Inflation Reduction Act Poised to Accelerate Carbon Capture for High-Emitting Industries

DENVER (October 19, 2023)—Federal policy mechanisms designed to hasten the transition from fossil fuels to clean and renewable energy sources have largely failed to move the needle in recent decades. The economics of transition, particularly for the most energy-intensive industries, remained overwhelmingly unfavorable. However, the Inflation Reduction Act (IRA) will likely change the equation quickly, speeding the U.S. toward a faster-than-anticipated transition this decade.

Federal incentives in the IRA, the most significant climate legislation in U.S. history, are squarely in the lucrative range for point-source carbon capture projects. The legislation also supports greater options for recycling carbon captured by these projects, opening the door to a circular carbon economy.

According to a new report from CoBank’s Knowledge Exchange, the legislation’s largest climate policy impact will likely prove to be the market incentives tied to carbon capture for the highest-emitting industries. 

“While competition, replacement and regulation will continue to decarbonize lower emitting segments of the economy, the hardest-to-abate industries would see little progress without the significant government support this legislation provides,” said Teri Viswanath, lead power, energy and water economist for CoBank. “By increasing carbon capture tax incentives and making important new funding opportunities available for clean fuel substitutes, the IRA could usher in a dramatic new chapter for scalable emission control systems.” 

A recent analysis from Princeton University estimated the legislation would increase the use of carbon capture 13-fold by 2030, relative to current policy. Other researchers suggest that by 2035, economy-wide emissions in the U.S. are anticipated to be 43-48% lower than 2005 levels, as compared to just 27-35% lower without the IRA stimulus. 

Most of the current decade’s clean energy gains will come from the transition well underway in the power sector. Aging fossil-fuel plants and the falling cost for renewables, along with stricter regulations under the Clean Air Act, will sustain the momentum for this sector. Likewise, increasing competition and regulation are hastening greater decarbonization in large portions of the transportation sector—personal vehicles and buses—without additional IRA spending. 

The most transformative aspect of the IRA’s energy policy are the lucrative incentives for carbon capture, utilization and storage (CCUS), which make adoption and implementation much more economically viable. 

Congress has seemingly placed the CCUS incentives in the ‘goldilocks’ range for point-source projects, with the tax credit now allowing projects to earn $85 per ton for CO2 permanently stored and $60 per ton for utilization. Additional user-friendly revisions to the code make the credit easier to claim by lowering capture volume requirements, implementing direct pay for a period of five years, and enabling the credit to be transferred to other parties.  

“The real test of whether IRA will enable carbon capacity to scale by 2030 is whether the hardest-to-abate sectors actually respond,” Viswanath said. “And on that front, there is reason for optimism. 2022 turned out to be a watershed year for new project announcements, leaving little doubt that these incentives have firmly captured the investment community’s attention.”

According to PwC, more than one quarter of all venture capital funding is now focused on climate technology, with increased attention on those technologies that have the most potential to cut emissions.

While the first chapter of public and private investing in CCUS in the 2000s proved an expensive failure, the lessons learned from that investment cycle now seemingly provide greater opportunities for success in the second chapter.

Read the report, Get Ready for Carbon Capture’s Second Act. 

About CoBank

CoBank is a cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving more than 76,000 farmers, ranchers and other rural borrowers in 23 states around the country.

CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture, rural infrastructure and rural communities. Headquartered outside Denver, Colorado, CoBank serves customers from regional banking centers across the U.S. and also maintains an international representative office in Singapore.