This post is the 17th in our series, “The ABCs of the AJP.”

President Biden’s American Jobs Plan (AJP) sends strong signals in support of carbon capture and sequestration as an important tool to achieve the President’s ambitious decarbonization objectives.

Most significantly, the President’s plan would reform and expand the bipartisan Section 45Q tax credit, “making it direct pay and easier to use for hard-to-decarbonize industrial applications, direct air capture, and retrofits of existing power plants.”  The President’s plan would also “establish ten pioneer facilities that demonstrate carbon capture retrofits for large steel, cement, and chemical production facilities,” while also ensuring – consistent with the plan’s overall emphasis on redressing environmental injustices – “that overburdened communities are protected from increases in cumulative pollution.”

According to many studies, such as Princeton’s Net-Zero America report, carbon capture, utilization and sequestration (CCUS) will play an important role in achieving carbon neutrality by mid-century.  Princeton’s modeling suggests that geological sequestration could amount to between 1 to 1.7 billion tonnes of carbon dioxide (CO2) per year by 2050, with the majority occurring in the Texas gulf coast, and an additional 100 to 700 million tonnes of CO2 converted to synthetic liquid or gas fuels (through synthesis with hydrogen).

On a global scale, the International Energy Agency (IEA) recently concluded that “reaching net zero will be virtually impossible without CCUS.”  In the IEA’s Sustainable Development Scenario, the initial focus would be on retrofitting existing fossil fuel-fired power plants and industrial operations, including production of low-carbon hydrogen, but then, over time, the focus would shift to net removals of CO2, including through direct air capture, and as a source of climate-neutral CO2 for synthetic aviation fuels.

All these studies envision the build-out of regional “hubs” of pipeline infrastructure to transport captured CO2 from many sources, to sequestration reservoirs for permanent storage of the CO2.  Building that infrastructure in the U.S. would require a massive amount of capital and labor, hence, why CCUS features prominently within the President’s job-creating climate strategy.

Yet none of these studies suggest that market forces alone are sufficient to cause wide-scale deployment of CCUS.  Particularly in the absence of an express price on carbon emissions, public support and incentives are critical.  That’s where the Section 45Q tax credit comes in.

The 45Q credit has been available since 2008, but was expanded significantly by Congress in 2018.  It provides a volumetric tax credit for each ton of CO2 captured and either sequestered permanently, used in enhanced oil recovery or otherwise used in a commercial process.  The credit is available for 12 years after the capture equipment is put in service, with the amount of the credit rising from $34.81 in 2021 for a ton permanently sequestered in geological formations, to $50 per ton in 2026.  For EOR or other utilization, the credit tops off at $35 per ton in 2026.

The U.S. Treasury and Internal Revenue Service (IRS) finalized regulations earlier this year clarifying many issues that should remove regulatory hurdles that may have been stymying interest among taxpayers to develop projects directly or provide tax equity financing to CCUS project developers.  However, most observers acknowledge that more than the 45Q is needed at this time to motivate investment at the scale needed to realize the potential for CCUS as part of the U.S.’s carbon neutrality strategy.

State incentives can help make projects economically viable.  For example, California’s Low Carbon Fuel Standard (LCFS) provides a ton-for-ton credit for direct air capture (DAC).  With LCFS credits currently trading just below the $200 per ton price ceiling, the promise of “stacking” the LCFS and 45Q credits has led to significant milestones in DAC project development in the U.S.  But the LCFS only provides access to credits for DAC projects and CCUS projects that are directly related to reducing the carbon intensity of transportation fuels; it provides no pathway for crediting CCUS in power generation or hard-to-abate sectors, such as cement and steelmaking.

Fortunately, the prospects for broader federal support of CCUS look good in Congress.  Despite the general disagreement between Republicans and Democrats on climate change strategies, several bills advancing through Congress that would help motivate the wide-scale deployment of CCUS have broad bipartisan support.

