Incentivizing DAC deployment with the ESIC Act

Tax credits can help launch DAC projects beyond RD&D

by Lucia Simonelli, PhD, senior policy fellow and Rory Jacobson, policy consultant

Editor’s Note: This blog was updated on July 30, 2021 to reflect the formal introduction of the ESIC Act by both Senate and House leadership. As this bill is considered by legislators, we’ll continue to update this post.

ESIC Act, meet direct air capture

The bipartisan Energy Sector Innovation Credit (ESIC) Act of 2021 led by Senator Crapo, Senator Whitehouse, Representative Reed, and Representative Panetta is good news for direct air capture (DAC), a key technological carbon removal solution. DAC has the potential to reach gigaton capacity by 2050 but is currently orders of magnitude away. Only with robust, timely, and thoughtful policy action can we catalyze this technology to reach its potential in the coming decades.

One of the most significant barriers to scaling DAC is cost. While recent funding for DAC research, development, and demonstration (RD&D) is critically important, this investment must be met with ambitious deployment incentives. Developers are ready to break ground on new plants, but federal and state policies and market signals have been far too weak for many projects to move forward. The current 45Q tax credit alone is unable to sufficiently advance the deployment of DAC facilities in the necessary timeframe, and the nature of California’s Low Carbon Fuel Standard (LCFS) credits does not provide enough certainty for project financing, even when combined with 45Q.

Through the ESIC Act, DAC could receive a substantial financial incentive that would help address key gaps in the existing policy landscape. This bill creates investment and production tax credits to promote deployment across the clean energy portfolio, including energy generation and storage, carbon capture, and DAC. Utilizing a tiered structure based on market penetration — the amount of a good or service used compared to the total available market — within each category, nascent technologies are matched with a level of incentivization to facilitate the transition from technological development to commercial application. Through this investment tax credit (ITC), DAC projects are able to finance capital costs and reduce project finance risk.

ITCs have a proven track record of benefiting emerging technologies that have not yet reached economies of scale or reaped the benefits of learning by doing; the solar ITC in particular played a fundamental role in launching and sustaining a strong deployment trajectory. DAC’s inclusion in this bill is big, not only because of the need for deployment incentives but because it provides an example of how carbon removal can be woven into a broad range of policy initiatives.

Let’s dig into some details of the bill.

This bill enables DAC projects to initially qualify for a tax credit of 40% of capital costs — such as expenses for equipment or construction — in order to significantly offset the investment necessary to finance plants. This percentage will not ramp down until DAC leaves the Tier 1 category, i.e., when annual, domestic DAC capacity exceeds 0.75% of total US emissions for the same year. Despite being a moving target, especially as emissions decline, the Tier 1 status should be applicable for many years to come. (For context, 0.75% of 2019 emissions is about 39 million metric tons — higher than US DAC deployment goals for 2030.)

While in general the ITC cannot be paired with 45Q, an exception is made when the captured carbon is stored underground in geologic formations such as saline aquifers. This is important because geologic storage does not benefit from utilization markets where companies pay for the captured carbon, and it ensures permanent carbon removal — we’re going to need lots of permanent carbon removal. Stacking this ITC with 45Q and LCFS credits would constitute the most substantial policy incentive bundle to-date for DAC with geologic storage.

The bill requires eligible DAC facilities to capture a minimum of 5,000 metric tons per year — a huge improvement from other, higher thresholds and more in line with many of our recommendations. Incentivizing the deployment of facilities of varying sizes would create a more equitable and vibrant market by diversifying technologies, encouraging participation of small businesses and entrepreneurs, and ensuring that DAC can benefit from niche market applications. While eligibility constraints are common in tax incentives, removing them completely would spark even more innovation.

The ITC can be exchanged across a wide number of parties, including those that have ownership or financing interest in the project. This makes the credit easier to use for project finance purposes, and also invites larger partnerships among technology licensors, project financiers, and infrastructure developers.

While we have mainly explored the features related to DAC, there are many important provisions in this bill. We hope to see Energy Sector Innovation Credit (ESIC) Act of 2021 move quickly through Congress and be enacted into law

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