By Fatima Maria Ahmad, Solutions Fellow, Center for Climate and Energy Solutions
A version of this article first appeared in the Sep./Oct. 2016 edition of the Carbon Capture Journal
Even in an election year, there are areas of energy policy where leaders of both parties and stakeholders from diverse sectors of the economy can find common ground. Encouraged by the landmark Paris Agreement in December 2015 and motivated by the need to avoid stranded assets and preserve jobs in the power sector, policymakers took seriously the challenge of accelerating deployment of carbon capture, use and storage (CCUS or carbon capture). Midway through the year, the International Energy Agency issued a report concluding that financial and policy support for carbon capture is not at a sufficient level to ensure an adequate pipeline of carbon capture projects that will enable the world to stay on track to meet mid-century goals of keeping global warming within 2 degrees Celsius of pre-industrial levels. Bipartisan proposals that are before Congress this year would encourage CCUS technology. State political leaders also supported carbon capture in notable ways this year.
H.R. 4622, the Carbon Capture Act
On Feb. 25, 2016, Rep. Mike Conaway (D-Texas) introduced H.R. 4622, the Carbon Capture Act, a bill to extend and expand Section 45Q, which is the primary tax credit for the use of carbon dioxide in enhanced oil recovery (CO2-EOR), a form of tertiary production. In the United States, carbon dioxide has been safely used in commercial enhanced oil recovery for more than 40 years. The United States produces about 4 percent of its oil through CO2-EOR. However, most of the carbon dioxide used is from naturally occurring underground reservoirs instead of from man-made sources. In addition to the climate benefits of reducing the amount of carbon dioxide vented into the atmosphere, CO2-EOR maximizes production from existing oil fields and may displace more carbon-intensive imported crude oil.
Rep. Conaway’s bill has 45 co-sponsors: 30 Republicans and 15 Democrats. These co-sponsors hail from 24 states and all regions of the country. This broad support challenges the notion that energy policy debates must be polarized and partisan.
H.R. 4622 provides four changes to 45Q. First, it would remove the existing cumulative cap of 75 million tons of CO2 and make the tax credit permanent. With less than half of the credits left for new projects to use, there is too much uncertainty for carbon capture project developers to secure financing. By making the tax credit permanent, the bill aims to establish certainty that would enable carbon capture project financing.
Second, the bill would increase the value of the credit per ton of CO2. Under current law, there is a credit of $10 per ton of CO2 for EOR and $20 per ton of CO2 for saline storage. Rep. Conaway’s bill would increase these values to $30 for both EOR and saline storage. These increases would ramp up over time reaching their full value in 2025.
Third, the bill would lower the threshold for qualifying facilities to 150,000 tons of CO2 for both power plants and industrial facilities. Industrial facilities that emit CO2 include ethanol plants; natural gas processing facilities; steel, cement, fertilizer and chemical plants; hydrogen production plants, and refineries. Capture of industrial CO2 emissions is critical because the sector accounts for almost 25 percent of global greenhouse gas emissions.
For these industrial sources, the cost to capture CO2 is often lower than for power plants. Technology to separate the CO2 stream has been used in natural gas processing for decades. The by-product CO2 stream is often of higher purity, i.e. less mixed with other gases, than power plant emissions. Importantly, there is no alternative to CCUS to achieve deep decarbonization in the industrial sector because production of CO2 is often an inherent part of the chemical or industrial process. By lowering the threshold for industrial sources of CO2, the bill aims to incentivize investment in industrial carbon capture projects.
Finally, the bill would allow transferability of the credit within the chain of CO2 custody. This change would allow entities with little or no tax liability to benefit from the incentive by transferring it to entities with the ability to use the credit.
In the Senate, companion legislation was offered on April 12, 2016, by Sens. Heidi Heitkamp (D-ND) and Shelly Moore Capito (R-WV) in the form of an amendment to the Federal Aviation Administration (FAA) reauthorization bill. The amendment had bipartisan support from two Democrats and five Republicans. While the amendment was voted into the tax title of the FAA bill, the tax title was ultimately dropped for other reasons.
S. 2012, Energy Policy Modernization Act
On Apr. 20, 2016, the Senate passed a broad energy bill authored by Senate Energy Committee Chairwoman Lisa Murkowski (R-Alaska) and Ranking Member Maria Cantwell (D-WA). The bill was approved 85-12, demonstrating bipartisan support. Section 3403 of the bill authorizes a new research, development and demonstration program at the U.S. Department of Energy (DOE) on CCUS technology. Section 3404, added by Sens. Heitkamp and Capito and co-sponsored by six Democrats and four Republicans, directs the DOE to report on long-term contracts to provide price stabilization support for carbon capture projects, a mechanism that is often referred to as a Contract for Differences (CfD). The DOE report would identify the costs and benefits of entering into CfDs and would outline options for how such CfDs could be structured and describe regulations that would be necessary to implement such a program.
