Thanks to federal tax credits, it’s boom time in the Midwest for carbon dioxide pipelines

Thousands of miles of carbon dioxide pipelines planned in the Midwest have been spurred, in part, by a major expansion of federal tax credits in Democrats’ 2022 climate law.

That could lead to billions of dollars per year in federal tax credits benefiting the powerful Midwest ethanol industry, even as the proposals create intense conflicts between developers and local landowners worried about pipelines on their property.

Some critics also say it’s going to be difficult to tell how much the federal government is spending on the tax credits and if they are really being earned by the companies claiming them. There are also questions about whether the pipelines will be that influential in removing carbon and slowing climate change.

The tax changes created incentives for larger-scale regional pipelines, Sasha Mackler, the executive director of the Center on Energy Policy at the nonprofit Bipartisan Policy Center, said.

Less than a year since Congress passed the law, the effect is hard to quantify, but the changes have generated huge interest in the nation’s ethanol-producing states, he said.

“It’s definitely created an enormous amount of enthusiasm and activity in the development community,” he said. “It’s very safe to say there’s been a significant uptick in commercial activity around carbon capture.”

Among the tax credits for various clean energy programs in the climate law, seen as the largest U.S. effort to date to address climate change, was a major expansion of tax credits for carbon sequestration, a technique of removing carbon emissions from industrial processes.

The 2022 law raised the credit from $50 to $85 per metric ton of carbon stored underground. It also extended a construction deadline and allowed for direct payment of the credit — making it simpler for companies to take advantage of — and made other changes that incentivized carbon storage.

Ethanol byproduct

Carbon dioxide is released during the fermentation process that’s part of ethanol production. That byproduct is a relatively pure — and easy-to-transport — form of carbon dioxide, compared with other industries.

Because the ethanol byproduct is easy to move, carbon sequestration in the industry has long been cheaper than in coal power plants, concrete manufacturing or other sectors.

The cost to ethanol producers of sequestration ranges from about $36 to $41 per metric ton, according to a report from the clean energy group Energy Futures Initiative, meaning the $50 tax credit was already profitable for the industry in most cases.

But costs varied on a case-by-case basis, depending on variables such as the length of a needed pipeline, Mackler said. The $85-per-ton credit provides even more of an incentive and makes more proposals profitable.

The expanded tax credits provide “a large economic opportunity” to retrofit or build new ethanol facilities with carbon capture in the Midwest, where plentiful corn crops helped create the center of domestic ethanol production, Joseph Hezir, executive vice president with Energy Futures Initiative, said in a late June event hosted by EFI and the environmental issues think tank Resources for the Future.

Producers may judge the potential benefits to outweigh the difficulties — including resistance from landowners opposed to pipeline construction — of building out carbon sequestration infrastructure, he said.

“Being able then to move that CO2 once you capture it to a place where you can sequester it is going to be a challenge,” Hezir said. “But the economics look promising and motivating enough for companies to want to begin to pursue that.”

While the full scope of the tax credit is hard to determine, the individual companies proposing carbon pipelines could see billions of dollars in annual tax benefits.

Summit Carbon Solutions, which has proposed a pipeline network that would connect 34 ethanol plants across Iowa, Minnesota, Nebraska, South Dakota and North Dakota and deposit carbon dioxide in underground storage in North Dakota, says the project could permanently store 18 million tons of carbon dioxide annually.

At $85 per ton, that would equal $1.5 billion per year from the sequestration tax credit.

Navigator CO2 Ventures, another company seeking permits to build pipelines across Iowa, estimates it could transport and store up to 15 million tons of carbon dioxide per year, which would earn tax credits of $1.3 billion.

Transparency issues

In theory, climate scientists say incentivizing carbon capture is good policy. It’s one of several climate solutions that major economies like the United States must use in combination to reach international climate goals.

“To meet all of our global climate goals we need to both rapidly scale up renewable energy, but then we also have to deal with the legacy carbon that’s in the atmosphere,” said Daniel Sanchez, a professor studying bioenergy at the University of California-Berkeley. “We need all of these tools at our disposal in order to effectively decarbonize the transportation sector.”

But critics say it’s hard to tell in practice exactly how much taxpayer money has been spent on carbon sequestration credits — or if the credits are going to facilities that are successfully removing carbon.

Companies must meet U.S. Environmental Protection Agency standards for underground carbon storage to qualify for the credit. But the agency and the Internal Revenue Service both lack the staffing to verify companies claiming the credits are earning them, said Jim Walsh, the policy director for the advocacy group Food and Water Watch, which opposes tax credits for carbon capture.

“These tax credits are shrouded in secrecy and ripe for corruption, with no ability for oversight by the public,” he said.

Carbon capture itself is not an effective strategy to address climate change, Walsh said. Pipelines and storage wells can leak carbon, but even without those problems, sequestration is a half-measure, he added.

“The only way that we’re going to address the climate crisis is to stop fossil fuel development and phase out fossil fuels quickly,” he said.

Carbon storage and other technologies that boost fossil fuel use are counter-productive, he said.

“That leaves us with a lot of solutions that are going to waste money while enriching powerful interests and undermining our ability to address the climate crisis in a meaningful way.”

Most climate scientists, though, say that carbon sequestration is part of a long-term solution.

The United Nations’ Intergovernmental Panel on Climate Change most recent report projected that reaching mid-century climate goals will require 6 gigatons of carbon dioxide sequestration.

Federal spending on carbon storage recognizes that the U.S. economy is largely fossil-fuel based, Mackler said.

“From a climate perspective, fossil fuels are not the problem,” he said. “The problem is emissions from fossil fuels. And so if we can develop a pathway for continuing to use at some scale, especially with the oil and the natural gas that we take advantage of to power our economy, if we can use them in a way that does not damage the climate, that’s fantastic.”