IRA-Based Carbon Capture Needs Better Strategies

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The Inflation Reduction Act and Federal Funds tax credit reforms are a significant change to the economics of carbon capture and sequestration projects in the United States.

Yet many questions remain about how to navigate permit approvals to set up CCS projects and fully realize the fiscal and climate benefits.

The IRA’s aim to rapidly advance CCS should be tempered by careful consideration of environmental and legal issues, including how to license carbon dioxide sequestration sinks, obtain mining rights interstitial space and build CO2 pipelines.

Developers looking to leverage the IRA’s momentum for CCS should take a strategic approach to project approvals and proactively engage with the agencies shaping this space.

Well requests

Most CCS developers interested in increased IRA tax credits are seeking approvals to store CO2 in deep geological sequestration wells or Class VI wells. These are regulated by the Environmental Protection Agency under the Safe Drinking Water Act.

Although established in 2010, the Class VI well program is still in its infancy. Only two wells were federally approved for injection, which took more than six years to be fully licensed. EPA approvals of state applications for Class VI program primacy could speed up the process, but have lagged expectations.

For example, North Dakota, one of the two primacy states, took less than a year to approve its first Class VI license. Until the EPA makes progress on the more than two dozen pending Class VI well applications or grants more primacy to states, uncertainty surrounding the program could hamper CCS development.

The bipartisan Infrastructure Investment and Jobs Act provided appropriations for EPA Class VI resources and assistance for state-delegated Class VI programs, but the IRA did not address class VI wells. In the absence of reforms or further guidance from the EPA, developers will likely focus on states with Class VI primacy or may consider storing CO2 in other wells, such as Class II wells. .

An expanded examination area is one of the distinct requirements of Class VI wells compared to other wells, which can present further challenges for developers regarding the appropriate pore space.

Porous space storage

Pressure points surrounding interstitial space storage – including issues related to geology, ownership and lease economics – were not considered in the IRA.

Project proponents are responsible for identifying the optimal porous space location for a project based on proximity to planned transmitters, existing and planned future capture and transmission infrastructure, size of that location considering anticipated storage needs, and the number and nature of landowners with an interest in a location.

Developers should also consider whether legal ownership of the pore space is clear in the state where the well would be located, and the potential for conflict between the rights of surface and mining interest owners, including tax credits or expected carbon.

Indeed, it is important to resolve these issues before submitting a Class VI application.

Pipelines

A viable CO2 pipeline network will also be crucial to support large scale adoption of CCS, and the IRA is mum on the matter. Currently, less than 5,000 miles of pipelines are dedicated to transporting CO2, and their reach is limited, moving CO2 from discrete natural or industrial sources to mature oilfields for enhanced oil recovery.

Some project developers are investigating how to deploy these existing systems for CCS purposes while others are considering conversions of other types of existing pipelines to transport CO2.

Developing a sufficiently sized interstate CO2 pipeline network for CCS requires regulatory certainty. First and foremost are location issues and whether federal or state governments will be delegated to oversee it. States currently control siting decisions.

There is no federal eminent domain, as the Federal Energy Regulatory Commission has already declined jurisdiction over CO2 pipelines under the Natural Gas Act.

Some assume that the Surface Transportation Board has jurisdiction under a law that requires pipelines to be common carriers. Since the STB has yet to assert its jurisdiction, developers are unsure how it will approach projects built with the support of “pillar” shippers using long-term contractual commitments.

The federal government has put in place regulations on the safety of CO2 pipelines, and stricter regulations may be deemed essential. Without additional guidance, however, proponents will need to continue to incorporate regulatory risk from CO2 pipelines into their planning scenarios.

Staff and funding

Beyond sequestration wells and pipelines, CCS projects funded by federal grants or otherwise triggering major federal action will be subject to environmental reviews under the National Environmental Policy Act.

Although Congress has the power to exempt NEPA projects, it has chosen not to exempt CCS projects from such scrutiny.

Instead, the IRA sought to address one of the reasons for the delay – staff shortages and resource constraints in federal agencies – through appropriations to fund “more efficient, accurate and timely planning, authorization and approval processes”.

These funds will no doubt meet certain constraints, but project developers should always anticipate long environmental review periods and the potential for protracted litigation, like any other project.

Going forward, while the ERI clearly amplifies federal support for CCS, the federal review and approval process will likely take as long as other large-scale industrial projects.

While agency reforms to streamline the process are possible, CCS developers keen to move projects forward should consider lessons learned from permitting issues for other types of energy infrastructure and focus on engaging early and meaningful with regulators.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Brittany Bolen is a Senior Policy Advisor within Sidley Austin’s Environmental and Government Strategy Practices, advising industry clients on complex regulatory and policy issues. As the former director of the US Environmental Protection Agency’s Office of Policy, she oversaw all aspects of the agency’s policy and regulatory development.

Emilie Mallen is a partner in the energy and infrastructure practices of Sidley Austin, advising gas, oil and pipeline clients on regulatory and transaction matters. She helps businesses comply with energy and environmental laws, including the Natural Gas Act, Natural Gas Policy Act, Interstate Commerce Act, and National Environmental Policy Act.

Mark Rose is a partner in the M&A, Private Equity and Energy practices of Sidley Austin. As an energy transactional lawyer, he advises a wide range of investors on all transactions and investments in the energy sector, involving oil and gas (upstream and midstream ) and renewable energies.

Peter Whitfield is a partner in the environmental practice of Sidley Austin. He advises clients in the energy industry on regulatory matters and litigation under the Clean Air Act, National Environmental Policy Act, Endangered Species Act, National Historic Preservation Act, Administrative Procedure Act , the Renewable Fuel Standard and other federal and state laws.

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