Easing the Path Toward Carbon Sequestration: Revenue Ruling 2021-13

On July 1, 2021, the IRS released Revenue Ruling 2021-13 (Rev. Rul. 2021-13). That ruling (i) provided an example of the functionality-based definition of carbon capture equipment found in final Section 45Q Treasury Regulations; (ii) held that an investor must own at least one component (and is not necessarily required to own all components) of carbon capture equipment in the “single process train” of carbon capture equipment at a facility in order to claim a Section 45Q tax credit; (iii) clarified that when one or more components of a single process train are placed into service prior to the single process train being placed into a state of readiness and availability for the capture, processing and preparation of carbon oxide for transport for disposal, injection or utilization, the applicable placed-in-service date is that of the single process train and not the component; and (iv) ruled that a different placed-in-service date applies for tax depreciation purposes as compared to Section 45Q tax credit purposes. Continue Reading

President Biden’s Plan for the Carbon Sequestration Tax Credit

Investment in Section 45Q tax partnerships may soon increase rapidly as the Biden administration aims to increase the Section 45Q tax incentive for carbon capture, utilization and sequestration.[1] Specifically, President Biden’s American Jobs Plan includes proposals to extend the Section 45Q tax credit to make it “easier to use for hard-to-decarbonize industrial applications, direct air capture, and retrofits of existing power plants.”[2]

Moreover, in its General Explanations for 2022, the U.S. Treasury Department revealed three major proposals for enhancing the Section 45Q tax credit.[3] First, the proposals would extend the “commence construction” date for qualified facilities by five years, from Jan. 1, 2026, to Jan. 1, 2031. [4] This change would give developers and investors more time to plan, pool the necessary resources and wait for carbon capture to become more cost-efficient. Second, the Biden administration would provide an additional $35 credit for each ton of qualified carbon oxide captured from “hard-to-abate industrial carbon oxide capture sectors,” such as cement production, steelmaking, hydrogen production and petroleum refining, and disposed of in secure geological storage.[5] That would bring the total to $85 per ton for these projects in 2026 (adjusting, in part, for inflation afterward).[6] Third, the Biden administration would provide another additional $70 credit to DAC projects per ton of qualified carbon oxide disposed of in secure geological storage.[7] Thus, the total Section 45Q tax credit for DAC projects with geological storage would be $120 per ton in 2026 (adjusting, in part, for inflation afterward).[8] Continue Reading

Monetizing the Section 45Q Tax Credit: The Key to Carbon Sequestration

If there is to be rapid progress in limiting the increase of carbon dioxide (CO2) in the atmosphere, it will depend substantially on federal tax credits and state incentives for carbon capture and storage. For now, carbon capture and storage strategies are largely of three kinds: (1) biological removal (using photosynthesis to fix atmospheric CO2 in soils, grasses and trees), (2) direct air capture (DAC) (removing atmospheric CO2 and injecting it into geological formations), and (3) capture of CO2 before it is released. All three forms of capture may be the subject of a tax credit under Section 45Q of the U.S. Internal Revenue Code.

On July 1, 2021, the IRS released Revenue Ruling 2021-13 (Rev. Rul. 2021-13). In relevant part, that ruling held that an investor must own at least one component (and is not necessarily required to own all components) of carbon capture equipment in the “single process train” of carbon capture equipment at a facility in order to claim a Section 45Q tax credit. Continue Reading

Introducing Pillar and Post: Energy Law in the 21st Century

With this first posting, we inaugurate a blog called “Pillar and Post: Energy Law in the 21st Century.” Covering energy and environmental law, the blog will be your “catalog of record” for legal issues as law and policy careen back and forth under the influence of new ideas and enthusiasms.

For example, have new legal rules for subsurface trespass and pore space ownership benefitted the country? Cap and trade? Tax policy? Trends in risk allocation in transactions?  Eminent domain rules for energy infrastructure? Carbon storage regulation and incentives?  Carbon and methane offset markets? Enforcement actions and tort suits as substitutes for regulation? Use of environmental laws to block or delay projects? Broader interpretations of environmental laws to achieve policy initiatives? The push for a “greener” economy?

Building upon individual applications of law to circumstances, the posts may help readers over time to find answers. Each post will always represent the views of the individual author alone.  We hope they will be thought-provoking. We promise they will be short. After all, who has time for more? The next enthusiasm is already tugging at your sleeve.

No Takebacks: Consequences of Choosing the Path of Litigation

A Houston oil and gas consulting firm waived its right to compel arbitration in a long-standing dispute given its “persistent pursuit of litigation,” the Fifth Circuit held last month in Int’l Energy Ventures Mgmt. L.L.C. v. United Energy Grp., Ltd., 2021 WL 2177062 (5th Cir. May 28, 2021). International Energy Ventures Management (IEVM) first sued United Energy Group (UEG) in Texas state court in 2013 over alleged nonpayment for consulting services. The agreement governing these services contained an arbitration clause, which IEVM initially ignored — until it became clear that its litigation strategy was failing. At that point, three months into the case, IEVM moved to compel arbitration. Since then, the dispute has worked its way through state court, federal court, two arbitrations and back again. Last month, the Fifth Circuit said, “Enough.”

For nearly eight years, IEVM strategically ping-ponged between litigation and arbitration, prospecting for a more favorable forum. When the likelihood of proceeding in state court looked low, IEVM moved to compel arbitration; when the first arbitrator held that IEVM had waived its right to arbitration, it jumped back into pending litigation; when that pending litigation was resolved in favor of UEG, IEVM filed a second lawsuit in state court and simultaneously initiated a second arbitration. Continue Reading

Emerging Chemical Issues – Ethylene Oxide (Part 5 of 5): OIG, EPA and the Consequences of Premature Public Disclosures

U.S. EPA has recently come under fire from its quasi-independent auditor, the Office of the Inspector General (OIG), which has issued multiple reports accusing EPA of not moving with sufficient speed or transparency to increase regulations of sources of EtO. In these reports, OIG pressed the issue by publishing EPA draft work files, over EPA’s objection, which identified many facilities potentially contributing to increased community cancer risks. But publishing the draft screening results for these facilities is likely to have unintended consequences including complicating information gathering efforts, and increasing private litigation.

