What’s Next for Carbon Capture with Passage of 45Q Legislation?

Passage of the Furthering carbon capture, Utilization, Technology, Underground storage, and Reduced Emissions Act as part of the Bipartisan Budget Act of 2018 was an astonishing accomplishment for a Congress that has been mostly known for deadlock and partisan acrimony.

The reform of Section 45Q of the Internal Revenue Code provides the energy industry with a valuable incentive to capture carbon from industrial sources that would otherwise be emitted into the atmosphere. The bipartisan carbon policy’s passage announces the United States as a leader in the reduction of carbon emissions in the atmosphere on the world stage.

Much like the wind production tax credit and the solar investment tax credit created for the renewable energy industry, the credit – which is expected to usher in new technologies and billions in investment in carbon capture – will spur a new carbon reduction industry in the United States.

Passing a law is one thing. Now, supporters of 45Q must turn their attention to the credit’s implementation by the Treasury, Energy and Interior departments and the Environmental Protection Agency. The success of the wind and solar tax credits is directly linked to the successful implementation of guidance that supported investment and financing of projects.

In the case of 45Q, the Treasury and other agencies should adopt a number of policies to support investment in the carbon capture industry. First, the regulatory uncertainty over the definition of secure geologic storage of carbon must be removed. Since the FUTURE Act qualifies tertiary recovery, permanent storage and utilization of carbon as receiving tax benefits under the law, the agencies must provide clear and sensible guidance that ensures the tax benefits can be utilized by investing taxpayers.

In addition, the agencies must address the unique and progressive provision in the FUTURE Act that allows the owner of the tax credit to transfer the credit to a third party.

This provision – which provides the right to the person who captures the carbon to transfer the credit to the taxpayer who disposes of the carbon, utilizes the carbon, or uses the carbon in tertiary recovery – should be interpreted as broadly and flexibly as possible. If this tax credit cannot be utilized by a taxpayer having enough tax liability to monetize the credit, it has no real world value.

A lower corporate tax, paired with the creation of a new base erosion tax, has slowed the financing market for tax equity transactions. Further, since investors rushed to finance wind production tax credit projects in an effort to lock in higher-value rates for the wind production tax credit in 2015, 2016 and 2017, tax equity deals have slowed somewhat.

Although the tax equity market will return to higher levels of market demand in the future — as carbon capture projects are under construction — it is imperative that investors be able to take advantage of the transfer provision in 45Q. For example, large technology companies may be motivated to invest in the tax credit as a means of accomplishing climate objectives.

Finally, the Treasury Department, again working with DOE, Interior and EPA, is responsible for implementing 45Q in a way that will incentivize carbon reductions. Therefore, the agencies must promulgate reasonable regulations that clearly provide the tax credit to those who create products that use carbon captured as part of production, isolate carbon from the atmosphere, or prevent carbon from being emitted.

If properly implemented, the 45Q tax credit will create an exciting and new carbon capture industry, generating billions of dollars of investment in emission-reducing technologies. Now that 45Q is law, implementation of the guidance and regulations, or the hard work, is ready to start.

Hunter Johnston is a partner at Steptoe & Johnson LLP specializing in energy public policy, and he represents the Lake Charles Methanol project and other companies interested in monetizing Section 45Q tax credits.

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