September Natural Gas, Oil Production Taxes Add $1B to Texas Treasury

“Texas’s natural resources make it a natural fit for  hydrogen energy and vehicles.” – Texas Monthly

Key Questions:   

•  Why should there be an increased reliance on hydrogen?   
•  How has hydrogen as a fuel source been advanced?   
•  What will help further promote hydrogen use?   
  

The energy industry continues to face growing energy demands from an increasing  population, while also being called to reduce carbon emissions on a significant scale.  Innovations in technology and process, including Carbon Capture, Utilization, and Storage,  provide one pathway for an array of industries both to meet demand and to attempt to  achieve carbon neutrality. Toward that end, industry and government are increasingly  focused on the use of hydrogen, an energy source touted as an affordable, reliable, clean, and  secure energy by the U.S. Department of Energy (DOE) and industry groups alike. The DOE  has billed hydrogen as the fuel product that can “enable U.S. energy security, resiliency, and  economic prosperity.”i As a key player in the oil and gas industry, Texas has the opportunity  to lead the way in providing that energy stability and reliability, while also seeing the  economic benefits of advancing the potential future of fuel.   

Why Hydrogen?   

Hydrogen is a one-hundred percent renewable, zero emission fuel that can be produced from  various resources, including natural gas, nuclear power, biomass, and renewables, such as  solar and wind power. In 2020, one percent of hydrogen production in the U.S. was from  electrolysis, while 99 percent was from fossil fuels. “Fossil fuels are expected to continue as  the main source of hydrogen through 2050 based on International Energy Agency  projections driven by abundant supply, low cost, and expected development of large-scale  carbon capture and storage.” ii   

However, because it can be produced through diverse resources, it can be produced on a  large scale. Hydrogen is an invisible gas, but it is classified in name by colors, from green to  grey to blue, yellow, turquoise, and pink. While broadly all hydrogen is seen as a “clean” fuel, the three main variations of produced hydrogen, grey, blue, and green, each produced  through different processes and with different carbon intensities:

• Grey hydrogen, which is currently the most common, is derived from  natural gas, and is most commonly used in the chemical industry to make fertilizer and for refining oil.iii  

• Blue hydrogen utilizes the Carbon Capture, Utilization, and Storage  process, repurposing generated carbon for reuse in the hydrogen  manufacturing process or storing it for future use. Blue hydrogen can be  used as a low-carbon fuel for generating electricity and storing energy,  powering cars , trucks and trains. iv 
• Green hydrogen is produced using electrolysis powered by renewable  energy, such as offshore wind, and carries the benefit of producing zero  carbon emissions. It can be used for manufacturing ammonia and  fertilizers, and also in the petrochemical industry to produce petroleum products.v
  Although green hydrogen is seen as the ultimate goal for zero emissions, it requires twice as  much water as steam methane reformation to produce grey or blue hydrogen and can be two  or three times as expensive to produce as grey or blue hydrogen, depending on the price of  natural gas.vii The European Union has called for the increased use and focus solely on green  hydrogen in order to meet the EU’s goal of net-zero emissions by 2050. In the U.S., however,  the landscape holds a mix of gray, blue, and green hydrogen, as the industry weighs  investment, demand, and regulation. Case in point: the Port of Corpus Christi (PCC), the US’s leading energy export gateway, is actively cultivating production of low-carbon hydrogen  from diverse feedstocks to supply world-scale international demand. In public  presentations, PCC leadership has stated that while the port has numerous commercial scale  electrolytic (green) hydrogen projects in development, they are also recognizing that  bringing hydrogen production to world scale will require using natural gas feedstock, at least  for the next 8-10 years. To this end, PCC is partnering to develop scalable, centralized  geologic storage for captured carbon, which will enable low-carbon hydrogen production  from the regions abundant, affordable natural gas. The Center for Houston’s Future recently  released a report outlining the ways in which Houston could become the epicenter of a global  clean hydrogen hub, including the utilization of existing hydrogen production facilities and  pipelines on the Gulf Coast, reliance on Houston’s industrial energy consumer base, and the  renewable energy assets already in place. The report projects that a Houston-led clean  hydrogen hub could reduce carbon emissions by 220 million tons by 2050. viii   
  
  

