(This is the second blog in a series on the 45Q tax credit. View the first, third, fourth and fifth posts.)
In the past year, three pipeline developers have proposed building major new carbon pipeline systems in the multiple Midwestern states:
- Summit Carbon Solutions “Midwest Carbon Express”
- Navigator CO₂ Ventures “Heartland Greenway”
- Wolf Carbon Solutions’ pipeline
Why did they all announce their pipeline projects at about the same time? The short answer is it’s Congress’s fault. The goldrush to build CO2 pipelines is a direct result of how Congress structured its 45Q tax credit program for carbon capture and storage (CCS). If you would like to read the federal documents that create and contain the rules for how this program works, download the statute, 26 U.S.C. § 45Q, and the IRS regulations that implement this program, 26 C.F.R Chapter 1.45Q. I warn you, these regulatory documents are not easy to understand. If you would like to see a basic description of the tax credit, download this June 8, 2021, brief by the Congressional Research Service.
The purpose of this blog post is not to rehash this basic information, but to discuss the practical implications of the 45Q tax credit for landowners and others who are concerned about the rush to build CO2 pipelines. First, we’ll start with a little history and then explain how Congress changed the tax credit and triggered a pipeline goldrush.
The First Tax Credit Deal: Not Enough Slop for the Piggies
The 45Q tax credit was first enacted on October 3, 2008. This program provided a tax credit amount of $20 per metric ton for captured and sequestered CO2, meaning CO2 that is captured at industrial facilities and then pumped underground in the hope that it will stay there. It also provided a tax credit of $10 per metric ton for CO2 that is captured and then pumped underground for enhanced oil recovery (EOR). EOR projects use CO2 to extract more crude oil and natural gas for old oil fields. When a company pumped one metric ton of CO2 underground, Congress gave it the right to deduct either $20 or $10 from its taxes.
The 2008 version of the 45Q tax credit also limited eligible facilities to those that captured a minimum of 500,000 metric tons per year, which excluded small and modestly sized CO2 emitters, such as most ethanol plants, from the program. It also limited the total amount of tax credits authorized by the program to 75 million metric tons of CO2. Depending on the proportion of sequestration versus EOR credits claimed, this cap limited federal tax revenue losses to a range of $750,000,000 to $1.5 billion.
The tax credit stayed more or less the same for about 10 years. During this time, only one sequestration project at the very large ADM ethanol plant in Decatur, Illinois, claimed the $20 sequestration credit. The 2008 version of the tax credit failed to spawn a CCS industry because its dollar value was too low to make large projects (at least 500,000 metric tons) economically viable.
According to the Congressional Research Service, eleven EOR projects claimed the $10 per metric ton CO2-EOR tax credit. This modest tax credit improved the bottom line at these projects, but again was not high enough to trigger rapid growth in EOR operations.
Since tax credit claims are considered part of tax returns and therefore confidential taxpayer information, the IRS did not disclose which companies claimed the tax credit or how much they claimed. But, the IRS reported that as of June 2020 (two years ago), the tax credit had been claimed for approximately 72 million metric tons out of the 75 million metric ton cap. So, if all of this was for EOR, that would be $750,000,000 in tax credits, but since ADM was claiming $20 per metric ton, probably the total federal budget hit was in the billion dollar range.
Rolling Out the Red Carpet to the Hog Trough
In 2018, Congress sweetened the 45Q tax credit in three important ways:
- it allowed smaller CO2 capture projects (25,000 metric tons to 500,000 metric tons) to claim the 45Q tax credit;
- it increased the sequestration credit amount so that it ramped up from a starting point in 2018 of $22.66 per metric ton to a maximum starting in 2027 of $50 per metric ton; and it increased the EOR tax credit so that it ramped up from $12.83 in 2018 to a maximum of $35 per metric ton in 2027; and
- It removed the program’s spending cap, meaning that an unlimited number of companies can claim an unlimited amount of tax credits, but they can do so for only 12 years.
In addition, Congress allowed facilities that use captured CO2 for commercial purposes other than EOR to claim the tax credit, but the relative amounts of CO2 used for these other purposes are expected to be small.
By waiting to bring CCS projects online until just before or in 2027, relative to the 2008 deal, the tax credit piggies will get 250% higher tax credits for sequestered CO2 and 350% higher for CO2 used in EOR or for other commercial purposes. Projects can claim these maximum amounts without any cap on the total number of tons and dollars that may be claimed annually or cumulatively, but they have just 12 years to exploit this program. Yeehaw! Congress started calling the tax credit hogs (soueee!), and all the piggies come a running! https://www.youtube.com/watch?v=3AsrCZdzvAY
How much money are we talking? The small Valero Lakota Ethanol Plant in Kossuth County, IA emitted 41,506 metric tons of CO2 in 2020, and the large ADM Corn Processing plant in Cedar Rapids, IA, emitted 2,338,390 metric tons of CO2 in 2020 . If these plants sequestered 100% of these emissions and received $50 per ton of tax credit, then they would earn tax credits worth $2,075,300 and $116,919,500 per year, respectively. Over 12 years this would amount to $25 million for Valero and $1.4 billion for ADM. This being said, the 45Q tax credit does limit claims from a single CO2 emitter (other than power plants) to 500,000 metric tons per year, so ADM’s tax credit might be capped at $25 million per year and $300 million over 12 years. But that’s just two CO2 emitters. Here’s a table showing the maximum tax credits from the three CO2 pipeline projects proposed in the Midwest – so far.
