Keith Martin / Co-head of Projects, U.S. / Norton Rose Fulbright
Keith Martin
Changes in a U.S. tax credit for carbon sequestration should make the tax credit more attractive to the tax equity market.
However, the issue will be whether Congress gave a long enough runway for developers to respond to the new incentive and for the tax equity market to become comfortable with the risks in such transactions.
Sequestration projects must be under construction by the end of 2023 to qualify. Tax credits can be claimed for up to 12 years after a project is put in service on the carbon dioxide captured at an industrial facility or power plant and permanently buried, used as a tertiary injectant to recover oil and gas or put to some other commercial use in a manner that disposes of the CO2.
The U.S. government has offered a tax credit to sequester carbon since late 2008. The credit is in section 45Q of the U.S. tax code.
In the past, the tax credit was too small in amount to generate enough activity, and it could only be claimed on the first 75 million metric tons in total carbon dioxide sequestered nationwide. No more tax credits could be claimed by anyone after the year the IRS announced the 75-million figure was reached. This made it impossible to know, when undertaking a project, how much in tax credits a developer would receive.
Congress eliminated the 75-million-ton cap and increased the credit amount for new carbon capture equipment installed on or after February 9, 2018 as part of a rider to a temporary spending bill, called the “Bipartisan Budget Act,” in early February that kept the federal government operating for another three weeks until a more permanent budget deal was worked out later that month.
Congress also made it easier to transfer the tax credits in cases where the person entitled to tax credits is unable to use them.
Carbon capture at older facilities that were in service before February 9, 2018 will continue to qualify for tax credits, but at the old rates and subject to the 75-million-ton cap.
A big coal-fired power plant that emits and captures five million tons of CO2 a year could generate more than $110 million a year in tax credits.
The credit is more likely to lead to transactions at smaller industrial facilities than power plants in the short run because of cost. Costly deals are more complicated and time consuming to put together.
What qualifies?
The revamped tax credit for installing new capture equipment — like the old tax credit — rewards capturing carbon dioxide from any industrial source, including a power plant, and then either burying it in a secure geological storage or using it in one of a variety of ways.
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