45Q – the tax credit for carbon capture creating new revenue streams for US energy, fertilizer and chemical manufacturers

For many carbon capture is the ultimate panacea when it comes to combating carbon change. Capture the carbon dioxide, store it and carry on, business as usual. Carbon sequestration efforts can be broadly classified primarily into two main categories; natural sinks (natural carbon reservoirs that can remove carbon dioxide) and carbon capture, utilisation and storage technologies (CCUS).

The latter include the capture and storage of carbon by the energy sector (coal, natural gas and oil) but also other high carbon emitting industries (cement, fertiliser, etc.). According to a 2019 report by Goldman Sachs (Carbonomics: The Future of Energy in the Age of Climate Change) the cost of these technologies varies from $25 per tonne for natural gas CCS to $200 per tonne for cement CCS.

At the extreme high cost end, capturing carbon out of the air (known as direct air carbon capture and storage (DACCS)) is very expensive, and as yet not proven on a commercial scale. According to Goldman Sachs, “In particular, DACCS has highly uncertain economics, with most estimates between $40-400/ton (at scale) and only small pilot plants currently in activity. The importance of DACCS lies in its potential to be almost infinitely scalable and standardizable, therefore potentially setting the price of carbon in a net zero emission scenario.”

In order for many of these technologies to be commercially viable, policies need be set so that capturing, re-purposing or permanently storing the carbon becomes more profitable than emitting it into the atmosphere. One option to increase the viability of these projects is to introduce a carbon trading scheme and let that set the price of carbon. Another is to directly incentivise it via the tax system, and here the U.S. is already ahead of the game.

An existing but little known tax credit lets American companies make a deduction for every tonne of carbon sequestered from the air. Known as 45Q, the tax credit was enacted in 2008 and enables companies to deduct tax if they have securely stored carbon dioxide in geologic formations, such as oil fields and saline formations or beneficially used as a feedstock to produce fuels, chemicals, and products.

The credit was amended in 2018, removing the tonnage limit. As of March 2021, the 45Q tax credit pays $35 per tonne for CO2 captured and used in the production of oil and gas or used in the manufacture of fuels, chemicals or other products, and $50 per tonne for sequestering CO2 in geological storage (DACCS).

However, a recent bill could lead to a dramatic increase in the value of the 45Q credit. For CO2 captured and stored in oil and gas fields or used in the processing of fuels, chemicals etc it could rise by $40 per tonne to $75 per tonne, while a $70 per tonne rise to $120 per tonne could be on the cards for CO2 captured and stored in geologic formations (DACCS).

Although the proposed increase in the 45Q tax credit will still only go part of the way to cover the costs of direct air carbon capture they do provide much greater regulatory certainty, and if they are combined with other policies they could be even more attractive to the development of the technology.

Oil companies such as Occidental Petroleum and Exxon have been at the forefront of carbon capture given how they already use carbon dioxide to extract oil from shale formations, pumping it deep underground to juice more crude from the streams – in a process known as enhanced oil recovery or EOR. However, low returns, regulatory uncertainty and technological constraints meant that they haven’t thrown significant resources behind direct air capture technology.

Occidental is the first mover in this field. It’s CEO Vicki Hollub even went so far as to say that the company would become a “carbon management company” in the future. Occidental already has plans in place to build a direct air capture facility on a 100-acre site in the Permian Basin, with construction scheduled to begin in 2022 and complete in 2025.

The tax credit will also be a big opportunity for many other companies that handle lots of CO2 as part of their existing operations. This includes fertilizer companies, cement and ethanol producers and other manufacturers that produce carbon dioxide as a byproduct of their manufacturing process. According to Wood Mackenzie these industries could eliminate 3.5 billion tonnes of carbon by using recycled CO2 while also generating a valuable new revenue stream.

Related article: How to bet on higher carbon prices

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