Related Articles
Forward article link
Share PDF with colleagues

Carbon capture catches a big tax break

Generous new incentives could be a breakthrough

The past decade or so has been a golden age for new energy technologies, especially those aimed at reducing carbon emissions and combating climate change. One technology that has failed to launch, despite lofty expectations and high ambitions, has been carbon capture and storage. Beset by stubbornly high costs and a dearth of political support, CCS has seen setback after setback, while other carbon-cutting technologies, like wind and solar, race ahead.

That could be about to change. The recent budget deal passed in Congress and signed off by President Donald Trump includes a major boost to America's fledgling CCS sector that could extend a vital lifeline to the technology in a crucial market.

A bipartisan deal has strengthened a tax incentive for CCS known as 45Q, first put in place as part of the 2009 post-financial-crisis stimulus plan. CCS builders will now be able to claim a tax credit of $50 per tonne of carbon that's captured and stored underground, up from just $20/tonne before. For projects that put the carbon to use elsewhere, such as selling to enhanced oil-recovery operators, this credit has been raised from $10/tonne to $35. The revision also removes caps on the credit and extends the timeline for operators to be able to take advantage of the measure.

The fundamental problem CCS has faced in the US, and elsewhere, has been an inadequate price on carbon, making it impossible in most cases to recoup the expense of outfitting plants with costly CCS kit.

CCS has worked in the US only when there has been a nearby market for the carbon that's captured, making the endeavour more economically attractive. The Petro Nova coal-fired CCS power plant near Houston, which was started up last year by NRG Energy and Japan's JX Nippon, is able to sell the carbon it captures to enhanced oil-recovery projects and take advantage of the 45Q tax break.

$50/tonne—new tax break for CCS projects

But Petra Nova has been the exception in an otherwise bleak landscape for CCS in the US. The incentives that have been in place haven't been enough to push new projects forward.

The technology's backers argue that, like other new energy technologies, CCS just needs a good hard push out of the gate. That push, they argue, will send it into the same sort of virtuous cycle that wind and solar have enjoyed: public backing allows building at scale, which reduces costs, allowing more projects to go ahead that deliver further cost and technological advancements.

Whether the new tax incentives are enough to deliver this kind of breakthrough won't be known for some time. But a 2016 study from the Department of Energy offers some encouragement for CCS' backers. It found that tax breaks along the lines of those that have now passed would spur a significant buildout of CCS at power plants over the next two decades. If the buildout leads to cost breakthroughs that reduce the breakeven for most CCS-equipped power plants from around $65/tonne today to $35/tonne by 2030, as hoped, the expansion is supercharged.

Under the DOE's most optimistic scenario, where both the fiscal incentives and cost reductions are in place, annual carbon-capturing capacity at American power plants rises to 150m tonnes by 2030 and tops 200m tonnes by 2040. Millions more tonnes of carbon would be captured at other industrial sites. By comparison, the Petra Nova project is currently capturing a modest 1.6m tonnes a year.

At that point the tax credits would be costing the treasury $7bn or more a year, which could turn CCS' incentives into a victim of its own success. But that would be a far more favourable position to be in than today, where there hasn't been much success at all.

Also in this section
PE Live: Hydrogen ready for second phase of decarbonisation
11 August 2020
Reducing emissions becomes more complicated once relatively easy transitions have been completed, but the technology for hydrogen is ready to facilitate the next wave of decarbonisation
Letter from Brussels: Gas still fuelling EU's green transition
9 August 2020
The European Commission's transition plans, along with rising coal-to-gas switching, are entrenching gas in the EU energy mix
PE Live: Hydrogen firms need to deliver on stock surge
7 August 2020
Pure play hydrogen energy system companies have massively outperformed their peers, and expectations are high they will start to deliver profits well before 2030