North American Climate, Clean Energy, and Environment Partnership
On Jun. 29, 2016, President Barack Obama, Canadian Prime Minister Justin Trudeau, and Mexican President Enrique Peña Nieto announced the North American Climate, Energy, and Environment Partnership. The three nations aim to achieve 50 percent clean power generation by 2025, including through CCUS technology. One of the goals identified in the White House Action Plan is leveraging participation in Mission Innovation by identifying joint R&D initiatives to advance CCUS technology. By highlighting the role of CCUS in achieving deep decarbonization in North America, there is a renewed opportunity to focus on how the three nations can work together.
S. 3179, the Carbon Capture Utilization and Storage Act
On July 13, 2016, Sens. Heitkamp and Sheldon Whitehouse (D-RI) introduced S. 3179, the Carbon, Capture, Use and Storage Act, along with co-sponsoring Sens. Jon Tester (D-MT), Brian Schatz (D-Hawaii), Cory Booker (D-NJ), Tim Kaine (D-VA), and Bob Casey (D-PA). Republican co-sponsors include Sens. Capito and Blunt and Senate Majority Leader Mitch McConnell, putting the Kentucky Republican and some of the Senate’s leading advocates for climate action on the same side.
The Senate bill allows forms of CO2 utilization beyond EOR to be eligible for the tax credit. Under the bill, utilization is expanded to include the fixation of CO2 “through photosynthesis or chemosynthesis, such as through the growing of algae or bacteria,” chemical conversion of CO2 to a material or chemical compound in which CO2 is securely stored, or the use of CO2 for “any other purpose for which a commercial market exists.” A leading example of carbon dioxide use beyond EOR is algae biofuels.
The Senate bill would extend the tax credit for seven years and would allow the credit to be claimed for 12 years. For new facilities, the Senate bill increases the value per ton of CO2 of the tax credit to $35 for EOR and $50 for geologic storage. The bill lowers the threshold for qualifying facilities to 100,000 tons for industrial facilities. Finally, the Heitkamp-Whitehouse bill provides the tax credit to the owner of the carbon capture equipment.
Other Federal Efforts: H.R. 2883, the Master Limited Partnerships Parity Act and S. 2305, the Carbon Capture Improvement Act.
Developments this year build on previous efforts to promote carbon capture. On June 24, 2015, Rep. Ted Poe (R-Texas) and Rep. Mike Thompson (D-CA) re-introduced H.R. 2883, the Master Limited Partnerships Parity Act, which would extend the publicly traded partnership ownership structure available for certain oil and gas activities to renewable energy development. The bill would also extend the tax treatment to carbon capture for EOR or other secure geologic storage. The bill was co-sponsored by six Democrats and six Republicans.
Additionally, on Nov. 19, 2015, Sens. Michael Bennet (D-CO) and Rob Portman (R-OH) introduced S. 2305, the Carbon Capture Improvement Act, which would allow the use of tax-exempt private activity bonds (PABs) issued by state or local governments to finance carbon capture projects.
From the perspective of project developers, the extension and expansion of Section 45Q will do the most to accelerate the deployment of CCUS technology, although the MLP and PAB efforts will play a critical role. Like with other low- and zero-carbon energy technologies such as wind and solar, multiple and complementary incentive policies are often more effective in enabling investment to drive deployment than any single incentive policy.
A number of states have demonstrated leadership on carbon capture policy in 2016 by voicing growing support for federal incentives. In February, the National Association of Regulatory Utility Commissioners (NARUC) adopted a resolution urging Congress and the Obama Administration to support state efforts on CCUS including CO2-EOR. In June, the Western Governors’ Association followed up on a June 2015 resolution supporting CO2-EOR with a letter of support for federal incentives for this technology. In July, Montana Governor Steve Bullock released Montana’s Energy Future Blueprint, which highlights the need for federal and state support of accelerated commercial deployment of CCUS technology. Last fall, the Southern States Energy Board also issued a resolution supporting federal incentives for CO2-EOR.
Despite encouraging progress at the federal and state levels, formidable challenges lie ahead. Developers of carbon capture projects face serious obstacles in obtaining financing. Deployment of carbon capture technology is not on track to meet our climate goals. Fewer than half of the Intergovernmental Panel on Climate Change models were able to stay within a 2-degree scenario without CCUS. Without carbon capture, the costs of climate change mitigation increase by 138 percent. Carbon capture projects are capital-intensive and require long lead times to reach commissioning. In this context, the need for action is urgent.
What we have seen this year is that U.S. political leaders are able find common ground on energy policy where the goals of emissions reduction, energy security, and economic development converge. Looking forward, there is reason to hope that through working together on carbon capture policy this year, elected officials on both sides of the aisle have developed working relationships and built bridges that will enable continued action on climate in the next administration.
