IRA 'turbocharged' carbon capture tax credit, but challenges persist: experts

The Inflation Reduction Act "turbocharged" the 45Q tax credit for carbon capture and sequestration, but regulatory and capital challenges remain, panelists said during Infocast's CCS/Decarbonization conference July 25 in Houston.

In particular, the tax credit was raised to $60/metric ton for carbon dioxide used in enhanced oil recovery or other industrial operations and to $85/mt for permanently stored CO2, from $35/mt and $50/mt, respectively.

During a panel discussion about the "opportunities and critical questions" regarding the IRA, panelist Jeremy DuMuth, managing director for federal tax services at the Deloitte accounting firm, said that before the IRA passed, just 12 of 26 US CCS projects he knew about "made economic sense," but after the IRA, they all could be financed.

Eric Blumrosen, conference chairman and Houston-based technology partner at the Foley & Lardner law firm, said, "CCUS -- carbon management in general -- will play a critical role in providing the world with the energy it needs, while at the same time, meaningfully reducing our carbon footprint."

'Floodgates' still shut

But when moderator Michael Rodgers, counsel in the White & Case law firm, asked whether the IRA opened "floodgates" of investment into CCS projects, panelist Matthew Kittell, chief sustainability officer for the Americas of the Societe Generale investment bank, said, "I think that the waters have built up, but it's sort of like in a reservoir – still waiting to be released, because there's still a lot of things that have to be figured out in the market."

For example, panelist Greg Matlock, leader of the EY accounting firm's Americas energy transition and renewable energy practice, cited the IRA's labor requirements, which will be hard to monitor and could allow the Internal Revenue Service to "take away 80% of your tax credit."

Such rules include abiding by the Davis-Bacon Act's requirement for contractors to pay prevailing wages and the IRA's requirement for using a certain minimum of apprentice labor alongside journeyman workers on construction projects.

"With Davis-Bacon, you're submitting payroll with a lot of detail every week to the US Department of Labor," Matlock said.

Brent Lewis, CEO and co-founder of Carbon America, a company focused on CCUS finance, engineering and development, said, "I'm a finance person and project finance person, and I'm used to slow, long, complicated deals, but this is just ridiculous."

Michael Yurkerwich, managing director of the CohnReznick Capital financial service company, added that "a lot of these projects are larger than typically tax-financed vehicles, and in order to get the requisite capital, they needed to create new opportunities to monetize tax credits, and that's why" the IRA's creation of the direct pay and transferability of tax credits will expedite the effort.

Bayou Bend project

One example of such large CCS project is the Bayou Bend bringing CO2 from petrochemical facilities in Port Arthur, Texas, to storage 8,000 feet below 40,000 acres of offshore space in the Gulf of Mexico.

Houston-based Carbonvert is working with Talos Energy and Chevron to develop and operate the facility, said Alex Tiller, Carbonvert,CEO. In March, Carbonvert announced plans to expand the storage area to 100,000 acres onshore.

"Our strategy from the beginning was to go for a very high-impact, large-scale projects," Tiller said.

However, just the application was 5,000 pages long, and the supporting documentation was 10,000 pages, Tiller said.

"So, it's a tough hill to climb with respect to time," Tiller said. "If it's going to take two years for us to get approved, are you brave enough or feel comfortable enough to start ordering piping or whatever the case may be?"

A developer that is "nervous" and delays ordering equipment may add more time to the process, and then actual completion may stretch the project out to "six or seven years" before cash starts flowing, Tiller said.

Once more projects are complete and the model is proven "I think it'll improve over time," Tiller said.

"So, we're still excited about it," Tiller said. "It's just difficult for us right at this moment."