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Carbon Capture Tax Rules Raise Transparency, Clawback Issues (1)

May 29, 2020, 8:30 PMUpdated: May 29, 2020, 9:18 PM

Lawmakers and the energy lobby cheered the release of long-awaited Treasury Department proposed rules for an expanded tax credit for companies that capture and store carbon dioxide.

The proposals (REG-112339-19), released Thursday, nevertheless may prompt pushback from both energy industry and environmental interests over language laying out the period over which the IRS can claw back the credit because of carbon leakage, as well as from transparency advocates worried about improper credit claims.

While an industry-friendly development overall, “it’s kind of a mixed bag,” said Hunter Johnston, a partner at Steptoe & Johnson LLP, noting that the rules left the door open for future guidance on other carbon capture technologies that could qualify for the incentive. “Even though there may be some issues still with the regulations, things people want clarified, this moves the industry in a very positive direction.”

Energy sector lobbyists have swarmed officials crafting and reviewing guidance for the credit since its 2018 expansion. Representatives of Shell, BP, Occidental, Baker Hughes, and others requested meetings with White House and Treasury officials while the Office of Management and Budget reviewed the rules, and the government received more than 100 comment letters in response to the IRS’s notice of plans to write the rules.

The expanded credit’s tax code section, 45Q, has appeared in dozens of lobbying disclosure forms—most recently from the likes of Exxon Mobil, Air Liquide, ConocoPhillips, and Peabody Energy—over the past two years.

The proposed rules—which companies can apply as far back as Feb. 9, 2018, the date a budget law expanded the credit—would allow the IRS to recapture the credits because of leakage up to five years after the tax breaks are claimed. The Carbon Capture Coalition, a lobbying group focused on the technology, had sought a one-year limit.

The group plans to spend some time talking to members in the next few weeks to hash out a letter to the IRS in response to this and other parts of the rule package, said Brad Crabtree, its director.

“The good thing is they at least recognized how important it is to put some boundaries on the financial risk,” he said. “The rule is very specific and clear about that.”

Scott Anderson, a senior director at the Environmental Defense Fund focused on energy, wrote in an email that the group is concerned “that the proposed period for recapturing the credit in the event there are leaks is too short and not adequate to help assure that storage is secure.”

But that proposed five-year period could effectively stretch to as many as 17 years based on the way the rules are written, said Amish Shah, partner-in-charge at the Eversheds Sutherland LLP Washington office.

“You can be in year 12 and have a potential recapture event based on CO2 that was injected back in year one,” he said. “So there’s a problem there in that I don’t think they really did what they suggested they’re going to do in the preamble.”

This language may well generate pushback, or simply need a revision, said Barbara de Marigny, a partner at Baker Botts in Houston.

“I think what they’re going to need to do is clarify their definition of the recapture period,” she said, noting that this is a big deal to investors in these projects, as potential clawbacks are seen as a major risk.

IRS and Treasury spokespeople didn’t immediately respond to requests for comment on the language.

Standards and Disclosures

The rules would also set standards for companies to prove that they’ve truly captured and stored carbon pollutants and are therefore eligible, not long after an investigation shed light on hundreds of millions of dollars worth of improper credit claims.

In April, after Sen. Bob Menendez (D-N.J.) requested an investigation into carbon capture credit claims, a Treasury watchdog found that nearly $900 million worth, or 87%, had been claimed improperly from 2010 through 2019. Seven of the 10 companies that reported receiving essentially all of the carbon capture tax credits did so without an approved monitoring and reporting plan, and without complying with Environmental Protection Agency reporting requirements, the Treasury Inspector General for Tax Administration said.

The standard the rule authors chose for demonstrating carbon capture and storage to the IRS are rigorous, Crabtree and Johnston said. Yet the authors of the proposed rules said that when it comes to transparency, they’re limited by a part of the tax code that bars the IRS from publicly disclosing taxpayer information.

Crabtree lauded IRS officials for emphasizing the importance of public disclosure, even if they ultimately determined that the law prevented them from making use of the credits public.

“We would be concerned if they had stipulated that transparency is unnecessary,” he said, noting that it may be up to Congress to make more transparency lawful.

(Updates with comments throughout.)

To contact the reporter on this story: Lydia O'Neal in Washington at

To contact the editors responsible for this story: Patrick Ambrosio at; David Jolly at