Fossil Fuel Companies Stand to Make Billions From Tax Break in Democrats’ Build Back Better Bill

The legislation would increase tax breaks for carbon capture and carbon removal by 70 percent, potentially yielding payouts large enough to wipe out some companies’ income tax bills.

Oil refineries are seen off of the Houston Ship Channel in Houston, Texas on Sept. 29, 2014. Credit: Ken Cedeno/Corbis via Getty Images

Oil refineries are seen off of the Houston Ship Channel in Houston, Texas on Sept. 29, 2014. Credit: Ken Cedeno/Corbis via Getty Images

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With the Senate turning its attention to President Joe Biden’s climate and social policy bill in the coming weeks, lawmakers are poised to expand a key tax credit that energy industry lobbyists and some experts say could unleash an important climate tool.

But the legislation, which includes changes to a tax credit for removing carbon dioxide from smokestacks or the atmosphere, could also funnel tens of billions of dollars to fossil fuel companies and other polluters over the next two decades. The House passed the bill last month.

Together with the bipartisan infrastructure bill enacted in November, which included more than $12 billion in funding for carbon capture and carbon removal technologies, the Build Back Better legislation would hand fossil fuel companies nearly every item on their carbon capture wishlist.

Perhaps the most important change in the bill is a 70 percent increase in the value of the tax credit. The payouts from the expanded credit could be so large that, if energy companies reach the scale they say they can, it could largely wipe away their corporate income tax bills, according to recent comments by Erik Oswald, an ExxonMobil lobbyist.

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“If you did this at scale, like the gigatons of sequestration I was talking about,” companies’ federal income taxes “would be entirely eaten by that,” he said in a recording obtained by the watchdog group Documented and provided to Inside Climate News.

Oswald was speaking at a meeting of the Interstate Oil and Gas Compact Commission, a group of state energy regulators, on November 9, the week before the House passed the Build Back Better package. The comments came in response to a question about whether carbon capture and storage could be viable without government support. Oswald said it could, eventually, suggesting that policy makers could scale back the credit if the technology took off.

The legislation passed by the House would not only raise the amount of the tax credit but would also tweak it to allow companies to receive direct payments from the federal government, rather than having to deduct the value from their income tax statements. It also would extend the credit’s eligibility by six years.

Some industry executives have said that the changes could finally make the finances work for projects including gas-fired power plants fitted with carbon capture equipment.

“We were really excited to see that all of our tax-related priorities were included,” said Madelyn Morrison, a spokeswoman for the Carbon Capture Coalition, a group that includes utilities, coal producers, oil companies and other industries, as well as some environmental groups and unions. Exxon is not a member of the coalition.

Still, Morrison said her members were seeking further changes in the Senate, including removing a requirement that power plants capture at least 75 percent of their emissions to qualify for the credit. She added that Sen. Joe Manchin, the West Virginia Democrat who has been the central roadblock to passing Biden’s climate agenda, “is someone we’re hoping to deploy on this specific provision.”

At the November 9 meeting, Oswald, the Exxon lobbyist, also indicated that he was seeking an even larger expansion of the tax credit as the bill progresses, along with other changes.

“I’d say they made a really strong first step at facilitating these things to start to grow, and then there’ll be a lot of horse trading here for the rest of the year to see where” the legislation goes, he said. “There’s still a lot of work to do.”

Asked about Oswald’s comments, Todd Spitler, an Exxon spokesman, said “We are encouraged by the progress we are seeing to enhance 45Q,” as the tax credit is known, “and we continue to discuss which policy and regulatory enhancements are needed to see carbon capture and storage develop at the scope we are considering.”

Carbon capture and storage, together with newer technologies that would remove carbon dioxide directly from the atmosphere, have emerged as an important but controversial climate fix in recent years. The technology has been pushed by fossil fuel companies for decades but has remained prohibitively expensive. More recently, it has received broader support from some academics and environmental advocates, as reports by the United Nations climate convention and others have suggested carbon removal may prove critical to hitting the Paris Agreement goals.

Many of those supporters say the changes to the tax credit by the House could finally position the technologies to take off. The credit currently provides companies with $50 per metric ton of carbon dioxide captured if the gas is stored underground, and $35 when it is turned into products or sent into depleted oil fields to boost production, as happens with nearly all the carbon dioxide captured in the United States today.

The legislation passed by the House would increase those values to up to $85 per metric ton for storage and up to $60 per metric ton when carbon dioxide is used for oil production or to make products like fuels. It would also provide up to $180 per metric ton for companies that remove carbon dioxide from the air, or up to $130 per metric ton if that carbon dioxide is used to pump oil or make other products. The increases could be “transformative,” said Rory Jacobson, deputy director of policy at Carbon180, a nonprofit that promotes carbon removal. 

Energy companies say injecting the gas for oil production, which they have done for decades, can also store carbon dioxide underground permanently, effectively producing lower-carbon oil, though there have been accidents that released some carbon dioxide back into the air.

For Industry, Potentially Billions Per Year

Some environmental advocates worry that the changes in the tax credit could extend the life of coal power plants, which could delay their planned closings for years in the hope that the higher credit values could make carbon capture retrofits financially viable. The advocates worry that much of the money will serve as a subsidy to use carbon dioxide to produce oil, and say the money would be better directed toward other solutions, like expanding renewable energy or battery storage.