  • The 45Q Carbon Capture, Utilization, and Storage Tax Credit Amendments of 2021, introduced in Senator Tina Smith (D-MN) with bipartisan support, would provide a direct pay option for the full value of the tax credit, meaning that project developers who don’t pay income taxes would no longer be beholden upon tax equity sponsors to finance their projects. It would also introduce a new $50 to $120 per ton credit for DAC projects storing in saline geologic formations.
  • The Storing CO2 and Lowering Emissions (SCALE) Act, introduced in March by Senators Chris Coons (D-Del) and Bill Cassidy (R-LA) and U.S. Representatives Marc Veasey (D-TX) and David McKinley (R-WV), would establish a financing mechanism at the Department of Energy for common carrier CO2 transport infrastructure, in essence, helping motivate development of the transportation infrastructure that doesn’t qualify for 45Q credits.
  • The Coordinated Action to Capture Harmful Emissions (CATCH) Act, introduced last month in the House by a bipartisan group of representatives, led by Tim Ryan (D-OH), would boost the 45Q credit to $85 per ton for industrial and power generation facilities securely storing CO2 in saline geologic formations and $60 per ton for EOR and other beneficial uses.

Together, this suite of bills, if enacted, could put CCUS projects in the money, regardless of the taxpayer status of their sponsors.

Yet many from the environmental community are critical of CCUS, including the White House’s Environmental Justice Advisory Council (EJAC), which recently suggested that the Biden Administration should exclude CCUS and DAC from its tool chest of climate solutions because it would extend the lifespan of fossil-fuel generation.  White House domestic climate adviser Gina McCarthy responded by saying that the Administration has not “taken anything off the table” in terms of its carbon reduction strategy.

The EJAC’s logic is apparently holding sway in places where the environmental justice movement first proved its ascendance.

Last week, the California Assembly approved a bill that would potentially sideline CCS from playing any role in achieving the state’s carbon neutrality targets.  AB 1395 would limit carbon “removals” to no more than 10 percent of what is needed to achieve the state’s carbon neutrality objective.  It would also define technology-based solutions, including electricity generation with CCS, as a removal.  This is scientifically inaccurate, as CO2 captured from a power plant is never emitted to the atmosphere in the first place.

But the bill would also impose criteria on the state’s ability to rely upon any technology-based solutions, including that use of any such solutions shall not increase toxic and criteria air pollutants.  This could act as a poison pill for any CCUS project, as the process of stripping CO2 out of flue gas requires the use of amines and the chemical reaction between those substances and the flue gas results in small amounts of toxic air contaminants, which, albeit insignificant, are unavoidable.  Moreover, the primary argument against CCUS is that it will allow for continued production and consumption of fossil fuels, the consumption of which will result in criteria pollutant emissions, and that exclusion of CCUS would force a faster transition.

And so policymakers face a choice: They can relegate to the side a promising technology that can deliver significant reductions in CO2 because, according to one narrative, anything that allows for continued production and consumption of fossil fuels is per se bad.  Or they can focus on carbon reduction as the target and support investment in CCUS.  Based upon legislation introduced in the past several months, a bipartisan caucus in Congress is unwilling to write CCUS off.

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Photo of Kevin Poloncarz Kevin Poloncarz

Kevin Poloncarz represents a broad range of clients on policy, regulatory, litigation, commercial, and enforcement matters involving air quality, climate change, and clean energy. He co-chairs the firm’s Environmental Practice Group and Energy Industry Group.

Mr. Poloncarz is ranked by Chambers USA among…

Kevin Poloncarz represents a broad range of clients on policy, regulatory, litigation, commercial, and enforcement matters involving air quality, climate change, and clean energy. He co-chairs the firm’s Environmental Practice Group and Energy Industry Group.

Mr. Poloncarz is ranked by Chambers USA among the nation’s leading climate change attorneys and California’s leading environmental lawyers, with sources describing him as “a phenomenal” and “tremendous lawyer.” He was named an “Energy & Environmental Trailblazer” by the National Law Journal in 2017 and was inducted as a Fellow of the American College of Environmental Lawyers in 2018.

He has extensive experience with California’s Cap-and-Trade Program, Low Carbon Fuel Standard (LCFS), Renewables Portfolio Standard (RPS), and is recognized as a leading advisor on carbon markets. He also assists energy-sector clients in obtaining and defending state and federal approvals for major projects throughout California.

Mr. Poloncarz also assists clients with the development and execution of legislative and policy strategies supporting decarbonization, including carbon capture and sequestration, low-carbon fuels, advanced transportation and energy storage, and is a registered lobbyist in California and Oregon.