Lew Daly - 45Q Carbon Capture Tax Credits are a Financial Disaster in the Making - Climate Money Watchdog

Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Gregory A. Williams (00:00):
Music.

(00:10):
Thank you for joining us foranother episode of climate money
watchdog, where we investigateand report on how federal
dollars are being spent onmitigating climate change and
protecting the environment. Weare a private, non partisan, non
profit organization that doesnot accept advertisers or
sponsors. So we can only do thiswork with your support. Please

(00:31):
visit us at climate moneywatchdog.org to learn more about
us and consider making adonation. My name is Greg
Williams, and I learned toinvestigate and report on waste,
fraud and abuse in federalspending. While working at the
project on government oversightor Pogo 30 years ago, I learned
to do independent research, aswell as to work with

(00:51):
confidential informers orwhistleblowers to uncover things
like overpriced spare parts,like the infamous $435 hammers
and expensive military weaponsystems that didn't work as
advertised. I was taught by myco host, Dina razor, who founded
Pogo in 1981 and founded climatemoney watchdog with me three

(01:12):
years ago, Dina has spent 40years investigating and
sometimes recovering millions ofdollars wasted by the Defense
Department and other branches ofgovernment while at Pogo as an
independent journalist, as anauthor and as a professional
investigator, our guest tonightis Lou Daly, senior fellow for

(01:33):
Climate and Energy Policy atjust solutions, where he works
in partnership with state andfederal organizations and
networks in pursuit of just anequitable clean energy
transition. His previous 15years of work in the public
policy field includeappointments such as Director of
Policy and Research and seniorpolicy analyst for climate

(01:55):
equity at demos, Deputy Directorof climate policy at the
Roosevelt Institute. Lou is alifetime resident of New York
State, born and raised inOnondaga County, Central New
York State, and has been basedwith his family in western
Harlem New York City since 1999his New York service in field

(02:16):
includes being a member of thesteering committee of the New
York renews coalition from 2017to 2020 co coordinator New York
renews policy developmentcommittee supporting the
development and passage of thenation leading climate
leadership and communityProtection Act in 2019 member of
the New York City offshore windadvisory council in 2022 and

(02:40):
2023 and Lou has also workedinternationally as a member of
the global well being Lab of thepresence Institute Germany's
Global Leadership Academy, andas an international advisory
board member at the Center forthe Study of governance
Innovation at The University ofPretoria, with Doug kapow of

(03:02):
Earth track. Lou is the authormost recently of the report
taxpayer costs for carboncapture, utilization and
storage, just out from justsolutions and Earth track. In
addition to his extensive policywork, Lou's articles and
commentaries and featurearticles have appeared in The
New York Times, The WashingtonPost, the New Republic,

(03:26):
democracy journal, Bostonreview, grist and many other
publications. Dina, would youlike to say a few words about
why we're excited to have Louwith us? Yeah,

Dina Rasor (03:38):
Lou and I work on on climate issues together at
various time. And we had Doug ona podcast not too long ago, and
when they came up with this factsheet, I'm not usually shocked.

(03:59):
For 44 years of doing this. I'mnot easily shocked. But the the
45Q subsidy, when you actuallytake it out into the out years,
you know, because it startsslow, and then it goes it's a
bell curve kind of thing. I wasastounded at the amount of
money. And quite frankly, whatwe were talking about before we

(04:21):
started. If Leon, if Elon Musk,wants to find a trillion dollars
to knock off or or almost atrillion dollars to knock off
all he has to just get rid ofthis and it, but it's unlikely,
because of the connection to bigfossil fuel. So I'm really happy

(04:43):
he's here. I was very excitedabout their report and hoping
that that it, and we willdefinitely post it on the
website and our blog along withthis podcast, because I would
suggest everybody read it. Itis. Depressing how much money

(05:03):
they're going to try to suck outof this subsidy.

Lou, is there anything else you'd like
our listeners to know before weget started?

Lew Daly (05:11):
No, let's jump right in.

All right, so we're hearing about a fiscal
Time Bomb tied to carbon capturetax credits. What exactly is
this looming crisis, and whyshould everyday taxpayers care?

Lew Daly (05:27):
Yeah, I mean, on the most basic level, what we've
done in our report is to look atthe official government
estimates of what will be theultimate price tag, or the long
term price tag of for the CCStax credits, which are come
through the 45Q program of thetax code, as compared to
independent estimates that havedifferent features, and we'll

(05:50):
get into the weeds of whatexplains these disparities. But
the basic fact is, what we'relooking at potentially, and we
think more realistically, is amuch, much bigger price tag for
this particular climatesolution, some of us don't
consider it to be a solution,and so that's part of the the
distress and concern we havewhen we're looking at these,

(06:10):
these disparate fiscal analyzes.
And I think the the and we'llget into the details of just
why, you know why there is,there are such differences
between independent analyzes andgovernment analyzes in a minute.
But I think whether it's againsta backdrop of like fiscal
concern, which is ostensiblywhat's being fought over right
in the current negotiations overthe budget reconciliation, or if

(06:32):
the question, as it is for me,is, wait a minute, this is going
to cost us a lot more than wethought originally, and for a
solution that I believe isactually antithetical to the
goals of climate mitigation. Ineither case, the question of
these disparities and estimatesshould be raising a lot of
concern and causing a lot ofuncertainty about the future of

(06:56):
the program and whether or notit needs to be reformed.

Dina Rasor (07:02):
Yeah, so why don't we start by going back over what
the 45Q tax credit is, how itcame to be, you know, it was in
Biden's inflation Reduction Actand how, and then maybe even
talk a little bit for the peoplewho don't follow this closely
about carbon capture and and ifthey don't get this credit, how

(07:25):
is it going to affect thatprogram?

