45Q Creates Tax Credits for Carbon Capture. Who Benefits?

This is part two in a series on the legislative landscape of carbontech, a class of processes, products, and services that convert waste carbon into commodities using processes that create fewer emissions than standard alternatives.

“So now what?” That’s the question being asked in corporate offices after the unexpected passage of the reformed “45Q” tax credit in February. Given the right circumstances, 45Q has the potential to bring carbon capture projects across the U.S. into profitability. But there are still a number of hurdles to clear before carbon capture can become an economical addition to American industries.

Currently, a number of industrial processes produce “streams” of CO2 at various concentrations, but they don’t stand to benefit equally from 45Q. The cost to capture this CO2 differs from project to project, depending on their technical characteristics. Here I’ll break down which projects are likely to pick up the windfalls and why.

(For a look at the background and legislative details of 45Q, check out the previous post in the series.)

Industrial sources are likely to be the first new capture projects

The facilities where costs to implement carbon capture are lowest will have the easiest time becoming profitable. A low-hanging fruit is ethanol, an alcohol made by fermenting corn or other biomass. The fermentation process produces a near-pure stream of CO2 by-product, and at a steady rate: for every molecule of ethanol, the plant yields a molecule of CO2. The capacity factor of this process (or fraction of the time that the plant is running) is also high, meaning the CO2 is likely available around-the-clock and the equipment runs for more hours during the year.

(Compare this to a fossil power plant, where capacity factors are less than 60% and the capital cost for carbon capture goes up. Current facilities, like Petra Nova, get around this challenge by capturing on only the portion of their capacity running continuously. The catch? Only a fraction of their emissions get captured.)

But it doesn’t stop at ethanol. Natural gas purification, ammonia synthesis, coal- and gas-to-liquids, ethylene oxide—all of these industrial processes are already producing CO2 by-product at concentrations and capacity factors that make them ideal for least-cost carbon capture sources. And as smaller point sources, the capital and technical risk required to add or improve capture technology is lower than that of larger facilities.

Enhanced oil recovery will drive demand

It may seem ironic that the oil industry, one of the world’s largest emitters of greenhouse gases, could also be the key to accelerating carbon capture, a technology fundamentally motivated by the need for rapid decarbonization in response to climate change.

Ironic, but true.

The U.S. is the world leader in EOR, or enhanced oil recovery. The practice involves injecting steam or supercritical CO2 into a depleted oil field in order to extract additional hydrocarbons. Historically, EOR has used a number of extraction methods, like water or other solvents, but CO2 is quickly becoming the most popular option.

In fact, most of the CO2 skimmed from combustion in the U.S. currently goes to EOR. This puts the industry and the country in a unique position to produce a systemic shift in how we manage carbon emissions—and 45Q can help.

With more gas (in the right location and at the right price), new oil fields can be enhanced. But the natural geologic reservoirs responsible for supplying the industry are themselves beginning to deplete. For the operators whose EOR projects are meant to run for decades, this natural decline poses a serious challenge.

Under 45Q, selling to EOR is more profitable than saline sequestration. The latter pays $50 per ton in tax credits. EOR gets $35 in credits plus the delivered cost of the CO2, which, depending on the price of oil, could be anywhere between $15-30 a ton. The deal is sealed further when you consider the preference for cash over tax credits and the regulatory difficulties of acquiring permits for saline sequestration wells.

That isn’t to say that, if you’re a CO2 provider, EOR is a preferred customer. In fact, EOR makes for an awkward ally to small emitters like ethanol facilities: the politics of oil versus ethanol make for awkward pillow talk, especially when an oil company’s trade association is trying to put their ethanol partner out of business by changing the federal Renewable Fuel Standard.

Even more obstructive to that partnership is the mismatch in scale. An EOR project big enough to justify an interstate pipeline might use 1 billion standard cubic feet per day (equivalent to ~19 million tons per year), which is only a significant fraction of the ethanol industry’s CO2 emissions. Making it work would require linking up dozens of facilities in a transaction with many counterparties.

Carbontech will likely partner with Big Oil to claim 45Q

Another challenge to carbontech claiming 45Q is scale—or, more specifically, the lack of it. 45Q stipulates minimum amounts of carbon that must be captured from a facility each year to qualify for the credit. These annual minimums guards against large facilities capturing insignificant slipstreams of their emissions and claiming they’ve decarbonized. In this way, 45Q tries to avert the “greenwashing” feared by environmental groups.

The problem, however, is that the annual minimums are prohibitively large for the nascent carbontech industry. Direct air capture facilities need to capture 100,000 tons per year, which is 100 times more than the largest direct air capture facility, ClimeWorks’ Hinwil facility in Switzerland, captures today. While 45Q gives a nod to non-EOR carbontech by setting its minimum project size at the lowest level of any project—25,000 metric tons per year of CO2 captured and utilized—that’s still an ambitious figure for technologies still in their infancy.

The solution is partnerships. Rather than have dedicated capture projects for carbontech, it makes more sense to partner with a carbon capture project, such as one supplying EOR, and use a slipstream of the CO2 for carbontech. While it might seem odd that a low-carbon carbontech industry would partner with Big Oil, 45Q has created a unique and exciting opportunity where these seemingly unlikely partnerships can grow.