Firm Addresses Aggregation Under Carbon Capture Credit Regs

November 30, 2020

The Honorable David J. Kautter
Assistant Secretary for Tax Policy
1500 Pennsylvania Ave., NW
3120 MT
Washington, DC 20220

Proposed Regulations Section 45Q Tax Credit for Carbon Capture and Sequestration Notice of Proposed Rule Making (REG-112339-19)

Dear Assistant Secretary Kautter:

We appreciate the work that the Treasury Department and Internal Revenue Service (the “IRS”) are doing to finalize the regulations for the Section 45Q tax credit for carbon capture and sequestration. We are writing to emphasize the importance that those final regulations adopt a single project rule for purposes of meeting the minimum annual threshold amount of qualified carbon oxide that is captured at a qualified facility under Section 45Q(d)(2) (the “Annual Minimum Threshold”). Providing such an election will be critically important to achieving the policy goals supporting the Section 45Q tax credit for a number of emission sources, such as natural gas processing facilities.

Section 45Q(d) provides that the term "qualified facility" means any industrial facility or direct air capture facility the construction of which begins before January 1, 2024, and which captures —

Section 45Q(d)(2).

Aggregation under Single Project

While the term “qualified facility” is singular, the IRS has recognized that multiple qualified facilities or industrial emission sources, and multiple units of carbon capture equipment, can be operated as a single project and treated as a single qualified facility. In Section 8.01 of Notice 2020-12, the guidance provides:

[M]ultiple qualified facilities or units of carbon capture equipment that are operated as part of a single project (along with any components of property that serve some or all such qualified facilities or units of carbon capture equipment) may be treated as a single qualified facility or unit of carbon capture equipment. Whether multiple qualified facilities or units of carbon capture equipment are operated as part of a single project will depend on the relevant facts and circumstances. (emphasis added)

The factors indicating that multiple qualified facilities, and multiple units of carbon capture equipment, are operated as part of a single project for beginning of construction purposes include, but are not limited to:

These same factors should be used for determining whether multiple industrial emission sources or qualified facilities, and multiple units of carbon capture equipment, are operated as part of a single project for purposes of satisfying the Minimum Annual Threshold. It is well within the purview of Treasury and the IRS to define a “qualified industrial facility” as inclusive of multiple emission sources that are part of a single project. If multiple sources of emissions and the associated carbon capture equipment can be treated as a single qualified facility for purposes of beginning of construction, the same rule should apply for purposes of satisfying the Minimum Annual Threshold. Consistent application of the rule provides clarity and eliminates ambiguity in how the rules should be applied.

There are numerous examples of industrial facilities to which the single project rule could apply. For example, a large industrial complex such as a chemical or petroleum refinery may have multiple emission sources within the complex based upon the industrial processes being employed. Another example involves natural gas processing facilities, which separate the natural gas from carbon dioxide and other contaminants. In many cases, those natural gas processing facilities currently vent carbon dioxide into the atmosphere. The natural gas processing facilities may be within the same geographic area, may be interconnected with gathering pipelines, and share other attributes of a single project as outlined above. Such facilities that satisfy the requirements for a single project should be treated as a single industrial facility for purposes of the Minimum Annual Threshold requirements. Such treatment is consistent with Congressional intent to achieve large scale carbon capture.

Aggregation under a Facility with Multiple Sites

A second situation involves multiple emission sources that are connected to a single carbon capture and processing facility. Specifically, the definition of carbon capture equipment currently includes components that might be utilized as part of preparing and processing carbon dioxide from what might be treated as multiple emission sources or facilities. Where these “multiple facilities” and the carbon capture equipment they share are owned by the same taxpayer, we believe it would be more appropriate to treat these multiple emission sources and the associated carbon capture equipment as a single qualified facility.

To illustrate, a taxpayer owns two natural gas processing plants located within a mile of one another that process raw gas and are currently each venting a waste stream that includes 50,000 metric tons of carbon oxide a year. The taxpayer installs equipment to capture and redirect that waste stream to a single newly built, centralized carbon dioxide processing plant located between the two natural gas processing plants. The centralized carbon dioxide processing plant further separates, purifies and dries the carbon dioxide resulting in a single, clean carbon dioxide stream of 100,000 metric tons a year that is sequestered in secure geological storage. It is clear in this example that each of the two natural gas processing plants and the new carbon dioxide processing plant contain carbon capture equipment. Each of the two natural gas processing plants are an industrial source of emissions. When the centralized carbon dioxide processing plant is connected to those two facilities, the two facilities should be treated as a single project with the centralized carbon dioxide processing plant. The final regulations should clarify that the two natural gas processing facilities facilities and the central carbon dioxide processing facility are a single project that qualifies as a single qualified facility where it captures 100,000 metric tons of carbon dioxide a year from the multiple sources.

Summary

We urge Treasury and the IRS to extend the single project rule to the Minimum Annual Threshold requirements in the final regulations. Application of the rule will help to achieve consistency in application of the rules and the important policy objectives underlying the tax credit.

In addition, we believe that under more limited circumstances allowance should be made for the concept that a single qualified facility can capture and collect carbon dioxide from multiple sites. Specifically, this would help avoid problems that would otherwise arise from carbon capture equipment being installed at a plant that does not by itself constitute a qualified facility and which carbon capture equipment is used as part of the carbon capture process from multiple facilities.

