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

Our guest tonight is Lew Daly, Senior Fellow for Climate and Energy Policy at Just Solutions, where he works in partnership with state and federal organizations and networks in pursuit of a just and equitable clean energy transition. 

His previous 15 years work in the public policy field includes appointments such as:

• Director of Policy and Research and Senior Policy Analyst for Climate Equity at Demos
• Deputy Director of Climate Policy at the Roosevelt Institute 

Lew is a lifelong resident of New York State--Born and raised in Onondaga County, Central New York State, and has been based with his family in Wester Harlem, New York City, since 1999. His New York service in the field includes:

• Steering Committee member of the New York Renews Coalition from 2017-2020.
• Co-coordinator: New York Renews Policy Development Committee, supporting the development and passage of the nation-leading Climate Leadership and Community Protection act in 2019.
• Member of the New York City Offshore Wind Advisory Council in 2022 and 2023.

He has also worked internationally as a US member of the Global Well-Being Lab of the Presencing Institute and Germany's Global Leadership Academy, and as an International Advisory Board Member of the Centre for the Study of Governance Innovation at the University of Pretoria.

With Doug Koplow of Earth Track, Lew is the author most recently of the report, Taxpayer Costs for Carbon Capture, Utilization, and Storage, just out from Just Solutions and Earth Track. 

In addition to his extensive policy work, Lew's commentaries and feature articles have appeared in the New York Times, the Washington Post, the New Republic, Democracy Journal, Boston Review, Grist, and many other publications. 

Transcript

Gregory A. Williams: 0:00

Music. Thank you for joining us for another episode of climate money watchdog, where we investigate and report on how federal dollars are being spent on mitigating climate change and protecting the environment. We are a private, non partisan, non profit organization that does not accept advertisers or sponsors. So we can only do this work with your support. Please visit us at climate money watchdog.org to learn more about us and consider making a donation. My name is Greg Williams, and I learned to investigate and report on waste, fraud and abuse in federal spending. While working at the project on government oversight or Pogo 30 years ago, I learned to do independent research, as well as to work with confidential informers or whistleblowers to uncover things like overpriced spare parts, like the infamous $435 hammers and expensive military weapon systems that didn't work as advertised. I was taught by my co host, Dina razor, who founded Pogo in 1981 and founded climate money watchdog with me three years ago, Dina has spent 40 years investigating and sometimes recovering millions of dollars wasted by the Defense Department and other branches of government while at Pogo as an independent journalist, as an author and as a professional investigator, our guest tonight is Lou Daly, senior fellow for Climate and Energy Policy at just solutions, where he works in partnership with state and federal organizations and networks in pursuit of just an equitable clean energy transition. His previous 15 years of work in the public policy field include appointments such as Director of Policy and Research and senior policy analyst for climate equity at demos, Deputy Director of climate policy at the Roosevelt Institute. Lou is a lifetime resident of New York State, born and raised in Onondaga County, Central New York State, and has been based with his family in western Harlem New York City since 1999 his New York service in field includes being a member of the steering committee of the New York renews coalition from 2017 to 2020 co coordinator New York renews policy development committee supporting the development and passage of the nation leading climate leadership and community Protection Act in 2019 member of the New York City offshore wind advisory council in 2022 and 2023 and Lou has also worked internationally as a member of the global well being Lab of the presence Institute Germany's Global Leadership Academy, and as an international advisory board member at the Center for the Study of governance Innovation at The University of Pretoria, with Doug kapow of Earth track. Lou is the author most recently of the report taxpayer costs for carbon capture, utilization and storage, just out from just solutions and Earth track. In addition to his extensive policy work, Lou's articles and commentaries and feature articles have appeared in The New York Times, The Washington Post, the New Republic, democracy journal, Boston review, grist and many other publications. Dina, would you like to say a few words about why we're excited to have Lou with us? Yeah,

Dina Rasor: 3:38

Lou and I work on on climate issues together at various time. And we had Doug on a podcast not too long ago, and when they came up with this fact sheet, I'm not usually shocked. For 44 years of doing this. I'm not easily shocked. But the the 45Q subsidy, when you actually take it out into the out years, you know, because it starts slow, and then it goes it's a bell curve kind of thing. I was astounded at the amount of money. And quite frankly, what we were talking about before we started. If Leon, if Elon Musk, wants to find a trillion dollars to knock off or or almost a trillion dollars to knock off all he has to just get rid of this and it, but it's unlikely, because of the connection to big fossil fuel. So I'm really happy he's here. I was very excited about their report and hoping that that it, and we will definitely post it on the website and our blog along with this podcast, because I would suggest everybody read it. It is. Depressing how much money they're going to try to suck out of this subsidy.

Gregory A. Williams: 5:08

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

Lew Daly: 5:11

No, let's jump right in.

