ethanol, explained that the IRA, which is more technically the budget reconciliation legislation for fiscal year 2022, will have a far reaching impact on the ethanol industry beyond CCUS. In an Ethanol Producer Magazine podcast in September, he explained that the legislation provides U.S. Department of Agriculture funding for climate smart agriculture programs, sustainable aviation fuel (SAF) tax credits and half a billion dollars to the USDA for biofuels infrastructure.

Jennings also explained that the legislation implements a tax credit for ethanol producers based on each facility’s specific carbon intensity score, ranging from 20 cents per gallon to over a $1 per gallon. “The lower your carbon intensity is as a biofuels producer the more lucrative tax credit you can receive over the course of 2025 to 2027,” he says. “That is really going to help producers recoup the expenses they incur for adding these technologies that reduce carbon intensity.”

The improvements made to the 45Q have a positive impact on CCUS projects. “This budget reconciliation legislation really improves on that credit to make these projects much more doable, there’s so much in there to like,” Jennings says.

Boosting 45Q
The IRA increased 45Q tax credits for carbon capture and sequestration from $50 per metric ton to $85 per metric ton; and it also extended the deadline for qualifying projects to start construction by seven years, from January 1, 2026, to January 1, 2033. This is good news for those building huge multi-million dollar projects, Jennings explains, since they can qualify for 45Q tax credits as long as they start construction before 2033.

This extended timeframe also allows for projects such as the Heartland Greenway to operate in phases, Burns-Thompson explains. “You don’t want to rush construction, you don’t want to rush the permitting processes,” she says. “Now, you do want to make sure there is effective permitting in a way that can allow for us to actually move forward. It should be thorough, but it shouldn’t be impossible.”

The concept of permanently sequestering CO2 thousands of feet underground has gained a lot of interest from many ethanol producers due to the uniquely pure CO2 that comes off the fermentation step of ethanol production. Many ethanol producers signed on to CCUS aggregate projects in hopes of acquiring 45Q tax credits and possibly selling the ethanol in a low carbon fuel market.

Alongside boosting the sequestration credits, the IRA also increased tax credits for beneficial utilization, jumping from $35 to $60 per ton, which may spark interest in CO2 utilization research. Although the industry is still in its infancy, Burns-Thompson explains that there is already a strong market value for CO2 utilization—such as within the beverage industry for carbonated drinks, dry ice and food processing—and that market has potential to grow with new innovations. “That byproduct could potentially have an extreme amount of value, especially when you look at all of the very interesting and new technologies that are being explored in laboratories all across the country,” she says.

While up until this point, sequestration and utilization have frequently been seen as opposites, this does not need to be the case, Burns-Thompson explains. Techniques such as turning CO2 into bioplastic essentially keep it out of the atmosphere, and other technologies are in development. “Is there a way that utilization also achieves the goals of not releasing it back into the atmosphere? I think technology is showing us that it can actually be the case,” she says.
 
Financing Structure Changes
The IRA also made updates to the financing structure around CCUS projects, explains Aaron Hood, chief financial officer with Summit Carbon Solutions. “Summit can directly collect tax credits from the federal government for a portion of the time of the tax credit, which is a major change. Today, you have to enter into a tax equity partnership with a tax—a bank or a financial institution that has a well known tax appetite, and those transactions are pretty complicated,” Hood says. Simplification of these financing structures gives projects a wider array of options as far as financing sources.

The other provision in the IRA that changes the financial structure of CCUS is the implementation of direct sale for tax credits, which allows the proprietors of the tax credits to directly transfer them or sell them once, avoiding a complicated tax equity structure, Hood explains.

Dave Locascio, attorney with Hogan Lovells law firm in Houston, has been practicing law within the energy industry for 30 years, working with oil producers, oil and CO2 pipeline projects, and, gas and power companies. He also has some experience with CCUS, due to his experience over the past nine years with the now idle Petro Nova CCUS/enhanced oil recovery project, which is at a coal plant in southeast Texas. 

“For players who may not have the taxable income to use tax credits themselves, there’s a one-time sale option to sell it to somebody who could use it. And so that’s a way for those players to monetize the tax credit,” Locascio says.

Burns-Thompson explains that as a common carrier, Navigator CO2 plans to help producers understand this market and “helping our customers and our shippers navigate all of the different facets of both the component pieces of the IRA and also making sure that they’re maximizing the value of basically the carbon economy broadly.”

Increased tax credits will help carbon capture and sequestration projects look more attractive to investors, Locascio explains. With so many companies aiming to be carbon neutral by a certain date and builders needing private equity, there is potential for a mutually beneficial situation. “I think these look attractive if you can provide the credit, they provide returns. They provide the upside that makes it attractive to private equity,” he says.

Supply Chain and Agricultural Impact
CCUS has the potential to reduce ethanol’s carbon intensity outside of the ethanol plant in fertilizer and other agriculture related industries. Burns-Thompson explains that the fertilizer plants that participate in CCUS can help reduce the carbon intensity of the corn production it is used for by capturing their CO2. “If you think about what this technology could mean from an integration of potentially lower carbon or no carbon fertilizer going onto the farm to begin with, they are then producing the crop at a lower carbon intensity score and then [extending] into the value-added manufacturers like the ethanol producers that are linking up with our project or others that are also benefitting from carbon capture technology and further driving down the carbon intensity scores,” she says.

Hood highlights the importance of the IRA for the agricultural industry. “We’re really an agriculture focused company,” he says. “The goal is to decarbonize agriculture and, for us specifically, to continue to lower the carbon intensity of the ethanol space, which is an important part of the corn sector—ethanol uses 40 to 50 percent of the corn produced. So we think that the Inflation Reduction Act also brings in post combustion CO2 gathering as opposed to just CO2 from fermentation, and we think that is a great opportunity for our plants to continue to lower the carbon intensity of the ethanol they produce, which will be great for farmers.”

'The Tip of the Iceberg'
We are only seeing “the tip of the iceberg” in the world of CCUS, according to Burns-Thompson. Carbon reduction is bigger than transportation fuels and is becoming an increasing focus in many industries, she explains. Locascio highlights that there is interest from industry players who are choosing to be greener due to carbon neutrality goals.

“We’re more hyper focused on it in the fuels sector based on what you do and what I do, but carbon is being looked at everywhere,” Burns-Thompson says. “From kids’ toys to what you buy on the internet, and my Google Maps tells me the lowest carbon intensity route with a little leaf next to it. There is definitely value associated with the carbon intensity of these products and or services that are being provided, and so this is part of quantifying of that, and it’s going to keep getting more hyper local down to the farm gate level, I believe, as well. You necessarily need the infrastructure to be able to support that at the processor level to allow folks to recognize those benefits.”

 
Author: Katie Schroeder
Contact: [email protected]