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The Carbon Tax Checklist

Many stakeholders have called for the United States to adopt a carbon tax. Such a tax could raise billions of dollars in annual revenue while simultaneously reducing greenhouse gas emissions. Several carbon tax proposals were introduced in the last Congress (2019-2020 term), and it is likely that several more will be introduced in the new Congress. Several conservative economists have endorsed the idea, as has Janet Yellen, President Biden’s Secretary of the Treasury. But the details of a carbon tax matter—for revenue generation, emissions reductions and fairness. Because Congress is likely to consider several competing carbon tax proposals this year, this article provides a way to compare proposals with a checklist of 10 questions to ask about any specific legislative carbon tax proposal, to help understand that proposal’s design and implications.

1. What form does the tax take: Is it an emissions tax, a fuel tax or a production tax?

The point of a carbon tax is to reduce greenhouse gas emissions by imposing a price on those emissions. But there is more than one way to impose that price. Critically, the range of options depends, to a very large degree, on the type of greenhouse gas the tax is trying to address.

The most ubiquitous greenhouse gas is carbon dioxide (CO2) and the largest source of CO2 emissions is the combustion of fossil fuels. Those emissions can be addressed by imposing a fee on each individual emission source or by taxing the carbon content of the fuel—because carbon content is a reliable predictor of CO2 emissions across different combustion circumstances. Most carbon tax proposals are fuel tax proposals; they impose a tax on fuel sales, corresponding to the amount of CO2 that will be emitted when the fuel is burned.

For CO2 emissions, the fuel tax approach has one significant advantage over the emissions fee approach. The fuel tax can be imposed “upstream,” rather than “downstream,” thereby reducing the total number of taxpayers and the overall administrative burdens associated with collecting the tax. A tax imposed on petroleum products as they leave the refinery, for example, is a way to address CO2 emissions from motor vehicles without the need to tax every individual owner of a gasoline-powered car. Most CO2-related carbon tax proposals work that way—they are upstream fuel taxes rather than downstream emissions taxes.

But not all greenhouse gas emissions can be addressed through a fuel tax, because not all greenhouse gas emissions come from fossil fuel combustion. Methane, for example, is released in significant quantities from cows, coal mines and natural gas production systems. A carbon tax directed at those emissions is likely to take the form of an emissions fee imposed on the owner or operator of the emission source. Many carbon tax proposals, however, simply ignore methane emissions or expressly exempt agricultural sources.

Fluorinated gases are yet another type of greenhouse. If they are subjected to a carbon tax, that tax is likely to take the form of a production tax, which would be imposed [...]

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Six Takeaways: Utilization and Structuring for Section 45Q Carbon Capture Credits

On Thursday, June 11, McDermott partners Phil Tingle, Heather Cooper and Jacob Hollinger were joined by Ken Ditzel, managing director at FTI Consulting, to discuss their insights into the proposed Section 45Q carbon capture and sequestration credit regulations.


The Treasury Department and IRS recently published proposed regulations implementing the Section 45Q carbon capture and sequestration credit. The regulations clarify some questions about the credit, though many questions remain. For further discussion, see our On The Subject.

Below are six key takeaways from this week’s webinar:

      1. Carbon capture projects are likely to be economically important moving forward. Ken Ditzel estimated there are more than 600 economically viable projects, including both secure geological storage at deep saline formations and enhanced oil recovery projects.
      2. The proposed regulations provide a compliance pathway for satisfying the reporting requirements. For long-term storage, taxpayers should comply with Subpart RR of the Clean Air Act’s greenhouse gas reporting rule. For enhanced oil recovery projects, taxpayers may choose either Subpart RR or alternative standards developed by the American National Standards Institute (ANSI).
      3. Taxpayers can claim the credit if they utilize the captured carbon for a purpose for which a commercial market exists, instead of storing it. Additional guidance is needed to determine what commercial markets the IRS will recognize and how they will go about making those determinations.
      4. The proposed regulations offer considerable flexibility to contract with third parties to dispose the captured carbon and to pass the section 45Q credit to the disposing party. Contracts must meet certain procedural requirements, including commercially reasonable terms and not limiting damages to a specified amount.
      5. If the captured carbon dioxide leaks, the carbon capture tax credit is subject to recapture by the IRS. The taxpayer who claimed the credit bears the recapture liability, but IRS guidance permits indemnities and insurance for credit recapture.
      6. The partnership allocation revenue procedure issued in February 2020 provides flexibility for the section 45Q credit relative to other tax equity structures, by only requiring 50% non-contingent contributions by an investor member. This may make projects easier to finance, especially in light of the other contracting flexibility in the proposed regulations.

Download the key takeaways here.