|Project ||Maximum Capacity (metric tons per year) ||Annual Maximum Tax Credits at $50/MT ||Tax Credits Over 12 Years at $50/MT |
|Summit ||12 million ||$600 million ||$7.2 billion |
|Navigator ||15 million ||$750 million ||$9.0 billion |
|Wolf ||12 million ||$600 million ||$7.2 billion |
|Total ||39 million ||$1.95 billion ||$23.4 billion |
But, the federal government has rolled out the red carpet to an unlimited number of tax credit piggies, so the totals will almost certainly increase – a lot. This is big money. Do you hear the sound of pounding pig feet in the distance?
Rolling in Federal Hog Slop
Did Congress need to make the credit so generous? Probably not. There are studies showing that the cost of capturing CO2 at ethanol, natural gas processing, and fertilizer plants is in the $25 to $35 per metric ton range, so offering $50 per ton for sequestered carbon allows for a very handsome tax credit benefit even taking into account the cost of the carbon capture equipment, pipelines, and sequestration wells.
The $35 per metric ton credit for EOR is more than the entire cost of capturing CO2 at many ethanol, natural gas processing, and fertilizer plants. An oil company could pay for carbon capture equipment at an ethanol plant and get a tax credit generous enough to fully compensate it for the cost of buying and operating this equipment, as well as the cost of building and operating a pipeline to transport the CO2 to an EOR project. Essentially, Congress is giving the oil industry free CO2 so it can pump more oil, because most CO2-EOR projects are not economically viable when oil prices are low enough to keep voters happy. The 45Q tax credit is a sneaky way to use tax dollars to subsidize the oil industry.
Congress could have attempted to find the minimum effective price for the tax credit by ramping it up and then capping it when companies began to exploit it and limiting the total amount available. This structure would have allowed discovery of the lowest price that triggered CCS and EOR project development. Instead, Congress set the tax credit high enough to create a goldrush mentality.
Does the fact that the sequestration credit is $50 per ton and the EOR credit is less at $35 per ton mean that the CO2 will preferentially go to sequestration projects? Well, no, because EOR facilities would also pay something for the CO2, so whoever owns the CO2 would receive $35 per ton in tax credits from the federal government plus compensation from the EOR project for the CO2. Available EOR economic studies assume that oil companies can pay from $25 to $40 per ton for CO2 and still earn profit on the extracted oil. So, selling CO2 to oil companies might result in a combined tax plus cash benefit of $60 to $75 per metric ton – significantly more than the $50 per ton tax credit from sequestering the CO2. This means that the 45Q tax credit actually creates a greater incentive to use CO2 for EOR than it does for sequestration. The 45Q tax credit is to a substantial degree a giveaway to the oil industry to make large scale CO2-EOR financially viable and even highly profitable.
The 12-year life span of the 45Q tax credit also creates a need for a very generous credit, because investors can firmly rely on just 12 years of tax credits. They must assume that CCS projects will pay off multi-billions in debt in just 12 years and still have dollars left over to pay generous profits. Typically, major oil and gas pipelines operate and generate revenue for decades, so repayment of capital debt can be spread out over a long period of time, but not so with 45Q pipelines. They need a lot of $ slop and they need it fast.
The Pigs Roar MOAR!
According to a July 28, 2021, Congressional Research Service report, in 2021, the tax credit piggies pushed Congress for even more slop. In response to lobbying, Members of Congress introduced a number of bills (proposed legislation) including:
- S. 2230/H.R. 3538: increases sequestration to $85/MT and the EOR to $60/MT;
- H.R. 2633: increases sequestration to $85/MT and EOR to $50/MT;
- S. 986: increases EOR to $75/MT and creates a new category for direct air capture projects to $120/MT; and
- S. 1298: for CO2 from direct air capture a sequestration credit of 175/MT and $150/MT for use.
Most of these bills also extend the life of the program or make it permanent. These tax credit amounts would make CCS projects at any untapped ethanol, natural gas processing, and fertilizer plants wildly profitable, and make CCS viable at some industrial plants with higher carbon capture costs, such as at power plants. If this proposed legislation is enacted, it would spur another tax piggie stampede to build even more pipelines, because the capacity of the first round of pipelines would be fully committed.
In contrast, the Biden Administration proposed to increase the credit for sequestered CO2 by $35/MT to a total of $85/MT, but only for “hard-to-abate” industrial sources, such as power plants and cement plants, and it would also provide a credit of $120/MT for direct air capture of CO2. While not as generous with the slop as Congress, even this proposal would likely spur a second round of pipelines.