Lew Daly (07:29):
Okay, sure. Okay, so when we talk about 45Q that is
the section of the InternalRevenue Code that gives credits,
tax credits to CCS projects thatare often related to fossil
fuels now, CCS, very broadly, isa, is a, is a climate mitigation

(07:53):
technology and proposed solutionthat doesn't restrict the the
extraction, the production andthe combustion of fossil fuels.
What it does is it basicallyattempts to capture the CO two
emissions. Once you've you'veextracted the fossil fuels,
process them, transported them,and burned them, for example, to

(08:16):
generate electricity in a powerplant. So you're basically
capturing CO two and then theCC. This the storage part.
Carbon Capture and Storage isthe idea being that you capture
and then you store it in orderto keep it out of the
atmosphere. And this is how itbecomes a climate mitigation

(08:37):
solution. So 45Q was introducedin 2008 back in the day, it was
mainly considered a kind of aclean coal subsidy to to to
attach CCS facilities to verydirty coal plants, for example,

(08:57):
and also for use and enhancedoil recovery, which I think will
circle back to it. It had verylittle usage up through even up
until the inflation ReductionAct, it was modified into first
modified significantly in 2018with the values of the credits

(09:18):
being raised for certainactivities and other design
features to to enhance theincentive effects of the
program. But with the IRA comescame some very significant
changes in the 45Q program thathas resulted in a whole new slew

(09:40):
of or set of projects that havecome come online and entered
into the pipeline to to be putinto service over the next
decade or so. And we'll get backto that, because that's an
important part of explaining thedisparities with the independent
fiscal analyzes. But I'll justgive a quick overview of. Of how

(10:01):
the IRA, the inflation ReductionAct that was passed in 2022
enhanced the 45Q program. Themain one is that it increased
the value of the credit forsequestered carbon capture from
$50 to $85 it also, for EOR,raised the value of the credit

(10:23):
from $35 to $60 and also forother uses, there's another type
of utilization beyond EOR thatwe can also talk about, that
credit rate was raised from $35to $60 under the IRA so a lot

(10:44):
more value in the credits withthe IRA revisions. The other
thing that is important is thatthe the capture thresholds for
what kinds of facilities areeligible for. 45Q were greatly
reduced, which greatly expandedthe breadth of eligible

(11:06):
facilities to include muchsmaller facilities. So
previously, the threshold toreceive a 45Q credit for a power
plant would be a facilityproducing at least 500,000
metric tons annually of CO twoemissions that has now been
reduced to only 18,750 metrictons of emissions. So much, much

(11:28):
smaller power plants are noweligible and able to qualify for
the 45Q credit when it comes topower plants. Likewise other
facilities, these would mostlybe industrial facilities,
cement, steel making, ammoniaproduction, or biofuel
facilities like ethanol, theythey also had a significantly

(11:51):
more breadth added by reducingthose thresholds from 100,000
metric tons to Only 12,500metric tons. So higher values,
much more breadth in terms ofthe size of the facilities, and
then they added financialefficiency mechanisms known as
transferability and direct pay,which gives the claimants of the

(12:16):
credits the ability toessentially monetize them by
selling the credits into amarketplace where other entities
with higher tax liability, forexample, would find value in
those credits in exchange forgiving cash to the original
claimant of the credit. Sothat's going to greatly grease
the wheels, as it were, for 45Qkind of flowing into the

(12:39):
economy. And also, I thinksomewhat oddly related to
transferability mechanisms, issomething called direct pay,
where you essentially you get arefundable credit for probably
smaller facilities withoutsufficient tax liability, or

(13:03):
newer facilities to fullybenefit from the credit. Are
able to get the balance of thecredit as a basically a direct
payment from the government. Andthis is applicable for CCS
projects that are in for fiveyears for profit, who, you know,
who would otherwise be taxable.
And also for nonprofit, CCSprojects, for example, with a

(13:27):
Public Power Authority or afederal or an Electric Co Op,

Dina Rasor (13:35):
okay? Well, you know, I want to, I would think.
I always, when people talk aboutcarbon capture, I always say, I
say, I try to get it as simpleas a $435 hammer, in the sense
that they and so I always say,Look, you pump the you pump the
fossil fuel out, you pump youknow, you pump out. You pump it

(13:56):
out, and then you put itpipelines. You get to capture
the CO two. You put it,pressurize it, put it pipelines,
because you rarely have a plantthat's sitting into a place that
you can sink it into the ground,and you pipeline it all over the
place. And the pipeline networkthat they're planning to do for
CCS is just incredibly big. Andso then it gets there, then you

(14:21):
pump it back into the ground,and then hopefully start
forever, or you use it for whatyou call enhanced oil recovery.
And I just look at it and say,What started out as clean coal.
You know, the clean coal is anoxymoron, really. And even
though the current presidentwants to go back to it, that

(14:47):
this, this always seemed to meto be kind of a crazy thing to
do, because if you just leave itin the ground and you find
alternative energy, then youdon't have to. Do all this. But
one of the things that when Ifirst looked at the 45Q I
realized, and then I had severalpeople in the group that Lou and

(15:07):
I worked together in as sayingthat there's no way they could
even build the pipelines forthis without the kind of
enhanced credit. So at somepoint, we need to also talk

(15:28):
about enhanced oil recovery. I'mjust want to do all this so
everybody really understandswhen we start talking about the
numbers of what it's going tocost. Greg, you had a question.

Well, just to sum it up and check my
understanding, you're sayingthat if you operate a solar
plant, you get no credit underthis program, and you also emit
no carbon dioxide. But if youdrill for oil using enhanced
recovery and pump a bunch of COtwo under the ground, you get
money for that, and you producea whole bunch of oil that's

(15:58):
going to produce a bunch ofcarbon dioxide, and then you
burn that carbon dioxide andcapture some, perhaps a tiny
percentage of the the CO twothat that produces, you get, you
get money back from your taxeson both the burning and the and
the extraction of the oil. Sofrom the perspective of this,

(16:20):
this program, you make way moremoney if you're putting more
carbon dioxide into theatmosphere than if you were just
using wind or solar to produceelectricity. Is that right?

Lew Daly (16:36):
Generally, yes, I would modify it a bit. But so,
so, so the I mean to be, to befair, there are substantial tax
credits for wind and solar inthe in the energy tax

Dina Rasor (16:51):
long, not yet. Well, this will pass, but the other
won't.

