Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

Congressional research reportAug 19, 2014

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Clean Coal Loan Guarantees and Tax

Incentives: Issues in Brief

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Specialist in Energy and Natural Resources Policy

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Specialist in Public Finance

August 19, 2014

Congressional Research Service

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R43690

Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

Summary

Coal represents a major energy resource for the United States. Coal-fired power plants provided

approximately 37% of U.S. generated electricity (about 1.5 billion megawatt-hours) in 2012,

while consuming over 800 million tons of coal. Power plants that use coal are also a major source

of greenhouse gas emissions in the United States, contributing approximately 28% of total U.S.

CO2 emissions in 2012.

As part of federal efforts to reduce greenhouse gas emissions, loan guarantees and tax incentives

have been made available to support private sector investment in “clean coal.” Both loan

guarantees and tax incentives were included in the Energy Policy Act of 2005 (EPACT05, P.L.

109-58). Mitigating CO2 emissions has also become the primary focus of U.S. Department of

Energy (DOE) efforts within the clean coal research and development program (now Coal R&D)

within its Office of Fossil Energy. At issue for Congress is the extent to which the private sector

has used the financial incentive tools available, and whether they are the right tools for promoting

the development of technology to reduce CO2 emissions from fossil fuel power plants.

No loan guarantees have been issued to clean coal projects since enactment of Section 1703 of

EPACT05. This legislation authorized the Secretary of Energy to make loan guarantees for

projects that (1) avoid, reduce, or sequester air pollutants or anthropogenic emissions of

greenhouse gases; and (2) employ new or significantly improved technologies as compared to

commercial technologies in service in the United States at the time. Only two projects, both

nuclear power-related, have obtained or are on track to obtain loan guarantees under Section

1703. A question for Congress to consider is why no loan guarantees have been issued for clean

coal projects under Section 1703, despite several authorizations of appropriations and two

solicitations for proposals since enactment of EPACT05.

Tax incentives for clean coal were first authorized in EPACT05. EPACT05 codified two new

sections in the Internal Revenue Code: Section 48A was added to provide tax credits for

qualifying advanced coal projects; and Section 48B provides tax credits to qualifying gasification

projects. Additional tax incentives for clean coal were included in P.L. 110-343, the Emergency

Economic Stabilization Act of 2008 (EESA). EESA provided additional funding for clean coal

investment tax credits. EESA also included the Section 45Q CO2 sequestration credit, under

which taxpayers may claim up to a $20 per metric ton credit for qualifying domestic CO2 that is

captured and sequestered.

Regarding tax incentives, Congress might consider several options: (1) maintain the status quo,

which would allow existing tax incentives to phase out; (2) authorize additional funding for

existing tax incentives; or (3) redesign tax incentives for clean coal or carbon capture and

sequestration related technologies. Several projects that were previously allocated tax credits have

been cancelled. A question for Congress is whether there is demand for tax benefits in their

current form. Further, are tax incentives an effective tool for encouraging investment in clean coal

technologies?

Congressional Research Service

Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

Contents

Introduction...................................................................................................................................... 1

Loan Guarantees .............................................................................................................................. 2

Incentives for Innovative Technologies ..................................................................................... 2

Terms and Conditions.......................................................................................................... 3

Loan Guarantee Authorizations and Solicitations ..................................................................... 4

Authorizations ..................................................................................................................... 4

Solicitations ......................................................................................................................... 5

Projects Awarded Loan Guarantees ........................................................................................... 6

Tax Incentives .................................................................................................................................. 6

Investment Tax Credits .............................................................................................................. 6

Carbon Dioxide (CO2) Sequestration Credit ............................................................................. 9

Tax Treatment of Clean Coal Grants ....................................................................................... 10

Issues for Congress ........................................................................................................................ 10

Loan Guarantees ...................................................................................................................... 11

Tax Incentives .......................................................................................................................... 11

Tables

Table 1. Current Guaranteed Loan Authority for Section 1703 Programs ....................................... 5

Table 2. Clean Coal Tax Credit Allocations ..................................................................................... 8

Table 3. Tax Expenditures for Clean Coal and CO2 Sequestration Credits: FY2014FY2018 ......................................................................................................................................... 9

Contacts

Author Contact Information........................................................................................................... 13

Congressional Research Service

Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

Introduction

This report discusses certain federal financial incentive mechanisms for “clean coal” commercial

projects; namely, loan guarantees and tax incentives. Both loan guarantees and tax incentives

have been available to the private sector for clean coal activities following enactment of the

Energy Policy Act of 2005 (EPACT05, P.L. 109-58). At issue for Congress is the extent to which

the private sector has used these financial tools—and whether they are the right tools—to develop

the technology needed for reducing carbon dioxide (CO2) emissions from fossil fuel power plants

while continuing to use available domestic coal reserves for electricity generation.

