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Energy Insights: IRS proposes carbon capture tax credit qualifications

BY Ellen S. Friedman

On May 28, 2020, the IRS proposed rules regarding how companies can qualify for carbon capture tax credits. Based on the long-awaited guidance (last year the IRS had asked for feedback and comment from industry participants in part to determine whether an alternative existed to the Environmental Protection Agency’s Greenhouse Gas Reporting Program’s Subpart RR), the IRS is allowing for a standard known as ISO 27916 to be an alternative to Subpart RR for carbon stored in association with enhanced oil recovery as one of the measures proposed in the IRS anticipated rules. This essentially helps give taxpayers an alternative to demonstrating the “secure geological storage” that is needed to claim the credit.

How is carbon captured?

While the exact science is beyond the scope of this article, here is how it works in simple terms: To start, picture a power plant. As a power plant is in operation, one of the byproducts that is emitted is carbon oxides. These particle emissions of carbon oxide get released into the air, which contributes to greenhouse gases. Greenhouses gases do not particularly help anything. Why? Well, they contribute to climate change.

So what exactly does capturing carbon do? Well, through carbon capture, the carbon is seized at the point that it is emitted. Then that captured carbon is stored, or sequestered, deep underground in saline reservoirs or in oil and gas fields, which can help with oil and gas recovery. It is like being part of the circle of life where it helps to keep on giving. Note there are other uses for carbon that is captured as well.

How does ISO 27916 make carbon capture (and carbon credits) easier?

Well, without getting into a lengthy tax history lesson, prior Notice 2009-83, which was the main guidance under the old Section 45Q credit program, was issued when the U.S. Environmental Protection Agency (EPA) was still creating its rules for greenhouse gas reporting rules.

Wait—side bar: Why are we talking about the EPA?

Well, in order for carbon oxide to be injected underground, it must be done under an EPA underground injection control well permit. This is where Subpart RR comes into play. Subpart RR had more involved rules for greenhouse gas reporting, which required an EPA-approved site-specific monitoring, reporting, verification (MRV) plan.

There is a difference of opinion among taxpayers regarding whether reporting under Subpart RR is required to claim the credit under Section 45Q as it pertains to injections of carbon oxide in enhanced oil recovery, which is considered as Class II for EPA purposes. The reason for the differing opinions: the IRS has only taken the position that an approved MRV plan is required for these purposes in Form 8933. This is not typically considered binding.

The guidance given by the IRS through the proposed regulations basically does this: gives taxpayers a workaround while complying with the Subpart RR for Class II wells (hint: injections for oil and gas recovery) and thereby giving taxpayers an alternative to identifying “secure geological storage.” In fact, many commenters to previous requests from the IRS for input indicated there is a need for an effective and workable framework to demonstrate “secure geological storage.”

So by now, you are asking: How exactly are the ISO standards better? Good question.

Not necessarily that they are better, but it does not require the taxpayer to disclose information to the public. Both Subpart RR and the ISO standards require some type of certification. Under Subpart RR, there is a self-certification function for volumes of carbon oxide being reported. Under the ISO, the documentation is prepared internally and then provided to an independent engineer or geologist for certification but there is otherwise no requirement that the information gets shared with the public. In fact, the Treasury Department has explained that there is no statutory requirement in Section 45Q for taxpayers, federal agencies, or industry groups to make available the information.

Where will this ultimately end up with the industry? More to come! 

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Ellen S. Friedman


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