  In that report, the Houston Energy Transition Initiative (HETI), through their collaborative  of the Greater Houston Partnership and Center for Houston’s Future, also forecasted that  Texas could build a $100 billion hydrogen economy, with 180,000 jobs by 2050, through  initiatives focused on policy, infrastructure, innovation, and talent. The report projects that  clean hydrogen demand could grow from current 3.6 million tons (MT) to 21 MT by 2050,  with 11 MT of local demand and 10 MT available for export. ix
    
  

  On a global level, PricewaterhouseCoopers analyzed the green hydrogen market on a  worldwide scale and released findings on potential demand growth. The report projected  that through 2030, demand growth will maintain a moderate, steady growth through smaller  application across industrial, transport, energy and building sectors. The growth is then  expected to accelerate from 2035 forward, due to a decrease in production costs over time,  technological advances, and economies of scale.x In 2020, GoldmanSachs projected that  green hydrogen could supply up to 25% of the world’s energy needs by 2050 and become a  $10 trillion market by 2050.xi
    
  

  Other companies such as Sempra are seeking ways to support green hydrogen initiatives,  with goals to support the expansion of electric grids, with increased flexibility, with low or  zero carbon energy such as hydrogen. The Southern California Gas Company recently  announced a green hydrogen energy infrastructure system, called The Angeles Link, to serve  the Loas Angeles County with a hydrogen-ready, interstate pipeline system in an effort to  decarbonize dispatchable electric generation.xii More innovative initiatives to use hydrogen  in order to deliver reliable, affordable energy that is low or zero-carbon are sure to follow.  
  
  

  Hydrogen Economy Advancement   

   

  According to the International Energy Agency (IEA), the current largest consumer of  hydrogen is in oil refining, followed by use in chemical production, ammonia production, and  methanol production. Steelmaking consumed a minor amount of hydrogen in 2020, but  demand in the iron and steel industry is expected to rise. In the transportation sector,  hydrogen has been used in limited amounts, but as fuel cell electric vehicle development  expands in the U.S. and Japan, increased use is expected as a motor fuel for both light and  heavy duty vehicles.xiii The Texas-based company Hydron has begun the effort to bring  hydrogen-powered, autonomous ready long-haul Class 8 trucks to the Texas roadway.xiv Hydrogen fuel cells offer several distinct advantages over battery electric vehicles in the  heavy freight sector, with substantially longer range and lower refueling times.   
  
  A federal effort to further increase reliance on all hydrogen is already underway. DOE has  put in place a major initiative to advance the production, transport, storage, and utilization  of hydrogen in an affordable way, across multiple sectors.xv “[email protected],” the DOE initiative,  is built on the idea that hydrogen as a fuel source carries many benefits. First, hydrogen  contains the highest energy content by weight of all fuels and is seen as a critical feedstock  for all chemical industry. Second, it can be a zero-emissions fuel, making it a critical part of  many industry and government goals for reducing or eliminating emissions. Hydrogen can  also be used as a ‘responsive load’ on the grid, enabling stability and energy storage and  increasing utilization of power generators.   

   

  The DOE identifies the next steps in expanding the value proposition of hydrogen  technologies as increasing infrastructure and seeking further opportunities for the use of  hydrogen. Those other uses include “steel manufacturing, ammonia production, synthetic or  electrofuel production (using CO2 plus hydrogen), and the use of hydrogen for marine, rail,  datacenter, and heavy-duty vehicle applications.”xvi The [email protected] program offers some  incentive, focusing on early-stage research and development projects and facilitated through  cooperative agreements with matching DOE funds. There remains a push, however, for a  prominent role for the private sector in advancing hydrogen use: “[w]hile DOE’s role focuses  on early-stage R&D, such as new concepts for dispatchable hydrogen production, delivery,  and storage, reliance on the private sector for demonstration is critical.”
     
  

  In October of 2021, Senator John Cornyn and others introduced a bi-partisan bill package to  incentivize hydrogen infrastructure and adoption of hydrogen in certain sectors. The three bill initiative creates research and grant programs for advancements in hydrogen  infrastructure, with the following three focus areas:  
  

1. Maritime: Creates a grant program for hydrogen-fueled equipment at ports and in  shipping;  
2. Heavy Industry: Creates a grant program for commercial-scale demonstration  projects for end-use industrial application of hydrogen, which includes the  production of steel, cement, glass, and chemicals;
3. Infrastructure: Creates a pilot financing program to provide grants and low interest loans for new or retrofitted transport infrastructure, storage, or refueling  stations. 
   
