Illustration: Sarah Grillo/Axios

Some of America’s biggest energy companies are lobbying Washington to change — critics say weaken — oversight of a federal tax credit going to facilities capturing carbon emissions.

Why it matters: The scramble shows the challenge of tackling climate change piecemeal through the nation’s tax laws in the absence of overarching policy.

The technology at issue is considered essential to achieving the greenhouse gas emission cuts scientists have recommended, and the oil industry’s use of it could help spur its widespread adoption. But divisions and uncertainty are emerging after Congress expanded the tax credit earlier this year, which is aimed largely at companies that use captured carbon to extract oil.

“The tax credit is a game changer for carbon capture and incentivizing new projects. But, implementation of the credit by the IRS has to be done in a way that resolves uncertainty and ensures that the credit can actually be used to finance projects.”
— Hunter Johnston, partner at Steptoe & Johnson and counsel to a proposed facility in Louisiana that would capture carbon emissions

Driving the news: A new industry coalition is pushing legislation allowing companies to receive the tax credit without submitting a monitoring plan to the Environmental Protection Agency, which would ensure the captured carbon stays underground after extracting oil. The coalition, called the Energy Advance Center, is also urging EPA to change its rules on the tax credit.

The companies involved:

  • ExxonMobil
  • Chevron
  • BP
  • Southern Company
  • Mitsubishi Heavy Industries America
  • Denbury Resources, an oil company focused on injecting carbon to extract oil

Seeking to take advantage of the expanded tax credit, the coalition says the monitoring requirement is unnecessary because the carbon is stored after extracting the oil.

The requirement would make the newly expanded tax credit mostly unusable in oil fields, the companies argue, because: It could violate property rights, such as some state laws (notably in Texas) requiring companies to leave property once they’re done producing, and possibly require renegotiating hundreds of leases.

This would “be exceptionally burdensome and could substantially alter the economic viability of a field,” the coalition wrote in its comments filed with EPA. Fred Eames, partner at lobbying firm Hunton Andrews Kurth who represents the coalition, declined to comment for this article.

There are also ongoing questions about how companies have previously taken the tax credit, according to multiple people following the issue.

Neither individual companies nor the IRS discloses who receives tax credits. But there aren't a lot of carbon-capture projects in the U.S. that qualify, so experts conclude Exxon is one of its main beneficiaries through its facility in Wyoming, along with Occidental Petroleum.

The IRS says nearly 59 million tons of carbon have been captured to claim the credit since 2008. But only three million tons were monitored at EPA in 2016, all from Occidental, according to agency data.

That discrepancy, highlighted in a new report by environmental group Clean Water Action, suggests that most companies claiming the credit, including Exxon, are not monitoring the carbon underground as the IRS says is required in both an agency manual and tax form.

But disagreement persists throughout industry about what has the force of law because of other conflicting IRS and EPA guidance over the years.

People following the issue say it's unclear whether companies, including Exxon, have been taking the credit properly without submitting a monitoring program. An Exxon official indicated no concerns.

"We are comfortable with all the positions we take on our tax returns," said Exxon spokesman Scott Silvestri. "We also believe that taxpayers and the IRS would benefit from properly issued Treasury regulations in this area, as directed by the statute itself."

The IRS declined to comment.

The aggregate amount of the credit ranges from $597 million to $1.3 billion, according to Clean Water Action's report. IRS doesn't disclose how much individual companies receive.

The legislation that's being pushed by the coalition — and Exxon individually — would eliminate requirements to monitor carbon when using it to extract oil, a change that industry lobbyists and environmentalists say may apply retroactively.

The bills are sponsored by Republican Sen. John Hoeven and Rep. Kevin Cramer, both of North Dakota. The lawmakers also asked the Treasury Department last month to make the change administratively; Cramer specifically asked to make it retroactive.

The other side

At least one oil company — Occidental—- supports the status quo. As one of America’s most prolific producers using carbon to extract oil, Occidental is staking its business on it. A top executive endorsed the current monitoring requirements in a letter sent to California regulators late last month about its policies.

“We believe this level of transparency is imperative to gain public acceptance and to insure the integrity of any benefit derived from the permanent sequestration of the C02,” wrote Al Collins, Occidental’s senior director of regulatory affairs.

Environmentalists, many of whom believe the tax credit is mostly a handout to oil companies, are concerned that changing the requirement could risk leaks of carbon dioxide.

“Getting oversight and accountability right is critical to the growth of carbon capture as an effective climate mitigation technology,” said John Noël, who directs the oil and gas program at Clean Water Action. “It is even more important to get right now that the credit is extended.”

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