Gregory A. Williams: 5:14

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

Lew Daly: 5:27

Yeah, I mean, on the most basic level, what we've done in our report is to look at the official government estimates of what will be the ultimate price tag, or the long term price tag of for the CCS tax credits, which are come through the 45Q program of the tax code, as compared to independent estimates that have different features, and we'll get into the weeds of what explains these disparities. But the basic fact is, what we're looking at potentially, and we think more realistically, is a much, much bigger price tag for this particular climate solution, some of us don't consider it to be a solution, and so that's part of the the distress and concern we have when we're looking at these, these disparate fiscal analyzes. And I think the the and we'll get into the details of just why, you know why there is, there are such differences between independent analyzes and government analyzes in a minute. But I think whether it's against a backdrop of like fiscal concern, which is ostensibly what's being fought over right in the current negotiations over the budget reconciliation, or if the question, as it is for me, is, wait a minute, this is going to cost us a lot more than we thought originally, and for a solution that I believe is actually antithetical to the goals of climate mitigation. In either case, the question of these disparities and estimates should be raising a lot of concern and causing a lot of uncertainty about the future of the program and whether or not it needs to be reformed.

Dina Rasor: 7:02

Yeah, so why don't we start by going back over what the 45Q tax credit is, how it came to be, you know, it was in Biden's inflation Reduction Act and how, and then maybe even talk a little bit for the people who don't follow this closely about carbon capture and and if they don't get this credit, how is it going to affect that program?

Lew Daly: 7:29

Okay, sure. Okay, so when we talk about 45Q that is the section of the Internal Revenue Code that gives credits, tax credits to CCS projects that are often related to fossil fuels now, CCS, very broadly, is a, is a, is a climate mitigation technology and proposed solution that doesn't restrict the the extraction, the production and the combustion of fossil fuels. What it does is it basically attempts to capture the CO two emissions. Once you've you've extracted the fossil fuels, process them, transported them, and burned them, for example, to generate electricity in a power plant. So you're basically capturing CO two and then the CC. This the storage part. Carbon Capture and Storage is the idea being that you capture and then you store it in order to keep it out of the atmosphere. And this is how it becomes a climate mitigation solution. So 45Q was introduced in 2008 back in the day, it was mainly considered a kind of a clean coal subsidy to to to attach CCS facilities to very dirty coal plants, for example, and also for use and enhanced oil recovery, which I think will circle back to it. It had very little usage up through even up until the inflation Reduction Act, it was modified into first modified significantly in 2018 with the values of the credits being raised for certain activities and other design features to to enhance the incentive effects of the program. But with the IRA comes came some very significant changes in the 45Q program that has resulted in a whole new slew of or set of projects that have come come online and entered into the pipeline to to be put into service over the next decade or so. And we'll get back to that, because that's an important part of explaining the disparities with the independent fiscal analyzes. But I'll just give a quick overview of. Of how the IRA, the inflation Reduction Act that was passed in 2022 enhanced the 45Q program. The main one is that it increased the value of the credit for sequestered carbon capture from$50 to $85 it also, for EOR, raised the value of the credit from $35 to $60 and also for other uses, there's another type of utilization beyond EOR that we can also talk about, that credit rate was raised from $35 to $60 under the IRA so a lot more value in the credits with the IRA revisions. The other thing that is important is that the the capture thresholds for what kinds of facilities are eligible for. 45Q were greatly reduced, which greatly expanded the breadth of eligible facilities to include much smaller facilities. So previously, the threshold to receive a 45Q credit for a power plant would be a facility producing at least 500,000 metric tons annually of CO two emissions that has now been reduced to only 18,750 metric tons of emissions. So much, much smaller power plants are now eligible and able to qualify for the 45Q credit when it comes to power plants. Likewise other facilities, these would mostly be industrial facilities, cement, steel making, ammonia production, or biofuel facilities like ethanol, they they also had a significantly more breadth added by reducing those thresholds from 100,000 metric tons to Only 12,500 metric tons. So higher values, much more breadth in terms of the size of the facilities, and then they added financial efficiency mechanisms known as transferability and direct pay, which gives the claimants of the credits the ability to essentially monetize them by selling the credits into a marketplace where other entities with higher tax liability, for example, would find value in those credits in exchange for giving cash to the original claimant of the credit. So that's going to greatly grease the wheels, as it were, for 45Q kind of flowing into the economy. And also, I think somewhat oddly related to transferability mechanisms, is something called direct pay, where you essentially you get a refundable credit for probably smaller facilities without sufficient tax liability, or newer facilities to fully benefit from the credit. Are able to get the balance of the credit as a basically a direct payment from the government. And this is applicable for CCS projects that are in for five years for profit, who, you know, who would otherwise be taxable. And also for nonprofit, CCS projects, for example, with a Public Power Authority or a federal or an Electric Co Op,

Dina Rasor: 13:35

okay? Well, you know, I want to, I would think. I always, when people talk about carbon capture, I always say, I say, I try to get it as simple as 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 you know, you pump out. You pump it out, and then you put it pipelines. You get to capture the CO two. You put it, pressurize it, put it pipelines, because you rarely have a plant that's sitting into a place that you can sink it into the ground, and you pipeline it all over the place. And the pipeline network that they're planning to do for CCS is just incredibly big. And so then it gets there, then you pump it back into the ground, and then hopefully start forever, or you use it for what you call enhanced oil recovery. And I just look at it and say, What started out as clean coal. You know, the clean coal is an oxymoron, really. And even though the current president wants to go back to it, that this, this always seemed to me to be kind of a crazy thing to do, because if you just leave it in the ground and you find alternative energy, then you don't have to. Do all this. But one of the things that when I first looked at the 45Q I realized, and then I had several people in the group that Lou and I worked together in as saying that there's no way they could even build the pipelines for this without the kind of enhanced credit. So at some point, we need to also talk about enhanced oil recovery. I'm just want to do all this so everybody really understands when we start talking about the numbers of what it's going to cost. Greg, you had a question.

