May 2014
U.S. Policy
Summary of the Expanding Carbon Capture through Enhanced Oil Recovery Act of 2014 (S.2288)

This document provides a general summary of S.2288 introduced by Sen. Jay Rockefeller (D-WV) on May 5, 2014. This bill would expand and reform the Section 45Q Tax Credit for Carbon Sequestration.

Introduction

Section 1. Short Title.

This Act may be cited as the Expanding Carbon Capture through Enhanced Oil Recovery Act of 2014.

Section 2. Expansion of Tax Credit for Capture, Utilization, and Sequestration of Carbon Dioxide.

The legislation is intended to increase the use of enhanced oil recovery with man-made carbon dioxide (CO2-EOR) by expanding and reforming the existing “Tax Credit for Carbon Sequestration,” established under section 45Q of the Internal Revenue Code. Among other things, the legislation:

  • Leaves the existing 45Q program in place and makes no changes to the way the remaining pool of credits can be claimed.
  • Establishes a competitive bidding process for allocating additional 45Q tax credits.
  • Divides the bidding for CO2 capture projects into three separate categories, or “tranches,” of facility, so that sources for which CO2 capture is inherently more expensive (e.g., power plants) bid against themselves, rather than against sources for which CO2 capture is inherently less expensive (e.g., natural gas processing).
  • Establishes a tax credit certification, or reservation, process, thus providing certainty for private sector companies investing in commercial-scale CO2 capture projects.
  • Includes provisions to ensure that the 45Q program is revenue positive for the federal government within a ten-year window and remains so for the duration of the program.

Simplified Eligibility Rules for Claiming the Credit

The legislation revises definitions to simplify the eligibility criteria for claiming 45Q credits. Current definitions have been a barrier for CO2 capture project developers.

In contrast to the existing section 45Q, the taxpayer does not have to own the facility where CO2 capture equipment is put into service. The taxpayer capturing CO2 and ensuring its disposal through EOR will be the party eligible to claim newly allocated 45Q tax credits.

In addition, CO2 must be captured from an electric power or industrial source (See the list of potential sources below.)

Similar to the existing section 45Q, the taxpayer must ensure that all existing regulatory requirements in the tax code for CO2 injection and storage are met.

Tax Credit Transfer with Parties in the CO2-EOR Supply Chain

The taxpayer capturing man-made CO2 may have insufficient tax appetite to take financial advantage of tax credits. 45Q tax credits may be assigned to other parties in the CO2-EOR supply chain, such as the party utilizing the CO2 in EOR and assuring of its secure geologic storage. This provision can facilitate tax equity partnerships.

Competitive Bidding

Each calendar year, new 45Q tax credits will be allocated through a competitive bidding process. A taxpayer operating a CO2 capture project will submit a bid for an allocation of tax credits equal to a certain dollar value per ton of CO2.

The existing 45Q tax credit equals $10 per ton of CO2 disposed of through EOR. Depending on the value of the winning bids, new 45Q tax credits may be more or less than $10 per ton of CO2.

The competitive bidding process is structured as follows:

  • Depending upon the source of man-made CO2, a taxpayer will bid for credits from one of three pools, called tranches (see next section).
  • Credits will first be awarded to projects submitting the lowest bids.
  • For example, a project seeking a $10 per ton tax credit will receive an allocation before a project seeking $15 per ton. Once the lowest bidders are allocated their credits, credits will be allocated to the next lowest bidder.
  • Allocations of tax credits will be made until annual fiscal limits are reached.

Bids will reflect a capture project’s cost gap:

A capture project’s cost gap equals the cost to capture and transport a ton of CO2 minus the revenue received for selling a ton of CO2 for use in EOR

In most cases, the revenue received by a CO2 capture project for selling CO2 for use in EOR will be tied oil prices. An EOR operator will pay a certain percentage of the prevailing oil price (per barrel) per million cubic feet (mcf) of CO2. An additional conversion must be made to express CO2 in tons, rather than mcf).