   

In this initiative, priority will be given to projects that will maximize emissions reductions.  In February of 2022, the Port of Corpus Christi and Apex Clean Energy, Ares, and EPIC  Midstream entered an agreement to explore development of gigawatt-scale green hydrogen  production, storage, transportation, and export as part of PCC’s burgeoning hydrogen hub.  This agreement builds upon an agreement from May of 2021 to work towards developing  infrastructure to support green hydrogen production.   

Major oil companies such as BP and Shell are pursuing hydrogen projects that may begin as  blue hydrogen but will likely yield increasingly more green hydrogen as the electrolier  marketplace matures. With this increased focus, BP projects that hydrogen could make up  16% of global energy consumption by 2050 if net zero carbon-emissions goals are to be met,  where it is currently at less than 1%.xvii Currently, the United States produces more than 10  1million metric tons of hydrogen each year, which amounts to one-seventh of the world’s  supply.xviii A move toward increased hydrogen production has been percolating in the Texas  industry for years. In a 2017 Texas Monthly article, Michael Lewis, program manager for fuel   cell vehicle research in the Center for Electromechanics, University of Texas at Austin,  identified Texas’ unique ability to be a leader in hydrogen production. “Texas’s natural  resources make it a natural fit for hydrogen energy and vehicles. Our natural gas resources  are an economical feedstock for hydrogen production. Curtailed wind power in West Texas  could power the production of hydrogen for use in vehicles and other applications. And miles  of hydrogen pipeline already exist along the Texas coast, which would ease distribution.”xix With Texas holding the majority of 1600 miles of hydrogen pipeline infrastructurexx, Texas  has an advantage in pursuing the advancement of hydrogen production.   

Geological storage of hydrogen is another topic that must be considered in the advancement  of hydrogen use. Salt caverns have met current storage needs, which allow for fast  withdrawal and injection rates but can be costly and have limited capacity. The Bureau of  Economic Geology at the University of Texas (BEG) has identified two categories of storage reservoirs that could provide more available and advantageous storage: (1) depleted oil and  gas reservoirs; and (2) saline aquifers, which have proven storage capabilities and are  already supported by infrastructure. xxi The BEG has identified the need for an inventory of  sites for use in order to make progress on hydrogen storage; the identification of such sites  could also help further other low carbon initiatives such as CCUS, by locating storage that  could be utilized for both long term sequestration and immediate term hydrogen storage.  

Hydrogen Incentives  

Industrial adoption of hydrogen as a primary fuel could be accelerated by additional  incentives. One proposal is to create “Hydrogen Development Zones” taking advantage of the  Opportunity Zone Program, a federally approved program meant to spur economic  development and job creation in distressed communities. The program offers incentives  such as capital gains abatement when private businesses invest eligible capital into pre  

qualified opportunity zone assets. A sustainable energy enterprise, earlier discussed as a  company engaged in CCUS, and further here in hydrogen production, could potentially apply  for the tax incentives when pursuing increased hydrogen production in a “Hydrogen  Development Zone.” Tax relief could further be encouraged through the Governor’s Office of  Economic Development and Tourism, with a directive for tax incentives to foster job creation  and development of sustainable energy in Hydrogen Development Zones.

A statutory definition of hydrogen could be included, to include products derived from  hydrogen or any other conversion technology that produces hydrogen from a fossil fuel  feedstock. Another necessary action would be requiring Texas and its partners, including  local governments, industry, and institutions of higher learning, to consider a number of  factors in their duties to support the state’s Hydrogen Initiative. Relating to procurement, a  state agency that seeks to purchase any item requiring the use of a power source, including  but not limited to motor vehicles, material and cargo-handling equipment such as forklifts,  harbor craft, generators, power systems, portable floodlights, microgrids, and  telecommunications equipment, should include in the request for proposals provisions that  allow for the consideration of items that are powered by Texas hydrogen.   

