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New Policy Incentives for Carbon Intensity Cuts: Part 1, USA

How Your Company Can Assess Section 45Q & 45V Tax Credit Opportunities

Life cycle metrics, LCAs needed for billions of dollars in Inflation Reduction Act tax credits

Can your company benefit from Sections 45Q or 45V of the US Inflation Reduction Act (IRA) or Canadian Clean Fuel Regulation (CFR) programs? In this two-part series, we’ll provide a quick overview of what to expect in the two application processes; we’ll focus first on the US side, including a free tool to help determine if participation in Section 45 of the IRA is worthwhile for your enterprise.

Speaking at a recent EarthShift Global webinar, our founder and CEO Lise Laurin explained that the relevant sections of the wide-ranging IRA are largely focused on greenhouse gas (GHG) reduction and “getting us from where we are today to a lower-carbon future.” The act is part of a broader Federal initiative to drive 2030 economy wide GHG emissions to 40% below 2005 levels.

It includes a range of investments in alternative fuels, clean electricity production and storage, alternative vehicles, and home energy efficiency, but the most salient for many companies using fermentation, considering adding hydrogen production, or looking at air-capture of carbon dioxide will be Section 45Q, carbon sequestration and reuse, and Section 45V, production of hydrogen for industrial heat and transportation.

Both these sections (as well as several others in the IRA and the entire CFR) have a life cycle orientation and require applicants to use specific tools and methods to conduct a life cycle greenhouse gas assessment (LCA), which in many cases must be critically reviewed or audited. Thus, organizations considering these programs should do some up-front evaluation of their existing internal resources and confirm that the potential benefits (including over $30 billion in anticipated 45Q tax credits for the 2022-2032 period justify the effort involved.

Your Team, Data, and Process

“It’s important to understand your team’s technical capabilities and limitations,” said Lise. “Identify data collection requirements early on in the process, and also take a look at the required tools to Identify any data and modeling gaps.” She added that having a flexible process will be important, as products sold into different jurisdictions may be required to use different modeling tools, data, and assumptions.

Section 45Q, which offers a per-ton tax credit for CO2 stored underground or put to beneficial use, has already funded a number of projects as it was in place in prior to the IRA; the newer legislation updated its tax credit rates and qualification standards. The Department of Energy’s National Energy Technology Laboratory (NETL) offers guidance and a software toolkit for the application process.

As a preliminary step, companies can use EarthShift Global’s free Section 45Q calculator tool to estimate their potential tax credits. “It provides dropdowns for inputs, electricity, etc., and raw material transportation, and shows how many dollars you will potentially get, to give a rough idea of whether it makes sense for you to go after the tax credits,” noted Lise. “It doesn’t cover all CO2 production scenarios and makes some broad assumptions so shouldn’t be used for your actual application.”

Emerging Clean Hydrogen Incentives

Section 45V focuses on clean hydrogen technologies with the potential to cut emissions in challenging sectors like heavy industry and long-haul transportation. Its implementation is less advanced than 45Q; the Treasury Department recently issued draft rules, and requested public comment to by February 26, 2024.

The proposed Section 45V rules cover multiple hydrogen sources (including natural gas, landfill gas, coal, and biomass) and production techniques, several of which also involve carbon capture and sequestration. As drafted, electrolysis-based production would be required to use electricity conforming to several requirements to ensure that grid emissions do not increase and offset gains elsewhere.

In order to calculate the carbon emissions, applicants must use Argonne National Laboratory’s 45VH2–GREET model, which is publicly available. The result must be less than 4 kg CO2e/kg of hydrogen, which is about 25% of the impact of steam reforming of natural gas and about twice that of production as a byproduct of petroleum processing. The lower the emissions, the higher the monetary credit. While the LCA does not need to be reviewed (the tool is actually quite simple to use), the actual production data must be audited.

If the pathway has not yet been included in the tool, the applicant must apply for a provisional rate. A rigorous LCA has a better chance of having the provisional rate approved, which is where a company like EarthShift Global can help.

Detailed information on Section 45V can be found in a Department of Energy white paper and relevant software and data from the Argonne National Laboratory’s GREET suite of LCA models is available.

The webinar also provided a wealth of more-detailed data on the IRA initiatives; a recording can be accessed here: Brown Bag Webinar recordings.

Interested in learning more?  Click here to read Part 2: a look at Canada’s Clean Fuel Regulation with EarthShift Global director of research Nathan Ayer.