Separate Tranches for Power Plant and Industrial Sources

Establishing different pools of credits, or tranches, for different sources of CO2 – electric power, lower-cost industrial, higher-cost industrial – will ensure that all potential man-made sources of CO2 will be able to compete in the program. The three tranches are:

  • Tranche One: Electric power plants
  • Tranche Two: Lower-cost industrial sources, including:
    • Natural gas processing
    • Ethanol production
    • Ammonia production.
    • Existing gasification of coal, petroleum residuals, biomass, or waste streams.
  • Tranche Three: Higher-cost industrial sources, including:
    • Cement production
    • Iron & steel production
    • Hydrogen production
    • New-build gasification of coal, petroleum residuals, biomass, waste streams

Maximum and Minimum Bids

The Secretary of the Treasury will establish minimum and maximum bids for 45Q tax credits under each tranche.

Minimum bid levels are intended to prevent economically-unviable CO2 capture projects from disrupting the competitive bidding process.

Maximum bid levels are intended to ensure that several CO2 capture projects will receive an allocation of tax credits in each annual round of competitive bidding.

Annual Adjustment to Tax Credit Values

Each year in which a taxpayer claims 45Q credits, the value of the tax credits will be adjusted to reflect change in the oil price in any given year. This mechanism is included to limit the financial exposure of the federal government in providing tax credits when oil prices rise and the exposure of CO2 capture project developers when oil prices fall.

Annual Dollar Amounts Available for Tax Credit Allocation

This table lists the dollar amount available for tax credit allocation by tranche for a specific auction year.

($ millions) Years 1-3 Years 4-6 Year 7 Year 8 Year 9 and after
Electric power project tranche $1,350 $2,700 $4,050 $5,400 $6,750
First tranche industrial $400 $400 $400 $400 $400
Second tranche industrial $300 $600 $600 $600 $600

Capping the total dollar amount available for each tranche and sub-tranche in each year is intended to help the 45Q program become revenue positive for the federal government within a 10-year window. It also will provide certainty regarding the availability of federal incentives to CO2 capture project developers.

The examples below show how the dollar limits will work under each tranche:

Electric Power: The typical power project is likely to capture up to 3 million tons of CO2 per year.

Example: In Year 1, if an applicant capturing 3 million tons of CO2 per year bids for 10 years of credits at $45 per ton, the entire amount available for allocation, $1.35 billion, will be allocated. (3 million tons of CO2 captured per year x 10 years x $45 per ton = $1.35 billion)

First (lower-cost) industrial sub-tranche: The typical lower-cost industrial project is likely to capture at least 1 million tons of CO2 per year. Given that $400 million will be available for allocation in the early years of competitive bidding, more than one lower-cost industrial CO2 capture projects will likely receive an allocation each year.

Example: In Year 1, if an applicant capturing 1 million tons of CO2 per year bids for 10 years of credits at $10 per ton, the amount allocated will be $100 million. (1 million tons of CO2 captured per year x 10 years x $10 per ton = $100 million)

Second (higher-cost) industrial sub-tranche: A typical higher-cost industrial project is likely to capture at least 1.5 million tons of CO2 per year. The total dollar amount available for allocation in the electric power tranche and the second (higher-cost) industrial project will increase in Year 4 and later in order to accommodate more projects as CO2 capture technology matures in these sectors and overall CO2 capture costs decrease.

Example: In Year 1, if an applicant capturing 1.5 million tons of CO2 per year bids for 10 years of credits at $20 per ton, the amount allocated will be $300 million. (1.5 million tons of CO2 captured per year x 10 years x $20 per ton = $300 million)

Certification

The legislation establishes a certification process which enables capture projects winning allocations of 45Q tax credits to reserve the credits for future use provided that the project meets and continues to meet certain criteria. The existing 45Q program does not have a certification process.

Credit certification provides needed certainty to project developers and helps them in seeking private sector investment in their projects. To maintain certification, projects must move forward in a timely manner and meet deadlines for beginning construction and starting operations.

Upon receiving an allocation of tax credits, a taxpayer will apply for certification.

Requirements for certification include: having a binding contract for the disposal of CO2 through EOR and having performed a “qualifying action” that proves a CO2 project has committed itself to moving forward to financial close and construction in a timely fashion.

The list of potential qualifying actions includes:

  • The execution of a commitment by lenders, boards of directors, or other appropriate entities to finance a qualified project.  Customary closing conditions may be associated with the execution of that commitment.
  • The execution of a surety bond in sufficient amounts no later than 2 years after the date on which certification has been issued.
  • For electric power projects, other qualifying actions, such as state regulatory approval for cost recovery for the project or state-level approval to purchase electricity from the project.

