Tax Policy’s Potential Role in the Transition to a Low Carbon Future

Frances Wood recently presented results of an OnLocation analysis at the 35^th Annual USAEE/IAEE North American Conference held in Houston Texas in November 2017.  The United States Association for Energy Economics (USAEE) is the largest affiliate of the International Association for Energy Economics (IAEE), an organization that provides a forum for industry professionals to exchange ideas on a variety of issues and challenges facing the energy industry. 

Ms. Wood’s presentation, titled “Examining a “No Regrets” Policy to Facilitate a Transition to a Lower Carbon Future,” focused on the potential impact of a tax policy combined with improved carbon capture and storage (CCS) technology at power plants to provide captured CO₂ for use in enhanced oil recovery (EOR) under various market conditions. 

The analysis was performed using a customized version of the National Energy Modeling System (NEMS) created by OnLocation[1] that includes a carbon capture, transport, utilization and storage (CTUS) module designed by OnLocation for use in the NEMS model. The CTUS module uses information about captured CO₂ from the electricity model (EMM) and liquid fuels market model (LFMM), and EOR demand from the oil and gas supply model (OGSM), and uses this information to determine the best (least cost) pipeline configuration that can be used to transport CO₂ to EOR and saline storage locations.

The analysis compares CCS deployment in the U.S. power sector and EOR potential in three main scenarios: 

1. A Tax Credit Policy Scenario that includes a tax credit of $35/ton for CO₂ captured and used for EOR and a $50/ton credit for CO₂ sequestered in geologic storage;
2. A Low Oil and Natural Gas Resources Scenario combined with the tax credits for CO₂ capture and sequestration;
3. A Combined Optimistic Low Cost and Policy Scenario that assumes lower technology costs for CCS combined with the tax credits.

The scenarios are designed to determine the potential impact of three different factors that could play a role in the future of CCS technology in power plants:  a tax subsidy that incentivizes captured CO₂ for EOR and geologic storage, higher future domestic oil and natural gas prices that would make EOR more attractive, and lower CCS technology costs that would reduce the cost of captured CO₂ from power plants. 

The results were insightful:

 1. In all three scenarios, CO₂ sequestered from power plants increased compared to a reference case with less favorable market and policy conditions.

 2. The impact of a tax credit for captured CO₂ was magnified when paired with higher natural gas prices and optimistic CCS technology assumptions.

3. While the market for CO₂ for use in EOR increased in the short run, captured CO₂ was also economic in the long run when sent to saline geologic storage. 

The presentation concludes that a tax credit for CO₂ capture and sequestration can be an effective policy to facilitate a transition to a lower carbon future, especially under favorable market conditions and technology assumptions. This “no regrets” tax policy can also provide lower cost sources of CO₂ to the enhanced oil recovery market, thus providing benefits beyond CO₂ reduction.

[1] All underlying model assumptions were adopted from the EIA Annual Energy Outlook 2017 reference case.