Lew Daly (16:56):
Yes, yes. And I should mention, although I don't do
anything with you know, I muststrictly see three person are
not involved at all in any ofthe lobbying around these
questions. But 45Q apparently,does seem to be one of the
credits that might survive thechopping block of the doge and

(17:21):
the fiscal hawks in in Congress,I want to refrain from
commenting on anything to dowith potential legislation, but
it's a surprisingly popularcredit and has some bipartisan
support, certainly democraticstates that have a lot of corn
are seeing a lot of potentialvalue in 45Q as it relates to

(17:45):
capturing emissions fromethanol, for example. So a state
like Illinois or Minnesota, forexample, probably has some
support for continuing 45Q Butto get to back to the EOR Dina,
you're right. EOR has the onefacility, I think, where there

(18:06):
is actually, there are 13operating CCS supply chains,
projects currently, 11 of the 13are for enhanced oil recovery.
And the problem with this isthat you what you're doing,

(18:27):
essentially is you're givingwith one hand and you're taking
away with the other. You'regetting a credit, right? There's
a credit for capturing thecarbon, and then that carbon is
used as an injectant into a welloil, a depleted oil well that
from which the remaining oilwould otherwise not be

(18:49):
recoverable economically. It'snot economically feasible
without the credit related toEOR then, in turn, in a life
cycle perspective, of course,the oil that otherwise would be
kept in the ground, but becauseof 45Q is being extracted using
the the CO two as an injectantto help drive the oil toward

(19:14):
toward the drilling system whereotherwise it wouldn't be
movable, movable. Then thatentails combustion and
additional CO two once you burnthat oil so that's been
recovered. And there arecomplicated mathematical, you
know, models that the industrywould use to say, Well, if the

(19:38):
EOR oil is used to substitutefor existing supplies, right?
That don't involve carboncapture at the front end. It's a
cleaner addition to it's acleaner you're helping to clean
up the emissions of the oil andgas combustion, if you're just.

(20:00):
Adding more oil into the intothe oil supply, well, that
negates any potential benefitthat you would get from
capturing those emissions upfront. I don't, I am not an
expert on the the mathematics ofoil supply and demand and
whether, on a net basis, EORreally is as stupid as it seems

(20:23):
to be, but certainly there arevery serious questions. And of
course, when you're looking atthe overall, you know pathway of
45Q being predominantly EOR, andis it just going to be more EOR?
There are certainly proposals toraise the value of the EOR
specific credit. There are alsoproposals on the on on the

(20:48):
opposite side, to actuallydelete EOR from the 45Q program.
So there's a lot at stake onthat question, and certainly,
given the history of 45Q asprimarily being a driver of EOR,
we have to be worried, as we'relooking in, you know, in the out
years, of how much it couldactually cost.

And I just want to remind listeners, the
EOR is enhanced oil recovery.
It's pumping gas, such as CO twointo the ground to force oil up
to the wellhead. You Yeah,

Dina Rasor (21:23):
okay, well, yeah, okay, so why don't we get into
the costs from millions totrillions, and so why don't you
go ahead and talk about what theoriginal estimates were and and
now that you've got otherindependent analysis that shows
that it's not going to be ascheap as the government thought.

Lew Daly (21:45):
Yeah, okay, so some of the background here of what
we're looking at when a law, anew law, is introduced, and also
when the final form, if itpasses what the final form of
that law is. The under, I forgetwhich statute, but Congress

(22:09):
through and he called theCongressional Budget Office is
required to issue a score ofwhat will be the budget effects
of the particular provisions ofthis law. So when the CBO did
its score of the enhanced 45Qprogram under the inflation

(22:32):
Reduction Act, it projected acost of 3.2 3 billion in revenue
losses, meaning that these theseare credits, so you're reducing
the amount of taxes that areowed by the credited facilities
or entities or the owners ofthose facilities. So there's a
revenue loss to the Treasurywith a credit. And so they

(22:57):
projected a revenue loss of$3.23 billion over 10 years
through 2031 and we call itcosts, but it's, it's, you know,
technically, it's revenuelosses. It's not necessarily a
cost in this, in the way inwhich a grant, for example,
would be a cost concurrently theunit the Treasury Department is

(23:23):
also, I think, under a differentstatute, required to give
estimates of tax expenditures.
Now, an important feature of theCBO score is that it is only
scoring the revenue effects ofchanges. In the case of 45Q
which, as I said, has beenaround since 2008 the CBO score

(23:45):
is revenue effects of changes inthe law that are specific, in
this case, to the inflationReduction Act. So it's only the
marginal increment attributableto to the changes in the law
that came with the IRAenhancements that I went through

(24:06):
earlier. The Treasury knows itsown measure of what it calls tax
expenditures, and it's changedover time and but the most
recent estimate is as comparedto 3.2 3 billion CBO score 43
billion. Now that's a grossmeasure, because it includes the

(24:26):
baseline expenditures from theexisting policy and then the
additional expenditures thatcome with the enhanced
enhancements of the program fromthe IRA IRA. So typically, the
Treasury estimates tend to belarger than the CBO estimates.
Okay, so that's in theconstellation of government
estimates. Then we began to lookat independent estimates. We in

(24:50):
particular, we looked at anestimate from credit Credit
Suisse that looked at the same.
Exact same time period through2031 an estimated cost of $52
billion over that period. Andthen another estimate from

(25:11):
Bloomberg New Economy financeestimates45Q costs of 104
billion this is for a 13 yearperiod, beginning in 2024 and
I'll come back to this questionof why the different time
periods matter. But theimportant thing, and this is

(25:32):
especially clear in theBloomberg estimate, is that it
incorporates much more robustinformation about the commercial
development of CCS the CBO scoreis very policy focused. If we
raise the value of the credithow, what additional revenue
losses will we see through the45Q program? It doesn't

(25:56):
incorporate in any robust way,commercial information about
what's actually materializing onthe ground in response, for
example, to the enhanced Ira 45Qprogram. The Bloomberg estimate
does incorporate much morerobust commercial information.
However, another caveat when weget to the bigger estimates that

(26:18):
we'll be talking about is thatthat commercial information was
what they were looking at wasprior to the IRA. It was in
2020, 2021, in that period. Soit's prior to the enhancements
to 45Q that came with the IRA.
So even that much greaterestimate, much larger estimate,

(26:41):
compared to CBO, still had avery limited purview in terms of
actually tracking and accountingfor the commercial developments.
Now, when we turn to theestimates, the big picture
estimates that we focus on inour brief from the Institute for
Energy economics and financialanalysis, which we call iefa.

