IRS looking into carbon capture tax credits for oil and gas companies


Nearly $900 million of carbon capture tax credits awarded in the last decade went to oil companies that failed to show evidence they stored the amount of carbon dioxide claimed on their taxes. Now the Internal Revenue Service is investigating.

Two years ago, Congress enlisted oil companies to help develop an underground carbon storage system to aid in the fight against climate change.

Oil producers had for decades pumped carbon dioxide underground to increase output, steadily filling depleting oil reservoirs with the climate-warming gas. To get oil companies to pump more of the greenhouse gas underground, a bipartisan group of senators championed legislation that would double tax incentives for oil companies using carbon captured from the smokestacks of power plants and other industrial sites.

The Houston Chronicle reported that environmentalists said the revelation by the Internal Revenue Service is proof the energy industry should have less influence on climate change policy as federal officials investigate whether those tax credits claimed are legitimate.

The paper’s story followed an early May report about the efforts of U.S.Sen. Bob Menendez to suspend the tax credit for enhanced oil recovery in the wake of a watchdog report that found nearly $894 million worth of carbon capture and sequestration tax credits were inappropriately claimed over the last decade.

Suspending the enhanced oil recovery, or EOR, credit “would penalize those companies that followed the rules in the past, as well as those currently developing new projects under the revamped 45Q program,” the Carbon Capture Coalition said in a May 11 letter addressed to the New Jersey Democrat. The nonpartisan group’s membership includes a broad coalition of power companies, oil and gas producers, and environmental nonprofits.

Enacted in 2008 under the Energy Improvement and Extension Act, the 45Q tax credit was designed to incentivize the permanent storage of planet-warming carbon dioxide emissions. The original version provided a credit of $20 per metric ton of permanently stored CO2 but only $10 per metric ton if that CO2 is also used as an injectant for practices such as EOR.

In 2018, the U.S. Congress boosted the 45Q tax credit to $35 per metric ton for EOR and $50 per metric ton for geologic storage by 2026. It also made the $35 credit available for non-EOR CO2 utilization and direct air capture projects. Taxpayers that claim the credit are required to comply with monitoring, reporting and verification, or MRV, rules established under the U.S. Environmental Protection Agency’s Greenhouse Gas Reporting Program.

In response to a request from Menendez, U.S. Treasury Inspector General for Tax Administration Russell George reported in an April 15 letter that just 10 taxpayers accounted for 99.9% of the total 45Q credits claimed for tax years 2010 through 2019 and only three of those 10 had acceptable plans for meeting the EPA’s requirements. Of the more than $1 billion in credits claimed by those 10 companies, George determined that 87% ($893.9 million) of the credits were claimed when the companies were in noncompliance with EPA’s MRV requirements.

However, George also found that the U.S. Internal Revenue Service has disallowed approximately $531 million, or 59%, of the noncompliant credits claimed by the 10 taxpayers to date. The report did not name the taxpayers or specify whether additional IRS enforcements actions addressing the remaining noncompliant credits are underway.

In response to the IG report, Menendez on April 29 asked the IRS to initiate audits by May 13 of every taxpayer claiming more than $10,000 worth of 45Q credits. The senator also said the IRS should suspend the tax credit for EOR operations “until a full investigation on the past misuse of the credit by this industry can be conducted.”

In the group’s letter to Menendez, Carbon Capture Coalition Director Brad Crabtree said the group’s members support the senator’s efforts to “ensure integrity in the 45Q program” and noted the results of the OIG report show the IRS started disallowing noncompliant 45Q credits as early as 2012.

Sources: Houston Chronicle/S&P Global