Gregory A. Williams: 15:37

Well, just to sum it up and check my understanding, you're saying that if you operate a solar plant, you get no credit under this program, and you also emit no carbon dioxide. But if you drill for oil using enhanced recovery and pump a bunch of CO two under the ground, you get money for that, and you produce a whole bunch of oil that's going to produce a bunch of carbon dioxide, and then you burn that carbon dioxide and capture some, perhaps a tiny percentage of the the CO two that that produces, you get, you get money back from your taxes on both the burning and the and the extraction of the oil. So from the perspective of this, this program, you make way more money if you're putting more carbon dioxide into the atmosphere than if you were just using wind or solar to produce electricity. 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 be fair, there are substantial tax credits for wind and solar in the 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 must strictly see three person are not involved at all in any of the lobbying around these questions. But 45Q apparently, does seem to be one of the credits that might survive the chopping block of the doge and the fiscal hawks in in Congress, I want to refrain from commenting on anything to do with potential legislation, but it's a surprisingly popular credit and has some bipartisan support, certainly democratic states that have a lot of corn are seeing a lot of potential value in 45Q as it relates to capturing emissions from ethanol, for example. So a state like Illinois or Minnesota, for example, probably has some support for continuing 45Q But to get to back to the EOR Dina, you're right. EOR has the one facility, I think, where there is actually, there are 13 operating CCS supply chains, projects currently, 11 of the 13 are for enhanced oil recovery. And the problem with this is that you what you're doing, essentially is you're giving with one hand and you're taking away with the other. You're getting a credit, right? There's a credit for capturing the carbon, and then that carbon is used as an injectant into a well oil, a depleted oil well that from which the remaining oil would otherwise not be recoverable economically. It's not economically feasible without the credit related to EOR then, in turn, in a life cycle perspective, of course, the oil that otherwise would be kept in the ground, but because of 45Q is being extracted using the the CO two as an injectant to help drive the oil toward toward the drilling system where otherwise it wouldn't be movable, movable. Then that entails combustion and additional CO two once you burn that oil so that's been recovered. And there are complicated mathematical, you know, models that the industry would use to say, Well, if the EOR oil is used to substitute for existing supplies, right? That don't involve carbon capture at the front end. It's a cleaner addition to it's a cleaner you're helping to clean up the emissions of the oil and gas combustion, if you're just. Adding more oil into the into the oil supply, well, that negates any potential benefit that you would get from capturing those emissions up front. I don't, I am not an expert on the the mathematics of oil supply and demand and whether, on a net basis, EOR really is as stupid as it seems to be, but certainly there are very serious questions. And of course, when you're looking at the overall, you know pathway of 45Q being predominantly EOR, and is it just going to be more EOR? There are certainly proposals to raise the value of the EOR specific credit. There are also proposals on the on on the opposite side, to actually delete EOR from the 45Q program. So there's a lot at stake on that question, and certainly, given the history of 45Q as primarily being a driver of EOR, we have to be worried, as we're looking in, you know, in the out years, of how much it could actually cost.

