IRS Provides Clarity on Carbon Capture Tax Credit Rules
New rules aimed at removing bottleneck in new carbon capture projects
The Internal Revenue Service (IRS) has issued guidance intended to help businesses understand how they can claim tax credits on carbon capture projects and equipment. The new guidance is intended to provide clarity to legislation passed as part of the Bipartisan Budget Agreement from February 2018. That legislation enabled companies to claim tax credits for carbon dioxide captured using carbon capture equipment, and placed in geological storage, or used for specific applications, including as an injectant used for oil and gas extraction, which will remain in geological storage after use.
Specifically, the new IRS notice provides details that help businesses determine when construction has begun on a qualified facility or on equipment in order to be eligible for the credit. Along with the clarification notice, the IRS also a safe harbor provision for carbon capture partnerships, in a manner similar to the safe harbor applied to partnerships receiving wind energy production tax credits. The safe harbor rule is intended to simplify the process for partnerships to be able to claim the carbon capture credit.
Carbon capture technology is a key tool expected to enable energy companies to dramatically lower emissions in coming decades. For example, as part of Dominion Energy’s announcement this month that it would target net zero emissions by 2050, the company identified carbon capture technology as one of the tools showing potential for achieving significant emission reductions, along with large-scale energy storage, hydrogen, and advanced nuclear.
Although the legislation was passed over 2 years ago, progress on carbon capture projects has been slow, as companies have been awaiting clarification on the rules prior to investing. Industry observers are hoping that the new IRS release will help spur pent up demand for the projects. According to The Global CCS Institute, an Australia-based carbon capture think tank, carbon capture projects are ready for launch in the U.S., and have been awaiting IRS guidance.