We have attached to this letter suggested language to be included in the regulations to address these issues.

We would be happy to discuss with you or provide access to industry experts if it would be helpful.

Respectfully submitted,

David S. Lowman, Jr.
Hunton Andrews Kurth LLP
Washington, DC

cc:
Krishna P. Vallabhaneni
Tax Legislative Counsel
1500 Pennsylvania Ave. NW
Washington, DC 20220

Hannah Hawkins
Deputy Tax Legislative Counsel
1500 Pennsylvania Ave. NW
1205-A MT
Washington, DC 20220

Holly Porter
Associate Chief Counsel
Passthroughs and Special Industries (CC:PSI)
1111 Constitution Ave., NW
5300 IR
Washington, DC 20224

Christopher T. Kelley
Special Counsel to the Associate Chief Counsel
Passthroughs and Special Industries (CC:PSI)
1111 Constitution Ave., NW
5300 IR
Washington, DC 20224

David A. Selig
Senior Counsel
Passthroughs and Special Industries, Branch 6 (CC:PSI:B06)
1111 Constitution Ave., NW
5315 IR
Washington, DC 20224

Maggie Stehn
Attorney
Passthroughs and Special Industries, Branch 6 (CC:PSI:B06)
1111 Constitution Ave., NW
5110 IR

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Proposed Language for Aggregation of Emission Sources or Facilities to Meet the Minimum Annual Threshold Requirements

Single Project

Insert a new section at Regulation section 1.45Q-2(g) defining “Qualified Facility”.

(g)(_). Single Project Qualified Facility. A qualified facility shall include multiple facilities or units of carbon capture equipment that are operated as part of a single project. Where multiple facilities or units of carbon capture equipment are operated as part of a single project, the emission and capture requirements in (g)(1) will be met where those requirements are satisfied by a single project that is a qualified facility. Whether multiple facilities or units of carbon capture equipment are operated as part of a single project will depend on the relevant facts and circumstances.

(_) Factors for Single Project Determination. The factors indicating that multiple qualified facilities, and multiple units of carbon capture equipment, are operated as part of a single project include, but are not limited to:

(_) Timing of Single Project Determination. The determination of whether multiple facilities or units of carbon capture equipment are operated as part of a single project and are therefore treated as a single qualified facility or unit of carbon capture equipment for purposes of (g) must be determined in the calendar year during which the last of the multiple qualified facilities or units of carbon capture equipment is placed in service.

(_) Example 1. A taxpayer is developing Project E that will consist of 5 natural gas processing facilities that separate natural gas from carbon oxides and other contaminants. The taxpayer will install carbon capture equipment on each of the 5 facilities to capture the carbon oxide. Each of the 5 facilities will capture approximately 50,000 metric tons of carbon oxide per year. The carbon capture equipment at the 5 facilities will be owned by a single entity. The carbon oxide captured at the 5 facilities will be collected and delivered to a transportation pipeline through a single system of gathering lines and disposed of for secure geological storage. The carbon oxide captured at the 5 facilities will total approximately 250,000 metric tons per year and will satisfy the minimum threshold of 100,000 metric tons per year required for these types of facilities. Project E will be treated as a single project and a single qualified facility under section (g)(_).

Example 2. A taxpayer is developing Project F that will consist of a natural gas processing facility that separates natural gas from carbon oxides and other contaminants. The taxpayer will install carbon capture equipment at the facility to capture the carbon oxide. Project E will enter into contracts with 5 natural gas production companies to receive and process their raw gas. The raw gas will be collected from each of the 5 natural gas production companies and connected to the processing facility by a system of collection pipelines. The raw gas from each of the 5 production companies will contain approximately 50,000 metric tons of carbon oxide. The processing facility will capture approximately 250,000 metric tons of carbon oxide per year. The carbon capture equipment at the processing facility and the gathering pipelines will be owned by a single entity. The carbon oxide captured at the facility will be collected and delivered to a transportation pipeline for disposal in secure geological storage. The carbon oxide collected from the 5 production companies and captured at the facility will total approximately 250,000 metric tons per year and will satisfy the minimum threshold of 100,000 metric tons per year required for these types of facilities. Project F will be treated as a single project and a single qualified facility under section (g)(_).

Example 3. A taxpayer is developing Project G to capture and collect the carbon oxide waste stream from two existing natural gas processing plants. Taxpayer owns the two natural gas processing plants, which are located within a mile of one another and process raw gas. Each natural gas processing facility currently is venting a waste stream that includes 50,000 metric tons of carbon oxide a year. The taxpayer installs equipment to capture and redirect that waste stream to a single newly built, centralized carbon dioxide processing plant located between the two natural gas processing plants. The centralized carbon dioxide processing plant further separates, purifies and dries the carbon dioxide resulting in a single, clean carbon dioxide stream of 100,000 metric tons a year that is delivered to a transportation pipeline for disposal in secure geological storage. The two natural gas processing facilities and the central carbon oxide processing facility are owned by the same taxpayer and located in the same general geographic location. Project G will be treated as a single project and a single qualified facility under section (g)(_).