Gregory A. Williams: 21:08

And I just want to remind listeners, the EOR is enhanced oil recovery. It's pumping gas, such as CO two into 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 to trillions, and so why don't you go ahead and talk about what the original estimates were and and now that you've got other independent analysis that shows that it's not going to be as cheap 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, a new law, is introduced, and also when the final form, if it passes what the final form of that law is. The under, I forget which statute, but Congress through and he called the Congressional Budget Office is required to issue a score of what will be the budget effects of the particular provisions of this law. So when the CBO did its score of the enhanced 45Q program under the inflation Reduction Act, it projected a cost of 3.2 3 billion in revenue losses, meaning that these these are credits, so you're reducing the amount of taxes that are owed by the credited facilities or entities or the owners of those facilities. So there's a revenue loss to the Treasury with a credit. And so they projected a revenue loss of$3.23 billion over 10 years through 2031 and we call it costs, but it's, it's, you know, technically, it's revenue losses. It's not necessarily a cost in this, in the way in which a grant, for example, would be a cost concurrently the unit the Treasury Department is also, I think, under a different statute, required to give estimates of tax expenditures. Now, an important feature of the CBO score is that it is only scoring the revenue effects of changes. In the case of 45Q which, as I said, has been around since 2008 the CBO score is revenue effects of changes in the law that are specific, in this case, to the inflation Reduction Act. So it's only the marginal increment attributable to to the changes in the law that came with the IRA enhancements that I went through earlier. The Treasury knows its own measure of what it calls tax expenditures, and it's changed over time and but the most recent estimate is as compared to 3.2 3 billion CBO score 43 billion. Now that's a gross measure, because it includes the baseline expenditures from the existing policy and then the additional expenditures that come with the enhanced enhancements of the program from the IRA IRA. So typically, the Treasury estimates tend to be larger than the CBO estimates. Okay, so that's in the constellation of government estimates. Then we began to look at independent estimates. We in particular, we looked at an estimate from credit Credit Suisse that looked at the same. Exact same time period through 2031 an estimated cost of $52 billion over that period. And then another estimate from Bloomberg New Economy finance estimates45Q costs of 104 billion this is for a 13 year period, beginning in 2024 and I'll come back to this question of why the different time periods matter. But the important thing, and this is especially clear in the Bloomberg estimate, is that it incorporates much more robust information about the commercial development of CCS the CBO score is very policy focused. If we raise the value of the credit how, what additional revenue losses will we see through the 45Q program? It doesn't incorporate in any robust way, commercial information about what's actually materializing on the ground in response, for example, to the enhanced Ira 45Q program. The Bloomberg estimate does incorporate much more robust commercial information. However, another caveat when we get to the bigger estimates that we'll be talking about is that that commercial information was what they were looking at was prior to the IRA. It was in 2020, 2021, in that period. So it's prior to the enhancements to 45Q that came with the IRA. So even that much greater estimate, much larger estimate, compared to CBO, still had a very limited purview in terms of actually tracking and accounting for the commercial developments. Now, when we turn to the estimates, the big picture estimates that we focus on in our brief from the Institute for Energy economics and financial analysis, which we call iefa. Just for sure, they are projecting costs of 835 billion, and they're looking at the period of 2025, to 2042 so an 18 year window. Now, why is this important? What's important is that one thing that changed with the IRA is that the deadline for being able to qualify for 45Q credits was extended from 2026 to 2032, and then the credits under the old law and the new law are available for 12 years. So the legal timeline of the availability credits actually goes out all the way to 2043 2044 that credits can accrue. And so potentially, there will be many projects additionally coming online over the next six years to be able to meet that deadline of being eligible for the credits over the next 12 years, even with just the announcement or the or the passage of IRA, we saw A huge increase in the announcements and project pipelines that were introduced in response to the enhanced Ira 45Q program. And that's really the big difference between the ieefa estimate and the Bloomberg estimate, which has much more limited commercial information, but still, compared to CBO, which basically has very little commercial information. And so what IFA basically did is quite it's basically a kind of just pretty straightforward arithmetic. They looked at the project pipelines. There's a detailed database that's organized by the Clean Air Task Force of all of the CCS projects that are in the pipeline, and most of which have come online since 2022 with the new 45Q program. And it's about 227 projects in that database. And what aife did was simply to look at a subset of those 142 that actually has a projection of the emissions, the capturable emissions from the project the other projects don't have an emissions profile yet, as yet in the database. So even a subset of those 227 projects in the new put in the new project database that they extrapolate from those projects and the amount of emissions that are being projected from those that project to calculate, those projects to calculate, okay, this is how much this was. This is going to cost us. In terms of credits going to those projects, and so that is really the big difference. And I would just suggest that we're not trying to suggest that the CBO estimate is misleading, or in some way attention intentionally being deceptive. It's just methodologically not realistic about how the 45Q expenditures, and that trajectory is going to a fold to unfold, if you take it out to the full legal timeline through 2043 and then you incorporate all the commercial information that is starting to materialize and surface. And it's in various stages. Sometimes it's just, we're doing the front end engineering studies for this project for a new ammonia plant in Louisiana. That's one of the examples of a new project. Others are much further along and already in the permitting stage. So when I takes all of that additional information, that's where these much larger estimates they, as I said, through 2020, 42 they project 830, 5 billion in total costs of the program, again, compared to 3.2 3 billion. That's the government official estimate. 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 a trillion 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 appease people that you're trying To do something about carbon. But I think that the thing 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, and then it comes down, but in by 2022, if you average that out per year. Now, obviously we're not going to write governments, not going to write that check every year. It has to do with the fact that if you flatline it, rather than curve it, it's it's about 40, 43, billion a year. And when you think about the of all the other things and priorities and whatever we have is, and it's not clear that carbon capture actually does anything to reduce carbon that's very much still in the air, then you've got this situation where you've got the, you know, the the the increase in the overruns when the estimates are would be what I would call pentagonal. Is the Pentagon has a, you know, having done the Pentagon for years, they it's kind of like get the camel's nose under the tent, and then the prices go up, unless there's some kind of oversight or some kind of pressure down. And one of the things that we were we were looking at is the transparency and oversight of this program seems to be lacking the for anybody who is a person that looks at what could go wrong, and so in on the top of this money, there is the checking on how much they are. So kind of explain to me how they how they do, how there's lacking in oversight, and also lack, lacking in transparency this program that's concerning.

Lew Daly: 33:31

Yeah, so there are two, two basic parts of that description. One is that the IRS itself, which ostensibly is in charge of oversight of credit activities, is has under provision known as Section 6103 of the tax code has very strict confidentiality limits or rules basically that are apply to all, basically all information on tax returns, including credits. Now this is a very strange story, because it goes back to Watergate. Actually taxes, tax returns, at least in principle legally, were considered public records up until the mid 1970s when Richard Nixon and members of his administration and his circles were actively trying to obtain tax information from the IRS in order to weaponize it against their their political enemies. And so in the wake of a Watergate, Congress passed reforms to establish very strict confidentiality limits on public disclosure of tax information. Question. And so what this means in practice is that we have no idea. We have projections from the government of how much it will cost, but we have no verification of what was actually spent through 45Q and more importantly, we don't know who is getting credits, how much and for which activities? Okay, I'll stop there, because I think Greg wants to interject a question,

Gregory A. Williams: 35:27

yeah, so if I understand it correctly, this applies equally to direct payments as well as or what you refer to as direct pay earlier in the in the podcast, as well as tax credits. So even though the IRS is going to be sending out checks, there will be no way for the public to see who they're writing those checks for.

