Carbon Capture, Utilization and Storage tax credits and tax equity project financing in the USA: an assessment under bilateral tax treaties and BEPS actions

Abstract

Abstract Carbon Capture, Utilization and Storage (CCUS) is a technology for capturing man-made CO2 emissions (carbon emissions) and either storing them, hopefully permanently, underground, generally in suitable saline formations or oil and gas fields, or utilizing them by, eg, converting them into commercially viable products. Because global energy demand and carbon emissions will continue to increase until 2050 by almost 50 per cent, CCUS projects (despite a current difficult business case per metric tonne stored or used), if deployed on a large scale, could help the world to limit global warming to 2.0°C, but preferably 1.5°C, as proposed by the Paris Agreement. For economic reasons, without government support, it will be difficult to have the required number and scale of CCUS projects to tackle global warming. The introduction section of this paper explains how, if we accept the urgency of the Paris Agreement’s thresholds, there is probably not sufficient time for introducing a global emissions trading scheme (ETS) or a global carbon tax, which are considered the two best approaches to reducing carbon emissions. The CCUS legal/regulatory/fiscal approach section analyses, first, the different legal/regulatory/fiscal approaches to CCUS taken by the US and the EU, secondly, the US federal tax credits available for CCUS projects as of May 2022, and thirdly, the powerful incentive mechanism created when the US CCUS tax credits work together with tax equity partnerships. The US CCUS tax credits and tax treaties section, after some initial literature review of tax incentives and how the US CCUS tax credits can be framed within the panoply of tax incentives, focuses on the first research question, ie, on understanding how the US CCUS tax credits interact in a tax treaty environment. The US CCUS tax credits and the BEPS project section plays a similar role in relation to whether the US CCUS tax credits align well with the requirements of the OECD/G20's Base Erosion and Profit Shifting (BEPS) Project, which is aimed at reducing tax avoidance and is more recent in its development. The last section concludes.