(27:02):
Just for sure, they areprojecting costs of 835 billion,
and they're looking at theperiod of 2025, to 2042 so an 18
year window. Now, why is thisimportant? What's important is
that one thing that changed withthe IRA is that the deadline for

(27:24):
being able to qualify for 45Qcredits was extended from 2026
to 2032, and then the creditsunder the old law and the new
law are available for 12 years.

(27:45):
So the legal timeline of theavailability credits actually
goes out all the way to 20432044 that credits can accrue.
And so potentially, there willbe many projects additionally
coming online over the next sixyears to be able to meet that

(28:06):
deadline of being eligible forthe credits over the next 12
years, even with just theannouncement or the or the
passage of IRA, we saw A hugeincrease in the announcements
and project pipelines that wereintroduced in response to the

(28:28):
enhanced Ira 45Q program. Andthat's really the big difference
between the ieefa estimate andthe Bloomberg estimate, which
has much more limited commercialinformation, but still, compared
to CBO, which basically has verylittle commercial information.
And so what IFA basically did isquite it's basically a kind of

(28:48):
just pretty straightforwardarithmetic. They looked at the
project pipelines. There's adetailed database that's
organized by the Clean Air TaskForce of all of the CCS projects
that are in the pipeline, andmost of which have come online
since 2022 with the new 45Qprogram. And it's about 227

(29:16):
projects in that database. Andwhat aife did was simply to look
at a subset of those 142 thatactually has a projection of the
emissions, the capturableemissions from the project the
other projects don't have anemissions profile yet, as yet in

(29:38):
the database. So even a subsetof those 227 projects in the new
put in the new project databasethat they extrapolate from those
projects and the amount ofemissions that are being
projected from those thatproject to calculate, those
projects to calculate, okay,this is how much this was. This

(29:58):
is going to cost us. In terms ofcredits going to those projects,
and so that is really the bigdifference. And I would just
suggest that we're not trying tosuggest that the CBO estimate is
misleading, or in some wayattention intentionally being
deceptive. It's justmethodologically not realistic

(30:19):
about how the 45Q expenditures,and that trajectory is going to
a fold to unfold, if you take itout to the full legal timeline
through 2043 and then youincorporate all the commercial
information that is starting tomaterialize and surface. And
it's in various stages.
Sometimes it's just, we're doingthe front end engineering

(30:39):
studies for this project for anew ammonia plant in Louisiana.
That's one of the examples of anew project. Others are much
further along and already in thepermitting stage. So when I
takes all of that additionalinformation, that's where these
much larger estimates they, as Isaid, through 2020, 42 they

(31:00):
project 830, 5 billion in totalcosts of the program, again,
compared to 3.2 3 billion.
That's the government officialestimate. Just

Dina Rasor (31:12):
a little off. Yeah.
Okay, well, you know I think,and also, when you think about
that too, is that's almost atrillion dollars so, and that
is, if you don't add any more,there may be more of these come
online because they're, quote,popular ways to, I think, to

(31:33):
appease people that you'retrying To do something about
carbon. But I think that thething that I also got me is, of
course, it's a bell curve,because it starts out slowly,
and it gets up to the top, andthen it comes down, but in by
2022, if you average that outper year. Now, obviously we're

(31:54):
not going to write governments,not going to write that check
every year. It has to do withthe fact that if you flatline
it, rather than curve it, it'sit's about 40, 43, billion a
year. And when you think aboutthe of all the other things and
priorities and whatever we haveis, and it's not clear that

(32:18):
carbon capture actually doesanything to reduce carbon that's
very much still in the air, thenyou've got this situation where
you've got the, you know, thethe the increase in the overruns
when the estimates are would bewhat I would call pentagonal. Is
the Pentagon has a, you know,having done the Pentagon for

(32:38):
years, they it's kind of likeget the camel's nose under the
tent, and then the prices go up,unless there's some kind of
oversight or some kind ofpressure down. And one of the
things that we were we werelooking at is the transparency
and oversight of this programseems to be lacking the for

(33:01):
anybody who is a person thatlooks at what could go wrong,
and so in on the top of thismoney, there is the checking on
how much they are. So kind ofexplain to me how they how they
do, how there's lacking inoversight, and also lack,

(33:24):
lacking in transparency thisprogram that's concerning.

Lew Daly (33:31):
Yeah, so there are two, two basic
parts of thatdescription. One is that the IRS
itself, which ostensibly is incharge of oversight of credit
activities, is has underprovision known as Section 6103

(33:54):
of the tax code has very strictconfidentiality limits or rules
basically that are apply to all,basically all information on tax
returns, including credits. Nowthis is a very strange story,
because it goes back toWatergate. Actually taxes, tax

(34:17):
returns, at least in principlelegally, were considered public
records up until the mid 1970swhen Richard Nixon and members
of his administration and hiscircles were actively trying to
obtain tax information from theIRS in order to weaponize it

(34:40):
against their their politicalenemies. And so in the wake of a
Watergate, Congress passedreforms to establish very strict
confidentiality limits on publicdisclosure of tax information.
Question. And so what this meansin practice is that we have no

(35:02):
idea. We have projections fromthe government of how much it
will cost, but we have noverification of what was
actually spent through 45Q andmore importantly, we don't know
who is getting credits, how muchand for which activities? Okay,
I'll stop there, because I thinkGreg wants to interject a

(35:25):
question,

yeah, so if I understand it correctly, this
applies equally to directpayments as well as or what you
refer to as direct pay earlierin the in the podcast, as well
as tax credits. So even thoughthe IRS is going to be sending
out checks, there will be no wayfor the public to see who

(35:48):
they're writing those checksfor.