Lew Daly: 35:49

No, that's correct, and the the so there. And let me just give you an example of where this lack of transparency, you know, became a huge problem in the first 10 years of 45Q I think in a period of 2010 to 2019 a senator wrote a letter to the Treasury Inspector General for tax administration that office is the shorthand is TIG to asking for a review of the expenditures of 45Q in, in, in, in a context of wanting to check for accountability in terms of the results, the resulting carbon storage that that was being credited over this period. And the Treasury Inspector General came back with a report that basically said, well, one interestingly, out of something like 672 claims from from businesses for45Q over that first 10 year period, 10, obviously, we can deduce huge corporations got 99% of the total, about $1,000,000,001.2 billion worth of credits. So that's one interesting that is basically all going to giant corporations. We wouldn't have known that at all, that profile of who's getting these credits, let alone the specific entities who are getting the credits. That information to this day, we don't know who was getting those credits, but what the Treasury Inspector General found on this question of like accountability for the actual storage was that all of them, the 10 big recipients, none of them, at the time, when they were claiming the Credits, had fulfilled their regulatory requirements from the EPA as to what they call monitoring, reporting and verification, which is a rule, a regulation under the Safe Drinking Water Act to regulate the storage of carbon dioxide waste streams through establishing a monitoring protocol, report reporting standards, and then verification of the of the stored carbon of a facility. And so there are big problems with the weakness and lack of stringency of what is what actually an MRV report or framework from a given facility requires. It's actually not very stringent at all. But more important is that they were claiming the credits without even having an approved MRV plan from the in the EPA. So the credits were that some would call it fraud later, some of the corporations that were being credited filed and had MRV proposals 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 is supposed to be king. Okay, how much carbon did we save? How much money do you get? Because you get it on how much you save. And one of the problems with the EPA is they basically had, which also, by the way, happens in the Pentagon. They do this self reporting. In other words, they count on the company to tell you we and by filling out these reports that you just talked about, the company tells you, okay, I've we've saved X amount of carbon. And then the EPA looks at that says, oh, okay, good for you. And then they pass it on. There's really no. Rubbing of the numbers, and then they pass it on. The IRS is like, well, you know, the EPA said 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 input output, you know, there's, there's lack of transparency in the whole thing. And the EPA is just letting them self report. And so you might, I might want to comment on that input of how much carbon you saved, that that that is directly connected to how much money you're going to get 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 that you're getting credits without even having an approved MRV plan. So that was the quote fraud that the that was found in that inspector general's report, and some of that was recovered to this day. However, because of the privacy rules, we don't know who those perpetrators are right, because it still is protected and shielded by the confidentiality rules. But the more important point that you're making Dina is that really the MRV requirements themselves are way too weak. It basically says, this is your project. You know what it's going to take to monitor and report and verify your results of carbon storage better than we do in some way that could be uniform, the uniform technological standard for what kinds of monitoring or a uniform format for how results are being reported, let alone verified. So there's bottom line is, there's no independent, very verification of what a given business puts into its report. MRV report in terms of their of how much carbon dioxide is being stored. And so basically, you have self reporting based on a framework of overall MRV requirements that are self designed by the carbon capture business or the carbon capture owner, and really no objective or independent verification, not just you know, is that amount of carbon you know that's being claimed for this amount of credits, or do those add up? But actually, how it's being monitored, how it's being reported and verified, is also facility by facility sui generis. They just make it up as they go, and

Dina Rasor: 42:39

it's so that's what's so scary about this, because this program has not really ramped up to what it could be, and yet we know going into it that we're, you know, going to potentially shove $800 billion that direction, without the cost bank, okay, well, That's, you know, and, and, I mean, we'll talk about solutions. But another area that you were, you are interested in, you've done a lot of work in, is environmental justice. And so what to the people who don't know what that is, is, as you probably guessed, that a lot of times the worst, the worst, polluting and environmentally unsound things that go on in the in this, in the name of their of the environment, it really they tend to put it into. There's been always a tendency, if you only got to do is look at Louisiana and look at Houston, Texas. You tend to put it in areas and neighborhoods who don't really have, you know, disadvantaged neighborhoods. They don't really have the ability to say, not in my backyard, you know, they gotta go put it somewhere in in in a fancy or part of Houston, or another part Dallas or Louise, you wouldn't put it in New Orleans, there's going to be this, you know, not here and they fight. But I know you've done work on a lot of work on environmental justice, so I'd love to hear about how, even though the government's paying so much money for this, there's going to be environmental damage for people?

