US tax credits accelerate CCUS in the USA and beyond31 August 2023
Recent shifts in policy and regulatory frameworks in the USA are accelerating the deployment of carbon capture, utilisation, and storage (CCUS) both within and beyond its country borders. But with CCUS increasingly acknowledged as a critical tool to address climate change, are there sufficient policies and economic incentives in place to ensure the technology is commercially competitive enough to unlock its full potential?
In the last year, CCUS has been a hot topic with frequent project updates, technology developments and funding announcements reflecting how this technology is now a key consideration for hard-to-abate sectors that need to rapidly decarbonise. Demand for CCUS, particularly in North America, Europe and Asia- Pacific is rising rapidly, with over 200 facilities expected to be operational by 2030, capturing over 220 million tons of CO2 a year.
The USA is leading the pack
Some of this recent increase in activity is, in part, thanks to shifts in policy and regulatory frameworks, particularly in the USA. While tax credits have been available for US-based CCUS projects for some time, President Biden’s Inflation Reduction Act (IRA) boosts the 45Q tax credit for point sources from USD$50 to $85 per ton of CO2 sequestered. The goal of this tax credit is to incentivise CCUS for hard-to-abate applications such as gas-fired power plants, cement, steel, hydrogen, and petrochemicals. Given that 49% of CCUS projects were cancelled because of financial and economic challenges (according to Rystad Energy) the 45Q expansion is a major catalyst in revitalising and accelerating the CCUS industry.
The IRA also lowers the carbon emissions threshold that facilities must meet to qualify, creating the potential for many more projects to come forward in the USA. For power generation, the capture threshold for credit-eligible facilities will fall from 500 000 tons per year of CO2 emitted to 18 750 ton per year. Further, the introduction of an option for direct payment ensures that participants will benefit from CCUS, not just those with high cash tax liabilities, although non-tax-exempt entities will only benefit for 5 of the 12 year crediting period. These changes create more certainty for investors, which will ultimately unlock more investment options and stimulate the market in a way that tax liability limited credits do not. In fact, a study by the Bipartisan Policy Center found that “one dollar in cash has nearly double the value of a dollar in tax credits to a project developer.”
More certainty equals more attractiveness
Previously interrupted, delayed and cancelled projects across the US, eg, Kemper County in Mississippi and Petra Nova in Texas (pictured above), had created doubts about the viability of CCUS technologies. However, the changes instigated by the IRA are a welcome departure from this uncertainty and bring a new level of investor confidence to the CCUS market. This is particularly welcome news for those investors that had previously invested hundreds of thousands of dollars in feasibility studies, development plans and community engagement, only to fail to meet the criteria for government funding or lose in the competitive application process.
The investor attractiveness of the USA’s newly enhanced 45Q tax credit has not been lost on the governments of international CCUS hotspots such as Canada, the UK, the European Union, and Australia. As with the impact of the IRA more broadly, governments are concerned about the extent to which these announcements will redirect investment from their jurisdictions and are beginning to respond in turn, accelerating the commercial viability of CCUS as they do.
Canada’s 2023 budget, for example, expanded the investment tax credits available for CCUS and hydrogen production, and clean technology projects designed to stimulate investment to support the country’s energy transition. Similarly, the European Union’s Green Deal Industrial Plan and its Net Zero Industry Act (NZIA) look to address Europe’s main bottlenecks to a successful CCUS industry.
Clusters require collaboration
Early on, the UK found that approaching the deployment of CCUS through industrial clusters – which allow several businesses to share carbon transport and storage infrastructure – would maximise economies of scale and reduce total investment. Not only does the cluster approach drive down the unit cost of CCUS, but it also creates opportunities for smaller emitters to decarbonise and the potential to create new products and services using carbon dioxide.
While the US already has several of its own clusters in the making, the expansion of the 45Q credit programme could support many more industrial clusters to follow in these footsteps.
A collaborative and integrated approach will be key in bringing neighbouring industries together to benefit from the synergies of sharing infrastructure for transport and storage.
This approach not only supports CCUS first movers to achieve their decarbonisation goals, but it also accelerates the speed of innovation to market, benefiting future decarbonisation efforts too.
Credits can open the door to new construction
Altogether, the increase in global competitiveness brought about by the USA’s 45Q tax credit expansion is having a measurable impact on the interest in CCUS both in the USA and beyond its borders. These credits, along with the broadened definition of “qualified facilities”, open the door wider to developers and investors in the power industry seeking to construct new CCUS facilities. However, with varied policy instruments and technologies in play, and new announcements being made frequently, an experienced partner is vital for navigating the various economic, technology, infrastructure, and resource challenges to unlock CCUS’s full potential.
Whilst the US tax credit will not directly impact every company present in the CCUS space, it helps to prove the commercial viability of the technology and increase the confidence of developers and investors. With greater positive awareness and interest in CCUS technologies, it should encourage other regional jurisdictions to explore the role that incentives can play.
Author: Adam Green Carbon Policy Advisor, Worley*
* To date, Worley has supported over 300 CCUS projects across various industries (from delivering FEED services for VPI Immingham’s project in the UK to pre-FEED for Shell’s Polaris refinery in Canada). It is currently involved in over 30 advanced development projects across the CCUS value chain. It is also well placed to act as a convener and project partner to support CCUS clusters, and, being technology neutral, Worley has a breadth of experience in carbon capture technologies at varying technology readiness levels.