Lew Daly (35:49):
No, that's correct, and the the so there. And let me
just give you an example ofwhere this lack of transparency,
you know, became a huge problemin the first 10 years of 45Q I
think in a period of 2010 to2019 a senator wrote a letter to

(36:15):
the Treasury Inspector Generalfor tax administration that
office is the shorthand is TIGto asking for a review of the
expenditures of 45Q in, in, in,in a context of wanting to check

(36:37):
for accountability in terms ofthe results, the resulting
carbon storage that that wasbeing credited over this period.
And the Treasury InspectorGeneral came back with a report
that basically said, well, oneinterestingly, out of something
like 672 claims from frombusinesses for45Q over that

(37:02):
first 10 year period, 10,obviously, we can deduce huge
corporations got 99% of thetotal, about $1,000,000,001.2
billion worth of credits. Sothat's one interesting that is
basically all going to giantcorporations. We wouldn't have
known that at all, that profileof who's getting these credits,

(37:28):
let alone the specific entitieswho are getting the credits.
That information to this day, wedon't know who was getting those
credits, but what the TreasuryInspector General found on this
question of like accountabilityfor the actual storage was that

(37:48):
all of them, the 10 bigrecipients, none of them, at the
time, when they were claimingthe Credits, had fulfilled their
regulatory requirements from theEPA as to what they call
monitoring, reporting andverification, which is a rule, a

(38:09):
regulation under the SafeDrinking Water Act to regulate
the storage of carbon dioxidewaste streams through
establishing a monitoringprotocol, report reporting
standards, and then verificationof the of the stored carbon of a
facility. And so there are bigproblems with the weakness and

(38:34):
lack of stringency of what iswhat actually an MRV report or
framework from a given facilityrequires. It's actually not very
stringent at all. But moreimportant is that they were
claiming the credits withouteven having an approved MRV plan

(38:55):
from the in the EPA. So thecredits were that some would
call it fraud later, some of thecorporations that were being
credited filed and had MRVproposals approved, others had
their credits clawed back.

Dina Rasor (39:17):
So just to do we talk about the IRS pays it out,
but the EPA is the one that issupposed to be king. Okay, how
much carbon did we save? Howmuch money do you get? Because
you get it on how much you save.
And one of the problems with theEPA is they basically had, which
also, by the way, happens in thePentagon. They do this self

(39:38):
reporting. In other words, theycount on the company to tell you
we and by filling out thesereports that you just talked
about, the company tells you,okay, I've we've saved X amount
of carbon. And then the EPAlooks at that says, oh, okay,
good for you. And then they passit on. There's really no.
Rubbing of the numbers, and thenthey pass it on. The IRS is

(40:02):
like, well, you know, the EPAsaid it all right, we're not
environmentalists. Let's pay it,you know. So we're going to pay
it. So it's kind of inputoutput, you know, there's,
there's lack of transparency inthe whole thing. And the EPA is
just letting them self report.

(40:24):
And so you might, I might wantto comment on that input of how
much carbon you saved, that thatthat is directly connected to
how much money you're going toget out of this credit program.

Lew Daly (40:37):
Yeah. So, as I said, the the the or I alluded to the
the there's one thing thatyou're getting credits without
even having an approved MRVplan. So that was the quote
fraud that the that was found inthat inspector general's report,
and some of that was recoveredto this day. However, because of

(40:57):
the privacy rules, we don't knowwho those perpetrators are
right, because it still isprotected and shielded by the
confidentiality rules. But themore important point that you're
making Dina is that really theMRV requirements themselves are
way too weak. It basically says,this is your project. You know

(41:20):
what it's going to take tomonitor and report and verify
your results of carbon storagebetter than we do in some way
that could be uniform, theuniform technological standard
for what kinds of monitoring ora uniform format for how results
are being reported, let aloneverified. So there's bottom line

(41:44):
is, there's no independent, veryverification of what a given
business puts into its report.
MRV report in terms of their ofhow much carbon dioxide is being
stored. And so basically, youhave self reporting based on a
framework of overall MRVrequirements that are self

(42:09):
designed by the carbon capturebusiness or the carbon capture
owner, and really no objectiveor independent verification, not
just you know, is that amount ofcarbon you know that's being
claimed for this amount ofcredits, or do those add up? But
actually, how it's beingmonitored, how it's being

(42:31):
reported and verified, is alsofacility by facility sui
generis. They just make it up asthey go, and

Dina Rasor (42:39):
it's so that's what's so scary about this,
because this program has notreally ramped up to what it
could be, and yet we know goinginto it that we're, you know,
going to potentially shove $800billion that direction, without
the cost bank, okay, well,That's, you know, and, and, I

(43:01):
mean, we'll talk aboutsolutions. But another area that
you were, you are interested in,you've done a lot of work in, is
environmental justice. And sowhat to the people who don't
know what that is, is, as youprobably guessed, that a lot of
times the worst, the worst,polluting and environmentally

(43:24):
unsound things that go on in thein this, in the name of their of
the environment, it really theytend to put it into. There's
been always a tendency, if youonly got to do is look at
Louisiana and look at Houston,Texas. You tend to put it in
areas and neighborhoods whodon't really have, you know,

(43:46):
disadvantaged neighborhoods.
They don't really have theability to say, not in my
backyard, you know, they gottago put it somewhere in in in a
fancy or part of Houston, oranother part Dallas or Louise,
you wouldn't put it in NewOrleans, there's going to be
this, you know, not here andthey fight. But I know you've

(44:08):
done work on a lot of work onenvironmental justice, so I'd
love to hear about how, eventhough the government's paying
so much money for this, there'sgoing to be environmental damage
for people?

Lew Daly (44:23):
Yeah, thank you. I'm glad you raised that question.
That certainly is somethingthat's of ultimate concern for
me in the work that I do, andjust solution as part of just
solutions. So I mean, thequestion is, if so, again, going
back to the AIF advantage likethat, it features estimates

(44:44):
based on the actual commercialactivity that's materializing in
the in the wake of the IRAenhancements of 45Q I'm not sure
if I it's a large majority ofprojects, but it's certainly a.
Many of the largest projects andmost impactful projects, and

(45:05):
many of the projects that willobtain, you know, the the
plurality or majority of thecredits, because the the scale
of their emissions is so muchgreater, are concentrated in the
Gulf, south. And this wouldn'tbe surprising, because, as we
mentioned at the outset, CCS isgrafting onto the existing

(45:27):
fossil fuel system a climatesolution that is then, you know,
very lucratively rewarded bytaxpayers as a climate
mitigation solution. And so it'snatural that once those credit
values are enhanced, thosefacilities that are already
producing, processingrefineries, oil refineries, gas