Lew Daly: 44:23

Yeah, thank you. I'm glad you raised that question. That certainly is something that's of ultimate concern for me in the work that I do, and just solution as part of just solutions. So I mean, the question is, if so, again, going back to the AIF advantage like that, it features estimates based on the actual commercial activity that's materializing in the in the wake of the IRA enhancements of 45Q I'm not sure if I it's a large majority of projects, but it's certainly a. Many of the largest projects and most impactful projects, and many of the projects that will obtain, you know, the the plurality or majority of the credits, because the the scale of their emissions is so much greater, are concentrated in the Gulf, south. And this wouldn't be surprising, because, as we mentioned at the outset, CCS is grafting onto the existing fossil fuel system a climate solution that is then, you know, very lucratively rewarded by taxpayers as a climate mitigation solution. And so it's natural that once those credit values are enhanced, those facilities that are already producing, processing refineries, oil refineries, gas processing, ammonia, hydrogen, chemical production, coal plants are all concentrated in that part of the country to begin with, and so naturally, the flow of the credits is going to also go to that region, because that's where most of the emissions are to begin with, from these industries. That's where most of the 45Q value will flow. Because you're you have the existing concentration of pollution 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 having to calculate a trade off between, okay, isn't it better to capture the emissions from that refinery than not to capture the CO two emissions from that refinery? Keep in mind that that CO to capture equipment does not capture or reduce the local air pollution that results from these industrial processes, nitrogen dioxide precursors to ozone precursors to particulate matter, which you know has significant effects on people's respiratory systems, cardiovascular systems, and also potentially neurological systems. And so even as you might be capturing emissions from that coal plant in Southeast Texas or that ammonia plant in new ammonia plant in Ascension Parish of Louisiana, on the west side of the Mississippi I believe you're not doing anything about the corresponding local pollution that's being generated by these facilities. And in fact, because you're using more energy to actually power the CCS equipment, this is called an energy penalty. You're actually, potentially, on a net basis, adding more local pollution because of the additional energy that's needed to power the CCS equipment and the CCS system. So you have, like a trade off between, well, we reduced our CO two emissions by 95% but we raised because of energy penalties, we raise our local emissions by another 10 or 15% and so, on a net basis, what's good for climate, ostensibly, is potentially, actually much worse for 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 non partisanship, which we are too, we just call the balls and strikes. Is first of all that carbon capture became a big part of Biden's, you know, infrastructure thing. And there are still a lot of Democratic members of Congress that believe in it, push it and want to promote this, this 45Q subsidies. So this is not a partisan issue. There's still people that are there's still a lot of Democrats that have bought into carbon capture. Some of them have surprised me. I didn't think that they would be. And so now we're getting down to, well, what, what should be done about this? I mean, if you were king for the day, and you could change a lot of this with 45Q and this potential of, I think we've kind of established the potential that if the more in depth analysis have looked we're, you know, we're probably on the hook. And if you add inflation, we're probably on the hook for a trillion dollars on this thing. And what's the what? How do you reform it or stop it, or how do you change it? What would be your solution?

Lew Daly: 49:49

Before I answer that question, I do, I do want to also point to actually what also is quite realistic, which is an outer estimate. On the hypothesis that the credit timeline will be extended an additional 12 years. Once credits get into the code, they are very hard to repeal, or to say game over for the credit, because those credits are incentivizing a lot of capital investment, 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 will suddenly become stranded without the tax incentive. And so, you know you have, and also, there's already very intense lobbying that I'm aware of to actually increase the values of the credits beyond what's you know, already been added with the inflation Reduction Act. So at that outer boundary of expanding the timeline of the credits and further enhancing the values, the iefa estimate takes it out toward 2.1 trillion over 30 years. So there is a huge amount at stake. And I would just stick to just from a fiscal perspective, like very basically, we need transparency. So there are credits, including energy credits, that when they were codified, when they were put into a statute, had a requirement of public disclosures, going back to that problem of tax information confidentiality. What's interesting about this is particularly what's known as the 40 8c program, which is an investment in basically production of clean energy technologies and components of manufacturing credit that was passed as part of the Recovery Act of 2008 and it was capped. So it said, I forget what the cap was, but there's a limit and a time, a limited time frame, and a limited amount of how much credit we will allocate for these particular goods and services that are part of the 40 8c provision. And what that does is it turns it says an uncapped credit means anyone who fills out the form correctly and appears to be eligible, and notwithstanding, if they're actually verifying, in this case, the actual carbon storage, it's unlimited, anyone can get the credit if they fill out the form correctly and they appear to be eligible, and they At least 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 applications, assuming that they're say it's a $1 billion cap and there are $5 billion worth of credit claims that are, you know, all things being equal, eligible, then you have a process of picking and choosing which projects get credited with 40 8c because of that, where, essentially a tax cut and uncapped tax credit is turned into a competitive grant program where the Secretary of Treasury is making specific allocations to specific projects under to keep it under a cap, it required public disclosure of the credit amounts and the credited entities as a just a question of competition and transparency and to avoid any appearance or reality potential corruption in terms of picking and choosing winners and losers under a capped program. So when it comes to the basic transparency questions, but also the fiscal questions, I think what I would propose, and again, I'm not commenting on any specific legislation, what I would like to see, at a minimum, is a very stringent cap on the amount of credits, maybe leaving the timelines intact, the timeline of 12 years, going up potentially to the 2040s but a limit in what is the total allocation of the credit, or year over year, or whether that's annually or biannually, or a five year window, and then attached to that, You would have requirements about public disclosure that would introduce transparency to the program where otherwise it would continue to remain a secret.

