Senator Cramer’s proposed Bill to increase the value of the 45Q carbon credits for sequestration and use as well as remove the annual cap could be a game-changer in many ways. The threshold removal is necessary regardless of the credit value. In our view, the cap creates a potential competitive disadvantage for smaller companies competing with larger ones, especially in the chemical space. Should the Bill increase the tax credit enough to drive real investment in abatement but not remove the threshold we would expect to see litigation from smaller disadvantaged companies. The chart below shows the current expectations for 45Q. To date, the only real investment activity we are seeing is around sequestering CO2 from ethanol production in the US. This is because the CO2 stream is easy to separate in a fermentation process and because some of the ethanol can benefit from the much higher LCFS credit if the fuel is sold into California.
Source: McCoy
There are projects in the planning stage around larger sequestration initiatives, but 45Q is generally an inadequate incentive at its expected 2026 plateau, and we are unlikely to see major investment unless the cost of capture and compression comes down – which it is doing incrementally, or if customers are willing to pay more for a low carbon product. This is a subject that we have covered in detail in our weekly ESG and Climate reports. At the moment we believe that we will likely see LNG take the lead in CCS in the US, especially where the importing county has a strong carbon focus. The other possibility would be greenfield investment in the US to create blue hydrogen or blue ammonia aimed at the export market and targeting countries with higher credits for low carbon fuels – these investments, if they come would not lower the CO2 footprint in the US.
If the credit is increased sufficiently we could see a step-change in investment in the US and billions of dollars of investment aimed at capturing and sequestering hundreds of millions of tons of CO2, with much of it focused in the US Gulf, where the carbon footprint is high and the sequestration costs relatively low. A higher credit could also boost other carbon use investments.
