45Q for DAC

[Seth Miller]

All,

Can anyone on the list tell me whether the US subsidy for DAC (known as ‘45Q’), as written into the inflation reduction act, is indexed for inflation?

I have seen commentary that the point source capture provision is indexed to inflation starting in 2027, but I can’t tell whether DAC is similarly indexed. It is currently $180/tonne for capture and storage, and will presumably remain at this value until at least 2027, no matter how high inflation gets between now and then (but maybe longer?)

If you have expertise here, please chime in!

Best,

Seth

-------

Seth Miller, Ph.D.

www.linkedin.com/in/sethmiller2

Check my blog at: perspicacity.xyz

[jamesmat...@gmail.com]

Let me directly answer you question, and then provide some of my commercial experience (I'm an engineering PhD who works in frontier infrastructure financing) as to why it probably doesn't matter.

Direct answer: 45Q (regardless of whether it's point source vs. DAC, utilization vs. geologic storage) is inflation indexed. The inflation adjustment is in the 2018 Bipartisan Budget Act, not the IRA. The headline numbers are for CY2026, so your hypothetic CY2027 would have one year of inflation adjustment. "Inflation" itself needs to be defined and I don't recall what the particular index referenced in text. I also assume your hypothetical asset won't commission before Jan 1, 2026 when the new rules apply.

Some practical considerations why I don't think inflation matters in your context:

• The point of the incentive is offset/pay down the capital cost of the facility. The financially conservative thing to do--and infrastructure is a very financially conservative sector--is assume the inflation will be zero. So you will have $180/ton each year for the 12 year term of 45Q. The size of your "loan" (I'm being a little sloppy here to avoid the nuance of tax equity financing) is fixed by what size "loan" can be paid back with $180/ton over 12 years.
• If you don't qualify for direct pay for 12 years, then you'll need to monetize your tax credits through transferability for most years. You won't do this at $180/ton but rather at a discount. The discount rate rises with inflation to make your credits attractive vs other investments. The result is that the project is unlikely to get much of the rising credit value.
• If inflation (and therefore the value of the 45Q) credit rises, that's unlikely to be windfall to the profitability of the project because the operating expenses--utilities, labor, consumables--are normally tied to inflation. The gross operating profit of the facility is likely to be the same since the 45Q and the operating expenses will net out.
• A project that would commission in 2026, is likely to already have a fixed-price construction contract by now because building large infrastructure (this isn't specific to DAC/CCS) takes years. If you were beginning project development today, you're probably not going to have a fixed-priced construction contract until late 2025, at which point you'll have a better outlook for inflation during the 2026+ period so you can size your "loan" correctly. Inflation certainly makes construction more costly, but it also makes the product more valuable. Since there are very limited scenarios where the project would get pinched in the middle this generally doesn't matter.

Hope that helps,

~Matt

[Seth Miller]

Matt,

Thanks so much for the detailed reply! I had tried to confirm this provision in the IRA, or at least find a recent amended version of the 45Q rule, but hahahaha it’s not quite that easy.

On that note, a quick thank you to the entire list for bringing your expertise here.

Best,

Seth

-------

Seth Miller, Ph.D.

www.linkedin.com/in/sethmiller2

Check my blog at: perspicacity.xyz

--
You received this message because you are subscribed to the Google Groups "Carbon Dioxide Removal" group.
To unsubscribe from this group and stop receiving emails from it, send an email to CarbonDioxideRem...@googlegroups.com.
To view this discussion on the web visit https://groups.google.com/d/msgid/CarbonDioxideRemoval/49e0c88f-fd09-4a91-a108-ed83be2b8b8dn%40googlegroups.com.

[Bruce Melton -- Austin, Texas]

Hi Matt,

You say, "The point of the incentive is offset/pay down the capital cost of the facility." Is this written in the IRA, 45Q or Biden's Executive Order 14082?

I have a copy of the first draft of the Green New Deal from which the current IRS 45Q enhancement arose and it specifically calls out,

6(a)vi, Funding massive investment in the drawdown of greenhouse gases.