“There’s only so much federal support to go around,” said John Noël, a senior climate campaigner at Greenpeace USA. “Pretty much anything that’s going into carbon capture is getting taken from a proven climate solution.”

The Congressional Budget Office estimated that the changes in the House bill would cost $2.1 billion through 2031. But the true figure could be significantly higher, according to an analysis by Inside Climate News, and would likely rise even higher in the 2030s if the technology proves viable, since projects can take many years to plan and build.

The Carbon Capture Coalition, for example, said the legislation could enable 210-250 million metric tons in annual emissions reductions by 2035, which could translate into billions per year in tax credits.

Exxon has proposed building a carbon capture “hub” in Houston that would link together the region’s major polluters and capture up to 50 million tons of carbon dioxide annually within a decade, potentially making the various companies involved eligible to receive more than $4 billion per year.

A single carbon removal plant planned by Occidental Petroleum in Texas, which would use the carbon dioxide to pump oil from underground or to produce low-carbon fuels, could be eligible for more than $100 million in credits per year if it meets that company’s targets.

An Occidental spokeswoman declined to comment.

Noël, who has been tracking the tax credit for years, said it is hard to say whether companies will actually be able to deliver on their promises, even with a higher credit value, and he noted that many previous efforts have failed. Still, he added, “The fact that all the industry players got what they requested means that it is a big deal.”

An Expensive Endeavor

Exxon has long boasted that it has captured more carbon dioxide than any other company, the vast majority of which has come at a gas processing plant in Wyoming, where it primarily sells the gas to oil drillers. At the November meeting of state regulators, Oswald said the technology would be critical to meeting climate targets, but added that it could not reach the scale it needs to without government investment.

“This is what I spend most of my life going back and forth to Washington D.C. talking to policymakers about,” he said.

At the meeting, Oswald, whose title is vice president of strategy and advocacy for Exxon’s new “Low Carbon Solutions” business, described the company’s proposal for the Houston carbon capture hub. His slideshow listed 10 other companies working on the project, including Chevron, Marathon Petroleum, Dow and the electric utilities NRG and Calpine. And Oswald said that if work begins now, the hub could capture 50 million tons of carbon dioxide per year by 2030 and 100 million by 2040, tying together some of the area’s heavy polluters in a network of carbon dioxide pipelines. Last month, when the Interior Department auctioned offshore leases for oil and gas in the Gulf of Mexico, Exxon placed a bid on an area in shallow waters that some experts speculated could be intended to store carbon dioxide underground, rather than produce oil.

A Calpine executive told the Washington Examiner last month that the higher credit values in the House bill could make the company’s plans to retrofit some natural gas plants with carbon capture equipment economically viable. The company did not return requests for comment for this article.

But Oswald made clear that the Houston hub could not happen without tens of billions of dollars in government support. He said Exxon was seeking to raise the tax credit value to “more like $100 per ton,” adding, “We’re spending a lot of time talking to lawmakers about that.”

He also listed investments in pipeline infrastructure, regulatory changes and addressing liability for underground injection as key hurdles. The slideshow said Exxon needed a $10 billion federal grant for the Houston project.

Oswald said the infrastructure bill had already addressed some of these needs, including grants for carbon capture hubs, and the climate and social policy bill was poised to help with the tax credit. In addition to increasing the value of the credit, Oswald’s slideshow said the Houston project needed the credit to last for 30 years, rather than the current 12, and the elimination of a deadline for companies to begin construction in order to be eligible. The legislation passed by the House extended the deadline from January 1, 2026 to January 1, 2032, but did not eliminate it.

“It’s an expensive endeavor, and we all are going to pay for it,” he said, “either as taxpayers or as consumers.”

A Boon for Direct Air Capture?

Fossil fuel executives are not the only ones celebrating the changes to the tax credit. Some policy experts say that the provisions for removing carbon dioxide from the air could play an important role in developing a critical technology.

Most scientific modeling for limiting warming to 1.5 degrees Celsius (2.7 degrees Fahrenheit) shows the need to remove tremendous amounts of carbon dioxide from the air decades from now, either with new technologies, natural processes like planting trees or both.

The use of technologies, known as direct air capture, might have advantages, including  requiring much less land than planting forests, which would need to compete with other uses for acreage like agriculture. While the technologies work—there are a few small plants in operation—they currently face enormously high costs and require huge amounts of energy that would have to be supplied with renewable power in order to provide climate benefits.

Jacobson, of Carbon180, said the higher credit value in the Build Back Better bill “gets us a lot closer to what would be a cost effective removal, compared to things like forests or agriculture.”

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He also pointed to other measures, including incentives for companies to pay prevailing wages and to have apprenticeship programs, as important for making sure carbon removal and carbon capture could provide good jobs to people who might lose work in fossil fuel sectors. “This is what actually facilitates a just transition through carbon removal,” he said.

The fact that carbon removal has been paired with more conventional carbon capture and storage, or CCS, in the tax credit and other policies has made it more difficult for his group to promote the technology, he said.

“For a long time, folks have been told that CCS will clean up air quality, will reduce emissions, will be widely deployed, and we’ve continued to increase the 45Q tax credit dollar sign for all of those technologies, and communities haven’t seen much in terms of actual on the ground projects,” he said. “And I think the worry is that direct air capture will be similar.”