The Legislature could also authorize state government, specifically the Office of the Governor  and TCEQ, to consider investments in hydrogen fueling infrastructure and the production of  sustainable hydrogen as a transportation fuel, and also define transportation electrification  to include sustainable hydrogen used as a transportation fuel. Relatively small changes to  Texas Emissions Reduction Program alternative fuel requirements could open underutilized  funds currently allocated exclusively to compressed natural gas vehicles.xxii Finally,  industrial revenue bonds for the purpose of achieving a Texas Hydrogen Development Zone  goal could be authorized through the governor and the Legislature, along with permitting  counties, municipalities and other political districts to bond for sustainable projects. 

Although hydrogen prices have increased in line with other energy sources, due to increases  in the natural gas markets, long-term growth projections still anticipate a reduction in  hydrogen price as technology continues to advance and scale increases. xxiii Thanks to robust  existing hydrogen infrastructure and frenetic commercial activity in the hydrogen value  chain at Port Corpus Christi and other cornerstones of the global energy marketplace, Texas  could easily become the leading producer of low-cost hydrogen in the nation. With an  increased focus from the industry, along with support from state and local government  leaders, Texas is in the best possible position to benefit from an increased reliance on this  low to zero-emissions fuel.   

i https://www.energy.gov/eere/articles/five-things-you-might-not-know-about-h2scale  ii https://www.beg.utexas.edu/research/areas/hydrogen   

iii https://www.jdpower.com/cars/shopping-guides/whats-the-difference-between-gray-blue-and-green-hydrogen  iv https://theconversation.com/blue-hydrogen-what-is-it-and-should-it-replace-natural-gas-166053I  v https://www.activesustainability.com/sustainable-development/what-is-green-hydrogen-used for/?_adin=02021864894   

vi https://energyeducation.ca/encyclopedia/Types_of_hydrogen_fuel   

vii Blue Vs. Green Hydrogen: Which Will The Market Choose? (forbes.com)  

viii https://www.houston.org/news/report-houston-region-poised-become-global-clean-hydrogen-hub  ix  

https://www.mckinsey.com/~/media/mckinsey/business%20functions/sustainability/our%20insights/houston%20 as%20the%20epicenter%20of%20a%20global%20clean%20hydrogen%20hub/houston-as-the-epicenter-of-a global-clean-hydrogen-hub-vf.pdf?shouldIndex=false   

x https://www.pwc.com/gx/en/industries/energy-utilities-resources/future-energy/green-hydrogen cost.html#:~:text=Through%202030%2C%20hydrogen%20demand%20will,form%20to%20develop%20hydrogen% 20projects.   

xi https://www.goldmansachs.com/insights/pages/gs-research/green-hydrogen/report.pdf  xii https://www.sempra.com/newsroom/spotlight-articles/green-hydrogen-leadership-opportunity  xiii https://www.iea.org/reports/hydrogen   

xiv http://www.hydron.com/; https://hydrogen-central.com/tusimple-co-founder-mo-chen-launches-hydron producing-hydrogen-powered-autonomous-ready-freight-trucks/   

xv https://www.energy.gov/eere/fuelcells/downloads/h2scale-handout   

xvi https://www.energy.gov/eere/fuelcells/downloads/h2scale-handout   

xvii Big Oil Companies Push Hydrogen as Green Alternative, but Obstacles Remain – WSJ  

xviii https://www.energy.gov/eere/articles/five-things-you-might-not-know-about-h2scale  xix https://www.texasmonthly.com/news-politics/electric-vehicles-energy-problem-hydrogen-may-answer/  xx https://www.energy.gov/eere/fuelcells/hydrogen-pipelines  

xxi https://www.beg.utexas.edu/research/areas/hydrogen   

xxii https://www.tceq.texas.gov/airquality/terp/tngvgp.html   

xxiii https://www.utilitydive.com/news/green-hydrogen-prices-global-report/627776/  

The Texas energy industry faces a significant challenge today. The oil and gas industry is being asked to continue to provide reliable energy for an increasing population as well as for developing and emerging economies who strive to lift themselves out of ‘energy poverty’, while simultaneously meeting growing calls to reduce carbon emissions and address climate change. The pressure from financial institutions, in concert with federal regulatory agencies, means that the state must incentivize large-scale deployment of carbon capture technology.

