Tax credit reignites interest in the fossil-fuel industry’s preferred weapon against global warming

By Will Wade and Brian Eckhouse
June 11, 2020, 5:00 AM MDT Updated on June 11, 2020, 12:45 PM MDT

Carbon capture, the fossil-fuel industry’s favorite weapon against climate change, has never really caught on because of the cost.

That may be about to change. The Internal Revenue Service recently issued crucial guidance to help developers take advantage of tax credits for the systems, and supporters say it could usher in a new era for the controversial technology.

“It’s the make-or-break financial element,” said Peter Mandelstam, chief operating officer for Enchant Energy Corp., which is preparing to install a carbon-capture system at a coal-fired power plant near Farmington, New Mexico. “The Enchant project only works if the tax credit is in place.”

Thirteen commercial systems are operating in the U.S., with 30 more in development, according to the Carbon Capture Coalition. Nine have been announced since October. The growing list boasts projects proposed by deep-pocketed developers including Occidental Petroleum Corp. and Starwood Energy Group Global. A similar tax credit jump-started the U.S. wind-power industry more than a decade ago, and supporters say the new IRS guidance may prove to be the missing piece of the financial puzzle that will make capturing carbon economical.

Carbon capture systems put the “clean” in clean coal and can cut emissions at industrial sites like ethanol plants or cement factories. They trap carbon dioxide, which can then be stored underground or sold to drillers to help them pump oil and natural gas. Either way, carbon is kept out of the atmosphere where it causes global warming. Green groups say the technology extends America’s reliance on fossil fuels and steers financing away from wind and solar, but many of them support the credits because it helps reach the ultimate goal — slowing climate change.

Enthusiasm appears to be growing. Norton Rose Fulbright, a law firm that specializes in project funding, held an online seminar last week about tax-equity for carbon capture, a financing arrangement that’s common in renewable-energy projects. Organizers said they would’ve been happy with 150 registrants. Nearly 1,000 signed up, and 540 joined.

“The numbers say to me that the tax-equity market is looking for ways to diversify out of wind, solar and low-income housing,” said Keith Martin, the firm’s co-head of projects in the U.S.

Congress more than doubled the existing tax credit in 2018. The incentive provides $50 for every metric ton of CO2 that’s sequestered, or $35 a ton for producing oil with the captured carbon. That was enough for developers to start hatching plans, but tax questions held up financing deals. The IRS issued proposed regulations for the so-called Section 45Q credit last month.

“This gets us a lot closer to getting deals done,” said Himanshu Saxena, CEO of Starwood Energy, which is working with OGCI Climate Investments to retool a natural-gas power plant. “Without this, we would’ve been very far from the goal-posts.”

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