This concept was not carried through to subsequent versions and of course it is agnostic on if the incentive is a blanket or an incentive to pay off capitol costs. But to me at least it represents the origins of 45Q enhancements now found in the IRA.

I am also volunteering with a policy group at Sierra Cub that is concerned the 45Q incentive will be used to fatten accounts and or keep fossil fuel emissions facilities solvent and not for capture facilities payoff or further tech investment. I have not been able to interpret if there is a mandate to how the incentive is used as the docs are all quite cumbersome.

Original GND doc is attached.

Steep trails,

B

Bruce Melton PE
Director, Climate Change Now Initiative, 501c3
President, Melton Engineering Services Austin
8103 Kirkham Drive
Austin, Texas 78736
(512)799-7998
ClimateDiscovery.org
ClimateChangePhoto.org
MeltonEngineering.com
Face...@Bruce.Melton.395
Inst...@Bruce.C.Melton
The Band Climate Change
Twitter - BruceCMelton1

To view this discussion on the web visit https://groups.google.com/d/msgid/CarbonDioxideRemoval/8A80B5E5-2B1A-48D0-9599-A6716601DB55%40gmail.com.

[Matt Lucas]

I'm not a policy expert. I'm just stating a practical point of infrastructure finance, which is that paying down capital costs normally has seniority. But you can't practically legislate that, and to my knowledge no tax credit tries to make such a stipulation.

You received this message because you are subscribed to a topic in the Google Groups "Carbon Dioxide Removal" group.
To unsubscribe from this topic, visit https://groups.google.com/d/topic/CarbonDioxideRemoval/geev176LvhI/unsubscribe.
To unsubscribe from this group and all its topics, send an email to CarbonDioxideRem...@googlegroups.com.
To view this discussion on the web visit https://groups.google.com/d/msgid/CarbonDioxideRemoval/0ad6d8cd-c7c7-1733-063c-98f720cf4716%40earthlink.net.

[Dan Miller]

Groups like the Sierra Club and some climate scientists like Michael Mann believe that any actions besides emissions reduction will slow down emissions reduction.  But there are a number of problems with this thinking:

1) It assumes we (the collective world) will not take climate action seriously so any action beyond emissions reduction (CDR and/or SRM) will result in less emissions reduction as if we are asking fossil companies to “pretty please” reduce extraction and emissions. If we don’t take climate action seriously (and we currently do not) then we are screwed and we will go beyond 2ºC warming in the 2040s on our way to much higher warming later in the century.

2) At this point, emissions reduction *alone* (ERA) cannot keep our children safe. There are no practical approaches to ERA (as opposed to theoretical approaches such as "cease all emission tomorrow") that lead to less than 2ºC warming and 2ºC warming is catastrophic. Therefore, the only way to reach safe temperatures is a combination of 1) emissions reduction to as close to zero as possible as fast as possible, 2) CDR on a massive scale (~40 Gt/y), and 3) SRM while we work on (1) and (2).

While prominent scientists have recently reach this conclusion and published a letter calling for SRM research, I co-authored a paper in 2010 that reached the same conclusion.

The bottom line is that it is all hands on deck time and calling for partial action on climate will not keep our children safe.

Dan

To view this discussion on the web visit https://groups.google.com/d/msgid/CarbonDioxideRemoval/CAHmN3aaq%2BVMSY2E-oo_j6ZzZyQ2yxMYKNzrnyVHkB-WXdby1Cg%40mail.gmail.com.

[Robert Chris]

I want to endorse Dan Miller's comments.  The immediate policy challenge is how to get albedo enhancement (AE) cooling the planet so that the decarbonisation of the economy and the atmosphere have time to take effect.  ERA (a new acronym for me!) is doomed to deliver the collapse of civilisation as we know it (COCAWKI).  The so-called moral hazard argument, that any effort devoted to anything other than emissions reductions will only serve to delay those reductions, is a reckless distortion based on a failure to grasp the gravity of the situation.  Even if we got to zero or net-zero emissions tomorrow, the likelihood of cascading tipping events within the coming decades would hardly be impacted at all.