It is a recognized fact that energy demand has and will continue to grow. Specifically, the U.S. Energy Information Administration (EIA) projects a close to 50% increase in world energy use by 2050._i The EIA projects that total volumes of fossil fuels consumed in the United States will increase by 10% between now and 2050 and that 74% of America’s energy will still come from fossil fuels in 2050. Further, the EIA projects that by 2050 fossil fuels will still supply 69% of the world’s energy. As demand for fossil fuel energy continues to rise around the world, well-funded groups, financial institutions and regulatory agencies are making significant efforts to drastically reduce or even eliminate fossil fuels in an attempt to solve the carbon emissions issue. The result of such a course of action would undermine efforts to expand energy supply, increase energy poverty and make the current energy shortages around the world look miniscule in comparison.

The fossil fuels industry is faced with the dual problems of meeting increasing fossil fuels energy demand while also dealing with increased market – and – regulatory pressure to reduce greenhouse gas emissions. To address these problems, new technology and innovation is being advanced in the industry. One of these processes, Carbon Capture, Utilization, and Storage (CCUS) has been billed as part of a viable solution to achieve carbon neutrality without undermining the advancements of mankind’s quality of life to which the abundance and use of fossil fuels have dramatically contributed over the last 150 years.
However, CCUS is a costly and complex process. For Texas to take advantage of the opportunity CCUS provides, Texas has a unique opportunity to achieve – continued robust production of energy, but with lowered carbon emissions – with the addition of critical incentives.

What is “CCUS”?

Carbon Capture, Utilization, and Storage (“CCUS”) is the process of capturing carbon dioxide emissions produced from industrial sources to be used to increase hydrocarbon recovery, utilized for various industrial applications, or to be stored underground. Dedicated carbon storage is possible through the process of deep injection into secure geological formations, some of which may be depleted crude oil and/or natural gas reservoirs, brine-filled aquifers or mineralized basalt formations._ii Many projects in the United States and around the world have been developed, as industry has seen CCUS as a way to reduce
emissions while increasing production to meet demand.

The Opportunity for Texas

For CCUS, the existence of reservoirs and available pore space in Texas play a key role in their feasibility. Columbia University’s Center on Global Energy Policy released a case study¹ on possible industry efforts to achieve significant CO2 reduction and removal. The study focuses on the idea of “net-zero industrial hubs” as a pathway to reducing emissions, focusing on Texas’ potential, particularly regarding storing carbon when it comes to CCUS:

Texas is also home to an important natural resource required for a net-zero industrial hub: subsurface pore volume for CO2 storage. The combined onshore and offshore saline formation capacity along the Gulf Coast alone is estimated above 1 trillion tons capacity—more than 10,000 times the annual emissions of Houston—and the Gulf of Mexico pore-volume storage resources
is the largest in the United States._iii

Due to its storage resources available, and current infrastructure already in place, Texas stands to play a significant role in the development and advancement of CCUS.

Possible Incentives

Because CCUS is complex and still emerging as an industry, it requires significant integration across technical and legal disciplines as well as large capital investment for companies during the development, construction and operation phases. Costs for CCUS projects are estimated to cost approximately $400 million per 1 million tons per annum., captured and stored, divided among the cost of capture, transportation, and storage. This significant cost requires some type of financial incentive for companies looking to enter the CCUS industry, particularly as the regulatory, legal, and economic frameworks are still being
developed or need clarification both on a federal and state level. A GAO report on CCUS from December 2021 cites several barriers to CCUS development on the economic level, including viability risks of the host industrial emission point source, volatility in the fossil fuel commodities market, high expected project costs, and uncertainty within carbon markets
and tax incentives, making it difficult to estimate economic viability._iv

In the International Energy Agency (IEA)’s report² on CCUS in Clean Energy Transitions, the agency notes that several policy developments will be necessary to support this new industry:

A range of policy instruments are at policy makers’ disposal to support the establishment of a market for CCUS and address the investment challenges. In practice, a mix of measures is likely to be needed. These measures include direct capital grants, tax credits, carbon pricing mechanisms, operational subsidies, regulatory requirements and public procurement of low-carbon
products from CCUS-equipped plants. Continuous support for innovation is also needed to drive down costs, and develop and commercialize new technologies._v

Establishing sufficient incentives, on a federal and state level, could provide not only financial support but also certainty in pursuing new CCUS projects. CCUS is equivalent to making existing industrial activities carbon-free, whether for electric power, transportation fuels, petrochemicals, fertilizers, ammonia, methanol, and hydrogen. These existing sectors are large employers, particularly with well-educated, technical workforces in both the
corporate and field levels.