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How Energy Company Buyers Can Limit Environmental Liability Risk

Many energy companies may be driven into bankruptcy because of the COVID-19 pandemic. Third parties seeking to purchase those companies’ assets may be concerned about potential successor liability for the seller’s environmental obligations. This article highlights some steps that asset purchasers in bankruptcy can take to reduce the risk of such liability.

Successor liability exists under each of the major federal environmental laws. Four especially important statutes for energy companies are the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, the Resource Conservation and Recovery Act, the Clean Water Act and the Clean Air Act.

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Six Takeaways: How Utilities and IPPs Are Responding to COVID-19

On Thursday, April 30, McDermott was joined by Brett Kerr, vice president of external affairs at Calpine, Drew Murphy, senior vice president of strategy and corporate development at Edison International, and Andrew Campbell, director of regulatory support and planning at NiSource who shared their perspectives on how investor-owned utilities and independent power producers are managing the COVID-19 crisis.

Below are six takeaways from this week’s webinar:

      1. As businesses go back to work, it is essential that they carefully plan for a new normal, including consideration of travel restrictions, acquisition of personal protective equipment, maintaining social distancing of employees and contractors, and compliance with new rules and regulations.
      2. Utilities have been and will continue to optimize their maintenance schedules to balance safety and reliability concerns considering the essential nature of electricity and risks potentially associated with deferred maintenance.
      3. Although it is too soon to see the permanent effects of COVID-19, there has been a five to seven percent reduction in weather-normalized demand: this includes both an increase in residential demand and a larger reduction in commercial and industrial demand.
      4. Utilities are watching cash flow more closely as more customers are either not paying or deferring payment, and as commercial and industrial customers reduce demand. In California, where revenues are decoupled from electricity demand, this should not affect total revenues, but may lead to reallocation of rates across customer classes.
      5. A number of large commercial and industrial corporate customers with renewable and sustainability commitments are talking about placing these commitments on hold or rethinking them as recessionary impacts become clearer.
      6. Drops in load and low natural gas prices could detrimentally impact the economics of new renewable projects seeking financing and prevent the projects from moving forward. However, as renewables often dominate interconnection queues, if some of these projects do not come online, prices could actually remain constant.

Listen to the full webinar.

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IRS Releases Initial Section 45Q Carbon Sequestration Credit Guidance

Treasury and the IRS released initial guidance on the amended Section 45Q carbon oxide sequestration credit on February 19, 2020. Notice 2020-12 and Revenue Procedure 2020-12 provide guidance relating to the beginning of construction and tax equity partnership allocations.

This is the first Section 45Q guidance since Treasury issued a request for comments in Notice 2019-32 last year. That Notice sought input on a number of issues raised by amendments to Section 45Q that expanded the scope and enhanced the amount of the Section 45Q credit pursuant to the Bipartisan Budget Act of 2018, P.L. 115-123. The new guidance in Notice 2020-12 and Revenue Procedure 2020-12 is effective March 9, 2020.

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FERC Announces Tax Reform Actions and Eliminates Income Tax Allowance for Master Limited Partnerships

FERC announced actions in response to the 2017 tax reform legislation and a revised income tax policy, which eliminates the income tax allowance for Master Limited Partnerships. Regulated entities should ensure that they comply with FERC’s orders regarding the treatment of income taxes and consider whether to file comments on the proposed rulemaking and notice of inquiry.

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Transmission Planning and Construction Right of First Refusal Ruled Unduly Discriminatory, Not Mobile-Sierra Protected

The provision contained in incumbent electric utility tariffs—conferring on the holder the right of first refusal (ROFR) to construct additions to the high-voltage electrical grid, regardless of who conceived of and proposed the addition—is unduly discriminatory, the U.S. Circuit Court of Appeals for the D.C. Circuit held in a July 1 decision in Oklahoma Gas & Electric Co. v. FERC, No. 14-1281.   The court’s decision upheld utility-specific applications of the FERC mandate—a central open-access innovation of the agency’s Order No. 1000 (Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities)—that directed independent system operators and regional transmission organizations (ISO/RTO) to remove from their existing tariffs and membership agreements the ROFR provision (Removal Mandate).

Earlier in South Carolina Public Service Authority v. FERC, 762 F.3d 41 (D.C. Cir. 2014), the same court generally had upheld the Removal Mandate as applied to ISO/RTOs but had reserved judgment on whether the 60-year-old Mobile-Sierra presumption that the rates in negotiated arm’s length natural gas and power sales agreements are just and reasonable applied to the ROFR provisions of the ISO/RTO tariffs and membership agreements.  In Sierra, the Supreme Court of the United States held that the presumption applies against not only the parties to a negotiated agreement but against FERC itself; thus, if it were found to apply to the ROFR, FERC could overcome the presumption only by showing that the ROFR seriously harmed the public interest.

