A non-partisan Pew Research poll with over 10,000 respondents found that 65% of Americans feel that the federal government isn’t doing enough to address climate change. Meanwhile, 84% of Americans are in favor of the federal government providing a tax credit to businesses for developing CCUS projects and deploying carbon capture technologies.
Today, these issues are intersecting in the form of a growing call for the federal government to ensure the 45Q tax credit is available through “direct pay.” Legislation that passed the House of Representatives and is currently under negotiation in the Senate would increase the amount of the 45Q tax credit and make it available as a refundable tax credit.
As background, the 45Q tax credit is one of the main policies driving the adoption of carbon capture in the United States. In December 2020, Congress enacted a two-year extension of the period to begin construction of carbon capture projects and leverage a 45Q tax credit as part of the Consolidated Appropriations Act, 2021. Since then, more than 100 new facilities in the United States announced they were leveraging CCUS, and there are now more than 30 carbon capture projects in various stages of development.
This is significant since the overwhelming consensus of energy experts and the international environmental community is that we need more carbon capture as swiftly as possible if we’re going to meet our global environmental goals. In fact, the International Energy Agency estimates that the global carbon capture industry needs to scale up to over 2,000 facilities capturing 2.8 gigatons of CO2 per year to limit warming to 2 degrees Celsius.
So, while the progress we’ve made since the 45Q tax credit was enacted is good, we still have work to do. And that’s where direct pay comes in.
Direct payment allows taxpayers to treat tax credits as if they were an overpayment of taxes, meaning a taxpayer can receive a cash refund for their credit instead of solely using the credit to reduce overall tax liability. Proponents of direct pay also point out that this system ensures the full value of the 45Q tax credits benefits the carbon capture project without reduction for the cost associated with monetizing the 45Q tax credits with tax equity investors.
Importantly, supporters believe that allowing direct pay of 45Q tax credits would facilitate the energy transition by increasing market efficiencies and incentivizing new market participants.
Encouraging new market participants to invest in clean energy and technologies is crucial. Traditional tax credits largely benefit corporations with cash tax liability, while direct payment would allow other participants to enter the market and assist still-developing businesses. For the purposes of driving new innovation in the energy industry, this is significant. To many energy experts, carbon capture and other emerging energy technologies signify the next generation of clean, reliable energy in the United States. And they are energy technology sectors that are in the process of scaling up to reach their full potential. Direct payment can support this growth more quickly.
At the same time, as is stands right now, market participants that are exempt from federal income taxes, such as public utilities and rural electric cooperatives, cannot directly benefit from the 45Q tax credit program. Direct payment would provide these entities a significant financial incentive to invest in clean energy, speeding up a clean energy transition in the United States.
As Data for Progress put it in an April 2022 report on direct pay, “Despite the clear need for increased investment in clean energy, without policy interventions that make these technologies scalable, cost-effective, and accessible to marginalized communities, our technological innovations will be in vain.”
And according to the Bipartisan Policy Center, “Studies have shown that direct cash subsidies, which are functionally equivalent to ‘direct pay,’ incentivize up to twice the actual deployment of clean infrastructure per federal dollar spent.”
When you consider that CCUS has the ability to capture more than 90% of the CO2 emissions from power plants and industrial facilities – some of the most potent sources for U.S. CO2 emissions – and the overwhelming majority of Americans are looking for more government intervention in climate change mitigation, direct pay offers a viable path toward the greater deployment of clean energy technologies.
To learn more about the benefits of CCUS projects, check out our blog post, The Case for Carbon Capture.