45Q, financial uncertainties hinder capital flow for CCS deployment: panel

Carbon Capture and sequestration technologies have become universally recognized as a surefire way to decarbonize many petrochemical and fossil fuel industries, but financial uncertainties around these technologies are inhibiting the capital flow necessary to grow the CCS industry, a June 16 panel said during Global CCS Institute's annual forum.

One of the primary mechanisms through which a carbon capture project attracts financing are 45Q tax credits, which are issued to carbon capture projects to reduce their tax burden. Often projects collect these credits while also engaging with the voluntary carbon market, where projects can generate carbon offset credits to sell on the voluntary market.

But neither of these revenue streams are seen as durable enough for a CCS or direct air capture project to attract solid financing for getting off the ground, panelists said. And in a market where buyers aren't yet incentivized to pay premium prices for low-carbon commodities, financing carbon capture projects is riddled with risks, panelists said.

"When we talk about things like premiums for providing a product that's a lower CO2 intensity, it's great if that comes," said Michael Brownlie, division director at Macquaire Bank. "But for us as financiers, that needs to not just come, but there needs to be some way to lock it in over the long term. It can't be a fleeting, 'this year's great, next year I'm going to lose,' because we can't fundamentally finance that in an efficient way."

The current value of 45Q tax credits – at $50/mt for projects that permanently store CO2 and $35/mt for projects that use CO2 for enhanced oil recovery – have been roundly criticized as inefficient for properly scaling the CCS industry. Last year, the Biden administration's now-failed Build Back Better Act proposed increasing those amounts to $85/mt and $50/mt, respectively. Without certainty around the future of those bankable credits, its hard to incentivize emitters to add expensive carbon capture technologies to their operations, especially without a direct pay option.

Jeff Brown, managing director at the Energy Futures Initiative, described this certainty as "light at the end of the tunnel."

"You don't step into the tunnel until you can see the light at the end," he said. "People don't do the first-of-a-kind project unless they can see a trajectory to building enough of them to get their cost of capture down."

The additional mechanism often used to attract carbon capture financing, offset credits sold via the voluntary carbon market, is also seen as unreliable, Brown said. The voluntary carbon market has been too volatile to gain lenders' confidence.

According to S&P Global Commodity Insights, the assessed price of tech carbon capture credits – a basket assessment that reflects credits issued by a range of technology projects that remove emissions, including direct air capture – was down to $131/mt of CO2e June 16 after several months of steady gains. In January, tech-based credit prices peaked at $170/mt.

"Some people are going to pay voluntary credits, and that's great, but not 20 years of voluntary credits at a locked-in price that I can mortgage," Brown said. "We have to get policies that are durable and makes sense for the long term."