The court could have resolved ISO/RTO and incumbent utilities’ challenges to the Removal Mandate in either of two ways.  First, it could have determined that the context in which the ROFR provision was included in the tariffs and membership agreements prevented the presumption from applying in the first instance because of infirmities or unfair dealings in contract formation, such as fraud or duress.   Second, it could determine that the presumption did apply and then address the question of whether FERC had overcome the presumption with evidence that the ROFR in member agreements seriously harmed the public interest.  The court took the former course.  It ruled that the Mobile-Sierra presumption never applied in the first instance because (quoting Order No. 1000 and citing South Carolina), the ROFR “created ‘a pre-existing [i.e., not negotiated] barrier to entry’ for nonincumbent transmission owners.”  Citing precedent from the Seventh Circuit, the court found that “such terms” as the ROFR are “self-protective and anti-competitive [and] cartel-like.”

By cabining its holding to the anticompetitive effects of the ROFR, the court was able to bypass two other and possibly more complicated issues.  First, it bypassed the issue of whether the Mobile-Sierra presumption applies not only to the rates in regulated natural gas and power sales agreements, but also to agreement terms that affect rates.  As the court noted, both the petitioners and FERC argued the case based “on the premise” that the presumption applies to both to rates and agreements terms that affect rates.  Second and possibly more nettlesome is whether the Mobile-Sierra presumption would protect other provisions of ISO/RTO tariffs even [...]

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Timing Is (Almost) Everything: FERC Implements D.C. Circuit Guidance on NEPA Review of Multiple Pipeline Construction Projects

In the wake of two recent D.C. Circuit decisions, the Federal Energy Regulatory Commission (FERC) has begun to implement its new policy concerning the review of natural gas pipeline construction proposals under the National Environmental Policy Act (NEPA). To decide whether a NEPA review must include other projects proposed by the pipeline, FERC will look at the timing and maturity of other proposals and the independence of the projects.

In the first decision, Delaware Riverkeeper Network, the U.S. Court of Appeals for the D.C. Circuit held that FERC failed to consider the cumulative environmental impact of four projects that had been separately proposed by the same pipeline. The D.C. Circuit held that the projects were not financially independent and were “a single pipeline” that was “linear and physically interdependent,” so the cumulative environmental impacts must be considered concurrently.

In the second decision, Minisink Residents for Environmental Preservation and Safety, the D.C. Circuit held that FERC had properly considered and rejected an alternative site to build a natural gas pipeline compressor station. Contrasting the decision to Delaware Riverkeeper, the court clarified that the “critical” factor in the previous decision was that all of the pipeline’s projects were either under construction or pending before FERC for environmental review at the same time.

In several recent orders, FERC has implemented the D.C. Circuit’s guidance in addressing claims of improper segmentation.  For example, FERC recently authorized Transcontinental Gas Pipe Line Company (Transco) to construct and operate the Leidy Southeast Project. The Leidy Southeast Project will include nearly 30 miles of new pipeline loop and four compressor stations to provide capacity from supply areas in Pennsylvania to various receipt points as far south as Choctaw County, Alabama. Opponents of the pipeline project (coincidentally Delaware Riverkeeper Network) claimed that FERC should have also considered in its NEPA review three other Transco projects—one already constructed and two proposed projects.

FERC rejected opponents’ request to conduct a joint NEPA review. FERC emphasized that (1) the first Transco project was approved nearly a year before Transco proposed the Leidy Southeast Project; (2) the other two Transco projects “were not fully defined ‘proposals’ at any time during the period that the Leidy Southeast Project was receiving consideration;” and (3) the Leidy Southeast Project was not “connected” to the other Transco projects, as it did not “rely on” other projects for its operation and “would have been built even if” the first project had not been constructed.




Key Energy-Related Tax Provisions in the 2017 Budget Proposal

President Obama’s recently released budget proposal for the 2017 fiscal year repeats many of his past energy-related tax proposals, including a permanent extension of the renewable energy production tax credit and a provision making it refundable. Making the production tax credit permanent and refundable signals the administration’s continued strong support for renewable energy. This On the Subject summarizes the key energy-related tax provisions contained in the budget proposal and detailed further in the US Department of the Treasury’s general explanation of the proposal.

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Oil and Gas in Egypt

Egypt has suffered from significant social and political unrest.  This resulted in a drop in oil and gas production levels at the same time as domestic energy consumption was rising.  Egypt was facing a serious energy crisis. The election of Abdel Fattah al-Sisi as president in June 2014 proved to be a turning point:

  • There has been a substantial reduction in the level of fuel subsidies.
  • Significant steps have been taken to repay debts owed to international oil and gas companies.
  • There is ongoing diversification of energy sources, with more renewable power projects and increasing imports of liquefied natural gas (LNG).

The future looks positive.  A number of agreements have recently been signed by international oil and gas companies and it seems Egypt is still a destination for international investment.

Read the full article in Oil & Gas Financial Journal.




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