Rhodium Group Report — Capturing Leadership: Policies for the U.S. to Advance Direct Air Capture Technology
Direct Air Capture (DAC) is a chemical process by which carbon dioxide (CO2) is removed directly from the air. Researchers highlight DAC research, development, and demonstration (RD&D) as a means to mitigate climate change and limit the increase in global temperature. In its 2018 report, the United Nations Intergovernmental Panel on Climate Change (IPCC) found that global emissions of CO2 had to reach net-zero between 2045 and 2055 to limit the increase in global temperature to 1.5 degrees Celsius above pre-industrial levels. The IPCC report provides that 100-1000 gigatons of CO2 must be removed from the atmosphere this century to prevent global temperatures from rising above this 1.5 degrees Celsius threshold. Academic researchers suggest that negative emissions technologies (NET) that directly remove CO2 from the air, such as DAC, are one of the many technologies necessary to achieve overall CO2 reduction and removal. For background on DAC and other carbon removal technologies, please refer to our post.
The Rhodium Group
To fill an existing research gap on the role of DAC technology in reducing CO2 levels in the atmosphere, the Rhodium Group (Rhodium) published a report in May analyzing the effects of DAC technology on climate change, and issued policy considerations for the expansion of RD&D in this area.
Rhodium is a research consultancy and advisory company that conducts research on economic global trends, policy developments, and climate change risks that affect the energy markets. Linden Trust and ClimateWorks provided the funding to support the report’s analysis.
According to Rhodium, with the increasing amount of CO2 in the atmosphere, carbon emissions reduction is not enough to combat climate change. To quickly and effectively reduce ambient CO2 to slow or reverse global temperature increase, Rhodium advises global leaders to focus on NETs that remove CO2 directly from the atmosphere.
The report highlights the need for DAC technological advancement and provides policy recommendations that could help further DAC development and commercialization. Rhodium’s report recommends an increase in governmental funding to advance and incentivize DAC RD&D. This would lead to the commercialization of the technology before the effects of global climate change worsen. The report urges that investing in DAC now would allow the United States to be a world leader in carbon removal technology due to the country’s resources and leadership in areas such as enhanced oil recovery, carbon capture, utilization and storage, and applied energy research. Moreover, should other NETs and climate change initiatives fail to meet the desired decrease in CO2 emissions, DACs could provide the United States with an “insurance policy” to ensure that reduction levels are met.
DAC as a Necessary Means to Reduce CO2 Levels in the Atmosphere
Rhodium states that to reach the industrial scale necessary to achieve the carbon-reduction targets, the United States must deploy at least nine million tons of DAC capacity by 2030. While private companies have already funded and built three DAC plants, none of these are large-scale facilities. Current private funding opportunities are scarce and policy incentives, including California’s Low Carbon Fuel Standard and the Federal Section 45Q tax credit, are not enough to incentivize this advancement. Using the history of wind and solar energy as examples, Rhodium argues that federal government funding and the implementation of policy initiatives could push DAC to succeed commercially.
The Need for Federal Government Action and Policy Recommendations
First, the report urges Congress to enact a law that authorizes and fully funds DAC research programs. Adopting the National Academies of Sciences, Engineering, and Medicine’s recommendation, Rhodium suggests that federal DAC funding should average to $240 million annually for the next ten years. This would be less than the amount the Department of Energy (DOE) spends on their other RD&D programs. Furthermore, with increased RD&D, costs will continue to drop through improved understanding and future market competition.
In addition to the DAC RD&D, Rhodium also suggest three “policy pathways” the federal government could follow to increase the demand for DAC, while also achieving its carbon-reduction goals.
- Pathway One: Federal Procurement to Drive DAC Deployment: Rhodium recommends that federal agencies encourage DAC deployment by leveraging their procurement requirements to meet specific carbon intensity targets. The report considers three specific products for the executive branch to target. First, agencies could procure drop-in fuels (such as synthetic diesel, gasoline, or jet fuel made from hydrogen combined with CO2 obtained from industrial sources or DAC).1 Second, the executive branch could procure building materials infused with DAC CO2, such as concrete and aggregate, as another form of carbon sequestration. This federal procurement could be implemented through an executive branch-led competitive bidding program to procure carbon removal from DAC with sequestration.
- Pathway Two: Revision of the Federal Section 45Q Tax Code: Rhodium recommends that Congress improve the current federal tax credit program to incentivize DAC RD&D. First, Congress could extend eligibility requirements by moving the commence-construction deadline for DAC plants from 2024 to 2030. Second, Congress could extend the credit payout period from 12 years to 30 years to ensure revenue certainty and incentivize the construction and operation of DAC facilities. Third, in order for DAC projects to be able to take advantage of the tax credit, the minimum capture threshold must be reduced from 100,000 to 10,000 tons per year, and the minimum utilization threshold must be reduced from 25,000 to 10,000 tons per year. Lastly, the report suggests increasing the storage credit value to $180 per ton.2 Congress can then gradually reduce the credit value over a reasonable amount of time while still providing sufficient support for DAC deployment. It is important to note that the Internal Revenue Service (IRS) has not yet issued guidelines to implement Section 45Q. However, in a recent notice published on May 2, 2019, the IRS requested public comments to this Section that could be addressed by further guidance.
- Pathway Three: Legislative Fuels Policy: Congress could also reform the current Renewable Fuels Standard to expand eligibility, or establish its own mandate. If Congress were to establish its own mandate, this could either set a requirement requesting DAC-derived drop-in fuels only, or lower the intensity requirement to make DAC-derived drop-in fuels competitive in the market. Rhodium suggests that the target DAC-derived fuel consumption would have to equal about 850 million gallons by 2030 to reach the desired benchmark of nine million tons of DAC deployment capacity.
Additionally, Rhodium recommends addressing developer and operator long-term liability for CO2 monitoring, leaking and other safety issues associated with storage to give future project developers certainty and incentivize deployment. The report also suggests lowering the overall cost of investment through existing federal policies that could complement DAC deployment policies. Lastly, the federal government could leverage opportunities to use DAC by creating a new agency dedicated to carbon removal, using DAC in infrastructure and building materials, and incorporating the project into energy policy frameworks.
Impacts of the Rhodium Report
Increased federal funding and implementation of Rhodium’s suggested policies would accelerate further DAC deployment and push the technology closer to commercialization. However, given the current political climate, it is unlikely that all of the proposed policy pathways will be successfully advanced in the near term. Therefore, Rhodium’s work to champion DAC’s possible role as an “insurance policy” for reaching specified carbon-reduction goals must be tempered with political realities. Instead, academic, governmental and private entities seeking to hedge their bets may want to consider supporting a broad set of emerging technologies to address climate change.
1 For more information on the support of DAC-derived synthetic fuels, see Chevron, Occidental Petroleum and BHP’s recent investments in Carbon Engineering, a start-up DAC technology company.
2 The Rhodium report did not go into detail on the financial impacts to the federal government from making such proposed adjustments and extensions.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.