Tax credits jump start Midwest carbon capture projects — but the cost will be in the billions
In an effort to reach zero carbon emissions by 2050, the Biden administration is offering more tax credits for carbon capture sequestration and utilization. The program once expected to cost $3.2 billion now could exceed $100 billion.
On any given day about 175,000 metric tons of carbon dioxide — equivalent to the emissions from 38,000 vehicles — stream out from Adkins Energy facility.
This northwest Illinois plant turns corn into ethanol, long touted as a renewable energy source.
Now the plant is thinking of ways to go greener. If a pilot project is successful, the Adkins Energy plant will capture all that CO2 and turn it into green methanol — an in-demand renewable fuel.
“If it works, it has all kinds of potential going forward,” said Adkins General Manager Bill Howell.
What makes this pilot and other carbon capture projects — including controversial CO2 pipelines — possible are federal tax credits worth up to $100 billion over 10 years.
The Inflation Reduction Act, signed by President Joe Biden in August 2022, offers new and expanded tax credits to encourage Americans to buy electric vehicles and install solar panels, among other provisions. It also offers uncapped tax credits for capturing emissions, including CO2, to reduce the worst impacts of climate change.
“The administration has committed to getting to net zero emissions by 2050, which means that we're going to be taking out as least as much carbon as we emit into the atmosphere every year,” said Noah Deich, deputy assistant secretary for carbon management at the U.S. Department of Energy.
Tax credits available for carbon capture or related projects
45Q: Under the Inflation Reduction Act, the government will pay qualified facilities $85 per metric ton of CO2 stored or $60 per ton of CO2 used for enhanced oil recovery or other use. Plants built to capture CO2 from the air can get $180 per metric ton. Projects have until January 2033 to begin construction.
45Z: Provides a tax credit of up to $1 per gallon for domestic production of clean transportation fuels between Dec. 31, 2024, and Dec. 31, 2027. Ethanol plants claiming credits under 45Z don’t have to sequester CO2; they can use it for other purposes.
45V: Provides up to $3 per kilogram of hydrogen produced with reduced greenhouse gas emissions. The tax credits may be claimed for 10 years on hydrogen sold or used. Hydrogen is an ingredient in fertilizer and has other industrial uses.
Carbon tax credits are a “challenge to industry that says ‘if you can do this thing that makes sense for the climate, the U.S. government will pay you potentially tens, if not hundreds, of billions of dollars in funding for solutions,’” Deich said.
One program, called 45Q, offers tax credits for collecting CO2 and storing it permanently underground. The credit was created in 2008, but the Inflation Reduction Act boosted the value to up to $85 per metric ton of CO2, extended the timeline for funding and made it so companies can get direct payment rather than a tax credit.
The Congressional Budget Office and the Joint Committee on Taxation predicted last summer the expanded program would cost $3.2 billion through 2031, providing usage levels stayed the same.
But a March analysis by the Brookings Institution predicts 45Q — with its new rules and more lucrative benefits — will balloon through 2033.
“In our modeling, we came up with a number closer to $100 billion over a decade because the tax credit is generous enough that many existing sources of CO2 may find it economical to pursue carbon capture and sequestration,” said Neil Mehrotra, assistant vice president and policy adviser at the Federal Reserve Bank of Minneapolis and a co-author of the Brookings paper.
Pipeline projects seek tax credits
Ethanol is considered low hanging fruit for carbon capture because corn fermentation produces a cleaner stream of CO2 than other manufacturing processes.
Summit Carbon Solutions proposed in 2021 collecting CO2 at ethanol plants across the Midwest and transporting it via pipeline to North Dakota, where the compressed gas would be permanently stored underground.
Summit and two other companies — Navigator and Wolf Carbon Solutions — now are seeking permits to build pipelines that would crisscross Iowa, Illinois, Minnesota, South Dakota, North Dakota and Nebraska to pick up CO2 at more than 50 ethanol and fertilizer plants.
All three projects face vocal opposition from landowners and environmental groups because of concerns about safety, forced easements and whether CO2 pipelines are the right approach to head off climate change.
Steve Ellis, the president of Taxpayers for Common Sense, said the 45Q tax credit has become so generous and the amount of CO2 required to be sequestered has dropped so much that the U.S. government may not be making a big enough dent in greenhouse gas emissions to be worth the cost of the program.
“The question is, are we actually getting a return on this investment?” Ellis said.
Other carbon credits don’t require sequestration
Another tax credit targeting CO2 emissions is 45Z, which provides up to $1 per gallon for production of clean transportation fuels. This program is brand-new and the Internal Revenue Service still is clarifying how facilities would get the money. But it’s causing some developers — even pipeline companies primarily interested in 45Q — to do a double take.
After all, 45Z allows them to make money from the CO2 they’ve collected rather than just bury it in the ground.
That’s what Adkins Energy wants to do. The ethanol and biodiesel plant, opened in 2002 in a town of 2,700 two hours west of Chicago, isn’t on the route of any of the proposed CO2 pipelines.
Jeff Bonar, CEO of CapCO2 Solutions, based in New York, approached Howell earlier this year about an idea to capture CO2 at ethanol plants, combine it with hydrogen from renewable energy and make it into green methanol, a fuel being used in the shipping industry to replace diesel.
Danish shipping giant Maersk announced last year it needs 6 million tons of green methanol a year to reach its 2030 greenhouse gas emissions target and even more by 2040 to get to net zero emissions.
“You can qualify for 45Q or 45Z, depending on what you do,” Howell said. “We’re looking at each of those tax credits to see what applies to what we want to do.”
Adkins and CapCO2 Solutions might even qualify for 45V tax credits for creating hydrogen from renewable energy, Howell said. Adkins gets all its energy from a nuclear power plant in nearby Byron, Illinois.
Adkins and CapCO2 still have a lot to figure out — including how they would share tax credits — but if all goes as planned, a pilot could start early next year.
Even with the tax credits, capturing CO2 wouldn’t be cost effective unless people want to buy the lower-carbon fuels being produced, Howell said. Government and shareholder pressure to reduce greenhouse gases has created a market for low-carbon fuels — like green methanol and sustainable aviation fuel.
“And then the tax credits support that,“ he said. ”It's sort of like jump starting your car.“
Are tax credits a game changer?
The ethanol industry has come around to carbon capture as a way to survive as electric vehicles replace gas and ethanol-powered cars. A study commissioned by the Iowa Renewable Fuels Association predicted 75% of Iowa’s ethanol plants would go out of business without the pipelines.
On the flip side, the tax credits create opportunities for ethanol plants to not only survive, but evolve and expand. Monte Shaw, executive director of the renewable fuels group, said of 45Z in March: “It is a game-changer for us.”
But some people don’t want to see growth of resource-heavy industries. Nearly half of all corn grown in the United States goes into ethanol production and there already are concerns about erosion and fertilizer runoff caused by limited crop rotations.
“It’s an entirely reasonable concern,” said Deich, of the Energy Department.
He sees carbon capture, use and storage as a short-term solution, a bridge to a time when renewable energy has replaced most fossil fuels.
“The choice is often whether we have carbon capture, or a continuation of that system without carbon capture, which puts that CO2 into the atmosphere. And if we slow down the rate that we explore these technologies, we almost certainly are going to lead to a warmer planet.”
This story is part of a collaboration between Harvest Public Media, a public media newsroom partnership that covers agriculture, and the Mississippi River Basin Ag & Water Desk, an editorially independent reporting network based at the University of Missouri School of Journalism.
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