The coronavirus pandemic and the resulting economic shock pose a significant threat to clean energy investment, and will certainly compromise long-term climate action to reduce emissions. Supply-chain disruptions, lack of demand, and a collapse of tax equity could delay clean-energy projects and put them at risk of missing deadlines to qualify for time-sensitive tax credits. The Wind and solar industries are already appealing for support to maintain employment and momentum in the wake of the coronavirus, and see the imminent stimulus package as a way to do it.
However, considering the cost-reductions already achieved in renewable electricity generation and the fact that unsubsidized new-build renewables are now cheaper than the marginal costs of running many traditional fossil fuel plants, it is not clear how much special attention those industries should get or if their long-term growth, post-recovery, will be significantly affected by increased levels of support in the coming year.
Meanwhile, if we want to pursue a low-carbon recovery, emerging technologies will need support. Carbon capture, utilization, and storage (CCUS) technology, for example, is years behind solar and wind, even though it will likely be important for achieving net-zero emissions. The International Energy Agency (IEA) scenario for 2˚C has U.S. power plants and industrial facilities with a CO2 capture capacity 50 times larger than today’s by 2030, when it will capture roughly 95 million metric tons of CO2 annually.
To spur deployment of CCUS, Congress passed the FUTURE Act in 2018 to support and expand 45Q, a tax credit for power plants and industrial facilities that capture and store CO2. Under current law, companies can claim a credit of $35 per metric ton of CO2 captured for enhanced oil recovery (EOR) or other utilization methods, and a credit of $50 for carbon captured for deep geologic storage. In order to qualify for the 45Q credit, CCUS projects must begin construction before January 1, 2024, and qualified projects can claim the credit for 12 years after being placed in service.
Even before this crisis, there were efforts to reform these credits. It took the Treasury Department years to issue regulations for how companies could claim the credit. With long lead times for engineering these projects the 2024 deadline was already hampering their effectiveness.
Rep. Kevin McCarthy’s new package to combat climate change includes a permanent extension of the 45Q tax credit. The draft bill from Reps Wenstrup and Schweikert would increase the 45Q credit value from $35 to $43.75 for carbon captured for enhanced oil recovery (EOR) and other utilization methods, $50 to $62.50 for carbon captured to be stored in deep geologic formations, and eliminate the January 1st, 2024 commence construction requirement projects had to meet to qualify for the credits. Given the economic disruption caused by the COVID-19 virus, should these reforms to the 45Q become part of the longer-term stimulus package?
A LCOE analysis developed by Joshua D. Rhodes from 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 plant. Given the recent crash in oil prices, the ability for CCUS projects to secure long-term contracts to supply CO2 for EOR is unknown. Due to high up-front capital costs, oil produced through EOR is among the most expensive. Therefore, crashing oil prices jeopardizes the most important revenue stream to keep CCUS projects competitive.
Rhodes’ cost estimates imply that higher 45Q credit values would make new 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. Additionally, eliminating the commence construction requirement would allow CCUS facilities to be eligible for the 45Q tax credits once oil prices, and demand for CO2 EOR, have recovered.
Indefinitely extending the commence construction deadline for the 45Q tax credit is not a long-term solution. Just as permanently extending renewable energy tax credits is ill-advised, indefinitely subsidizing CCUS technology risks over-extending resources into one technology set. An extension, 5 or 10 years of project installations, would be more appropriate. This slight change to the 45Q proposal would still incentivize early-investment in CCUS technology, without limiting the pipeline of future projects.
Our ability to mitigate the worst effects of climate change is dependent on our ability to reduce and scale CCUS technology. Given the impending economic recession, and implications this will have on clean-energy investment, fixing 45Q will position CCUS to play a role in a low-carbon recovery.