The Inflation Reduction Act may save the fossil fuel industries
The Inflation Reduction Act moved through Congress quickly, passing the Senate last week and the House on Friday — allowing for little time to understand the importance of tax credits for fossil fuel companies.
The bill includes amendments to the federal 45Q tax credit program for carbon capture use and sequestration (CCUS) and their implications for fossil fuel industries and the U.S. budget. By indiscriminately ramping up the 45Q program’s carbon credits by 70 percent across the board, the bill threatens to hand out tens of billions of dollars in windfall tax credits to oligarchs and provide decades of public subsidies to all fossil fuel industries. After a review of this program’s potential impacts on specific CCUS projects, it appears it would serve as a means for carbon dioxide (CO2) emitting industries and their oligarch investors to claim to be reducing greenhouse gas emissions — while simultaneously subsidizing the fossil fuel industry and supporting the next wave of oil development, at taxpayer expense, while bulldozing pipelines through local communities across America using eminent domain.
The federal 45Q tax credit program allows participants to reduce their federal taxes based on the amount of CO2 they are able to extract from the air pollution that comes from smoke stacks. Under existing law, for each metric ton of carbon captured, as of 2027 the program provides $50 per metric ton if the carbon is simply pumped underground (sequestered), and $35 per metric ton if the carbon is used in enhanced oil recovery operations (EOR). The use of carbon dioxide in EOR is based on the fact that liquid carbon dioxide is a very good solvent, so it can be used to dissolve oil that is trapped in rock deep underground.
The Inflation Reduction Act would indiscriminately increase the 45Q program tax credits to $85 per metric ton for sequestration and $60 per metric ton for EOR — a 70 percent increase that would be provided regardless of project cost. This one-size-fits-all tax credit means that lower-cost carbon capture projects (e.g. ethanol plants) will win the lottery.
For example, the existing 45Q program would provide up to $2 billion in tax credits per year to the Summit Carbon Solutions, Navigator CO2 Ventures and ADM/Wolf CCUS projects.The bill would increase this amount to $3.4 billion dollars per year. It is important to understand that the developers of these pipelines considered these projects economically viable and profitable without the Inflation Reduction Act’s proposed 70-percent increase. This means that the bill would provide up to $1.4 billion in additional tax credits to these projects beyond cost and current profits.
The $85 per metric ton sequestration credit appears to provide tax credits in excess of 200 percent of the capital costs of carbon capture at ethanol plants, and possibly in excess of 150 percent of the costs of capture at coal power plants. Since simply sequestering carbon does not generate cash, if CO2 is to be sequestered then the 45Q tax credits must be high enough to financially support the entire cost of capture and sequestration projects. This being said, CCUS projects may also receive cash from California’s low-carbon fuel program or from selling CO2 to EOR projects, meaning that some CCUS projects will likely be able to earn money in addition to the tax credits.
Now, let’s consider how the Inflation Reduction Act would impact the coal industry. Given the variable costs of carbon capture, the 45Q program could provide tax credits of 18 percent to 113 percent above breakeven costs — or depending on the size of the plant, from $13 million to $500 million per year, per plant, above breakeven. CCUS cost data for coal power plants indicates that the bill would make CCUS economically viable at a large proportion of coal plants in the U.S. and potentially provide tax benefits far in excess of CCUS project costs, meaning the 45Q tax credit could directly subsidize the coal industry.
With regard to the oil industry, it turns out that fluid CO2 is good at dissolving oil out of the rock pores in legacy oilfields, but for CO2 EOR to work huge amounts of it are needed. For decades, the oil industry has used CO2 EOR to increase the amount of oil pumped from legacy oilfields by 50 percent or more, but use of EOR has been relatively rare because it is costly. The oil industry sees CO2 EOR as its next major development wave that will grow as fracking declines. The problem is that the oil industry has fully exploited naturally occurring CO2 deposits. Therefore, the primary obstacle to increased expansion of CO2 EOR is not technical challenges — it is a lack of access to huge amounts of affordable CO2. The only way to do this is to use federal subsidies to capture CO2 at industrial facilities and ship it to oilfields.
The oil industry needs federally subsidized carbon capture projects to keep the oil flowing. This is why the CEO of Exxon recently described carbon capture as the “holy grail” and called for the 45Q program tax credit to be increased to $100 per metric ton. Carbon capture certainly is the holy grail for converting federal tax credits into future oil industry profits. Even oil industry supporters should pause and consider what it means to make future U.S. oil production dependent on massive federal subsidies and construction of a national carbon pipeline network entirely dependent on eminent domain.
From a climate change perspective, subsidized CO2 EOR could result in a huge amount of additional crude oil being pumped and burned, both in the U.S. and globally. Typically, the emissions from burning EOR oil exceed the amount of CO2 left in the ground, often by a ratio of at least two to one.
The Inflation Reduction Act is being rushed through Congress, yet it has the potential to provide truly massive subsidies and eye-watering windfall tax benefits to CO2 emitting industries. And those massive investments will surely be used down the road as arguments for why CCUS projects — and the facilities that emit captured CO2 — should be kept in operation, so that the federal tax credit gravy train keeps a-rollin’ indefinitely.
No wonder Congress is rushing.
Paul Blackburn is an attorney specializing in pipeline law who has represented community and environmental groups including Bold Alliance for over a decade on pipeline projects. He previously worked for a number of environmental organizations, as well as in renewable and fossil fuel energy project development.