The Biden administration just announced draft regulations that would require most coal-fired and gas power plants to capture and sequester up to 90 percent of their carbon emissions by the middle of the next decade, a move with the potential to transform the U.S. electricity sector and perhaps offer a boost to the fledgling domestic carbon capture and sequestration industry.

If approved in their current form, the proposed rules, under Section 111 of the Clean Air Act (CAA), would require new and existing gas plants — excepting those that only run part time — to capture and sequester 90 percent of their emissions by 2035. Existing coal-fired power plants would need to hit that 90 percent target in 2030, but only if operators plan to keep them in operation in 2040 and beyond.

How big a bump for CCS?

The US Environmental Protection Agency (EPA) believes that much of the reduction in greenhouse gases (GHG) emissions under Section 111 for the electricity sector can be accomplished through carbon capture and sequestration (CCS): collecting and isolating carbon emissions at the source, then injecting into subjacent formations, saline aquifers, depleted oil and gas reservoirs, or subsea geologic formations for permanent storage and sequestration. According to the draft EPA rules, CCS would be used for baseload power plants that generate a lot of electricity and are expected to be in operation after the year 2040. There is a lot of regulatory support for the technology despite a lack of proven facilities – to date there is only one power plant in the world using carbon capture at scale: the Boundary Dam Power Station near Estevan, Canada, located just across the North Dakota border. Operating since 2014, the Boundary Dam Power Station captures up to 90 percent of CO2 emitted from a coal plant, according to its operators. The primacy of CCS under the proposed rule could result in increased investor interest in the industry.

Likelihood of finalization and legal challenge?

We note that these are only proposed rules, subject to comment. The proposal will face scrutiny regarding, among other things, whether the EPA exceeded its statutory authority and Supreme Court restrictions on the agency’s powers. It has already received immediate criticism from lawmakers and officials in coal-heavy West Virginia. Since the announcement of the proposal on May 11, 2023, Democratic Sen. Joe Manchin has vowed to oppose any future EPA nominee in the Senate over the rule. Meanwhile, Manchin’s Republican colleague, Sen. Shelley Moore Capito, has called it an attempt to “kill American energy jobs” and has vowed to introduce a Congressional Review Act bill in an attempt to overturn it. However, it seems likely that the proposed rules will be finalized by the Biden administration.

Once finalized, the rule will face inventible legal challenge. EPA has a poor track record when it comes to legal challenges under CAA 111. The agency has tried and failed to promulgate regulations under Section 111 with regard to the electricity sector twice before. In both instances, federal courts threw out the rules — rejecting the Obama administration’s attempt to replace fossil fuels with renewable energy, while faulting the Trump administration for doing too little to confront climate change.

This time, the agency hopes its selection of a regulatory scheme that will push utilities to utilize CCS will withstand future legal challenges. EPA officials underscored they believed the rule comports with the Supreme Court’s recent decision in West Virginia v. EPA. However, whether the mandate for CCS in the manor proposed can be argued to be a “major question” that requires Congressional authority remains to be seen.

Fate of the CCS tax credit in light of proposed rule?

EPA has insisted the overall cost of the draft rules would be “negligible.” To do this math, EPA has projected up to $85 billion in benefits from avoided climate change and health impacts. Further, EPA officials also point to last year’s expansion of a lucrative tax credit for carbon capture from $50 per ton of CO2 to $85 per ton, which they said would offset the full cost of CCS retrofits at some plants.

CCS has traditionally been quite expensive to add to power plants, which may cause some utilities to choose to shut down gas- or coal-fired plants in favor of renewable energy like solar or wind. However, the Inflation Reduction Act (IRA) boosted subsidies for carbon capture, aiming to stimulate investment and offset the capital commitment necessary to implement the emission-cutting technology.

The fact that EPA is relying on the CCS tax credit does not guarantee the long-term survival of such a credit. EPA is an executive agency and the tax credit comes from Congress – there is no guarantee the two entities will remain in lockstep on coupling the two policies. However, if the rule is finalized as proposed, Congress will likely face pressure from both industry and constituents to keep the CCS tax credit in place, in order to subsidize the electricity sector’s compliance and to mitigate any adverse cost impacts from compliance efforts on consumer electricity costs.

However, the affordability of CCS remains a challenge. A utility industry source said that even if IRA subsidies bring the costs down, the lack of sufficient pipeline and storage infrastructure for captured carbon in the U.S. remains an unavoidable obstacle. Nevertheless, the proposed rule acknowledges this by incorporating long lead times and extended timelines, with the majority of GHG reduction not required until after 2040. This approach grants some flexibility to the industry, considering the infrastructure limitations. The issue of the cost of CCS is a complex subject; stay tuned for further analysis on this point.