Coal represents a major energy resource for the United States. Coal-fired power plants provided

approximately 37% of U.S. generated electricity (about 1.5 billion megawatt-hours) in 2012,

while consuming over 800 million tons of coal.1 Power plants that use coal are also a major

source of greenhouse gas emissions in the United States. Coal-fired electricity generation emitted

approximately 1.5 billion metric tons of CO2 in 2012, approximately 28% of total U.S. CO2

emissions.2

The fraction of U.S. electricity generated by coal-fired plants declined from 2008 to 2012, as did

the total coal consumption by coal-fired plants. Carbon dioxide emissions fell over the same

period.3 The use of coal for electricity generation complicates policy efforts to reduce U.S.

greenhouse gas emissions. Congress has focused on two EPA regulatory proposals released in

2013 and 2014 that would limit greenhouse gas emissions from new and existing coal-fired power

plants, respectively.4 Some believe the EPA efforts to regulate CO2 emissions from coal may

affect both the short- and long-term future for coal-fired electricity generation in the United

States. In the past, others have linked the viability of the U.S. coal-fired electricity industry to its

ability to capture and sequester CO2 emissions from coal-burning plants (carbon capture and

sequestration, or storage, referred to as CCS), and allowing the continued use of coal while

mitigating its contribution to rising CO2 levels in the atmosphere.5

Mitigating CO2 emissions has become the primary focus of U.S. Department of Energy efforts

within the clean coal research and development program (now Coal R&D) within its Office of

Fossil Energy. For example, the Coal R&D program accounted for $392 million of the total $562

million within Fossil Energy R&D at DOE in FY2014, or approximately two-thirds of the total.

Moreover, the American Recovery and Reinvestment Act (P.L. 111-5) provided $3.4 billion for

CCS R&D efforts beginning in 2009. Combined with Recovery Act funding, Congress has

U.S. Energy Information Administration, Electricity-Electric Power Annual Table 1.1 Total Electric Power Summary

Statistics, 2012 and 2011, Dec. 12, 2013, http://www.eia.gov/electricity/annual/html/epa_01_01.html; and U.S. Coal

Consumption by End-Use Sector, 2008-2014. June 30, 2014, http://www.eia.gov/coal/production/quarterly/.

U.S. Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2102, Chapter

2, Trends in Greenhouse Gas Emissions, Table 2-1 and Table 2-13.

Ibid.

The proposed regulation for new coal-fired power plants was published in the Federal Register on January 8, 2014;

the proposed standards for existing plants were released on June 2, 2014. For more information, see CRS Report

R41212, EPA Regulation of Greenhouse Gases: Congressional Responses and Options, by (name redacted), and

CRS Report R43572, EPA’s Proposed Greenhouse Gas Regulations for Existing Power Plants: Frequently Asked

Questions, by (name redacted) et al.

See, for example, MIT, The Future of Coal, Options for a Carbon-Constrained World, An Interdisciplinary MIT

Study, 2007, http://web.mit.edu/coal/The_Future_of_Coal_Summary_Report.pdf.

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Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

appropriated approximately $6 billion for CCS R&D since 2008 at DOE. The appropriations,

technology, and program activities are discussed in other CRS reports.6

For the purposes of this report, the term clean coal is used to describe activities supported by

DOE that would reduce greenhouse gas and other emissions from coal combustion, such as

carbon capture and sequestration (CCS). DOE notes that its clean coal R&D efforts are focused

on developing and demonstrating advanced power generation and carbon capture, utilization, and

storage technologies for existing facilities and new fossil-fueled power plants by increasing

overall system efficiencies and reducing capital costs.7 The term clean coal is used here for

descriptive purposes only.

Loan Guarantees

Historically, loan guarantees have been used as a policy tool for many different purposes,

including home ownership, university education, small business growth, international

development, and others.8 A loan guarantee might be defined as “a loan or security on which the

federal government has removed or reduced a lender’s risk by pledging to repay principal and

interest in case of default by the borrower.”9 The DOE loan guarantee program for projects that

reduce anthropogenic emissions of greenhouse gases was initially authorized in the EPACT05.

Incentives for Innovative Technologies

Title XVII of EPACT05 Section 1703 (42 U.S.C. 16511-16514) authorized the Secretary of

Energy to make loan guarantees for projects that (1) avoid, reduce, or sequester air pollutants or

anthropogenic emissions of greenhouse gases; and (2) employ new or significantly improved

technologies as compared to commercial technologies in service in the United States at the time.

Under Section 1703, EPACT05 included as categories, among others, for eligible projects (1)

advanced fossil energy technology (including coal gasification); and (2) carbon capture and

sequestration practices and technologies.10

EPACT05 Section 1703 elaborated on gasification projects eligible for loan guarantees, and

included (1) integrated gasification combined cycle projects; (2) industrial gasification projects;

(3) petroleum coke gasification projects; and (4) liquefaction projects (coal-to-oil). Eligible

projects included under Section 1703 would be subject to emissions limits for sulfur dioxide,

mercury, nitrogen oxide, and total particulates; however, no restrictions in the law were included

on CO2 emissions. For integrated gasification combined cycle (IGCC) plants eligible for loan

For a more detailed discussion of CCS R&D at DOE, see CRS Report R42496, Carbon Capture and Sequestration:

Research, Development, and Demonstration at the U.S. Department of Energy, by (name redacted). For an in-depth

discussion of CCS technology, see CRS Report R41325, Carbon Capture: A Technology Assessment, by (name redacted).