Federal Incentives

At the federal level, the tax credit for carbon dioxide sequestration (referred to by its Internal Revenue Code section, “45Q”) is a credit based on metric tons of carbon captured and sequestered when that carbon would have otherwise been released into the atmosphere. The captured carbon must be disposed of in “secure geological storage” to be credited.vi The credit has been expanded several times since its passage and remains a major incentive on the federal level for carbon capture projects.

Recent federal legislation increasing incentives will make an impact on CCUS funding but will not completely close the gap for companies seeking to enter the new industry. New federal regulation increases the 45Q credit to $85 per ton from $50 per ton for captured and stored carbon, $60 per ton for beneficial use of captured carbon emissions, and $60 per ton for carbon stored in oil and gas fields._vii The bill also increases credits for direct air capture projects, from $50 per ton of carbon captured to $180 per ton for carbon stored in geological formations, $130 per ton for utilization projects, and $130 per ton for storage in oil and gas fields. However, the cost of the technology, compounded with current inflation rates that will significantly impact the installed costs of CCUS infrastructure, make the current 45Q levels inadequate to encourage many companies to engage in new CCUS projects.viii Accordingly, industry seeking to adapt and deploy CCUS technologies should be able to turn to state-level programs to supplement and induce CCUS projects.

State Incentives

1. Tax Credit for Clean Energy

The Legislature created a tax credit for clean energy projects in 2013, aimed at coal projects. Though now expired, the statute provides a good framework to build upon for the clean energy project that is CCUS. The statute provided a tax credit equal to the lesser of 10% of capital costs of the projects or $100 million, and was limited to three projects, to be carried forward for no more than 20 consecutive years. The statute had a requirement that the project must sequester at least 70% of the carbon dioxide resulting from the project. In recent CCUS projects, the capture rate can vary depending on the type of CO2 facility, from 60% up to 85%. With input from industry, designating a required capture rate could work to limit the amount of eligible projects or applying categories of required capture rates with different levels of incentives, would help in capping the financial expense to the state while still supporting major CCUS projects.

2. “Prop 2” Pollution Control

Another potential for tax relief falls under the Tax Relief for Pollution Control Property Program, called “Prop 2”, which provides tax relief for facilities using certain property or equipment for pollution control. The TCEQ program offers tax relief for pollution control property or facilities that are used to “meet or exceed laws, rules, or regulations adopted by any environmental protection agency of the United States, Texas, or a political subdivision of Texas, for the prevention, monitoring, control, or reduction of air, water, or land pollution.”_xiii

To receive the tax exemption, applicants must request a use determination by TCEQ. Upon receiving a positive use determination, applicants then apply to their local property tax appraisal district for the property tax exemption.ix Currently, statute provides that property used to capture carbon dioxide is eligible for the tax credit but includes a limiting factor that the property is eligible if the Environmental Protection Agency (EPA), permitting authority, or other entity adopts rule or regulation regulating carbon dioxide as a pollutant.x

Rather than rely on various regulations subject to change, the state should remove the limiting factor to ensure that CCUS projects are eligible for the credit. Statute should also provide for a minimum amount of property tax relief rather than relying entirely on a determination by local appraisers with the floor increasing depending on the scale of the project. In addition, because the tax exemption is a constitutional provision, a constitutional amendment will also be required in order to amend the tax relief provision. If CCUS is considered a pollution control project or equipment, Prop 2 could provide another opportunity for tax relief when it comes to the cost of CCUS.

3. TERP

The Texas Emissions Reduction Program (TERP) offers financial incentives to eligible businesses and others for the reduction of emissions from vehicles and equipment. Texas Council on Environmental Quality (TCEQ) administers the program, funded by revenues from fees and surcharges relating to certain off-road equipment and on-road vehicles. TERP is intended to help Texas meet the goals of reduced pollution and improved air quality.