By requiring projects to provide evidence that they will move forward in a timely matter toward completion, certification will help discourage potentially unviable CO2 capture projects from entering the competitive bidding process. 

Failure to Maintain Certification

If projects do not maintain certification, they will lose their allocation of tax credits, which may be awarded to other projects.

The Secretary of the Treasury may revoke certification if a project makes materially inaccurate representations or does not meet specified timelines for beginning construction and beginning operations.

Projects must begin construction within two years of certification. A project must place CO2 capture equipment in service within five years of certification for new projects and within three years of certification for projects involving a retrofit or an upgrade of an existing facility.

The legislation includes a definition of “beginning construction,” which is consistent with recent Treasury guidances for other tax credit programs.

Projects can receive extensions from the Secretary of the Treasury in meeting specified timelines. An extension will only be granted if a project can demonstrate that it has maintained continuous construction, barring disruptions that are beyond the control of the project. The requirement for continuous construction is consistent with recent Treasury guidances for other tax credit programs.

If a project loses certification, the allocated tax credits will be made available for reallocation to other projects.

Revenue Positive Determination

New CO2-EOR production generates new federal revenue, which will cover the cost of new tax credits over time. After seven years, the Secretary of the Treasury will determine if new allocations of 45Q credits are revenue positive to the federal government.

Federal revenues from incremental CO2-EOR production could come from three sources - corporate taxes on EOR sales revenue, income taxes on royalties received by individuals who have CO2-EOR production on their land; and royalties received by the federal government for CO2-EOR production on federal land.

Seven years after the first round of competitive bidding, the Secretary of the Treasury, in consultation with the Secretary of Energy and the Chairman of the Securities and Exchange Commission, will make a determination as to whether federal revenues from increased CO2-EOR production will exceed the cost of new 45Q credits as projected.

If the 45Q program is projected to be revenue positive, competitive bidding will continue. If the 45Q program is not projected to be revenue positive, the Secretary of the Treasury will send a report to Congress recommending adjustments to the program.

Increased Public Disclosure and Other Rules

To increase the transparency of the 45Q program, the Secretary of the Treasury will make annual public disclosures about the program, including: the number of certified 45Q tax credits; the number of revoked certified 45Q tax credits; descriptions of CO2 capture projects receiving certification for 45Q tax credits or having certification revoked; and an annual report listing the number of certified 45Q tax credits, the number of 45Q tax credits available for allocation by tranche and sub-tranche under the next round of competitive bidding.

Program Review by an Independent Panel

An independent panel of experts will periodically review the 45Q program and make recommendations to the Secretary of Treasury for improving the 45Q program.

Beginning after the third round of competitive bidding, an independent panel of experts will review the 45Q program to ensure that the competitive bidding process is allocating tax credits effectively, efficiently, and transparently. After the first review, subsequent reviews will occur every four years.

Based on the panel’s recommendations and in consultation with the Secretary of Energy, the Secretary of the Treasury will have discretion to modify the maximum and minimum bid amounts in each tranche. 

Additional Criteria for Eligibility to Bid in the Competitive Bidding Process

Similar to the existing 45Q program, new CO2 capture projects, whether newly constructed facilities or retrofits of existing facilities with CO2 capture equipment, will be eligible for 45Q tax credits.

In general, CO2 capture projects must be put in service after December 31st, 2013.

If placed in service before December 31st, 2013, the CO2 capture project must have received assistance from the U.S. Department of Energy under the Clean Coal Power Initiative or the Industrial Carbon Capture and Sequestration Program.

Polygeneration projects, i.e., those which produce both electricity and an industrial commodity, must be able to provide a specified minimum amount of electricity to qualify as a power plant.

To qualify for future rounds of competitive bidding, CO2 projects will have to meet required capture rates that will be increased over time.

Limitations

Projects that have already claimed 45Q tax credits will be limited in how many new 45Q credits they can bid for and ultimately claim.

For a given tax year, a taxpayer may only claim existing 45Q tax credits or 45Q tax credits allocated through the competitive bidding process established by this legislation.