Big Federal PIggie Trough = Big Pipelines
It is likely that shipping the CO2 long distances to sequestration and EOR sites is cost effective only via large capacity pipelines that combine CO2 from a number of capture facilities. It would not be cost effective to capture CO2 from a single ethanol plant and ship it via a small diameter pipeline to a sequestration or EOR project, unless they were very close to each other (as is true at the ADM sequestration project in Decatur, IL). Shipping CO2 to sequestration and EOR projects hundreds or even thousands of miles away requires economies of scale. Therefore, the 45Q tax credit is also the likely driver behind the large sizes of the Summit, Navigator, and Wolf CCS pipeline projects.
Racing Pigs – On Your Mark, Get Set, Go!
One result of the automatic ramp up in tax credit value was that all the tax credit piggies decided to wait and bring their projects online as close to 2027 as possible so they could max out the amount of the tax credit they will receive over the twelve-year life of the credit. To accomplish this, they lobbied Congress to extend the construction start deadline for eligible projects to January 1, 2026, which of course Congress granted.
Although it might seem that the January 1, 2026 construction start deadline is like forever in the future, given that the proposed pipelines will pass through multiple Midwestern states, and total permitting and project development times in these states are typically 1 to 3 years, a number of companies apparently decided that they needed to kick off their CCS projects in 2021, just to ensure that their projects are permitted and start construction before 2026. If they get their permits early, they can always sit on them for a year or two.
As a result, Midwestern landowners and communities are being hit with a rush of CO2 pipeline proposals, all timed to allow construction to start before January 1, 2026. But, this doesn’t mean that all the 45Q piggies are at the trough. In oil producing states including Texas, Louisiana, Oklahoma, and Wyoming, there is no meaningful permitting process for pipelines, so they don’t need to announce their projects now. Instead, we might see a rush for the 45Q trough in these states perhaps next year and into 2024.
When a Pig Gives Birth to a Dead White Elephant
What happens to the pipelines when the 12-year tax credit runs out? Who knows? Congress could extend the credit and keep pouring cash into the piggy trough, or the federal government could be bankrupt by then. We should expect that if these pipelines are built, their owners will lobby Congress to keep the pork flowing, because not continuing this subsidy would result in a large amount of very expensive abandoned infrastructure. In other words, the 45Q tax credit would become so large that it would create its own momentum.
The fact that the carbon pipelines are the result of federal subsidies means that this entire industry is based on federal dollars, not free markets, so its future is based entirely in politics. The carbon pipelines may be built for a quick buck and then left to rot, leaving landowners with a belly-up white elephant.
Who Gets Trampled by the Stampeding Pigs?
You do. Congress has created a carbon pipeline goldrush, and thousands of impacted landowners and other citizens are being forced to deal with the impacts of pipelines on their lands, safety, and property rights. The total hit to the federal budget from this tax credit goldrush could be in the hundreds of billions of dollars, and American citizens will be on the hook to make up the difference.
The environment gets trampled, too. The 45Q tax credit is an extremely expensive way to reduce CO2 pollution that keeps the U.S. from transitioning to cleaner energy sources. There are cheaper and fairer ways to protect our environment that support true energy security.
My next posts will look into who will benefit from the 45Q tax credits, the IRS’s ability to ride herd on the pig stampede, and the oil industry’s role in this scheme. Stay tuned!
 Section 115 of Division B of the Energy Improvement and Extension Act of 2008, Public Law 110-343, 122 Stat. 3765, 3829. For a more complete history of the 45Q tax credit and a description of the IRS’s regulations to implement it, see this Congressional Research Service brief: https://sgp.fas.org/crs/misc/IF11455.pdf; June 2, 2020 Proposed IRS Rule at https://www.federalregister.gov/documents/2020/06/02/2020-11907/credit-for-carbon-oxide-sequestration; and January 15, 2021 Final Rule at https://www.federalregister.gov/documents/2021/01/15/2021-00302/credit-for-carbon-oxide-sequestration.
 Congress made minor wording changes to the 45Q tax credit in 2009 and 2014, but didn’t change its dollar amounts. Section 1131 of Division B of the American Recovery and Reinvestment Tax Act of 2009, Public Law 111-5, 123 Stat. 115, 325 (Feb. 17, 2009) (minor wording changes); Section 209(j)(1) of Division A of the Tax Increase Prevention Act of 2014, Public Law 113-295, 128 Stat. 4010, 4030 (Dec. 19, 2014) (minor wording change related to 45Q(d) agency responsibility).
 E.g., Role of CO 2 EOR for Carbon Management, Presentation to U.S. Energy Association, footnotes to slides 7-10; Economics and Lifecycle Emissions of CO 2 -EOR at slide 14.
 Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act, 2021, Public Law 116-260, 134 Stat. 1182, 3051 (Dec. 27, 2020).