Nearly $900 million in carbon capture tax credits were inappropriately claimed by a handful of companies that weren’t complying with federal requirements to monitor and report the stored carbon dioxide, a Treasury Department watchdog report made public Thursday reveals.
The bulk of credits under the so-called 45Q incentive program for carbon capture projects have been claimed by 10 companies, all of which claimed more than $1 million each, according to the Treasury Department inspector general’s report. Of those 10 companies, only three have the proper monitoring and reporting program approved with the Environmental Protection Agency, the report said.
Already, some Democratic lawmakers and environmentalists are saying companies’ abuse of the tax credits calls into question whether oil companies, some of the major carbon capture developers thus far, should be able to use the program for projects paired with enhanced oil recovery. Through that process, captured carbon is injected underground, where it is then stored, to produce more oil.
Carbon capture advocates, however, including some environmental groups, say the inspector general’s report should instill some confidence in the program. The Internal Revenue Service has disallowed more than $531 million in tax credits that were claimed by companies not meeting the requirements, according to the inspector general report. The report doesn’t name the companies because tax information is confidential.
Sen. Bob Menendez, a New Jersey Democrat who sought the inspector general’s probe, called on the IRS to suspend the use of the 45Q credits for enhanced oil recovery pending a full investigation of prior misuse of the credit. He added that hundreds of millions of inappropriately claimed credits “remain unchallenged” by the tax agency.
“It’s clear the oil and gas industry are not good stewards of taxpayer money,” said John Noel, a climate campaigner with Greenpeace. Noel said the enhanced oil recovery portion of the 45Q program should sunset, and the credit should return to its original intent, “to incentivize permitted and dedicated geologic storage” of carbon dioxide.
“The credit should not be going to any company that is using it to produce oil,” Noel added.
The criticism could complicate the political viability of a technology that’s built up broad bipartisan support in Congress. In 2018, Congress extended and expanded the 45Q tax credits with strong backing from policymakers on both sides of the aisle. Lawmakers have also floated a number of other bipartisan bills to boost carbon capture, including several provisions in a broader energy bill that would significantly increase research funding for the technology.
Nonetheless, some Democratic lawmakers have previously raised concerns about enhanced oil recovery, hesitant to support policies that would increase production of fossil fuels.
Supporters of carbon capture, however, say the inspector general’s report doesn’t mean the 45Q program is broken. They said there’s been an understanding for a while that a certain amount of credits had been disallowed, but the report shows the IRS has also been doing its job and holding companies accountable.
“Just because a few companies tried to take advantage of a tax incentive doesn’t mean that there’s something wrong with the incentive,” said Keith Tracy, president of Cornerpost CO2. “It only means that companies will sometimes try to cheat on their taxes, which is nothing new. When they’re caught, the IRS brings them into compliance, and rightfully so.”
And the IRS’ actions to disallow credits sends a signal to industry that the tax agency is serious about enforcing the requirements that companies have an approved monitoring, reporting, and verification plan, said Brad Crabtree, who directs the Carbon Capture Coalition. Currently, companies that are claiming the 45Q credit must report under the EPA’s greenhouse gas reporting program.
“Sunlight is the best solution here,” Crabtree said. He added the Carbon Capture Coalition, which includes fossil fuel companies, labor unions, and environmental groups, asked the Treasury Department and IRS in a recent letter to “safeguard the integrity” of the 45Q credits by requiring companies use a “mass-balance” approach to report tons of carbon dioxide stored. That would include the EPA’s approach, as well as any equivalent program the IRS decides on.
The IRS is currently working on a proposal that would outline what requirements companies must meet to demonstrate secure geologic storage to qualify for the tax credit, as well as a number of other outstanding implementation questions.
Sen. Sheldon Whitehouse, a Rhode Island Democrat, is pushing the Treasury Department “to impose strong accountability measures in its forthcoming 45Q regulations,” Richard Davidson, a spokesman for the senator, told the Washington Examiner.
“Those regulations give the Treasury a chance to reaffirm the effective EPA reporting requirements that are already on the books and boost compliance and oversight of the new program moving forward,” he added.
Carbon capture supporters also say lawmakers shouldn’t seek to undermine the 45Q program, including by suspending enhanced oil recovery-related credits.
“We know carbon capture and storage is a critical technology for decarbonizing the planet,” said Kurt Waltzer, managing director of the Clean Air Task Force. “What we don’t want to do is punish any project developers that have complied with the law,” he added.
Noel of Greenpeace, though, said the inspector general’s report is just phase one.
There’s much more to nail down, including which companies are involved and whether they defined the reporting requirements with an “intent to defraud the American taxpayer,” he said. “This story is just getting started.”
