Carbon Capture and Release Oversight Failures in the Section 45Q Tax Credit for Enhanced Oil Recovery Spring 2018 Acknowledgements This report was researched and written by John Noël, Clean Water Action/Clean Water Fund. The author would like to thank the following for their time and effort in reviewing this report: Andrew Grinberg, Michael Kelly and Lynn Thorp. For more information please contact: John Noël, [email protected] Clean Water Action — www.CleanWaterAction.org Clean Water Action is a national 501(c)(4) environmental organization with nearly one million members nationwide. Since our founding during the campaign to pass the landmark Clean Water Act in 1972, Clean Water Action has worked to win strong health and environmental protections by bringing issue expertise, solution-oriented thinking and people power to the table. Clean Water Fund — www.CleanWaterFund.org Clean Water Fund is a national 501(c)(3) research and education organization that has been promoting the public interest since 1978. Clean Water Fund supports protection of natural resources, with an emphasis on water quality and quantity issues. Clean Water Fund’s organizing has empowered citizen leaders, organizations and coalitions to improve conditions in hundreds of communities, and to strengthen policies at all levels of government. Clean Water Action requests that you provide appropriate credit on all reprinted materials. Executive Summary After decades of scientific analysis and international ronmental Protection Agency (EPA) that the carbon negotiations, reducing carbon emissions is now a injected remains safely underground. Research global imperative. U.S. Congress, for its part, recog- into the tax credit reveals an alarming lack of over- nized the potential for carbon capture and storage sight. EPA has no record of the vast majority of CO2 (CCS) technology to reduce emissions and provided claimed under the credit. It appears some compa- a tax incentive for companies that capture carbon nies that benefited from the tax credit ignored moni- dioxide (CO2) from various industrial practices and toring and reporting requirements and continued store it underground. to access the credit to their financial advantage. The new tax policy, codified under Section 45Q This report exposes these oversight failures and of the Internal Revenue Code, offered a tax credit challenges the assertion that federal subsidies for per ton of carbon captured and sold to compa- carbon used in enhanced oil recovery could ever be nies to inject underground for permanent stor- considered an effective climate mitigation policy. age or for use in enhanced oil recovery (EOR). The Among the findings: intent was to jump start a nascent technology that • 59,767,924: metric tons of CO2 claimed to IRS could eventually transform into a globally scalable as captured for tax credit as of May 14, 2018. option to reduce emissions. In January 2018, Con- • 3 million: metric tons of CO2 reported to EPA gress extended the credit, broadened the qualifying for sequestration verification as of August 5, industries and tripled the amount offered for CO2 2017. captured and sold to EOR companies.1 • $597 million up to $1.3 billion: value of Injecting captured carbon underground to produce claimed credits. more oil is promoted as a climate mitigation policy. • 85%–90%: percentage of projects under the Purportedly, over time oil fields could sequester new tax credit that will be used to extract (permanently store CO2 in geologic formations) large oil according to the International Energy amounts of carbon and at the same time help bring Agency (IEA). Only 10%–15% would result in down CCS technology costs. A popular notion is that permanent sequestration of CO . the oil extracted and burned is less of a concern, as 2 long as some carbon is permanently sequestered • 375 million barrels: increase in oil to help offset emissions elsewhere.2 The oil indus- production annually by 2030 as a result of try benefits from the enthusiasm for CCS because carbon capture technology and infrastructure deployment. its growth strategy leans heavily on injecting CO2 to increase production. The industry plans to use CO2- The discrepancy between the IRS and EPA data EOR to unlock billions of barrels of oil trapped in vast suggests that only a small portion of the required residual oil zones. A consistent supply of cheap CO2 reporting to EPA to ensure that the carbon is veri- improves the extraction economics for resources fiably and permanently stored underground is that would otherwise likely remain in the ground. occurring. In order to qualify for the tax credit under Section Verification that CO2 is actually sequestered is criti- 45Q, a company must verify and report to the Envi- cal to demonstrating the effectiveness of CCS as an The oil industry’s growth strategy leans heavily on injecting CO2 to improve production. 