Gregory A. Williams: 54:50

So I was just going to try to summarize the you would propose that there be caps and transparency and. These would significantly reduce the exposure for the 45Q program. But what are some alternative tax credit or other programs that you think would do a better job of promoting mitigation of climate change

Lew Daly: 55:18

when it comes to alternatives? I'd first want to focus on specific reforms to the 45Q program. I haven't really alluded to this yet, but my own position on 45Q is really at this point that it should be fully repealed from the tax code, I think given the climate risks involved, let alone the the price tag that we're potentially looking at, so the fiscal risks involved, um, I think the most prudent course of action would really be, at this point to to repeal 45Q and I think Many of certainly many of the environmental justice partners that just solutions work with would would agree with that. And the one reason also, I would point to, is that, in a sense, for CCUS is sort of at the starting line, as I mentioned, it was first established the 45Q program to support CCUS. Was first established in 2008 and really didn't have a lot of uptake until the the expansion of 45Q under the inflation Reduction Act. And then that's when we began to see a, you know, a plethora of new projects that I talked about earlier, materializing and being put into development. And so, in some ways, you know, what happens with 45Q and this current huge budget fight that's going on in Congress now is it will really tell the story of whether or not CCUS is a big or small part of our energy transition and so prudently, I think it's best now to sort of put, put CCUS out of Its misery by ending the credit. However, I don't think that's very likely to happen in the current scenario. And so then the question is, well, what do we do to better manage it, to rein it in as much as possible? And the best approach to that would be to impose what would be called a cap, basically a limit on the amount of the credits that could go go out over a given period. And actually, interestingly, when 45Q was first introduced in 2008 it did establish a cap, but it was a tonnage cap. It was 75 million tons of stored carbon was established as the cap. So it really didn't even have a fixed time frame, like the current 12 year eligibility time frame that I talked about earlier. It was just a cumulative sequestration cap. The problem with that, which I also talked about earlier, is that we don't actually know what's going on in terms of the verifiable sequestration. So if you have, like, a numerical cap on the amount of tonnage, that would be the ceiling of the program, but you don't actually know what's being stored, or at least verifiably stored. That cap is kind of illusory, as you know, in terms of reining in the growth of CCS, or better managing the outflow of funds, of taxpayer funds to support CCUS in 2022 the Department of Treasury announced that the cap had been reached and that there would be no further credits claimable under 45Q Subsequently, we had the IRA reauthorization of 45Q and expansion, as I've talked about, and they removed The cap and and turned to turn to the 12 year eligibility program and the other details that I talked about earlier, a much more prudent, certainly from a fiscal perspective, type of cap would be, in fact, a fiscal cap, a monetary cap of how much value of credits would be the ceiling of the 45Q program as it unfolds over time. There are interesting questions about a production cap, a production tax credit versus an investment tax credit. Yes, as I alluded to, the 40 8c program earlier, does have a cap under the IRA, it was set at ten billion of credits. But that's an investment credit. So it's like, 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 it acts more like a grant program when you put a cap on an investment credit with a production credit, which is year over year, you're being credited for ongoing operations. That's a little bit different in terms of how a cap could work, how it could be structured. Is it annual? Is it biannual? Is it every five years? Is it just a cumulative cap within that 12 year eligibility time framework, sort of like the tonnage cap, but based on, you know, the fiscal expenditures, all of those details would need to be worked out, and I haven't done sufficient research and modeling to even propose how stringent to the cap, in other words, how much should be available over time, or how it should be, you know, structured in terms of the periods of how the cap is being measured. I don't have a clear idea of what that should be, but a fiscal cap, I think, is, you know, a good alternative to repeal, as far as a perspective of reining in taxpayer costs with that, and the other concern around transparency and disclosure, where we have these privacy rules of the tax code that so we don't Know who's getting the caps and who's getting the credits and how much with a fiscal cap you you introduce a level of competition, because there's a limited amount of credits available and more, presumably more eligible credit claims. So there's discretion involved in terms of the how the IRS is allocating the credits. If there are more credits claimed above the level of the cap, that means there's going to be winners and losers, and so in this, in that kind of situation where it becomes more of a competitive program that really warrants or calls for, the need for much more transparency and disclosure. Even the stakeholders in the CCS industries would want to see that, because if they're going to end up on the losing end of the bargain with a cap, it that information should be publicly available in terms of who's getting a cap and who isn't. And so the cap not only brings a measure of fiscal constraint, but it also probably introduces the idea that there needs to be more transparency and accountability in the program as compared to a program that doesn't have any kind of cap.

Gregory A. Williams: 1:03:01

That makes a great deal of sense.

