The Inflation Reduction Act was quickly passed by Congress, passing the Senate last week and the House on Friday, leaving little time to understand the importance of tax credits for fuel companies fossils.
The bill includes changes to the federal 45Q Carbon Capture, Utilization, and Sequestration (CCUS) tax credit program and their implications for the fossil fuel industries and the U.S. budget. By indiscriminately increasing 45Q program carbon credits by 70% across the board, the bill threatens to dish out tens of billions of dollars in windfall tax credits to the oligarchs and provide decades of government subsidies to all fossil fuel industries. After an examination of the potential impacts of this program on specific CCUS projects, it seems that it would serve as a means for carbon dioxide (CO2) emitting industries and their oligarchic investors to claim to reduce greenhouse gas emissions – while simultaneously subsidizing the fossil fuel industry and supporting the next wave of oil development, at taxpayer expense, while razing pipelines through local communities across America using eminent domain.
The federal 45Q tax credit program allows participants to reduce their federal taxes based on the amount of CO2 they are able to extract from air pollution from smokestacks. Under current law, for every metric ton of carbon captured, beginning in 2027, the program provides $50 per metric ton if the carbon is simply pumped underground (sequestered) and $35 per metric ton if the carbon is used in enhanced oil recovery (EOR) operations. The use of carbon dioxide in EOR is based on the fact that liquid carbon dioxide is a very good solvent, so it can be used to dissolve oil trapped in deep rock.
The Inflation Reduction Act would indiscriminately increase 45Q program tax credits to $85 per metric ton for sequestration and $60 per metric ton for EOR – a 70% increase that would be provided regardless whatever the cost of the project. This one-time tax credit means lower-cost carbon capture projects (eg, ethanol plants) will win the lottery.
For example, the existing 45Q program would provide up to $2 billion in tax credits per year to Summit Carbon Solutions, Navigator CO2 Ventures, and ADM/Wolf CCUS projects. The bill would increase that amount to $3.4 billion a year. It is important to understand that the promoters of these pipelines considered these projects economically viable and profitable without the 70% increase proposed by the Inflation Reduction Act. This means the bill would provide up to $1.4 billion in additional tax credits to these projects beyond current costs and benefits.
The $85 per metric ton sequestration credit appears to provide tax credits in excess of 200% of carbon capture capital costs in ethanol plants, and possibly in excess of 150% of carbon capture costs in coal-fired power plants. Since simple carbon sequestration does not generate cash, if CO2 is to be sequestered, 45Q tax credits must be high enough to financially support the full cost of capture and sequestration projects. That being said, CCUS projects can also receive money from California’s low carbon fuel program or the sale of CO2 to EOR projects, which means some CCUS projects will likely be able to make money. plus tax credits.
Now let’s see how the Inflation Reduction Act would impact the coal industry. Given the variable costs of carbon capture, the 45Q program could provide tax credits of 18% to 113% above break-even – or, depending on plant size, $13 million at $500 million per year, per plant, above the break-even point. CCUS cost data for coal-fired power plants indicates that the bill would make CCUS economically viable in a large portion of coal-fired power plants in the United States and potentially provide tax benefits well in excess of the costs of the CCUS project, which which means that the 45Q tax credit could directly subsidize the coal industry. .
When it comes to the oil industry, it turns out that fluid CO2 is good for dissolving oil from the pores of rock in old oilfields, but for EOR CO2 to work, you need huge amounts of it. For decades, the oil industry has used CO2 EOR to increase the amount of oil pumped from old oilfields by 50% or more, but the use of EOR has been relatively rare because it is expensive. The oil industry sees CO2 EOR as its next big wave of development that will grow as hydraulic fracturing declines. The problem is that the oil industry has fully exploited the natural deposits of CO2. Therefore, the main obstacle to further expansion of CO2 EOR is not the technical challenges – it is the lack of access to huge quantities of affordable CO2. The only way to do this is to use federal subsidies to capture CO2 at industrial facilities and ship it to the oil fields.
The oil industry needs federally funded carbon capture projects to keep oil flowing. That’s why Exxon’s CEO recently described carbon capture as the “holy grail” and called for the 45Q program tax credit to be increased to $100 per metric ton. Carbon capture is certainly the holy grail for converting federal tax credits into future oil industry profits. Even supporters of the oil industry should stop and think about what it means to make future US oil production dependent on massive federal subsidies and the construction of a national network of carbon pipelines entirely dependent on eminent domain.
From a climate change perspective, the subsidized CO2 EOR could result in the pumping and burning of a huge amount of additional crude oil, both in the United States and around the world. Typically, emissions from burning EOR oil exceed the amount of CO2 left in the ground, often by a ratio of at least two to one.
The Inflation Reduction Act is about to pass Congress, but it has the potential to provide truly massive subsidies and windfall tax benefits to CO2-emitting industries. And these massive investments will surely be used later as arguments as to why CCUS projects – and facilities that emit captured CO2 – should be kept in operation, so that the federal tax credit gravy train keeps rolling indefinitely.
No wonder Congress is rushing.
Paul Blackburn is a pipeline lawyer who has represented community and environmental groups, including bold alliance for more than a decade on pipeline projects. He previously worked for a number of environmental organisations, as well as in the development of renewable and fossil energy projects.