That said, emissions abatement and greenhouse gas removal (GGR/CDR) remain urgent priorities alongside AE.  Decarbonisation is necessary but not sufficient.  To deliver a  policy regime sufficient to ensure a high probability of averting COCAWKI there is no alternative but to add AE into the mix.  Together, ER, GGR and AE stand a chance of being sufficient.  All are necessary and urgent.  None is sufficient on its own.

This list is focussed on CDR.  That's good and investment in it must be accelerated urgently.  But it can no longer be regarded as the top priority, particularly if, using the much abused moral hazard argument, it serves to divert resources from the now even more urgent task of readying AE for deployment so that our children and grandchildren get to enjoy the inescapably later benefits from ER and CDR.

By all means use whatever tax breaks are available to extend the scale and bring forward ER and GGR/CDR.  But also bear in mind that without equal, if not greater short-term emphasis on AE, your efforts will be of little lasting value and the profits you hope to make along the way will be equally evanescent.

Here's an extract of something I recently prepared for another purpose that expands on the above comments and provides references to the some of science on which they are based.

The problem.

The global policy response to climate is firmly based in Net Zero by 2050.  The implication is that if this goal were achieved, the worst ravages from climate change would be avoided.  Two recent papers show that even if we got to net zero by next week, the risk of global scale climate induced catastrophe will continue to grow with each passing week.  The reason for this is the combination of three factors: a) the time lag between reducing atmospheric greenhouse gas concentration and surface temperature reducing being very much longer than previously thought; b) the warming in the pipeline from past emissions, previously thought to be about 3C now being reassessed at closer to 10C; and c) the triggering of several cascading climate and social tipping points occurring at or around a 2C increase.

The upshot of this is that while reducing GHG concentration remains necessary and urgent, much of its climate effect will not emerge until towards the end of the century and into the next, by which time the tipping points will have been surpassed.  The only way to avoid that disastrous outcome is to cool the planet by increasing its albedo (i.e. reflecting more sunlight back into outer space) sufficiently quickly to prevent the tipping points from tipping.  Note that the point about tipping points is that their consequences are irreversible on any reasonable timescale.

From a policy standpoint this means that if we don't start very soon doing some serious planetary cooling (albedo enhancement) to stop, and even reverse, the surface temperature rise, our children and grandchildren will be lucky to be around to enjoy the benefits from the reduced GHGs.

This is a dramatic change from current policy orthodoxy and requires an urgent paradigm shift in public and policymaking awareness.  It is made even more challenging by the fact that the mere idea of intervening at planetary scale to enhance Earth’s albedo is hugely controversial, for good reason.  Unfortunately, just as the risks from climate change have grown because of a global failure to act decisively at a much earlier stage, so the risks from effective remedies have also increased.  There are many ways to enhance Earth's albedo beyond the most talked about method of stratospheric aerosol injection.  They have different applications, cost and risk profiles.  On the basis of current knowledge it is extremely likely that the risks from deploying AE, properly researched and governed, would be dwarfed by the risks of not deploying it.  This is a pivotal moment in the story of life on Earth.

There is now little doubt that unless the gravity of our situation is understood and acted upon at pace, we are bequeathing a very grim future to our successors and most of the rest of life as we know it.

Some of the sources on which these comments are based are listed here:

Hansen et al Warming in the Pipeline (Dec 2022) use previously unavailable paleo data to show that the warming effect of doubling CO₂ is closer to 10^oC than to 3^oC and explains why the models have got it so badly wrong.

Armstrong-McKay et al (Sep 2022) provide an update on tipping points.  Prof. Tim Lenton's recent (Jan 2023) presentation to the NAS tipping point workshop is also worth the 23 minutes it lasts - it is based on the Armstrong-McKay paper of which he and Johan Rockstrom were co-authors. 

The messages in these two papers are reinforced by this posting from Carbon Brief from last September and Steffen et al from 2018.

