45Q tax credit could help kill off power plants and reliable electricity

The 45Q tax credit serves as an incentive for power plants and industrial facilities to invest in carbon capture and sequestration/storage.

The Inflation Reduction Act (IRA) expanded the use of this credit. Sen. Joe Manchin (D-WV), who played a pivotal role in the passage of the IRA touted the expansion of the 45Q tax credit, explaining, “The law enhanced the 45Q tax credit for carbon capture, utilization and storage—worth about $3 billion—to spur investment in power plants and industrial facilities fueled by coal and natural gas.”

While lawmakers likely saw this as a carrot for power plants and other facilities, they inadvertently provided the ammunition to help kill off power plants and reliable electricity through this tax credit.

The Biden Environmental Protection Agency’s (EPA) rule on greenhouse gas emissions from power plants (Clean Power Plan 2.0 or CPP 2.0) relies heavily on the mere existence of the 45Q tax credit to justify this rule that would impose infeasible CCS requirements on power plants.

As my CEI colleague Marlo Lewis explains, “The rule’s 90 percent carbon capture and storage (CCS) requirement for existing baseload coal power plants is projected to decrease US coal generation by 89 percent below baseline projections by 2045. The rule’s 90-percent CCS requirement for new baseload natural gas combined cycle power plants will effectively preclude construction of new natural gas baseload generation.”

When developing standards under Section 111 of the Clean Air Act, which is the applicable provision for CPP 2.0, the agency must set standards “taking into account the cost of achieving such reduction…” The Biden EPA treated this cost consideration as just compliance costs, but the statute doesn’t narrow the cost consideration in this manner. There are other sections of the Clean Air Act that do expressly reference the cost of compliance, but Congress chose not to use similar language in this section. “Cost” is supposed to mean all costs, including costs to taxpayers for subsidies.

In addition to failing to account for the 45Q tax credits as a cost, the EPA used the mere existence of these tax credits to lower the projected compliance costs and to make the absurd case that CCS, as required in the regulations, is feasible.

Regarding compliance cost, the Biden EPA in the rule argued, “In determining the cost of CCS, the EPA is taking into account the tax credit provided under IRC section 45Q, as revised by the IRA. The tax credit…offsets a significant portion of the capture, transport, and sequestration costs…”

As for feasibility, the Biden EPA claimed:

In addition, the Inflation Reduction Act (IRA), enacted in 2022, extended and significantly increased the tax credit for carbon dioxide (CO₂) sequestration under Internal Revenue Code (IRC) section 45Q. The provision of tax credits in the IRA, combined with the funding included in the Infrastructure Investment and Jobs Act (IIJA), enacted in 2021, incentivize and facilitate the deployment of CCS and other GHG emission control technologies. As explained later in this preamble, these developments support the EPA’s conclusion that CCS is the BSER [best system of emissions reduction] for certain subcategories of new and existing EGUs because it is an adequately demonstrated and available control technology that significantly reduces emissions of dangerous pollution and because the costs of its installation and operation are reasonable.

In other words, a tax credit designed to help power plants is being used as the justification for infeasible technological requirements that will kill them off.

It is possible that the Trump administration could be successful in repealing CPP 2.0, something that the EPA to its credit is currently trying to do. However, while success is likely, it isn’t a slam dunk.

So what should Congress do?

Congress needs to get rid of the IRA energy subsidies through the reconciliation process. For the 45Q tax credit, lawmakers should address the fact that the Biden EPA was using the credit to kill off power plants.

This should mean repealing this credit. At a minimum, it should mean phasing it out quickly so that the Trump EPA can get rid of the CPP 2.0 in part by showing that the rule relied on the existence of a subsidy that won’t exist.

Further, Congress needs to make it clear that an agency can’t use the mere existence of energy subsidies, including the 45Q tax credit, as a means to establish that a technology is feasible. As I wrote with my CEI colleague Paige Lambermont:

Spending money doesn’t necessarily mean that an unproven technology will somehow become viable, especially on a commercial scale. In fact, the government’s expansion of subsidies is further evidence that the specific technology is not ready for prime time.

Section 45Q proponents may be excused for not foreseeing how the tax credit would be abused by the EPA to kill off power plants.

But no such excuse exists now. Lawmakers know that this tax credit could be the ammunition used to kill off reliable electricity. Not addressing this problem in reconciliation would be a major failure.