The Internal Revenue Service has published the first of the long-awaited guidance to implement bipartisan carbon capture tax credits — but don’t expect a bevy of new project announcements just yet.
The IRS on Wednesday released two items of draft guidance that begin to define how project developers and investors can take advantage of tax incentives for carbon capture and storage, known as the 45Q tax credits. Congress, in a bipartisan budget deal in 2018, expanded and extended the tax credits in what carbon capture advocates and analysts have said could be a boon for carbon capture in the United States.
But developers have been slow to announce projects, as the IRS has taken more than two years to determine how to implement the new tax credit program — despite increasing pressure from industry, some environmentalists, Congress, and even the Energy Department, all of whom are eager to see the credits in place.
Last month, the Energy Department’s top fossil energy official, Steven Winberg, said there were “billions of dollars” of projects waiting on the IRS to issue guidance. Under the current 45Q program, projects must begin construction by the end of 2023 to qualify, a relatively short time frame for capital-intensive projects that are difficult to finance.
Investors may still stay on the sidelines for now, though. While carbon capture advocates say the two pieces of guidance the IRS released are a good start, the agency has yet to resolve most of the tougher questions regarding the program’s oversight.
“This guidance alone is not sufficient to give great comfort to the companies that are concerned about whether or not their sequestration is sufficient,” said Barbara De Marigny, a partner at Baker Botts LLP. “Without that piece, knowing how to allocate the credit or knowing whether you’ve built your facility in time isn’t going to resolve the basic investment questions.”
The IRS unveiled just two pieces of guidance for implementing the tax credit program on Wednesday. One draft guidance defines what carbon capture projects must do to demonstrate they’ve begun construction in order to earn the tax credit. The other draft guidance outlines how various partners in a carbon capture project, from the developer of the equipment to investors, can claim pieces of the credit.
Still to come from the IRS is guidance on more thorny issues — including how companies must demonstrate they are securely storing carbon underground, in what situations the government can reclaim the tax incentive if projects fall short of requirements, and how to account for emissions reductions from carbon stored in products.
The IRS said in a news release that it will issue further guidance on those issues “in the near future,” and carbon capture experts expect those questions to be resolved in more comprehensive rule-making.
The Carbon Capture Coalition, a group supporting the technology that ranges from fossil fuel companies to environmental groups, is urging the IRS to “move as quickly as possible” to finish the implementation guidance.
Further delays in developing projects “threaten to undermine the full potential of the 45Q policy to help foster economy-wide deployment of carbon capture to meet midcentury emissions reduction goals while supporting domestic energy and industrial production and high-wage jobs,” the coalition said in a statement.
Experts, though, say there weren’t any surprises in the two draft items the IRS released on Wednesday. The “commence construction” and partnership guidance largely mirror prior rules for other energy tax credits for wind, solar, and refined coal, with some adjustments for the carbon capture industry, said Hunter Johnston, a partner at Steptoe and Johnson LLP.
They’re limited in scope, though, Johnston said, adding that one of the biggest issues for investors, how and whether the federal government can “recapture” the tax credit in the event of carbon dioxide leaks, is yet to be resolved.
“This work took far too long and has delayed hundreds of millions, if not billions, of dollars in investments in the development and deployment of carbon capture, use, and geologic storage projects that Congress sought to incentivize through its bipartisan reform of 45Q,” the Carbon Capture Coalition said.
Nonetheless, De Marigny said she doesn’t think the IRS has been purposefully slow-walking development of the 45Q guidance. Instead, it’s been navigating a brand new area, working with agencies such as the Environmental Protection Agency that it doesn’t typically work with, and dealing with a rapidly expanding industry, she said.
De Marigny also suggested that the IRS pay close attention to movement on Capitol Hill. Last week, a group of House Republicans introduced a bill that would make the 45Q tax incentives permanent, as part of a broader climate strategy pushed by Minority Leader Kevin McCarthy.
“I don’t want them to wait to put out guidance, but if there’s anything in proposed legislation that looks like it’s going to get enacted, that would render some of their issues moot,” she added.