For more information on DOE clean coal R&D, see http://energy.gov/fe/science-innovation/clean-coal-research.

For a more detailed discussion of loan guarantees for clean energy technologies, see CRS Report R42152, Loan

Guarantees for Clean Energy Technologies: Goals, Concerns, and Policy Options, by (name redacted).

Congressional Budget Office, “Loan Guarantees: Current Concerns and Alternatives for Control,” August 1978, p. 3,

http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/101xx/doc10184/78doc231.pdf.

§1703 loan guarantees should not be confused with §1705 loan guarantees. §1705 of EPACT05 was added by

enactment of the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), and was a temporary loan guarantee

program focused on deployment of renewable energy technologies and projects.

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Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

guarantees, Section 1703 required that the IGCC projects have a design that would accommodate

equipment likely to be needed to capture CO2 that would otherwise be emitted in flue gas.

Terms and Conditions

Under EPACT05 Section 1703, no loan guarantees would be made unless the loan guarantee costs

of a project were paid for by (1) appropriated funds; or (2) the borrower. These costs include the

loan guarantee credit subsidy cost, which is the estimated long-term amount that a direct loan or

loan guarantee will cost the federal government, calculated on a net present value basis, excluding

administrative costs.11 This estimated cost reflects what the government expects to pay and be

paid over the course of the loan: payments by the government to cover defaults and delinquencies,

interest subsidies, and other requirements; and payments to the government, including origination

and other fees, penalties, and recoveries.12 Without a specific appropriation, Section 1703

applicants are responsible for paying their own credit subsidy costs.13 For Section 1703 loan

guarantees, Congress has not appropriated funds for credit subsidy costs, with one exception.14

In addition to the credit subsidy costs, Section 1703 projects would need to cover certain

administrative costs: an application fee, which covers the costs associated with DOE’s financial

and technical reviews of proposed projects; a facility fee, which covers DOE’s administrative

expenses of due diligence, negotiation, and documentation; and a maintenance fee, which covers

DOE’s expenses in servicing and monitoring the loan guarantee agreement over the life of the

loan.15

Also, EPACT05 stipulated that the face value of the debt guaranteed by DOE is limited to no

more than 80% of the total project costs of the facility subject to the guarantee, as estimated by

DOE, at the time the loan guarantee was issued. However, for purposes of calculating the loan

guarantee credit subsidy costs, discussed above, the loan guarantee commitment is the full

principal amount of the loan, not just the portion guaranteed by the federal government.16

Although Section 1703 applicants would be fully responsible for the credit subsidy costs and

administrative costs, EPACT05 does not disqualify projects that receive tax credits for “clean

coal” technology from also receiving loan guarantees under Section 1703.

Office of Management and Budget Circular A-11, Part 5, Federal Credit, page 9 of section 185,

http://www.whitehouse.gov/sites/default/files/omb/assets/a11_current_year/s185.pdf.

For a brief discussion of what the credit subsidy costs are, see CRS Report IN10054, DOE Section 1703 Vogtle

Nuclear Project Loan Guarantees: How Can Credit Subsidy Fees Be Zero?, by (name redacted) and (name redacted).

In contrast to §1705 loan guarantees, for which Congress appropriated funds to pay credit subsidy costs in the

Recovery Act, P.L. 111-5. §1705 loan guarantees involved renewable energy systems, electric power transmission

systems, and biofuel projects. For more information on §1705 issues, see CRS Report R42152, Loan Guarantees for

Clean Energy Technologies: Goals, Concerns, and Policy Options, by (name redacted).

Congress provided $170 million in appropriations for credit subsidy costs for §1703 projects in P.L. 112-10, but

made the appropriations available for projects which applied for guaranteed loans under §1705 of EPACT05. In an

April 5, 2012, letter to Senators Bingaman and Murkowski, David Frantz, Acting Executive Director, DOE Loan

Programs Office, explained that the $170 million appropriation would fund credit subsidy costs for §1705 projects that

had not closed their loans and started construction prior to the September 30, 2011, deadline imposed on §1705 projects

by the Recovery Act.

U.S. Department of Energy, ENERGY.GOV Loan Programs Office, http://energy.gov/lpo/services/applicationprocess/fees.

Office of Management and Budget Circular A-11, Part 5, Federal Credit, page 13 of section 185.

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Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

Policies, procedures, and requirements for the Title XVII loan guarantee program are

promulgated in rules under 10 C.F.R. Part 609—Loan Guarantees for Projects That Employ

Innovative Technologies.

Loan Guarantee Authorizations and Solicitations

Following enactment of EPACT05, various appropriations bills have amended the authorization

of loan guarantees under Title XVII Section 1703 and set loan authority limits for certain

technology/project categories. DOE has offered several solicitations for projects to take

advantage of the loan guarantee authorization since enactment of EPACT05.

Authorizations

FY2007—Under P.L. 110-5, the Revised Continuing Appropriations Resolution, 2007 (H.J.Res.

