CCS Facing Heightened Scrutiny From Lawmakers; Courts

As part of an ongoing Blog series, Arnold & Porter’s cross-practice Energy and Energy Transition team is highlighting key legal and regulatory developments for clients across economic sectors navigating all aspects of the energy transition.

With nearly 100 carbon capture and storage (CCS) projects currently moving through the permitting process across the U.S., several groups are calling for increased oversight of these technologies. As summarized below, federal lawmakers are pushing for more stringent monitoring and compliance assurance for projects claiming 45Q tax credit under the Inflation Reduction Act, and litigants are challenging the readiness of CCS technologies for deployment in the power sector. At the state level, litigation is heating up over Louisiana’s regulatory authority for permitting injection wells, and CO2 leaks at the nation’s first federally permitted CCS project are fueling concerns from opposition groups over projects still in the pipeline.

In Louisiana, a coalition of environmental justice (EJ) groups are fighting to overturn a January Environmental Protection Agency (EPA) decision to delegate regulatory authority for CCS injection permitting to the state. Under the Underground Injection Control Program, states may apply for primary enforcement authority (primacy) to implement state programs that are at least as stringent as federal standards. The majority of states have received primacy for oil and gas injection wells (known as Class II wells), but Louisiana is only the third state to have received primacy for CCS Class VI wells. Congress recently encouraged states to seek primacy by providing $50 million in grant funding from the Bipartisan Infrastructure Law (BIL). At issue in the Louisiana case is a state law provision that shifts responsibility for the long-term care and stewardship of CCS facilities from the operator to the state after injection has ceased and the state approves site closure. Such provisions are relatively common in state CCS statutes, with 11 states adopting similar provisions to date. (For an updated map of states with these CCS long-term stewardship programs, see Arnold & Porter’s latest state-by-state CCS legislative tracker.) In legal filings, the EJ groups argue that the Louisiana law renders the state program less stringent than federal Class VI regulations by limiting the operator’s responsibility. EPA rejects this contention, responding that the law does not waive liability, but reasonably transfers liability to a state fund financed by fees imposed on CCS operators.

At the federal level, in a September 20, 2024 letter, a group of six Democratic Congressmembers urged the Internal Revenue Service (IRS) and EPA to “work together to implement basic guardrails” for the 45Q tax credit, a key federal incentive for CCS. Under this credit, as recently expanded by the Inflation Reduction Act, projects that capture carbon dioxide from emitting facilities can receive $85 per ton for storing CO2 in permanent geologic sequestration or $60 per ton for utilizing the CO2. Utilization can include enhanced oil recovery (EOR), a process where CO2 is injected into partially-depleted oil fields to recover remaining oil reserves. The majority of the injected CO2 then remains permanently sequestered. The group of lawmakers questioned the eligibility of EOR projects to claim the 45Q credit, asserting that increased oil production “cancels out” the emissions benefits of CCS. (Of course, removal of EOR eligibility under 45Q is not within IRS’ discretion and would require an act of Congress.) Proponents of EOR, however, point out that, so long as the market continues to demand oil in the near and medium term, EOR can reduce the life-cycle carbon intensity of the oil produced through EOR and used to meet that demand because the sequestered carbon offsets some of the carbon emissions from the production and consumption of the oil. The lawmakers also called for increased monitoring and recordkeeping procedures, including improved coordination between the IRS’ implementation of the 45Q tax credit and EPA’s implementation of the Mandatory Greenhouse Gas Reporting Program, third-party verification of the amount of carbon dioxide stored, and an extension of recordkeeping requirements from three to 12 years.

In the D.C. Circuit, a collection of state and industry petitioners are challenging an EPA rule that would require carbon capture equipment with a 90% capture rate be installed at certain fossil fuel power plants by the early 2030s. Central to the challenge is petitioners’ claim that CCS has not been “adequately demonstrated” as a control technology for the power sector. In a response brief filed October 11, 2024, EPA accuses the petitioners of attempting to “conjure” hurdles for CCS that go beyond the statute’s minimum requirements for being “adequately demonstrated.” EPA also relies specifically on the Boundary Dam, Petra Nova, Plant Barry, and Bellingham CCS projects as demonstrating that a 90% capture rate is possible, alongside “supporting evidence” from facilities operating below 90% and planned facilities expected to operate above 90%. An amicus brief filed by a group of CCS scientists and engineers supporting EPA’s “adequately demonstrated” determination further asserts that there is “no question that these systems are ready to be implemented now.” The Supreme Court denied petitioner’s request for a stay of the rule in October. However, Justice Thomas would have granted the stay and Justices Gorsuch and Kavanaugh noted petitioners’ “strong likelihood of success of the merits” but denied the stay because petitioners “need not start compliance work until June 2025” so there was no need for such a stay prior to the D.C. Circuit ruling on the case prior to that time.

Meanwhile, in Illinois, EPA in August issued a notice of violation (NOV) and proposed enforcement order under the Class VI program to the nation’s oldest CCS facility. The NOV relates to a leak in a monitoring well that allegedly allowed CO2 to migrate into an adjacent geologic formation approximately 5,000 feet below the surface, but that was contained without causing harms to any underground sources of drinking water (which EPA notes are no deeper than 110 feet). Some Illinois groups criticized the delay in public disclosure of the leak, which was first discovered in March. In contrast, CCS proponents have highlighted the identification and containment of the leak as an example of the Class VI regulations operating effectively to protect drinking water. Follow-up testing uncovered a second leak at a separate monitoring well in October, leading the facility to temporarily pause sequestration operations. The leaks are thought to be related to corrosion of the material 13 Chrome, used in the construction of the wells. These leaks are placing new scrutiny on whether 13 Chrome is sufficiently corrosion-resistant for CCS activities (where corrosion can occur from carbonic acid that is formed when CO2 reacts with water).

As reported in a previous post earlier this year, Illinois enacted one of the broadest and most stringent regulatory regimes for CCS in the country.

For questions or additional information, please reach out to the authors of this Blog or your Arnold & Porter contact. More detailed information on CCS permitting and state legislation is available on Arnold & Porter’s state-by-state CCS Tracker, a collaboration with Columbia Law School’s Sabin Center for Climate Change Law.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.