 The IRS announced that almost half of the credits available under the cumulative cap have been claimed. U.S. Internal Revenue Service, Notice 2015-44, Credit for Carbon Dioxide Sequestration: 2015 Section 45Q Inflation Adjustment Factor (2015), available at https://www.irs.gov/pub/irs-drop/n-15-44.pdf
 In the U.S., there are states and regions that will have candidates for carbon capture at lower-cost industrial facilities before they do in the power sector.
 Senators Joe Donnelly (D-IN), Jon Tester (D-MT), Roy Blunt (R-MO), John Barrasso (R-WY), Dan Coats (R-IN), Steve Daines (R-MT), and Mike Enzi (R-WY).
 Geof Koss, Blame Game Follows Collapse of Senate Tax Talks (E&E News PM, Apr. 12, 2016).
 Section 3403 establishes a new coal technology program, which includes programs for research and development, large-scale pilot projects, demonstration projects, and co-fired biomass-coal projects. Id. The section authorizes $632 million annually from 2017 – 2020, and $582 million in 2021. DOE continues to do substantial work and focus domestic and international policy efforts on CCUS. An important domestic DOE initiative is the creation of seven Regional Carbon Sequestration Partnerships to help develop infrastructure and regulations for CCUS technology and sequestration. An important international DOE initiative is the Carbon Sequestration Leadership Forum, a ministerial-level panel that meets to advance CCUS RD&D worldwide.
 Senators Joe Manchin (D-WV), Cory Booker (D-NJ), Sheldon Whitehouse (D-RI), Jon Tester (D-MT), Roy Blunt (R-MO), Al Franken (D-MN), Joe Donnelly (D-IN), John Barrasso (R-WY), Dan Coats (R-IN), and Mike Enzi (R-WY).
 As context, carbon capture projects often face steep financing challenges. This is because one of the main uses of CO2 that is in commercial operation today is CO2-EOR and the revenue from the sale of CO2 for EOR is dependent on volatile oil prices. The futures market for oil prices does not enable the type of commercial hedge that is needed to finance these projects. A CfD would address that market weakness by providing a reference oil price that would remain the same over the duration of the contract. When oil prices are above the reference oil price, the developer would pay the U.S. Treasury. When oil prices fall below the reference oil price, the Treasury would pay the developer. By providing certainty, a Federal CfD would make it easier for carbon capture projects to reach financial close.
 Mission Innovation is an initiative that was launched in Paris in November 2015. Through this initiative, 20 nations have committed to doubling their clean energy R&D investments over five years. The Breakthrough Energy Coalition is an independent initiative spearheaded by Bill Gates that launched simultaneously with Mission Innovation. Through the Breakthrough Energy Coalition, a global group of private investors have committed to commercializing the research that is funded by Mission Innovation.
 S. 3179, 114th Cong. § 2 (2016), providing a new Section 45Q(e)(7)(A).
 S. 3179, 114th Cong. § 2 (2016), providing a new Section 45Q(a)(3) and 45Q(d)(1)(A). The determination of eligibility is based on the date that a project commences construction. This provides greater certainty for investors than the existing cumulative cap of 75 million tons of CO2 but not as much certainty as a permanent tax credit.
 S. 3179, 114th Cong. § 2 (2016), providing a new Section 45Q(b)(1). The value of the credit ramps up over time. The Senate bill does not increase the value of the credit for existing facilities. S. 3179, 114th Cong. § 2 (2016), providing a new Section 45Q(a)(1)-(2).
 S. 3179, 114th Cong. § 2 (2016), providing a new Section 45Q(d)(1)(B). For power plants, the threshold for power plants remains at 500,000 tons. This would exclude some smaller demonstration carbon capture projects at power plants. The threshold is 25,000 for projects that utilize CO2.
 S. 3179, 114th Cong. § 2 (2016), providing a new Section 45Q(e)(5). Like H.R. 4622, this would enable rural electric cooperatives without tax liability to benefit from the incentive because the incentive could be claimed by a third-party that puts up the investment funds in the equipment. This would reduce the cost of capital for these projects.
 Representatives Mark Amodei (R-NV-2), Peter Welch (D-VT-At Large), Paul Gosar (R-AZ-4), Earl Blumenauer (D-OR-3), Mike Coffman (R-CO-6), Jerry McNerney (D-CA-9), Mia Love (R-UT-4), Tammy Duckworth (D-IL-8), Carlos Curbelo (R-FL-26), John Delaney (D-MD-6), Chris Gibson (R-NY-19), and Scott Peters (D-CA-52).
 Access to tax-exempt private activity bonds will provide project developers an important tool in a broader toolkit of measures needed to help attract private investment and finance carbon capture projects. The benefits to consumers and businesses of PABs include their tax-exempt status and the fact that they can be paid back over a longer period of time. S. 2305, 114th Cong. (2016), available at https://www.congress.gov/bill/114th-congress/senate-bill/2305
 MLPs and PABs will be especially helpful for electric power generation and some industrial sectors where the costs of carbon capture remain high.