20), Congress stipulated that commitments to guarantee loans under title XVII of EPACT05 shall

not exceed $4 billion, provided that the costs of the guaranteed loans—namely the credit subsidy

costs discussed above—would be provided by the borrowers pursuant to Section 1702(b)(2) of

EPACT05.17 The amounts received from the borrowers would remain available until expended.

FY2008—The Consolidated Appropriations Act for FY2009, P.L. 110-161 (Division C, Title III),

restated the loan guarantee authority provided in EPACT05, and made the authority available

until the end of FY2009. In the explanatory statement accompanying the bill, Congress increased

the allocation for coal-based power generation and industrial gasification activities for facilities

that incorporate carbon capture and sequestrations, or other beneficial uses of CO2, to $6 billion,

and included an additional $2 billion for advanced coal gasification.

FY2009—The Omnibus Appropriations Act, 2009 (P.L. 111-8, Division C, Title III), also restated

the loan guarantee authority provided in EPACT05, authorizing a maximum of $47 billion for

eligible projects under the entire EPACT05 Title XVII program,18 and restated that no

appropriations would be made available to pay the credit subsidy costs of the loan guarantee for

Section 1703 projects.

FY2011—The Department of Defense and Full-Year Continuing Appropriations Act, 2011 (P.L.

112-10, §1425), provided an additional $1.18 billion in loan guarantee authority to amounts

previously authorized under EPACT05, Title XVII and in the appropriations bills discussed

above. P.L. 112-10 also rescinded $18.18 billion in previous authority for Title XVII loan

guarantees.19

Table 1 summarizes the current loan guarantee authority under Section 1703.

The language in EPACT05, §1702(b)(2) is “No guarantee shall be made unless ... the Secretary has received from the

borrower a payment in full for the cost of the obligation and deposited the payment into the Treasury.”

The statute did not specifically refer to coal-based power generation, industrial gasification, or coal gasification

projects. The loan guarantee authority provided in P.L. 111-8 was amended by P.L. 111-32.

The appropriations bill specified that the rescission was for loan guarantee authority committed to renewable and/or

energy efficient systems and manufacturing, and distributed energy generation, transmission, and distribution projects.

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Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

Table 1. Current Guaranteed Loan Authority for Section 1703 Programs

billions of dollars

Technology Category

Loan Guarantee Authority

Energy efficiency and renewable energy

$1.5

Nuclear generation

$16.5

Nuclear front-end

$2.0

Fossil energy

$8.0

Mixed

$4.0

Total

$34.0

Source: GAO Report GAO-13-331R, March 15, 2013, http://www.gao.gov/products/GAO-13-331R.

Solicitations

DOE has offered two solicitations for clean coal project loan guarantees since enactment of

EPACT05—one in 2008 and one in 2013. An earlier solicitation in 2006 invited submission of

pre-applications seeking loan guarantees under Title XVII. The 2006 solicitation inviting preapplications was in support of debt financing for projects that promoted President Bush’s

Advanced Energy Initiative.20 However, the solicitation for pre-applications acknowledged that

DOE’s ability to enter into any loan guarantee agreement hinged on congressional authorization

of appropriations for the loan guarantee. DOE stated that this requirement was necessary even

though EPACT05 Title XVII allowed for the cost of a loan guarantee to be paid by the loan

recipient.

Following enactment of P.L. 110-161, which provided the required authorization of

appropriations, DOE issued its first solicitation on September 22, 2008, with Part I and Part II

applications due on December 22, 2008, and March 23, 2009, respectively.21 In its solicitation,

DOE cited P.L. 110-161 as the authority for making $6 billion available for coal-based power

generations and industrial gasification activities at new and retrofitted facilities that incorporate

CCS or other beneficial uses, and for making $2 billion available for advanced coal gasification

projects. The solicitation acknowledged that the authority to issue loan guarantees under P.L. 110161 expired on September 30, 2009, and raised the possibility that the full loan guarantee process

may not be completed by that date.

DOE issued its second solicitation on December 12, 2013.22 In the solicitation, DOE cited P.L.

111-8, as amended by P.L. 111-32, as its authority for providing up to $8 billion in loan

guarantees, to be available until expended. Projects eligible for loan guarantees under the

solicitation would be those that use advanced fossil energy technology in one or more of the

U.S. Department of Energy, Loan Guarantee Program Office, Loan Guarantee Solicitation Announcement, August 8,

2006, http://energy.gov/sites/prod/files/2014/03/f14/Solicitationfinal.pdf.

U.S. Department of Energy, Loan Guarantee Program Office, Federal Loan Guarantees for Coal-Based Power

Generation and Industrial Gasification Facilities that Incorporate Carbon Capture and Sequestration or Other Beneficial

Uses of Carbon and for Advanced Coal Gasification Facilities, September 22, 2008, http://energy.gov/sites/prod/files/

2014/03/f14/FE_Sol9_22_08.pdf.

U.S. Department of Energy, Loan Guarantee Program Office, Federal Loan Guarantees for Advanced Fossil Energy

Projects, December 12, 2013, http://energy.gov/sites/prod/files/2014/04/f14/Fossil-Solicitation-FINAL.pdf.

