On Friday, August 12th, the House of Representatives passed the Inflation Reduction Act (IRA). This was not a surprise, as the Democrats have majority in the House, but as the quote goes; “nothing is certain in politics”. With the passing of the IRA in the House, the final piece of the puzzle will now be the signature of President Joe Biden, which is more of a formality than an obstacle. The real victory came last week, when the IRA passed the US Senate by a vote of 50-50, with Vice President Kamala Harris serving as the tiebreaker. This enabled an historic deal for the fight against climate change, on which Joe Biden will soon put his signature!
So, why is this a big deal for CCUS? Well, in addition to the investments set of to lowering the national debt and enabling affordable healthcare, a historic $369 bln is set of for climate and clean energy investments. The bulk of the $369 bln support is aimed at maximizing the impact of technologies such as wind, solar, storage, nuclear and electric vehicles. However, CCUS and hydrogen also get significant support, and this comes on top of what is already received in the Bipartisan Infrastructure Law. The main change for CCUS is related to the 45Q tax incentive, which is summarized in the table below.
|Current Law||Infrastructure Reduction Act|
|$/ton (carbon utilized, including EOR)||Up to $35||$60|
|$/ton (carbon permanently stored)||Up to $50||$85|
|Direct Air Capture (carbon utilised)||Up to $35||$130|
|Direct Air Capture (carbon permanently stored)||Up to $50||$180|
|Minimum CO2 volume captured||Power plant: 500 ktpa Other industrial: 100 ktpa DAC: 100 ktpa||Power plant: 18.8 ktpa Other industrial: 12.5 ktpa DAC: 1 ktpa|
|Payment type (for the 12 years of the incentive)||Tax credit (for all 12 years of incentive)||Two options: Direct payment (for first 5 years), then tax credit (for remaining 7 years)Tax credit (for all 12 years of incentive)|
|Must start construction by||By January 1st 2026||By January 1st 2033|
In terms of planned CCUS capacity, the US is already a leader with 200 MTPA of planned capacity in the pipeline. The new 45Q proposal is likely to both increase the probability of these projects reaching a positive FID, as well as adding additional capacity to the pipeline. Implications of the 45Q could be the following;
- Significant support for Direct Air Capture (DAC): An increase of DAC tax credits from $50 (in 2026) to $180/tonne for CO2 linked with permanent storage ($35 to $130/tonne for CO2 going to enhanced oil recovery/utilization). This is likely to accelerate DAC development given these projects typically also benefit from Low Carbon Fuel Standard (LCFS) and voluntary carbon market credits as well.
- Increase to a higher and flat credit amount: The immediate increase to the higher credit amount is a strong motivator for projects planning to come online starting in 2023. Previously, the 45Q tax credit was stepped up over a period of several years, however the IRA provides a flat and higher rate of support.
- Direct payment introduced as an option for first five years: Payment becomes an option for the first five years of a project, allowing companies to claim cash payments, rather than build up tax credits to be used to offset income under the current 45Q. This option would free development companies from the complicated process of finding and incentivizing tax equity partners.
- Minimum project capture volume lowered: The previous version of the 45Q had 100 ktpa as the minimum CO2 volume to be captured in order to be eligible for support, with 500 ktpa for power plants. This is lowered considerably, to 18.8 ktpa for power plants and 12.5 ktpa for all other industries. This will likely incentivize smaller-scale capture projects across industries and modular construction of smaller capture units, in addition to more pilot projects.
- CCUS will be economically viable to implement at a wider range of industries: The shift to $85 per tonne for point-capture source capture is likely to attract more industries such as steel, cement, power (gas, coal, waste-to-energy), and petrochemical plants. This could enable more value chains to develop, as onshore transport and storage of CO2 in the US is considerably lower in cost than the offshore equivalents in Europe, with transport typically ranging from 10-25 $/tonne and storage at approximately 10 $/tonne. Still, for some industries, typically with lower CO2 concentration, the increase could still be to low to enable positive project economics.
- Requirements for fair pay and local jobs could increase support for CCUS: Minimum wage and percentage apprentice requirements will be vital to achieve full support. The base support of the 45Q is low compared to the max amount available, so the future CCUS industry is likely to provide local jobs with a fair pay. This could increase local support.
- Extended period for support eligibility: The extension of the construction start date requirement until 2033 enables longer-term planning and mega-projects such as Exxon’s Houston Ship Channel (100 MTPA capacity) to participate.
As mentioned, the enhanced credits would combine with CCUS elements of the 2021 Infrastructure Investment and Jobs Act which, through the Department of Energy, will grant $3.5 billion for carbon capture demonstrations, $3.5 billion to regional DAC hubs (of at least 1 Mtpa), $2.5 billion to carbon storage, $310 million for carbon utilization, $115 to winners of a DAC technology prize, and $100 million to winners of a carbon capture technology price. In addition, loans of $2.1 billion will be given to finance CO2 transportation. On top of that, the IRA also incentivises clean hydrogen through a production tax credit named 45V. With 45V, hydrogen production facilities can be eligible for a ten-year production tax credit of up to $3/kg. The 45V will evaluate emissions across the value chain, from feedstock to use, and renewable hydrogen (green hydrogen) will ultimately receive the final margin of max support. However, this could also support blue hydrogen projects going forward, given competitive gas prices for feedstock.
In total, the IRA accelerates the development of CCUS, putting emphasis on project deployment in the years leading up to 2030. With US already holding the leading position within planned CCUS capacity, the IRA can effectively enable the biggest pre-2030 CCUS market to materialise.
Note: This article has been written based on inputs from Bloomberg NEF, Rystad and Wood Mackenzie, combined with ACC reflections and insights.