US risks industrial CO2 shortage by paying suppliers to sequester emissions

A US federal tax incentive aimed at curbing carbon dioxide emissions could have unintended consequences for food processors and other CO₂ offtakers as the emitters supplying them opt to bury their carbon instead, industry watchers are warning.

The US expanded its carbon capture tax credit program in 2022 to provide up to $85 for every metric ton of CO₂ stored underground. But despite the overabundance of CO₂ in the atmosphere, the tax credit boost came as industrial companies struggled to secure CO₂ on the merchant market for a range of uses, from beermaking to medical procedures.

Industry watchers trace the 2022 shortage to problems with supply contamination at Denbury Inc.'s Jackson Dome site, an extinct volcano and natural CO₂ source near Jackson, Miss.

The result was a spike in CO₂ prices, exacerbated by anticipated fertilizer plant shutdowns after planting season, said Maura Garvey, president of Intelligas Consulting LLC. As with ethanol refining, ammonia production creates a nearly pure CO₂ biproduct that many plants sell to industrial gas companies.

"This year, we're better off than last year," Garvey said. "What's happening is supply is getting tighter and tighter."

Only two independent producers — POET LLC and Reliant Holdings Ltd. — plan to add new capacity within the next few years, Garvey added.

Companies supplying industrial gasses must now compete with carbon sequestration developers for deals with ethanol producers, a major source of their CO₂. In the past few years, the US Midwest has seen three CO₂ pipeline developers apply for permits across a half-dozen states. The projects would link partnering ethanol plants to underground CO₂ storage facilities in North Dakota and Illinois, allowing the stakeholders to claim the $85/t credit.

"This is a lot more than these ethanol companies are currently paid from the gas companies that take their crude feedstock to purify and get it into the market," Garvey said. "If those Midwest pipelines come to fruition and get built, we're going to lose those sources."

But the tight market has also created opportunities for small-scale emitters to make money by lowering their carbon footprint.

Due to the high transportation costs of CO₂, investment in carbon capture technology is currently only worthwhile to emitters who happen to have a customer nearby, Anna Pavlova, vice president of strategy and market development with CarbonQuest Inc., said in an interview. "And sometimes there's a match, and sometimes there isn't a match."

CarbonQuest provides equipment to commercial and residential buildings to capture their heating emissions and sell the CO₂ to nearby customers. Unlike industrial gas suppliers, the company targets end-users outside the traditional merchant market who use CO₂ to make low-carbon products, such as sustainable aviation fuel or cement.

But high CO₂ prices are also driving some traditional merchant market customers, particularly in the Northeast, toward more novel sources.

In some regions, customers are reporting prices as high as $1,000/t of CO₂ and up to $600/t for bulk purchases, Pavlova said. "We as a supplier see companies asking us, 'Where are you? How much can you sell us? Where can we partner?'"

Ripple effects

The US incentivizes the capture and utilization of CO₂ emissions with a smaller tax credit, worth up to $60/t.

Carbon utilization companies have lobbied Congress to bring the incentive to parity with that for carbon storage, arguing that in some cases, CO₂ recycling drives even greater emissions reductions by avoiding the need to mine it. In the last week of September, the industry met with lawmakers in hopes of getting momentum on a bill introduced in February that would increase the utilization credit to $85/t.

Without that parity, supporters say the US' 45Q tax credit program risks driving perverse incentives, such as encouraging sustainable aviation fuel companies to source their CO₂ from operations like Jackson Dome.

"For a lot of the demonstration projects, people are just buying it on the merchant market," Pavlova said. "They're trying really hard to buy recycled and there's pressure on them to buy recycled."

Meanwhile, many of the ethanol plants currently selling to the merchant market are now planning to sequester their emissions, cutting into the supply available to CO₂ offtakers. About 70% of that demand comes from the food industry for making dry ice, carbonating beverages and stunning chickens before slaughter, among other end uses.

"They had blinders on," Garvey said. "I think when they put through all the tax credits, they really weren't paying attention to how this might have a ripple effect down the road. It could affect a major industry here."

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