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Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

following technology areas: (1) advanced resource development; (2) carbon capture; (3) lowcarbon power systems; and (4) efficiency improvements. Further, projects would have to meet

both of two requirements: (1) avoid, reduce, or sequester anthropogenic emission of greenhouse

gases; and (2) employ new or significantly improved technology as compared to commercial

technology currently in service in the United States.

Projects Awarded Loan Guarantees

No loan guarantees have been issued to clean coal projects since enactment of EPACT05.

According to the DOE Loan Programs Office, the portfolio of guaranteed loans totals $32.4

billion and over 30 projects, only two of which are projects under Section 1703. Both of the

Section 1703 projects are nuclear power-related projects.23 All the other projects in the current

portfolio were issued under Section 1705 or under the Advanced Technology Vehicle

Manufacturing (ATVM) program.24 The Section 1705 loan program expired on September 30,

2011, and all loans under the Section 1705 program have been issued.

Tax Incentives

Clean coal investment tax credits were first authorized in EPACT05. These tax credits were

authorized alongside new research spending and other financial incentives, such as the loan

guarantees discussed above. Additional tax incentives for clean coal were provided in P.L. 110343, the Emergency Economic Stabilization Act of 2008 (EESA). The following sections provide

background on tax incentives for investments in clean coal technologies and carbon capture and

sequestration.

Investment Tax Credits

EPACT05 codified two new sections in the Internal Revenue Code (IRC). IRC Section 48A

provides tax credits for investment in qualifying advanced coal projects. Under EPACT05, $800

million was authorized for Section 48A tax credits for integrated gasification combined cycle

(IGCC) projects. The tax credit rate for investments in IGCC was set at 20% of eligible project

costs. Another $500 million was available for investments in other advanced coal-based

electricity generation technologies (ACBGT), at a tax credit rate of 15% of eligible project costs.

The second clean coal investment tax credit established under EPACT05, IRC Section 48B,

provides tax credits for investment in qualifying gasification projects.25 EPACT05 authorized

$350 million for qualified gasification projects qualifying for a tax credit under Section 48B. The

credit rate for qualifying investments in gasification projects was 20% of eligible project costs.

See U.S. Department of Energy, Loan Programs Office, Projects, http://energy.gov/lpo/georgia-power-company-gpcoglethorpe-power-corporation-opc-municipal and http://energy.gov/lpo/areva.

For more information on the ATVM program, see CRS Report R42064, The Advanced Technology Vehicles

Manufacturing (ATVM) Loan Program: Status and Issues, by (name redacted) and (name redacted).

Gasification technology includes “any process which converts a solid or liquid product from coal ... which [is]

recovered for [the] energy value or feedstock value into a synthesis gas composed primarily of carbon monoxide and

hydrogen for direct use or subsequent chemical or physical conversion.”

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Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

The Department of the Treasury and DOE work together to evaluate projects seeking tax credits

under IRC Sections 48A and 48B. Taxpayers investing in clean coal projects must apply for tax

credits, as these tax credits are competitively awarded. Under Section 48A, taxpayers have five

years to place in service projects for which tax credits are allocated.

In late 2006, the Internal Revenue Service announced that nearly $1 billion in investment tax

credits had been awarded to nine clean coal projects, located in nine different states.26 Two IGCC

bituminous coal projects received credits worth $133.5 million each, an IGCC lignite project

received a $133 million credit, two ACBGT projects received credits worth $125 million each,

and four gasification projects received tax credits ranging in value from $40.7 million to $130

million.27 Reportedly, 49 companies from 29 states had requested $5 billion in tax credits for

projects that cost a total of $58 billion.28 Credits were awarded to qualifying projects believed to

be technologically and economically feasible. Funds authorized in EPACT05 that were allocated

in “Phase I” of the program (allocation rounds in 2006 and 2007-2008) may be reallocated if

recipients fail to meet the conditions of the initial allocation or otherwise forfeit their awards.

The Energy Improvement and Extension Act of 2008, enacted as Division B of EESA, authorized

an additional $1.25 billion in investment tax credits for IGCC and ACBGT projects (§48A). An

additional $250 million was also provided for qualified gasification projects (§48B). The tax

credit rate for all qualified clean coal investments was increased to 30% (depending on the project

type, the rate had been 15% or 20%). Beginning with the 2009 allocation, qualifying IGCC and

other advanced coal projects must include equipment that separates and sequesters at least 65% of

the project’s total CO2 emissions. Gasification projects must separate and sequester 75% of total

CO2 emissions. Credits continued to be awarded for certified projects, with certifications issued

in a competitive bidding process by the Secretary of Treasury in consultation with the Secretary

of Energy.29 For Section 48B credits allocated starting in 2009, there is a seven-year placed-inservice requirement.

For allocations made after enactment of EESA, the Secretary of the Treasury is required to

disclose the identity of taxpayers receiving credits and the amount of the award. The results of the

2009-2010 allocation round were announced in September 2010 (see Table 2).30 More than $1

billion was awarded for Section 48A credits during the 2009-2010 allocation, leaving $240

Internal Revenue Service, “$1 Billion in Tax Credits Allocated to Clean Coal Projects,” press release, November 30,

2006, http://www.irs.gov/uac/$1-Billion-in-Tax-Credits-Allocated-to-Clean-Coal-Projects.

