Amidst the deeply polarized presidential race and congressional politics, something remarkable happened this month – an unprecedented coalition of key industry, labor, and environmental interests came together to urge Congressional action in support of an essential energy production and carbon reduction strategy – carbon capture, utilization, and storage (CCUS). Continue reading »
New legislation would increase oil production & reduce carbon emissions
May 5, 2014 in Carbon Management Authors: Brad Crabtree, Jennifer Christensen
New legislation introduced by Senator Jay Rockefeller of West Virginia will benefit the environment and economy, drive innovation in critical energy technology, and increase energy security. Continue reading »
Policy Recommendations – CO2-EOR: A Critical Domestic Energy, Economic & Environmental Opportunity
February 28, 2013 in Carbon Management, Reports & Whitepapers
Amidst economic uncertainty, fiscal crisis and political division over energy policy, carbon dioxide enhanced oil recovery (CO2-EOR) offers a safe and commercially proven method of domestic oil production that can help the United States simultaneously address three urgent national priorities:
The Center for Climate and Energy Solutions (C2ES) and the Great Plains Institute (GPI) conducted an analysis, with extensive input from the participants of National Enhanced Oil Recovery Initiative (NEORI), to inform NEORI’s recommendations for a federal production tax credit to support enhanced oil recovery with carbon dioxide (CO2-EOR). In particular, C2ES and GPI explored the implications of the recommendations for CO2supply, oil production and federal revenue. This document describes the research, assumptions, and methodology used in the analysis. NEORI’s recommendations report, Carbon Dioxide Enhanced Oil Recovery: A Critical Domestic Energy, Economic, and Environmental Opportunity, can be found at: http://gpisd.net/NEORI-Report-2012.
C2ES and GPI compared the likely cost of a federal tax credit for greater CO2 capture and supply with the federal revenues expected from applying existing tax rates to the resulting incremental oil production. C2ES and GPI quantified two key relationships for CO2-EOR development and a related tax credit program:
1) Cost gap – the difference between CO2 suppliers’ cost to capture and transport CO2 and EOR operators’ willingness to pay for CO2. The goal of the tax credit is to bridge the cost gap. Thus, the cost gap determines the expected level of the tax credit in a proposed competitive-bidding process.
2) Revenue neutrality/revenue-positive outcome the federal government will bear the cost of a CO2-EOR tax credit program, yet it will enjoy increased revenues from the expansion of CO2-EOR oil production when existing tax rates are applied to the additional production. C2ES and GPI analyzed when the net present value of expected revenues would equal or exceed the net present value of program costs.
Figure 1: Illustration of the Cost Gap and Revenue Neutral/Revenue Positive Outcome of Federal Production Tax Credit Program
*The “cost gap” is the difference between the cost to capture and transport CO2 and what EOR operators are willing to pay for CO2
**Net present value is the sum of annual tax revenue minus annual production tax credit costs for each year of the production tax credit program, discounted for each year
C2ES and GPI calculated the tax credit required to bridge the cost gap, and the cost and revenue implications. C2ES and GPI developed input assumptions based on real-world physical and market conditions after consulting with NEORI participants and other industry experts and reviewing available literature. C2ES and GPI developed a core scenario based on “best guess” inputs and conducted several sensitivity analyses of key inputs. C2ES and GPI demonstrated that a program can be designed that will become “revenue positive” (defined as when the federal revenues from additional new oil production exceed the cost of a carbon capture tax credit program after applying a discount rate to both costs and revenues) within ten years after tax credits are awarded. Sensitivity analysis reveals that the program remains revenue positive using a realistic range of likely assumptions.
The National Enhanced Oil Recovery Initiative (NEORI) recommends that Congress consider implementing arevenue-positive federal production tax credit to support deployment of commercial carbon dioxide (CO2) capture and pipeline projects. A new, more robust federal incentive is needed to increase the supply of man-made or anthropogenic CO2 that the oil industry can purchase for use in enhanced oil recovery (EOR) to increase domestic production from existing oil fields.
NEORI also recommends that Congress undertake immediate modification of the existing Section 45Q Tax Credit for Carbon Dioxide Sequestration, through legislative action and/or working with the Department of the Treasury to revise Internal Revenue Service program guidance.
To avoid stalling important commercial CO2 capture projects under development, there is an urgent need to improve the functionality and financial certainty of this federal incentive to enable its effective commercial use.
To make 45Q immediately accessible to US companies, Congress should pursue the following changes to the program:
- Designate the owner of the CO2 capture facility as the primary taxpayer;
- Establish a registration, credit allocation, and certification process;
- Change the recapture provision to ensure that any regulations issued after the disposal or use of CO2 shall not enable the government to recapture credits that were awarded according to regulations that existed at the time; and
- Authorize limited transferability of the credit within the CO2 chain of custody, from the primary taxpayer to the entity responsible for disposing of the CO2.
The consensus recommendations below detail the specific 45Q program modifications requested, and the section-by-section summary provides further explanation and context.
Background and Rationale
Section 45Q makes available a per-ton credit for CO2 disposed of in secure geologic storage. The program provides $10 per metric ton for CO2 stored through EOR operations and $20 per metric ton for CO2 stored in deep saline formations. However, due to unforeseen issues in the original statute (§ 115 of the Energy Improvement and Extension Act of 2008), the 45Q program lacks sufficient transparency and certainty for companies to be able to use the credit to secure private financing for projects.
Large-scale expansion of commercial EOR using industrially-sourced CO2 later in this decade requires that critical industrial capture projects begin construction now and enter commercial operation within the next few
years. If Congress makes modest, functional improvements this year to 45Q that result in little or no additional fiscal cost, the program currently authorized at 75 million metric tons of CO2 stored can help several significant EOR projects nationwide secure private sector financing and move forward to commercial operation.
