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Highlights

Permanent sequestration must begin by Jan. 1, 2024

IRS says tax relief is owed due to coronavirus pandemic

Houston — Recently proposed US Department of the Treasury and Internal Revenue Service regulations to help businesses understand how legislation passed in 2018 could benefit companies claiming carbon capture tax credits came under fire from lawyers as not only "complicated" but also as posing significant risks.

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The June 3 webcast, hosted by Norton Rose Fulbright, aimed to show how carbon sequestration transactions could be structured "in light of proposed regulations the IRS issued on May 27 about claiming section 45Q tax credits," and the law firm said the IRS has "disallowed over half the tax credits claimed so far."

The IRS released proposed regulations it said would provide guidance regarding two new credits for carbon oxide captured using equipment originally placed in service on or after February 9, 2018.

It said it would allow $50/mt of qualified carbon oxide for permanent sequestration, and up to $35/mt for Enhanced Oil Recovery purposes for up to 12 years if the effectiveness of storage is monitored and construction begins by January 1, 2024.

"Neither of these new credits is subject to a limitation on the number of metric tons of qualified carbon oxide captured," the IRS said.

The latest regulations expanded carbon capture to include "qualified carbon oxide," a broader term than "qualified carbon dioxide." Prior to the change in regulations, carbon capture was limited to a total of 75 million mt of qualified carbon oxide.

Additionally, the IRS said, its proposed regulations address issues such as procedures to determine adequate security measures for the geological storage of qualified carbon oxide, exceptions to the general rule for determining who the credit is attributable to, procedures for a taxpayer to make an election to allow third-party taxpayers to claim the credit, and standards for measuring utilization of qualified carbon oxide and rules for credit recapture.

The Section 45Q Credit may be claimed during the 12-year period beginning on the date the equipment is placed into service by the person who owns the carbon capture equipment and physically or contractually ensures the carbon capture.

THE RISKS

During the webcast, the Norton Rose Fulbright lawyers noted there will additionally be a five-year IRS "look-back" period to analyze if there have been any carbon leaks.

Part of the new regulations note that more than one party might be responsible for storage at a given geological site that could leak due to an earthquake or a volcano.

One attorney said in his view that "tax equity doesn't like the technology" that is currently being envisioned for carbon capture.

There are, additionally, "potential environmental liabilities" associated with the process, according to attorneys Amanda Rosenberg and David Burton, and tax equity does not like to take "construction risks."

They also said there is a "timing" risk associated with selling CO2 to the oil industry for enhanced oil recovery.

According to the International Energy Agency's May 27 report on energy investments in 2020, "80% of these projects plan to sell the captured CO2 to the oil industry for storage via enhanced oil recovery, but the current market turmoil could threaten their timelines."

There is also the risk that minimum emission levels will not be reached, and there is the risk that coal-fired power plants will shut down before the 12-year tax credit period has lapsed.

THE IRS, RENEWABLES AND A PANDEMIC

Also on May 27, the IRS released Notice 2020-41, which provides an additional year for renewable energy projects that started construction in 2016 and 2017 to be placed-in-service under Treasury's safe harbor guidance so the project can be eligible for tax relief.

"Because COVID-19 has caused industry-wide delays in the supply chain for components needed to complete renewable energy projects otherwise eligible for important tax credits the IRS has issued Notice 2020-41 to provide tax relief to affected taxpayers," it said.

The notice said the relief will go to "taxpayers that develop renewable energy projects that produce electricity from sources such as wind, biomass, geothermal, landfill gas, trash and hydropower, and use technologies such as solar panels, fuel cells, microturbines and combined heat and power systems."

What it means is that some projects that began construction in 2016 or 2017, that had a four-year deadline of December 31, 2020 and December 31, 2021 to receive 100% and 80% of the value of the production tax credit, respectively, now have a fifth year to be placed in-service with their construction being deemed "continuous."

Gregory Wetstone, CEO of the American Council on Renewable Energy said: "Treasury's recently released guidance granting an additional year to meet safe harbor qualifications for renewable tax credits is a welcome and important step to help the renewable sector and its workers in the face of the delays, disruptions and other challenges associated with COVID-19."