Projects that received credits and chose to have their selection publicly announced are (1) Duke Energy—

Edwardsport IGCC Project, Edwardsport, IN; (2) Tampa Electric Company, Polk County, FL; (3) Southern

Company—Mississippi Power Company, Kemper County, MS; (4) Duke Energy Cliffside Modernization Projects,

Cleveland and Rutherford County, NC; (5) E.ON U.S., Louisville Gas and Electric and Kentucky Utilities Co.,

Bedford, KY; (6) Carson Hydrogen Power, LLC: Carson Hydrogen Power Project, Carson, CA; and (7) TX Energy,

LLC: Longview Gasification and Refueling Project, Longview, TX. See United States Department of Energy, “Energy

Secretary and Secretary of the Treasury Announce the Award of $1 Billion in Tax Credits to Promote Clean Coal

Power Generation and Gasification Technologies,” press release, November 30, 2006, http://energy.gov/articles/

energy-secretary-and-secretary-treasury-announce-award-1-billion-tax-credits-promote-clean.

Meg Shreve, “$1 Billion Awarded in Clean Coal Tax Credits,” Tax Notes, December 4, 2006.

Under EESA, the Secretary of the Treasury is directed to give the highest priority to applicants who have a research

partnership with an eligible educational institution. Additionally, the Secretary of the Treasury is directed to award tax

credits to projects with the greatest separation and sequestration percentage of total carbon dioxide emissions.

Internal Revenue Service, “Internal Revenue Bulletin: 2010-39.” Announcement of the Results of 2009-10

Allocation Round of the Qualifying Advanced Coal Project Program and the Qualifying Gasification Project Program.

September 27, 2010, http://www.irs.gov/irb/2010-39_IRB/ar09.html.

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Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

million available for subsequent allocation. All $250 million made available for gasification

projects (§48B) under EESA was awarded in the 2009-2010 allocation round.

While $240 million in Section 48A credits were available for allocation in the 2010-2011

allocation round, none were made.31 The 2011-2012 allocation round resulted in one allocation of

$103.6 million in Section 48A credits (see Table 2).32 The 2011-2012 allocation round concluded

“Phase II” of the program.

In 2012, the Treasury announced that $658.5 million of Section 48A credits were available for

allocation. The funding available for the 2012-2013 allocation round included funding that had

previously been allocated to projects that had their certification revoked.33

Table 2. Clean Coal Tax Credit Allocations

Code Section

Project Name

Credit Awarded

2009-2010 Allocation Round

IRC §48A

Christian County Generation, LLC

$417,000,000

Summit Texas Clean Energy, LLC

$313,436,000

Mississippi Power Company

$279,000,000

Total

IRC §48B

$1,009,436,000

Faustina Hydrogen Products

$121,660,000

Lake Charles Gasification, LLC

$128,340,000

Total

$250,000,000

2011-2012 Allocation Round

IRC §48A

Hydrogen Energy California LLC

$103,564,000

Total

$103,564,000

2012-2013 Allocation Round

IRC §48A

STCE Holdings, LLC

$324,000,000

SCS Energy California, LLC

$334,500,000

Total

$658,500,000

Source: Internal Revenue Service.

Notes: Includes ‘Phase II’ and ‘Phase III’ allocations. ‘Phase I’ allocations, made before the enactment of

EESA, did not require public disclosure.

The Joint Committee on Taxation (JCT) provides annual tax expenditure estimates, or estimates

of the foregone revenue collections resulting from the clean coal investment tax credits. Between

fiscal years 2014 and 2018, the JCT estimates that the clean coal tax credits will reduce revenue

Internal Revenue Service, Announcement 2011-62, October 3, 2013, http://www.irs.gov/irb/2011-40_IRB/ar15.html.

Internal Revenue Service, Announcement 2013-2, January 7, 2013, http://www.irs.gov/irb/2013-02_IRB/ar10.html.

For example, delays at Southern Company’s Kemper County project reportedly led to a loss of tax benefits. See

Steven Mufson, “Intended Showcase of Clean-Coal Future Hits Snags,” Washington Post, May 17, 2014,

http://m.washingtonpost.com/business/economy/intended-showcase-of-clean-coal-future-hits-snags/2014/05/16/

fc03e326-cfd2-11e3-b812-0c92213941f4_story.html.

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Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

collections by $1.0 billion (see Table 3).34 From fiscal years 2006 through 2013, the JCT

estimated that clean coal investment tax credits reduced federal revenue collections by $1.3

billion, bringing the total estimated cost of the credits to $2.3 billion through 2018. These figures

might overstate the actual cost of the credits, as projects that initially received allocations have

been cancelled and there appear to be few new or proposed projects in the pipeline.35

Table 3. Tax Expenditures for Clean Coal and CO2 Sequestration Credits:

FY2014-FY2018

billions of dollars

2014

2015

2016

2017

2018

2014-2018

Credit for Investment in Clean Coal Facilities

0.2

1.0

Credit for CO2 Capture and Sequestration

0.1

0.3

0.1

0.7

Source: U.S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 20142018, committee print, 113th Congress, August 5, 2014, JCX-97-14 and Office of Management and Budget, Fiscal

Year 2015 Analytical Perspectives: Budget of the U.S. Government, Washington, DC, February 2014.