With amendment, CCUS could be considered eligible for several current grant programs in TERP, such as the New Technology Implementation Grant Program (NTIG) or the Emissions Reduction Incentive Grants (ERIG). Under the NTIG Program, there are several categories where CCUS could be applied, and should be included. “Advanced Clean Energy Projects” include projects that involve electricity generation through fuels such as coal or biomass, natural gas and use new technologies to reduce certain emissions from stationary sources. With the inclusion of natural gas in the category and a required reduction of carbon dioxide, a CCUS project should be considered eligible. Eligible projects under the “New Technology – Stationary Sources” category are projects that reduce emissions of regulated pollutants from stationary sources, including pollutants subject to TCEQ permitting. Carbon dioxide, as one of the major greenhouse gases, is currently permitted through TCEQ. Through either a new facility or the retrofit of an already existing facility, CCUS is a new technology that could be applied here and should be specifically included. “New Technology – Oil and Gas Projects” is another area CCUS may be applicable, as it is aimed at reduction of emissions from upstream and midstream oil and gas activities. The Emissions Reduction Incentive Grant Program (ERIG), providing grants for the upgrading or replacing of certain equipment to reduce emissions, may be another avenue for CCUS incentives. Establishing the avenue for TERP funding to apply to CCUS can help TCEQ and the state achieve the goal of reduced emissions while also allowing the state to continue its robust energy production.

4. Purchasing Preferences

There are several provisions dealing with procurement that might aid in incentivizing the purchase of products developed from captured carbon, or other low carbon processes, like hydrogen. For example, for contracts performed in nonattainment areas, the comptroller and state agencies may give preference to goods or services of a vendor that meets or exceeds environmental standards relating to air quality, when the cost would not exceed 105 percent of the cost of another vendor._xi Another provision gives a preference for some recycled, remanufactured, or environmentally sensitive products when certain factors allow,
such as price, quantity and quality._xii Amending either of these provisions, or creating a new provision, pertaining to products produced through low carbon efforts, could help incentive the market for low carbon products.

Limits on Incentives

To make CCUS incentives feasible on a state level, limiting factors are necessary, especially as the industry is developing in the state. Various metrics could apply to limit the total funds expended by the state, such as limits based on percentage of carbon captured or the size of the project. Pictured below are estimated target percentages of carbon captured per type of processing plant. As an example, the state could target plants capturing 90%- 95% of carbon emitted.

In addition to applying limits based on the size of the project or the amount of carbon captured, projects in non-attainment areas could be a priority. Non-attainment areas are those that do not currently meet National Ambient Air Quality Standards (NAAQS).

Incentives Around the Country

Several other states have created incentives meant to encourage a reduction in carbon emissions, some related directly to CCUS projects, and others related to and encompassing CCUS through enhanced oil recovery projects (EOR). Below is a summary of the tax incentives, bond authority, and eminent domain powers that have been enacted in other states to help support and develop CCUS. While bond amounts in each state are unknown, similar ideas could serve as a framework to be tailored to Texas. Importantly, this white paper does not cover other states’ initiatives concerning other elements of CCUS, namely pore space ownership and long-term liability ownership. These topics are summarized by CNC white papers elsewhere, whose conclusions with those offered herein are intended to advocate for comprehensive policy.

1. Illinois

In 2007, Illinois authorized the Illinois Finance Authority to issue bonds to finance the development and construction of coal-fired plants with carbon capture projects. Utilities in the state were also authorized to charge a fee to customers for deposit to the Renewable Energy Resources Trust Fund and Coal Technology Development Assistance Fund. Per the statute, the funds are to support the capture of emissions from coal-fired plants and the development of further capture and sequestration of carbon emissions.

2. California

California has a broad system regulating emissions, which incentivize CCUS projects as means in which to meet benchmark emissions standards in the state. California also provides an enhanced oil recovery tax credit that is similar to the federal enhanced oil recovery credit. In California, the credit is equal to 5 percent of the qualified enhanced oil recovery costs for qualified oil recovery projects within the state. However, this credit does not apply to taxpayers that are retailers of oil or natural gas or refiners of crude oil if daily refinery output exceeds 50,000 barrels.

3. Kansas

Kansas allows a five-year exemption from property taxes for property used for carbon dioxide capture, sequestration or utilization, and any electric generation unit used to capture and sequester carbon dioxide emissions. Kansas also allows for accelerated depreciation on CCUS machinery and equipment. There are also deductions from adjusted gross income available, starting with 55 percent of the amortizable cost down to 5 percent in following years for a 10-year period.