OIG’s April 15, 2021 Report

On April 15, 2021, the OIG issued a report accusing the Trump administration of delaying communications about cancer risk to communities near industrial EtO emissions. The gist of OIG’s criticism was that EPA had conducted some short-term monitoring of EtO emissions at the Sterigenics facility in Willowbrook, Illinois, as part of the 2014 NATA, but when the monitoring suggested that the facility’s EtO emissions were contributing to EtO concentrations significantly above the IRIS EtO URE, EPA did not immediately publish the monitoring results and engage in community outreach, but instead waited until the release of the 2014 NATA many months later to publicly disclose the EPA modeling of the Sterigenics sterilizer. Continue Reading

Emerging Chemical Issues – Ethylene Oxide (Part 4 of 5): Special Considerations Related to the Sterilization Industry

Commercial sterilization operations find themselves in a more unique and complex regulatory context than many other industrial sources of EtO. Unlike the chemical manufacturing industry, which can often make decisions about EtO usage based solely on the grounds of technical feasibility and costs, sterilizers may not be able to accept some methods of emission limitations, such as throughput limits (i.e., limits on how much EtO they can use in their processes in the first place), because sterilizers are also subject to independent regulations from the FDA, which actually require them to use EtO to sterilize certain products, and even can require certain amounts or concentrations of EtO to be used to ensure medical equipment is properly disinfected. This dynamic of potentially overlapping agency jurisdiction necessarily complicates EPA’s regulatory process for sterilization operations, since EPA not only has to account for dangers associated with EtO emissions, but also has to do so in a way that doesn’t infringe on FDA’s regulatory programs that protect the sterility of medical devices (thus protecting human health). COVID-19 introduced yet another reason to proceed with deliberate caution on any regulatory actions that limit sterilization operations in a way that could jeopardize the continuous availability of adequate medical supplies. Continue Reading

First-Ever Mandatory Cybersecurity Directive for Oil and Gas Pipelines Signals More Robust Regulations to Come

New cybersecurity requirements for oil and gas pipelines signal important changes to the regulatory landscape for midstream companies. A new security directive from the Transportation Security Administration (TSA), effective May 28, 2021, mandates immediate action and ongoing compliance protocols for certain energy companies. The security directive also raises many new questions that companies will need to consider in their response efforts and highlights the potential for increased regulation going forward. In particular, media reports indicate that the security directive is a precursor to additional regulations that will include financial penalties for companies that fail to address cybersecurity vulnerabilities.

The security directive is part of an increasingly urgent government effort to strengthen cybersecurity for critical industries in light of the recent Colonial Pipeline shutdown and other security incidents. On June 2, 2021, the White House issued a memorandum to corporate executives and business leaders stating that ransomware in particular is a “top priority” of the Biden administration. It states that “business executives should immediately convene their leadership teams to discuss the ransomware threat and review corporate security posture and business continuity plans to ensure [they] have the ability to continue or quickly restore operations.” In addition to the best practices listed in the June 2 memo, the security directive provides specific steps that oil and gas midstream companies will need to address. Continue Reading

Emerging Chemical Issues – Ethylene Oxide (Part 3 of 5): Challenges to the IRIS EtO URE

Today’s alert looks at the current status of challenges to the IRIS EtO URE and EPA’s related rulemaking proceedings.

Sterilizers have been one of the most widely publicized sources of EtO, and have taken the brunt of enforcement actions and plaintiffs’ lawsuits based on EtO exposures in the past couple years since publication of the 2014 NATA. But to date, formal regulatory challenges and litigation surrounding the validity of the IRIS EtO URE itself have focused on the chemical manufacturing industry.

The ACC was the first to attempt to formally challenge EPA’s use of the IRIS EtO URE. As soon at the 2014 NATA was published on Sept. 20, 2018, the ACC filed a Request for Correction under the Information Quality Act with EPA, requesting that EPA change its risk assessment for EtO based on subsequent studies, but to date EPA has not disposed of ACC’s request or revisited the IRIS EtO URE. Continue Reading

Emerging Chemical Issues – Ethylene Oxide (Part 2 of 5): A Patchwork of State Regulation

Federal law generally sets a floor, rather than a ceiling, when it comes to emission reduction regulations, and thus, when assessing a facility’s compliance and legal risks it is important to track state and local laws, regulations, and enforcement activities. This is particularly important for EtO, where several states have gotten ahead of EPA in setting state specific EtO risk thresholds and regulatory requirements.

As noted in our prior alert, public attention was drawn to EtO with the publication of the 2014 NATA in 2018, which identified many census tracts throughout the nation that merited further analysis for potential cancer risk associated with estimated EtO emissions. Because the existing federal NESHAP standards for industrial sources of EtO were all based on EtO unit risk estimates from before the 2016 IRIS EtO URE, and because EPA did not immediately propose to revise federal NESHAPs in light of the 2016 IRIS EtO URE and the 2014 NATA, many states have felt pressure to impose additional regulations on top of federal regulations. But in the absence of guidance from EPA on the meaning of the IRIS EtO URE and how to use it in the regulatory context (rather than in the preliminary risk screening context it was developed for), the result has been a complicated and contradictory patchwork of regulations that vary from state to state. Three basic approaches have emerged. Continue Reading