Notes: Rows may not sum due to rounding. Tax expenditure estimates for the clean coal investment credit

come from the JCT. Tax expenditure estimates for the CO2 sequestration credit were prepared by the Treasury.

Carbon Dioxide (CO2) Sequestration Credit

The Section 45Q credit for carbon dioxide (CO2) sequestration was added to the IRC as part of

the Energy Improvement and Extension Act of 2008, enacted as Division B of EESA. Under

Section 45Q, taxpayers may claim a $20 per metric ton credit ($21.51 in 2014, adjusted for

inflation) for qualifying domestic carbon dioxide that is captured and sequestered. Qualified

carbon dioxide is CO2 that is captured from an industrial source, would otherwise have been

released as an industrial greenhouse gas emission, and is measured at the source of capture and

verified upon disposal or injection. A $10 per metric ton credit ($10.75 in 2014, adjusted for

inflation) is available for taxpayers using captured CO2 as a tertiary injectant in an enhanced oil or

natural gas recovery project, so long as the qualified CO2 is disposed of in secure geological

storage.36

The Section 45Q credit is scheduled to terminate after 75 million metric tons of qualified CO2

have been captured and taken into account for the purposes of the credit. As of June 1, 2014, 27

million metric tons of CO2 had been taken into account for the purposes of the Section 45Q

credit.37 Previously, on May 14, 2013, the IRS had reported that nearly 21 million metric tons of

CO2 had been taken into account for the purposes of the credit.38 Thus, over the course of the year

The tax expenditure estimates do not directly correspond to the credit awards reported below, as credits are not paid

out in full in the year they are awarded but instead are used to offset tax liability over time.

In a 2012 report, the Congressional Budget Office (CBO) noted that a substantial portion of the clean coal investment

credits will likely never be used. See Congressional Budget Office, Federal Efforts to Reduce the Cost of Capturing

and Storing Carbon Dioxide, Washington, DC, June 2012, http://www.cbo.gov/publication/43357.

The qualification that the CO2 be stored in secure geological storage was added by the American Recovery and

Reinvestment Act of 2009 (P.L. 111-5).

Internal Revenue Service, Notice 2014-40, June 1, 2014, available at http://www.irs.gov/pub/irs-drop/n-14-40.pdf.

Internal Revenue Service, Notice 2013-34, May 14, 2013, available at http://www.irs.gov/pub/irs-drop/n-13-34.pdf.

Congressional Research Service

Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

ending June 1, 2014, the Section 45Q credit was claimed for approximately 6 million metric tons

of captured and sequestered CO2.

When enacted, the CO2 sequestration credit was estimated to cost $1.1 billion over the 10-year

budget window including fiscal years 2009 through 2018.39 The CO2 sequestration credit is not

included in JCT’s recent tax expenditure tables.40 The Treasury estimates that the CO2

sequestration credit will reduce federal revenues by $0.1 billion in FY2014, and $0.7 billion

between fiscal years 2014 and 2018 (see Table 3).41

Tax Treatment of Clean Coal Grants

Another area of concern has been the tax treatment of grants received from the Clean Coal Power

Initiative (CCPI).42 Corporate taxpayers can treat CCPI grants received as nonshareholder

contributions to capital, meaning that such payments do not have to be included in gross income

(and thus are not subject to tax).43 If grant awards are excluded from gross income, the taxpayer

must reduce their basis in the property. The reduction in basis reduces the amount that can be

claimed as depreciation deductions over time.

Under proposed legislation, the Expiring Provisions Improvement, Reform, and Efficiency

(EXPIRE) Act of 2014 (S. 2260), non-corporate taxpayers would be allowed to exclude CCPI

grants and awards from gross income. Taxpayers would be required to reduce their basis in the

property by the amount of the award. Grant recipients would also be required to pay an up-front

interest charge equal to 1.18% of the value of the award.

Issues for Congress

Many issues, not all financial, influence the future of clean coal in the United States. These

include the high-risk nature of large, complicated, technology-intensive and as-yet commercially

unproven projects that capture and sequester large volumes of CO2. In addition to the

technological challenges, issues such as liability, ownership, and long-term stewardship of the

captured CO2 add risk and complexity to large clean coal projects. Congress may decide to view

loan guarantees and tax incentives within the broader policy context that surrounds clean coal.

U.S. Congress, Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 110th Congress,

committee print, 110th Cong., March 2009, JCS-1-09.

In the 2013 tax expenditure tables, the CO2 sequestration credit is listed as one for which “quantification is not

available.” See U.S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years

2012-2017, committee print, 113th Cong., February 1, 2013, JCS-1-13. The CO2 sequestration credit is also not

included in the 2014 tax expenditure publication.