Lew Daly: 1:03:03

Yeah. So in addition to a cap, I would say a further reform of 45Q both from a fiscal perspective, but also from a climate perspective, would be to greatly narrow the types of projects that could be eligible for the credit. So there are certainly on the industrial side of CCS, where you're capturing industrial emissions from industrial processes. There are certain industries, certain sectors, that are very hard to electrify to as they put it, decarbonize so steel and cement, for example, to replace the high heat from fossil fuel combustion that you need to produce steel or cement is is very difficult through electrification. So you could imagine a much more constrained scope of eligibility of 45Q only for those industries really, are truly hard to decarbonize, and where you would actually be having a climate benefit, because otherwise they're just going to keep burning fossil fuels to produce steel and cement and certain petrochemicals as well. But what that would eliminate would be the much larger sectors, particularly the power sector, which is not hard to electrify, and there, there is ample room for, you know, electrifying our electricity generation and getting off of fossil fuels in the power sector, though, that sector also is the one that has the most emissions. So a lot of the you know, the fiscal costs of 45Q will be flowing into the power sector. You know, in a. This close situation, but wastefully, because the the you know, these power plants can be quite easily electrified, they're not hard to decarbonize. So there's a strong rationale. If we want to limit the scope and the cost of 45Q let's narrow it to those sectors that are truly hard to decarbonize. And

Gregory A. Williams: 1:05:23

so wherever that leave enhanced extraction,

Lew Daly: 1:05:28

I would also along with the power sector, and then you mean the enhanced oil recovery would also be disqualified under because of the clear uncertainties, if not almost certain climate negative aspects of EOR that's much smaller in terms of, you know, the capturable emissions and the costs from, you know, from, but Of course, the net emissions once you're burning that, that oil that's recovered through injecting CO two ends up being, you know, on the net base is quite, quite a large emitter, an emitting sector alongside The power sector. So we would disqualify power plants and ER and narrow the scope down to those truly hard to decarbonize industries, and that, I think, would improve the potential climate benefits of CCUS, or the chance of that, while also greatly, greatly reigning in the fiscal costs of the45Q program. Now the bigger picture I want to talk about, if we're, if we're, I don't know I'm, I'm looking at the IIF estimates. And to me and Dina alluded to this, I think realistically, we are looking at something like a trillion dollar price tag for 45Q in the current scenario 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 of waste here for a dubious climate mitigation solution, or, in the case of EOR, a climate negative quote, unquote climate solution, or false solution, as many of my colleagues would describe it, it isn't only that you're promoting A false solution, it's that you're diverting resource, potentially a lot of resources, from positive solutions, from truly beneficial climate solutions. And I just wanted to give one example to put the costs or misallocation, misallocated costs, or the misguided costs under 45Q or the misguided spending into perspective, there's an excellent program in the Department of Energy that was established by The the 2021 infrastructure law under President Biden, called the grip program grid resilience and Innovation Partnerships Program. It was appropriated at $10.5 billion and believe it or not, it was the single biggest set of programmatic investments in grid upgrades and grid innovations since the Rural Electrification programs of of the 19 Yeah, but yeah and and so that's remarkable in and of itself, as we're dealing with all of the grid issues, with the accelerating climate impacts and all the new critical loads, like the data centers, we have to double the electricity supply over the next several decades, and we have a grid that's basically, you know, in the vintage of the 1950s and trying to Get to the grid that you know what that grid needs to look like as of 2050 with all of the the new electricity supply that we need, combined with the climate vulnerability of of the electricity system. And so when you think about that program, I have some, you know, some criticisms of of over investment in large utility. You know, utility centered transmission, very expensive transmission projects like undergrounding. You know, hundreds of miles of of. Of the wires of the delivery system. Not enough focus on distributed solutions and needs we have at the local level for much more accelerated incorporation of distributed renewable energy resources into the grid. But leaving that aside in general, we need a lot more federal and public investment in upgrading and expanding and fortifying the grid, right? And all we had out of the last, you know, several years of a lot of investment in climate and energy projects. This is this 10 billion and so when you think about even just half of, let's say, the trillion dollar price tag of 45Q if you diverted all of that into something like an expanded version of the grip program, it's unclear what's going to happen to that program under the Trump administration. But leaving that aside, you would see a 50 fold increase in federal investments in upgrading, expanding and fortifying the grid, much more productive. We need all of that to be able to have economy wide decarbonization, because we need a lot more electricity to decarbonize, primarily transportation and buildings, which is, I don't know, upward of two thirds of greenhouse gas emissions at this point that you know that we need to break free of fossil fuels through electrification. We need a lot more grid capacity to be able to do that, and even just half of what one could argue we're wasting money on, with a trillion dollar price tag for CCS, would increase our federal investments in grid upgrades 50 fold at this point. So you can see how there's just a skewed proportionality between what we're spending or potentially going to be spending, on a false solution like CCUS, while at the same time we're grossly under investing in a true and necessary solution like upgrading the electricity grid.

Gregory A. Williams: 1:12:13

Is there anything else you'd like to add?

Lew Daly: 1:12:16

No, I think I've told much of what I know about the story and shared it with your audience, but I really appreciate the opportunity. Thank you so much. Thank you. And

Dina Rasor: 1:12:30

we really appreciate the you know your work here, because you know people will just look at a CBO or Congressional Budget Office estimate say, okay, that's what it is. And you just really, there's just so many tricks and and assumptions and whatever to make it look low to start, and then slowly but surely bring out the bad news before you know what we used to say in the Pentagon, first, it's too early to tell, and second, it's too late to do anything about it. So you gotta find that magic moment. Maybe this, maybe this, your fact sheet, could help towards that magic moment. And so maybe next time, we should have you and Doug together, yeah, to come back and talk to us about it when we see what happens with the Congress in the budget in the next couple months. So thank you so much for coming, for being on

Lew Daly: 1:13:27

You're very welcome. Thank you. Thanks again. You.