(45:51):
processing, ammonia, hydrogen,chemical production, coal plants
are all concentrated in thatpart of the country to begin
with, and so naturally, the flowof the credits is going to also
go to that region, becausethat's where most of the
emissions are to begin with,from these industries. That's
where most of the 45Q value willflow. Because you're you have

(46:14):
the existing concentration ofpollution and polluters already
there. What you're doing,though, is you're adding what's
called energy, in some cases,what's called energy penalties.
So and you end up sort of havingto calculate a trade off
between, okay, isn't it betterto capture the emissions from
that refinery than not tocapture the CO two emissions

(46:38):
from that refinery? Keep in mindthat that CO to capture
equipment does not capture orreduce the local air pollution
that results from theseindustrial processes, nitrogen
dioxide precursors to ozoneprecursors to particulate
matter, which you know hassignificant effects on people's

(47:01):
respiratory systems,cardiovascular systems, and also
potentially neurologicalsystems. And so even as you
might be capturing emissionsfrom that coal plant in
Southeast Texas or that ammoniaplant in new ammonia plant in
Ascension Parish of Louisiana,on the west side of the

(47:24):
Mississippi I believe you're notdoing anything about the
corresponding local pollutionthat's being generated by these
facilities. And in fact, becauseyou're using more energy to
actually power the CCSequipment, this is called an
energy penalty. You're actually,potentially, on a net basis,

(47:45):
adding more local pollutionbecause of the additional energy
that's needed to power the CCSequipment and the CCS system. So
you have, like a trade offbetween, well, we reduced our CO
two emissions by 95% but weraised because of energy
penalties, we raise our localemissions by another 10 or 15%

(48:06):
and so, on a net basis, what'sgood for climate, ostensibly, is
potentially, actually much worsefor local communities where
these facilities are based.

Dina Rasor (48:17):
And so it's a kind of a situation where, in and
then in the spirit of nonpartisanship, which we are too,
we just call the balls andstrikes. Is first of all that
carbon capture became a big partof Biden's, you know,
infrastructure thing. And thereare still a lot of Democratic

(48:42):
members of Congress that believein it, push it and want to
promote this, this 45Qsubsidies. So this is not a
partisan issue. There's stillpeople that are there's still a
lot of Democrats that havebought into carbon capture. Some
of them have surprised me. Ididn't think that they would be.

(49:06):
And so now we're getting downto, well, what, what should be
done about this? I mean, if youwere king for the day, and you
could change a lot of this with45Q and this potential of, I
think we've kind of establishedthe potential that if the more

(49:27):
in depth analysis have lookedwe're, you know, we're probably
on the hook. And if you addinflation, we're probably on the
hook for a trillion dollars onthis thing. And
what's the what? How do youreform it or stop it, or how do
you change it? What would beyour solution?

Lew Daly (49:49):
Before I answer that question, I do, I do want to
also point to actually what alsois quite realistic, which is an
outer estimate. On thehypothesis that the credit
timeline will be extended anadditional 12 years. Once
credits get into the code, theyare very hard to repeal, or to

(50:12):
say game over for the credit,because those credits are
incentivizing a lot of capitalinvestment, and

Dina Rasor (50:19):
the more plants they build, the more likely it's not
going to go away.

Lew Daly (50:23):
More likely it's not going to go away, because what's
going to those assets willsuddenly become stranded without
the tax incentive. And so, youknow you have, and also, there's
already very intense lobbyingthat I'm aware of to actually
increase the values of thecredits beyond what's you know,

(50:45):
already been added with theinflation Reduction Act. So at
that outer boundary of expandingthe timeline of the credits and
further enhancing the values,the iefa estimate takes it out
toward 2.1 trillion over 30years. So there is a huge amount

(51:06):
at stake. And I would just stickto just from a fiscal
perspective, like verybasically, we need transparency.
So there are credits, includingenergy credits, that when they
were codified, when they wereput into a statute, had a
requirement of publicdisclosures, going back to that

(51:28):
problem of tax informationconfidentiality. What's
interesting about this isparticularly what's known as the
40 8c program, which is aninvestment in basically
production of clean energytechnologies and components of

(51:49):
manufacturing credit that waspassed as part of the Recovery
Act of 2008 and it was capped.
So it said, I forget what thecap was, but there's a limit and
a time, a limited time frame,and a limited amount of how much
credit we will allocate forthese particular goods and

(52:11):
services that are part of the 408c provision. And what that does
is it turns it says an uncappedcredit means anyone who fills
out the form correctly andappears to be eligible, and
notwithstanding, if they'reactually verifying, in this
case, the actual carbon storage,it's unlimited, anyone can get

(52:32):
the credit if they fill out theform correctly and they appear
to be eligible, and they Atleast appear to be, you know,
producing the creditable, see,you know, carbon dioxide
storage. When you cap it,suddenly you have the IRS or the
Department of Treasury picking,picking and choosing which which

(52:55):
applications, assuming thatthey're say it's a $1 billion
cap and there are $5 billionworth of credit claims that are,
you know, all things beingequal, eligible, then you have a
process of picking and choosingwhich projects get credited with
40 8c because of that, where,essentially a tax cut and

(53:23):
uncapped tax credit is turnedinto a competitive grant program
where the Secretary of Treasuryis making specific allocations
to specific projects under tokeep it under a cap, it required
public disclosure of the creditamounts and the credited
entities as a just a question ofcompetition and transparency and

(53:45):
to avoid any appearance orreality potential corruption in
terms of picking and choosingwinners and losers under a
capped program. So when it comesto the basic transparency
questions, but also the fiscalquestions, I think what I would
propose, and again, I'm notcommenting on any specific

(54:06):
legislation, what I would liketo see, at a minimum, is a very
stringent cap on the amount ofcredits, maybe leaving the
timelines intact, the timelineof 12 years, going up
potentially to the 2040s but alimit in what is the total

(54:26):
allocation of the credit, oryear over year, or whether
that's annually or biannually,or a five year window, and then
attached to that, You would haverequirements about public
disclosure that would introducetransparency to the program
where otherwise it wouldcontinue to remain a secret.

