We are experiencing an unprecedented economic downturn due to the coronavirus pandemic. As of April 23, at least 26 million people have filed for unemployment benefits as a result of the lockdown measures. As the federal government is drafting its economic recovery packages, it should prioritize not only relief for households, but also providing immediate benefits to help companies get through this difficult time and retain their employees. One way to do it is to leverage existing energy tax credits. Extending the 45Q carbon-capture tax credits as well as the solar and wind tax credits and making them refundable would reduce the recession’s impact on the affected energy sectors. This is important for maintaining employment in these sectors and providing certainty for businesses. 

What are existing energy credits?

The 45Q tax credits are provided for power plants and industrial facilities that capture and store CO2. To accelerate the development of carbon capture, utilization, and storage (CCUS) technology, Congress passed legislation in 2018 to expand 45Q. Under current law, companies can claim a credit of $35 per metric ton of CO2 captured for use in an oil-drilling technique known as enhanced oil recovery (EOR) or for other utilization methods; the credit is $50 for carbon captured for deep geologic storage.

Clean energy credits also include the solar Investment Tax Credit (ITC) and wind Production Investment Credit (PTC). These tax credits are provided to clean-energy companies to reduce their tax liability. The ITC has been enacted since 2006 and it is currently a 26 percent tax credit for the cost of installing solar systems on both residential and commercial properties. The PTC provides a tax credit on a per kilowatt-hour basis for the first 10 years of electricity generation for utility-scale wind.

Currently, CCUS projects are eligible for the 45Q credit as long as they begin construction before January 2, 2024, and they can claim the credit for 12 years after the projects are placed in service. Both the ITC and PTC are expiring by the end of 2020. 

Extending energy credits 

Congress should extend the solar and wind tax credits to minimize the disruptions caused by the pandemic. The impact of the public health and economic crisis on the renewable industries is very likely to last beyond this year. Extending these credits would help support the growth of clean energy industries and achieve decarbonization. Additionally, extending the tax credits can give certainty to investors that any project delay due to the pandemic won’t threaten their project returns. For example, extending the shovel date for projects to be eligible for the 45Q credit beyond 2024 would also allow projects to claim the credit once oil prices, and demand for CO2 EOR, have recovered.  

Making the energy credits temporarily refundable

Congress should temporarily make the 45Q credits as well as the ITC and PTC credits refundable. If a refundable credit exceeds the amount of taxes owed, the difference is paid to the beneficiary as a refund. Currently, eligible clean-energy companies are allowed to use the credits to reduce their tax liability. However, if a company makes little or no profits, and thus has little or no tax liability, then the tax credits can not be taken advantage of. As a result, the clean-energy companies need to partner with third parties to use the tax credits. This is called a tax equity transaction. In simple terms, the direct beneficiary of a tax credit, say a solar company, agrees to transfer the credit to a third-party company in exchange for an equity financing contribution from this third-party company. In this way, the solar company secures financing for its business and the third-party company can use the tax credit against its tax liability. 

However, due to the economic shock, the tax equity market is slowing down considerably. Third-party tax equity investors that would have normally been interested in investing in renewable energy projects are losing the incentive to do so because they may have little or no tax liability in the recession. As a result, these renewable energy companies lose financing, which may lead to businesses shutting down and job losses. 

The clean energy industries are already appealing to Congress to make the ITC and PTC temporarily refundable during the recession. This is equivalent to the federal government giving out direct payments to these businesses equal to the amount of their eligible tax credits, regardless whether these companies have tax liability or not. This would leverage the existing tax credit mechanism to provide immediate relief to the clean energy industry. According to a joint letter by the Solar Energy Industries Association (SEIA) and the American Wind Energy Association (AWEA), there are currently 364,000 workers in the solar and wind industries. The groups estimate that more than 35,000 wind energy jobs and 125,000 solar energy jobs could be lost due to the pandemic. 

Increasing the value of the 45Q tax credit

In the House, Republican Minority Leader Kevin McCarthy’s new package to combat climate change includes a permanent extension of the 45Q tax credit. The draft bill from Brad Wenstrup of Ohio and David Schweikert of Arizona would increase the 45Q credit value from $35 to $43.75 for carbon captured for EOR and other utilization methods and from $50 to $62.50 for carbon captured to be stored in deep geologic formations. It would also eliminate the January 1, 2024, commence-construction requirement that projects had to meet to qualify for the credits. Given the economic disruption caused by the COVID-19 virus, lawmakers should consider including these reforms to the 45Q as part of the longer-term stimulus package.

An analysis developed by Joshua D. Rhodes of the University of Texas at Austin found that at current 45Q credit levels, natural gas combined-cycle and coal plants equipped with CCUS are competitive with traditional plants, but this hinges on their ability to obtain long-term financial compensation for selling CO2 for EOR at roughly $15 per ton of CO2, while carbon captured for deep geologic sequestration is still uneconomical for either type of plant because they would incur the cost of sequestering the carbon. Given the recent crash in oil prices, the ability for CCUS projects to secure long-term contracts to supply CO2 for EOR is in doubt. Due to high up-front capital costs, oil produced through EOR is among the most expensive types. Therefore, crashing oil prices jeopardize the most important revenue stream to keep CCUS projects competitive. 

Higher 45Q credit values would make power plants equipped with CCUS competitive, even with lower profits from selling CO2 for EOR. This alone is a case to increase the 45Q credit values. However, the majority of power sector carbon capture demonstration and commercial projects have been for coal, and there are still technical barriers to applying this technology at natural gas facilities that higher 45Q credit prices alone will not address. 45Q needs to be paired with targeted R&D programs focused on the technical barriers to applying this technology to gas plants. 

Targeted R&D and deployment programs are also necessary for other applications of CCUS technology where higher credit values will not be enough, such as the cement sector and iron and steel manufacturing. Deploying CCUS in sectors where this technology is still too expensive can bring down the future cost of applying it by up some 17 percent in iron and steel manufacturing and 16 percent in cement production, the Global CCS Institute reports.

If policymakers are looking to provide economic relief to the clean energy industry, there are several viable options related to the existing tax credits: extending the 45Q credits as well as solar and wind tax credits, making them temporarily refundable, and increasing the 45Q credit values would be effective ways to support these clean energy industries and their employment. At the same time, we would not be compromising climate action when we are addressing an unprecedented public health crisis and economic recession.