4. Louisiana

Louisiana provides a Sales and Use tax exemption for anthropogenic carbon dioxide used in a tertiary recovery project, once approved by their Office of Conservation in the Department of Natural Resources. The exemption does not specifically require geologic sequestration to qualify. The state also allows a 50 percent reduction on severance tax for the production of crude oil from a tertiary recovery project using anthropogenic carbon dioxide.

5. North Dakota

North Dakota classifies CO2 pipelines as common carrier, thereby granting them the right of eminent domain. The state also provides an exemption from their Sales and Use tax, a rate of 5 percent, for all gross receipts from the sale of carbon dioxide used for enhanced recovery of oil or natural gas. Another exemption from the Sales and Use tax is allowed for gross receipts from sales of tangible personal property used to build or expand a system used for carbon dioxide storage, transportation, or for use in enhanced recovery of oil or natural gas. The property must be incorporated into a new system rather than be used to replace an existing system, although there are exceptions for expansion purposes.

North Dakota also provides a property tax exemption for pipelines and related equipment for the transportation or storage of carbon dioxide for use in enhanced recovery or geologic storage, during construction and the following ten years.

An ad valorem tax exemption applies to coal conversion facilities and any carbon dioxide capture system located there, plus any equipment directly used for geologic storage of carbon dioxide or enhanced recovery of oil or natural gas classified as personal property. The exemption does not apply to tangible personal property incorporated as a component part of a carbon dioxide pipeline, but this restriction does not affect eligibility of such a pipeline for the carbon dioxide pipeline exemption.

Finally, carbon dioxide capture credits are available for coal conversion facilities that capture 20 percent of carbon dioxide emissions during a certain period. The owner of such a facility may take from a 20 percent reduction of the North Dakota privilege tax, a tax levied on operators of coal conversion facilities, up to a maximum of a 50 percent reduction when 80 percent or more of carbon dioxide emissions are captured. The tax reduction is available for ten years from the date of the first capture or ten years from the date the facility is eligible for the tax credit. _xiii

Summary

Texas has the opportunity to lead the way in showing that the fossil fuel industry is ready to continue to provide affordable energy, electricity, and a vast array of products for the benefit of consumers while still improving our environment through lower carbon emissions. Consumers will continue to need fossil fuels for electricity, fuels, and products, but their production and use can become carbon neutral through CCUS. CCUS can be the answer to meeting government-mandated reductions in emissions, without harming the vital fossil fuel industry.

On both the federal and state level, renewable energy has benefitted from substantial subsidies._xiv As Texas has focused on incentivizing wind and solar energy in part to help reduce emissions, a new focus on enabling the oil and gas industry to utilize CCUS to reduce emissions will achieve similar goals, while still affording the state the ability to produce reliable, affordable energy. In addition, Texas’ existing workforce will be protected while also new technical jobs will be created. With a dedicated focus, the Texas energy industry stands to be the model toward reliable and secure energy production, and carbon neutrality,
through CCUS.

_{i https://www.eia.gov/todayinenergy/detail.php?id=41433}

_{ii https://www.energy.gov/carbon-capture-utilization-storage}

_{iii Columbia | SIPA Center on Global Energy Policy | Evaluating Net-Zero Industrial Hubs in the United States:A Case Study of Houston}

_{iv https://www.gao.gov/products/gao-22-105111
v https://www.iea.org/reports/ccus-in-clean-energy-transitions
vi https://fas.org/sgp/crs/misc/IF11455.pdf
vii https://www.jdsupra.com/legalnews/key-climate-and-energy-provisions-in-5560526/}

_{viii https://www.catf.us/2022/06/inflation-creates-new-urgency-for-passage-of-45q-enhancements/#:~:text=In%20the%20most%20recent%20draft,for%20inflation%20beginning%20in%202 027.}

_{ix https://www.tceq.texas.gov/airquality/taxrelief
x Tex. Tax Code § 11.31
xi Tex. Govt. Code Tit.10, Ch. 2155.451
xii Tex. Govt. Code Tit. 10, Ch. 2155.455}

_{xiii FTI Orrick USEA CCUS Report.pdf}

_{xiv https://www.dsireusa.org/}