Carbon Capture Coalition Presents Model Guidance to the U.S. Department of Treasury for 45Q Tax Credit Implementation

Despite intense partisanship and gridlock over national energy and environmental policy, Republicans and Democrats came together earlier this year to reform and strengthen the federal Section 45Q tax credit for the geologic storage and beneficial use of carbon captured from industrial facilities and power plants. In February, Congress enacted the FUTURE Act (Furthering Carbon Capture, Utilization, Technology, Underground Storage, and Reduced Emissions Act) as part of the Bipartisan Budget Act of 2018.

The culmination of more than six years’ work by the Carbon Capture Coalition’s industry, labor, and environmental participants and their partners, this landmark legislation aims to unleash private capital to invest in the deployment of carbon capture technology across a range of key industries, including electric power generation, ethanol and fertilizer production, natural gas processing, chemicals production, refining, and the manufacture of steel and cement.

Given its potential to support domestic energy and industrial production, protect and create high-paying jobs and reduce our nation’s carbon emissions, it is crucial that the U.S. Department of the Treasury proceed promptly to issue guidance for the revamped 45Q tax credit that provides the flexibility and financial certainty for carbon capture project developers and investors sought by congressional sponsors of the FUTURE Act.

In the months following passage of the FUTURE Act, Coalition participants have rolled up their sleeves to engage Treasury, which has responsibility for the implementation of the 45Q tax credit and has begun the process of developing guidance in consultation with the Environmental Protection Agency and Department of Energy.

In May, the Coalition presented a letter to Treasury outlining key implementation priorities:

• Election to assign the 45Q tax credit. The statute specifically provides for transferability of the credit to parties other than the owner of the carbon capture equipment, and flexibility is critical to enable and expand private investment in carbon capture deployment as Congress intended, yet there is little precedent from other federal programs to draw on;
• Recapture of the credit. Certainty with respect to the rules, circumstances and timeframe under which the credit could potentially be recaptured is important to avoid uncertainty and risk that would lead to devaluation of the credit by investors;
• Lifecycle analysis. Effectiveness of the new application of the 45Q credit to beneficial utilization of CO2 (outside the enhanced oil recovery and underground injection industries) will hinge on implementation of lifecycle analysis in a manner compatible with the needs of project developers and investors, while achieving the required emissions reductions; and
• Definition of commence construction. Clarity regarding how commencement of construction is defined will be important to give developers and investors the confidence to proceed with development of carbon capture projects, given the long lead times of such projects.

After submitting the letter in May, the Coalition this summer engaged the law firm Steptoe and Johnson to provide a tax and legal team to work with the Coalition to identify key implementation issues relevant to Treasury guidance, develop potential solutions, and draft model guidance. A Coalition subcommittee met several times and undertook numerous iterations of drafting and review with the Steptoe team to prepare the model guidance. In addition, legal and tax professionals from some of the participating companies and organizations provided detailed technical review prior to preparing the final version.

The Carbon Capture Coalition submitted a cover letter, model guidance and supplementary narrative on geologic storage to the Department of Treasury on November 21, 2018.

The model guidance addresses several implementation issues identified by the Coalition:

Credit Transferability: Many carbon capture project developers lack the tax appetite to monetize the 45Q tax credit themselves. Project developers may be tax-exempt cooperatives or municipal utilities, or they may not have sufficient tax liability offset by the credit to take full financial advantage of the credit. The ability for a project developer to effectively transfer the tax credit to investors or project partners with the ability to fully monetize the tax credit under certain conditions will be essential to attracting investment and financing many carbon capture projects. The statute provides flexibility to transfer the credit, but guidance is needed to fully clarify the transfer rules.

The Coalition recommends that IRS provide for the full flexibility regarding credit transferability permitted under the statute, including annual elections of the 45Q tax credit (not just one election for the life of the project) and for partial election of the credit (a portion or portions of credits being claimed for a project, not just the entire amount).

Contractual Assurance: Both the prior 45Q program and the amendments made earlier this year expressly contemplate that a project claiming a section 45Q credit need not physically dispose of, use, or utilize qualified carbon oxide if the taxpayer “contractually ensures” that the qualified carbon oxide is disposed of, used, or utilized by another party. In implementing the changes to section 45Q under the Act, Treasury and the IRS should clarify that an entity claiming the tax credit need not physically carry out the specified activities (disposal, use, or utilization) in order to claim the credit, as long as such person contractually ensures that the specified activity is carried out by another party.

In addition, the Coalition’s model guidance submitted to Treasury would treat a carbon capture project as contractually ensuring that a specified activity is carried out if: (i) if the owner of the carbon capture equipment enters into a contract with another entity, which requires that entity to either (A) carry out such an activity directly, or (B) contract with a third party to carry out such an activity; and that (ii) contracts include commercially reasonable terms to enforce such other party’s obligation to carry out required activities. The purpose of this flexible approach to contractual assurance is to facilitate utilization and injection projects on an appropriate risk-reward commercial basis, which will enable new investment in carbon capture projects.

Credit Recapture: The statutory provision for recapture of 45Q credits (in the event of loss of CO2 for which credits were claimed) has the potential to create a significant barrier to obtaining financing for carbon capture and storage projects. Because of the anticipated increase in demand for the credit following the amendments made by the Bipartisan Budget Act, prompt guidance is needed. As explained in the Coalition’s cover letter to Treasury, the Coalition urges adoption of a safe harbor for credit claimants to clarify and manage the risk of credit recapture.

Beginning of Construction: To qualify for the 45Q tax credit under the current congressional authorization, a carbon capture project must commence construction by the end of 2023. Identifying what activities are sufficient to adequately demonstrate that construction has indeed “commenced” is important. The Coalition recommends that the IRS adopt precedents for defining commence construction from wind and solar energy tax credits that are already widely understood and accepted by industry and investors.

Finally, in addition to the model guidance just submitted to Treasury, a Coalition work group is considering additional recommendations focusing specifically on implementation of the statutory requirement of lifecycle greenhouse gas analysis for projects claiming the 45Q tax credit for emissions reductions achieved through beneficial utilization of CO2 captured from power plants and industrial facilities.

Proper implementation of the 45Q tax credit is crucial to realizing the significant domestic energy and industrial production, jobs and emissions reduction benefits that will come from economywide deployment of carbon capture technology. The Carbon Capture Coalition looks forward to working with federal officials at Treasury, EPA and DOE charged with implementing the 45Q tax credit to ensure timely and thoughtful implementation of this important and innovative federal policy.

Carbon Capture Coalition model 45Q guidance for Treasury