3 emissions reduction technology. Ensuring secure resources necessary to hold bad actors account- geological storage is a large part of the biparti- able, and restore public trust in the process of geo- san support for the tax credit. Proponents want logic sequestration. The relatively small universe to incentivize sequestration, not merely injection of companies that capture carbon combined with for oil extraction. The tax policy is designed so that the limited number of companies that injected car- EOR operations have to confirm by monitoring, bon to enhance oil recovery from 2011–2018 should reporting and verifying that these projects provide make it easy for regulators to identify those who are the intended carbon storage benefit. This did not skirting the rules.3 happen. Until the tax credit oversight is reformed, Congress Ignoring compliance provided industry an unearned should: advantage in the marketplace. If it is not remedied • Enact a moratorium on all Section 45Q tax the increase in tax credits will only exacerbate over- credits for CO used in enhanced oil recovery. sight issues and undermine the competiveness of 2 zero carbon alternatives. Instead, a small group of • Ensure projects out of compliance since oil companies are attempting to further weaken 2011 submit a Monitoring Reporting and the tax credit requirements. Legislation supported Verification plan to EPA or halt injection. by Exxon Mobil and Denbury Resources sought to • The Senate Finance and Environment and change what is considered secure geological stor- Public Works Committees should hold age. So far these attempts have not been success- hearings on past and future oversight of 45Q. ful, but there have been ongoing efforts to weaken the 45Q requirements even after the tax credit was • Begin a stakeholder process to create a increased. This undercuts the largely good-faith credible regulatory framework for CO2–EOR efforts to develop sound CCS policy. designed to reflect the unique risks associated with the injection of carbon and to ensure In light of the credit extension, lawmakers should geologic sequestration. grant Section 45Q additional scrutiny, provide Oversight of CO2 Injection When Congress passed the Safe Drinking Water Act of injection activity. Class II regulates three aspects (SDWA) in 1974, it authorized the U.S. Environmen- of oil and gas activity: injection for enhanced oil tal Protection Agency (EPA) to develop a program recovery, disposal of wastewater from oil and gas to protect underground drinking water resources activities and storage of hydrocarbons. In 2010, EPA from risks of industrial activities in which fluids are added a new category of wells — Class VI — for per- injected into the ground. In order to ensure contin- manent storage. Each well class has a set of permit ued access to safe drinking water from groundwater requirements. sources, SDWA prohibits injection that endangers Most oil and gas producing states receive primary any underground source of drinking water (USDW). management and enforcement authority over their EPA’s Underground Injection Control (UIC) program own state UIC programs. This “primacy” allows classifies wells into six categories based on the type states to regulate most oil and gas injection activity Ignoring compliance provided industry an unearned advantage in the marketplace. 4 after demonstrating to EPA that their Class II regu- to help ensure CO2 leaks are detected and fixed and lations protect USDWs. State primacy over Class VI that the carbon remains permanently underground. wells is still in the early stages of adoption.4 The major elements of MRV plans include: The broad list of requirements for Class II EOR wells • Identification of potential surface leakage 5 includes: pathways for CO2. • Site characterization: identifying faults and • Delineation of the maximum monitoring area fractures and a confining zone and active monitoring areas. • Area of review: operator must design a proper • A strategy for detecting and quantifying any area of review and identify any wells and surface leakage of CO2. geologic features that may penetrate the area • A strategy for establishing the expected of injection baselines for monitoring CO2 surface leakage. • Well construction: requirements designed to • A summary of how the facility will calculate prevent fluids or CO2 migration into USDWs site-specific variables for the mass balance The UIC Class II regulations were originally designed equation, such as considerations for to prevent migration of fluids into USDWs. The regu- calculating equipment leakage and vented lations did not address unique airside risks related emissions