So I was just going to try to summarize
the you would propose that therebe caps and transparency and.
These would significantly reducethe exposure for the 45Q
program. But what are somealternative tax credit or other
programs that you think would doa better job of promoting

(55:14):
mitigation of climate change

Lew Daly (55:18):
when it comes to alternatives? I'd first want to
focus on specific reforms to the45Q program. I haven't really
alluded to this yet, but my ownposition on 45Q is really at
this point that it should befully repealed from the tax

(55:38):
code, I think given the climaterisks involved, let alone the
the price tag that we'repotentially looking at, so the
fiscal risks involved, um, Ithink the most prudent course of
action would really be, at thispoint to to repeal 45Q and I

(55:58):
think Many of certainly many ofthe environmental justice
partners that just solutionswork with would would agree with
that. And the one reason also, Iwould point to, is that, in a
sense, for CCUS is sort of atthe starting line, as I
mentioned, it was firstestablished the 45Q program to

(56:23):
support CCUS. Was firstestablished in 2008 and really
didn't have a lot of uptakeuntil the the expansion of 45Q
under the inflation ReductionAct. And then that's when we
began to see a, you know, aplethora of new projects that I

(56:44):
talked about earlier,materializing and being put into
development. And so, in someways, you know, what happens
with 45Q and this current hugebudget fight that's going on in
Congress now is it will reallytell the story of whether or not
CCUS is a big or small part ofour energy transition and so

(57:10):
prudently, I think it's best nowto sort of put, put CCUS out of
Its misery by ending the credit.
However, I don't think that'svery likely to happen in the
current scenario. And so thenthe question is, well, what do
we do to better manage it, torein it in as much as possible?

(57:33):
And the best approach to thatwould be to impose what would be
called a cap, basically a limiton the amount of the credits
that could go go out over agiven period. And actually,
interestingly, when 45Q wasfirst introduced in 2008 it did

(57:53):
establish a cap, but it was atonnage cap. It was 75 million
tons of stored carbon wasestablished as the cap. So it
really didn't even have a fixedtime frame, like the current 12
year eligibility time frame thatI talked about earlier. It was

(58:15):
just a cumulative sequestrationcap. The problem with that,
which I also talked aboutearlier, is that we don't
actually know what's going on interms of the verifiable
sequestration. So if you have,like, a numerical cap on the
amount of tonnage, that would bethe ceiling of the program, but

(58:37):
you don't actually know what'sbeing stored, or at least
verifiably stored. That cap iskind of illusory, as you know,
in terms of reining in thegrowth of CCS, or better
managing the outflow of funds,of taxpayer funds to support
CCUS in 2022 the Department ofTreasury announced that the cap

(59:00):
had been reached and that therewould be no further credits
claimable under 45QSubsequently, we had the IRA
reauthorization of 45Q andexpansion, as I've talked about,
and they removed The cap and andturned to turn to the 12 year

(59:20):
eligibility program and theother details that I talked
about earlier, a much moreprudent, certainly from a fiscal
perspective, type of cap wouldbe, in fact, a fiscal cap, a
monetary cap of how much valueof credits would be the ceiling
of the 45Q program as it unfoldsover time. There are interesting

(59:46):
questions about a productioncap, a production tax credit
versus an investment tax credit.
Yes, as I alluded to, the 40 8cprogram earlier, does have a cap
under the IRA, it was set at tenbillion of credits. But that's

(01:00:10):
an investment credit. So it'slike, it's a it's a 30% discount
on capital costs. It's one time,a one time credit for an
eligible project. So it's itacts more like a grant program
when you put a cap on aninvestment credit with a
production credit, which is yearover year, you're being credited

(01:00:32):
for ongoing operations. That's alittle bit different in terms of
how a cap could work, how itcould be structured. Is it
annual? Is it biannual? Is itevery five years? Is it just a
cumulative cap within that 12year eligibility time framework,
sort of like the tonnage cap,but based on, you know, the

(01:00:53):
fiscal expenditures, all ofthose details would need to be
worked out, and I haven't donesufficient research and modeling
to even propose how stringent tothe cap, in other words, how
much should be available overtime, or how it should be, you
know, structured in terms of theperiods of how the cap is being

(01:01:15):
measured. I don't have a clearidea of what that should be, but
a fiscal cap, I think, is, youknow, a good alternative to
repeal, as far as a perspectiveof reining in taxpayer costs
with that, and the other concernaround transparency and

(01:01:35):
disclosure, where we have theseprivacy rules of the tax code
that so we don't Know who'sgetting the caps and who's
getting the credits and how muchwith a fiscal cap you you
introduce a level ofcompetition, because there's a
limited amount of creditsavailable and more, presumably

(01:01:57):
more eligible credit claims. Sothere's discretion involved in
terms of the how the IRS isallocating the credits. If there
are more credits claimed abovethe level of the cap, that means
there's going to be winners andlosers, and so in this, in that
kind of situation where itbecomes more of a competitive

(01:02:19):
program that really warrants orcalls for, the need for much
more transparency anddisclosure. Even the
stakeholders in the CCSindustries would want to see
that, because if they're goingto end up on the losing end of
the bargain with a cap, it thatinformation should be publicly
available in terms of who'sgetting a cap and who isn't. And

(01:02:43):
so the cap not only brings ameasure of fiscal constraint,
but it also probably introducesthe idea that there needs to be
more transparency andaccountability in the program as
compared to a program thatdoesn't have any kind of cap.

Gregory A. Williams (01:03:01):
That makes a great deal of sense.

Lew Daly (01:03:03):
Yeah.
So in addition to a cap, I wouldsay a further reform of 45Q both
from a fiscal perspective, butalso from a climate perspective,
would be to greatly narrow thetypes of projects that could be
eligible for the credit. Sothere are certainly on the

(01:03:26):
industrial side of CCS, whereyou're capturing industrial
emissions from industrialprocesses. There are certain
industries, certain sectors,that are very hard to electrify
to as they put it, decarbonizeso steel and cement, for
example, to replace the highheat from fossil fuel combustion

(01:03:49):
that you need to produce steelor cement is is very difficult
through electrification. So youcould imagine a much more
constrained scope of eligibilityof 45Q only for those industries
really, are truly hard todecarbonize, and where you would

(01:04:11):
actually be having a climatebenefit, because otherwise
they're just going to keepburning fossil fuels to produce
steel and cement and certainpetrochemicals as well. But what
that would eliminate would bethe much larger sectors,
particularly the power sector,which is not hard to electrify,

(01:04:33):
and there, there is ample roomfor, you know, electrifying our
electricity generation andgetting off of fossil fuels in
the power sector, though, thatsector also is the one that has
the most emissions. So a lot ofthe you know, the fiscal costs

(01:04:54):
of 45Q will be flowing into thepower sector. You know, in a.
This close situation, butwastefully, because the the you
know, these power plants can bequite easily electrified,
they're not hard to decarbonize.
So there's a strong rationale.

