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Key Takeaways | Conventional Energy Companies Pivot to Renewables

How will traditional energy companies compete as the world transitions to renewable energy? In the latest webinar in our Energy Transition series, McDermott Will & Emery Partner Jack Langlois hosted Philip Tingle, global co-head of McDermott’s Energy and Project Finance Practice Group, and Michael Hanson, managing director of energy transition at Truist Securities, to answer exactly that. During the 30-minute discussion, they assessed the future for conventional energy companies, including key issues surrounding decarbonization and current tax credit frameworks.

Below are key takeaways from the webinar:

1. Timeline and Decision-Making. There is a broad divergence of views in how quickly the transition to renewable energy will happen, but changes in law and policy could accelerate that timeline. Conventional energy companies are taking small steps to get acclimated to new renewable opportunities because there are multiple factors they need to consider before deciding whether to enter into the renewable energy space: Strategic fit, materiality, profitability and risk. Many conventional energy companies that have successfully pivoted to renewable opportunities have done so by reutilizing their existing assets.

2. Carbon Capture. Carbon capture is often a strategic fit for oil and gas companies. However, companies, investors and banks are still struggling with the profitability of carbon capture because without government incentive, carbon capture is not profitable. The current incentive structures do not compel a sufficient amount of activity because they only compensate capture equipment owners, leaving out all the necessary downstream affiliates. Until this business model is corrected, banks especially will struggle with how to finance carbon capture.

3. Reconciliation Bill. Carbon capture incentives may be around for a while longer. In the reconciliation bill, there is a provision that would extend the Section 45Q carbon capture tax credit through the year 2032. However, the bill would also modify the tax credit to provide for wage and apprenticeship requirements. Companies will need to find ways to assure financing parties that they have met these additional requirements. If they can accomplish this, the extension period will allow greater opportunities for conventional energy companies to enter the space.

To access past webinars in this series and to begin receiving Energy updates, including invitations to the webinar series, please click here.




Carbon Capture, Utilization and Sequestration – An Industry Primed for Explosive Growth? A Summary of the White House Council on Environmental Quality’s Report

On June 30, 2021, the White House Council on Environmental Quality (CEQ) delivered a Carbon Capture, Utilization and Sequestration (CCUS) report to Congress in accordance with the Utilizing Significant Emissions with Innovative Technologies (USE IT) Act passed in December 2020. The CEQ report highlights an inventory of existing permitting requirements for CCUS deployment and identifies best practices for advancing the efficient, orderly and responsible development of CCUS projects at an increased rate.

The Biden Administration is “committed to accelerating the responsible development and deployment of CCUS to make it a widely available, increasing cost-effective, and rapidly scalable climate solution across all industry sectors.” CEQ Chair Brenda Mallory recognized that in order “[t]o avoid the worst impacts of climate change and reach President Biden’s goal of net-zero emissions by 2050, we need to safely develop and deploy technologies that keep carbon pollution from entering the air and remove pollution from the air…The report … outlines a framework for how the U.S. can accelerate carbon capture technologies and projects in a way that benefits all communities.” Development of CCUS projects and related infrastructure will be encouraged and favorably looked upon by the Biden Administration as a demonstrable example of how it’s seeking to combat climate change.

CCUS – OPPORTUNITY OF THE FUTURE FOR MIDSTREAM COMPANIES?

CCUS refers to a set of technologies that remove carbon dioxide (CO2) from the emissions of point sources or the atmosphere and permanently sequesters them. In addition to removing CO2, carbon capture technology has the potential to remove other types of pollution, such as sulfur oxides. According to leading scientists and experts, removal of CO2 from the air is essential to addressing the climate crisis and alleviating the most severe impacts of climate change. Beyond the impact carbon capture technology will have on the climate crisis, CCUS will continue to have a valuable role in the US economy as the technology continues to evolve.

The CEQ report makes it extremely clear that any effective nationwide rollout of CCUS is heavily dependent on a massive buildout of pipelines for CO2 transportation infrastructure. Currently, there are approximately 45 CCUS facilities in operation or in development and 5,200 miles of dedicated CO2 pipelines. The number of CCUS facilities and the breadth of dedicated CO2 pipelines will need to expand at a rapid rate if CCUS is to become an effective tool for meeting net-zero emission by 2050.

Establishing CCUS at scale is going to be heavily dependent on—and presents a great opportunity for—midstream pipeline developers. Despite the 5,200 miles of CO2 pipelines and the potential to employ “orphaned” pipeline networks previously used by the oil and gas industry once remediated, there is no current network of CO2 pipelines at a scale large enough for permanent carbon sequestration across all industrial sectors. Thus, to achieve climate goals set by the Biden Administration, a significant amount of CO2 pipelines will need to be developed. According to the CEQ report, expansion of CO2 pipeline infrastructure in “the near term is [...]

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The Energy Market in 2021: From Crisis to Opportunity | Tax Credit for Carbon Capture Products

The energy market has undergone significant change in the past 12 months, with even more on the horizon. Our webinar series explores how these changes have shaped—and will continue to impact—the energy industry, including discussions of what’s to come.

Our latest webinar featured FTI Consulting’s Ken Ditzel, Senior Managing Director and Fengrong Li, Managing Director, who are both in the Economic and Financial Consulting Practice.


Below are key takeaways from the webinar:

  1. The carbon capture and sequestration tax credit under section 45Q is an important source of predictable revenue for carbon capture projects. The section 45Q credit was substantially expanded in 2018 and is worth up to $50 per metric ton for carbon permanently sequestered and up to $35 per metric ton for carbon used as a tertiary injectant in connection with an enhanced oil or natural gas recovery project. Internal Revenue Service (IRS) guidance released last year and final regulations promulgated in January have provided more certainty for the market to move forward with carbon capture projects and claim the enhanced section 45Q credit.
  2. There are currently about 32 strong contender carbon capture projects in the US market. About half of the carbon capture projects are traditional power generation and another third of projects are ethanol projects. Deep saline formations represent almost 90% of carbon sequestration storage capacity with enhanced oil recovery representing most of the remaining storage capacity.
  3. Tax equity investors—including banks, financial institutions and energy companies—are closely monitoring and have expressed interest in carbon capture projects. To date, there are no closed transactions that include tax equity structures. Rather, project sponsors have claimed the section 45Q credit against their own tax liabilities. The recapture lookback period was reduced from five to three years in the final section 45Q regulations, which may encourage tax equity investments.

To access past webinars in this series and to begin receiving Energy updates, including invitations to the webinar series, please click here.




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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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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