Regards

Robert Chris

To view this discussion on the web visit https://groups.google.com/d/msgid/CarbonDioxideRemoval/34201223-54F8-4B46-B394-400A34AB1824%40rodagroup.com.

[Bruce Melton -- Austin, Texas]

Ah, very good. This is exactly what I considering. When Obama created 45Q it was for flue gas only, $10 and $25 a ton for EOR and for straight sequestration. Trump tripled the pay to $35 and $50 and included air capture. The IRA tripled again to $85 and $180 and added a direct pay instead of just a tax incentive as in the first two incarnations.

So maybe not directly, so far, is the incentive stipulated for reinvestment or for whatever... but certainly some strong caveats.

With Sulfur Cap and Trade there is also no stipulation. When that all happened in the late 90s, it was commonly thought retro fitting smokestacks with scrubbers would be the result but no tech or strategy was stipulated and what happened was mostly a switch to low sulfur western coal. A good story -

Schmalensee and Stavins, the SO2 Allowance Trading System - The Ironic History of a Grand Policy Experiment, MIT Center for Environment and Policy Research, August 2012.
https://research.hks.harvard.edu/publications/getFile.aspx?Id=827

There are lots of other industrial (and agricultural) incentives that I know little about. Does anybody have any ideas if there are incentives that require proceeds to be used in a certain way? Seems logical...

Thanks,

B

Bruce Melton PE
Director, Climate Change Now Initiative, 501c3
President, Melton Engineering Services Austin
8103 Kirkham Drive
Austin, Texas 78736
(512)799-7998
ClimateDiscovery.org
ClimateChangePhoto.org
MeltonEngineering.com
Face...@Bruce.Melton.395
Inst...@Bruce.C.Melton
The Band Climate Change
Twitter - BruceCMelton1

[Bruce Melton -- Austin, Texas]

Dan,

Yup. There are Sierra Club members that believe emissions reductions alone are sufficient, or that emissions reductions and natural systems can deal, that anything else is a dangerous distraction, but(!), in 2020 we adopted very significant new policy. Those with the previously stated beliefs remain however, but a number of us in the Club are working to get them to heed our new policies:

Climate Resilience, Carbon Dioxide Removal, and Geoengineering Policy, March 2020
https://www.sierraclub.org/sites/default/files/2020-Sierra-Club-Climate-Resilience-Policy.pdf

We adopted a "less than 1 degree C" target to go with our 350 ppm CO2 target from years back, where we wrongly had a former target of 1.5 C. I brought Hansen 2017 to the attention of the policy group I was on and settled that score and we now have a 1 C target, the first of its kind. It went all the way to the Board with little trouble.

We adopted a policy that we support "research into geoengineering in case emergency cooling is needed;" also because of the science I presented showing that Hansen's rationale for 350 ppm meant we were perilously close to needing geoengineering, and if we did not have the science on geoengineering, curtains would be the result. This also passed all reviews and committees and the board with far less trouble than I anticipated. (Our previous position on geoengineering "anything" was "over our dead body.")

And - also in this work, we support both CDR and emissions reductions simultaneously as official policy, so that as per IPCC we can achieve negative emissions to remove up to 1,000 Gt CO2 from the sky when natural systems can only account for about 5.5 Gt annually as per IPCC and the National Academies Negative Emissions Report in 2018, based on sustainability and (importantly on) equity. Therefor the policies include air capture with industrial tech.

And finally, we adopted very specific policy on beliefs that display the moral hazard of emissions reductions alone: Avoiding the Moral Hazard. It's all written there in our policies, but that doesn't mean a bunch of volunteers, or even staff, are going to support for a number of reasons.

We are working on it, but still - global firsts in approved policy!

Cheers,

B

Bruce Melton PE
Director, Climate Change Now Initiative, 501c3
President, Melton Engineering Services Austin
8103 Kirkham Drive
Austin, Texas 78736
(512)799-7998
ClimateDiscovery.org
ClimateChangePhoto.org
MeltonEngineering.com
Face...@Bruce.Melton.395
Inst...@Bruce.C.Melton
The Band Climate Change
Twitter - BruceCMelton1