(01:05:14):
If we want to limit the scopeand the cost of 45Q let's narrow
it to those sectors that aretruly hard to decarbonize. And

so wherever that leave enhanced extraction,

Lew Daly (01:05:28):
I would also along with the power sector, and then
you mean the enhanced oilrecovery would also be
disqualified under because ofthe clear uncertainties, if not
almost certain climate negativeaspects of EOR that's much
smaller in terms of, you know,the capturable emissions and the

(01:05:52):
costs from, you know, from, butOf course, the net emissions
once you're burning that, thatoil that's recovered through
injecting CO two ends up being,you know, on the net base is
quite, quite a large emitter, anemitting sector alongside The

(01:06:14):
power sector. So we woulddisqualify
power plants and ER and narrowthe scope down to those truly
hard to decarbonize industries,and that, I think, would improve
the potential climate benefitsof CCUS, or the chance of that,

(01:06:36):
while also greatly, greatlyreigning in the fiscal costs of
the45Q program. Now the biggerpicture I want to talk about, if
we're, if we're, I don't knowI'm, I'm looking at the IIF
estimates. And to me and Dinaalluded to this, I think

(01:06:57):
realistically, we are looking atsomething like a trillion dollar
price tag for 45Q in the currentscenario under the IRA. And so
when you're accounting for that,or looking at that and and it's
not just that there's a lot ofwaste here for a dubious climate

(01:07:21):
mitigation solution, or, in thecase of EOR, a climate negative
quote, unquote climate solution,or false solution, as many of my
colleagues would describe it, itisn't only that you're promoting
A false solution, it's thatyou're diverting resource,

(01:07:42):
potentially a lot of resources,from positive solutions, from
truly beneficial climatesolutions. And I just wanted to
give one example to put thecosts or misallocation,
misallocated costs, or themisguided costs under 45Q or the
misguided spending intoperspective, there's an

(01:08:07):
excellent program in theDepartment of Energy that was
established by The the 2021infrastructure law under
President Biden, called the gripprogram grid resilience and
Innovation Partnerships Program.
It was appropriated at $10.5billion and believe it or not,

(01:08:32):
it was the single biggest set ofprogrammatic investments in grid
upgrades and grid innovationssince the Rural Electrification
programs of of the 19 Yeah,but yeah

(01:08:56):
and and so that's remarkable inand of itself, as we're dealing
with all of the grid issues,with the accelerating climate
impacts and all the new criticalloads, like the data centers, we
have to double the electricitysupply over the next several
decades, and we have a gridthat's basically, you know, in
the vintage of the 1950s andtrying to Get to the grid that

(01:09:22):
you know what that grid needs tolook like as of 2050 with all of
the the new electricity supplythat we need, combined with the
climate vulnerability of of theelectricity system. And so when
you think about that program, Ihave some, you know, some
criticisms of of over investmentin large utility. You know,

(01:09:48):
utility centered transmission,very expensive transmission
projects like undergrounding.
You know, hundreds of miles ofof. Of the wires of the delivery
system. Not enough focus ondistributed solutions and needs
we have at the local level formuch more accelerated

(01:10:11):
incorporation of distributedrenewable energy resources into
the grid. But leaving that asidein general, we need a lot more
federal and public investment inupgrading and expanding and
fortifying the grid, right? Andall we had out of the last, you
know, several years of a lot ofinvestment in climate and energy

(01:10:35):
projects. This is this 10billion and so when you think
about even just half of, let'ssay, the trillion dollar price
tag of 45Q if you diverted allof that into something like an
expanded version of the gripprogram, it's unclear what's
going to happen to that programunder the Trump administration.

(01:10:56):
But leaving that aside, youwould see a 50 fold increase in
federal investments inupgrading, expanding and
fortifying the grid, much moreproductive. We need all of that
to be able to have economy widedecarbonization, because we need
a lot more electricity todecarbonize, primarily

(01:11:18):
transportation and buildings,which is, I don't know, upward
of two thirds of greenhouse gasemissions at this point that you
know that we need to break freeof fossil fuels through
electrification. We need a lotmore grid capacity to be able to
do that, and even just half ofwhat one could argue we're

(01:11:40):
wasting money on, with atrillion dollar price tag for
CCS, would increase our federalinvestments in grid upgrades 50
fold at this point. So you cansee how there's just a skewed
proportionality between whatwe're spending or potentially
going to be spending, on a falsesolution like CCUS, while at the

(01:12:02):
same time we're grossly underinvesting in a true and
necessary solution likeupgrading the electricity grid.

Is there anything else you'd like to add?

Lew Daly (01:12:16):
No, I think I've told much of what I know about the
story and shared it with youraudience, but I really
appreciate the opportunity.
Thank you so much. Thank you.
And

Dina Rasor (01:12:30):
we really appreciate the you know your work here,
because you know people willjust look at a CBO or
Congressional Budget Officeestimate say, okay, that's what
it is. And you just really,there's just so many tricks and
and assumptions and whatever tomake it look low to start, and

(01:12:52):
then slowly but surely bring outthe bad news before you know
what we used to say in thePentagon, first, it's too early
to tell, and second, it's toolate to do anything about it. So
you gotta find that magicmoment. Maybe this, maybe this,
your fact sheet, could helptowards that magic moment. And

(01:13:13):
so maybe next time, we shouldhave you and Doug together,
yeah, to come back and talk tous about it when we see what
happens with the Congress in thebudget in the next couple
months. So thank you so much forcoming, for being on

Lew Daly (01:13:27):
You're very welcome.
Thank you. Thanks again. You.

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Lew Daly - 45Q Carbon Capture Tax Credits are a Financial Disaster in the Making

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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}Lew Daly - 45Q Carbon Capture Tax Credits are a Financial Disaster in the Making