Office of Management and Budget, Fiscal Year 2015 Analytical Perspectives: Budget of the U.S. Government,

Washington, DC, February 2014, http://www.whitehouse.gov/omb/budget/Analytical_Perspectives.

For more information, see CRS Report R42496, Carbon Capture and Sequestration: Research, Development, and

Demonstration at the U.S. Department of Energy, by (name redacted).

Internal Revenue Service, Rev. Proc. 2011-30, April 14, 2011.

Congressional Research Service

Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

Loan Guarantees

A question for Congress to consider is why no loan guarantees have been issued for clean coal

projects, despite several authorizations of appropriations and two solicitations. The most recent

solicitation was issued in late 2013, and information is not publicly available about the number of

proposals that may have been submitted pursuant to the most recent solicitation. Yet, only two

Section 1703 projects, both nuclear power-related, have received or are on the path to obtaining

loan guarantees since enactment of EPACT05 nearly 10 years ago.

It could be argued that a major distinction that encouraged projects under Section 1705—

renewable energy systems, electric power transmission systems, leading edge biofuel projects—

was the decision by Congress to provide appropriated funds to pay for some or all of the loan

guarantee credit subsidy costs. DOE has not sought appropriations for Section 1703 projects

although, notably, DOE deemed zero credit subsidy costs for both nuclear power related projects

that are on track for the loan guarantees.44 Thus, a common characteristic among all projects that

received loan guarantees or are on track to receive loan guarantees is the removal of any

requirement by the loan guarantee recipient to self-pay the credit subsidy costs, either through

congressional appropriations or within the current regulatory framework (or through higher

interest rates on the loan).

It is difficult to gauge the interest by industry in seeking guaranteed loans under Section 1703

without knowing how many applications for clean coal projects were submitted in response to the

solicitations. Similarly, it is difficult to determine whether projects were not awarded loan

guarantees because they failed to meet criteria required under the program, or were disqualified

for some other reason.

An additional challenge for these projects is the requirement to employ new technology while at

the same time achieving commercial viability. In addition, the EPA proposals to regulate CO2

from new and existing coal-fired power plants have arguably introduced more uncertainty into the

future of coal. Whether the 2013 and 2014 EPA proposals will create demand for loan guarantees,

or have the opposite effect, is not clear.

Tax Incentives

When it comes to tax incentives for clean coal and carbon capture and sequestration, there are

several options for Congress to consider. One option is to maintain the status quo, which would

essentially allow existing tax incentives to phase out. Since existing tax incentives have limited

funds or are volume capped, these incentives will not be available for new investments or CO2

sequestration once available funds have been fully allocated.

A second option is for Congress to authorize additional funding for investment tax credits under

Sections 48A and 48B. However, several projects that were allocated credits under Sections 48A

or 48B have been cancelled, and given the lack of new or proposed projects, it is not clear that

additional funds for Sections 48A or 48B could be allocated in the near term. Given these

developments, a question for Congress is whether there is an appetite for these investment credits.

This controversial decision by DOE is discussed in more detail in CRS Report IN10054, DOE Section 1703 Vogtle

Nuclear Project Loan Guarantees: How Can Credit Subsidy Fees Be Zero?, by (name redacted) and (name redacted).

Congressional Research Service

Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

Further, are the tax credits considered an effective tool to further develop eligible technologies for

clean coal?

Some technical changes also have been cited as potential improvements to existing tax benefits.

Modifications to the Section 45Q credit have been proposed in the Carbon Capture and

Sequestration Deployment Act of 2014 (S. 2287). Specifically, S. 2287 would change the current

structure of Section 45Q. Credits would be allocated to applicants, so that applicants could be

assured tax credits would be available before CO2 is actually captured, with the goal of providing

greater certainty to the industry.45 S. 2287 would also allow credits to be transferred, at the

discretion of the tax credit recipient that captured the CO2, to the company storing the CO2. Both

of these proposals were included in a 2012 recommendation by the National Enhanced Oil

Recovery Initiative.46 Regarding Sections 48A and 48B investment credits, there are unresolved

issues related to reallocations for forfeited credits and recertification for projects that have not

met placed-in-service deadlines. These issues may be addressed through Treasury guidance.

Other changes in energy tax policy could also affect the outlook for clean coal and CCS

technologies. For example, a tax on carbon emissions or regulations that otherwise increase the

cost of carbon-intensive electricity production would make low-carbon coal options more

competitive. Electricity produced at facilities equipped with CCS could also benefit from clean

energy production and investment credits, such as those proposed by former Senate Finance

Committee Chairman Max Baucus.47

Also at issue is whether tax incentives should be used to promote investment in clean coal, carbon

capture and sequestration, or related technologies.48 Generally, an efficient tax system is one that

is free from incentives, where markets dictate where investments are made. There are, however, a

number of exceptions to this general case. Tax incentives that result in investments that reduce

pollution or emissions, for example, can improve the allocation of resources in the economy. Tax

incentives that lead to investment in emerging technologies with spillover benefits can also

improve the economy-wide allocation of resources. There are concerns regarding the structure of

the clean coal tax credits, particularly the investment tax credits, where recipients are selected for

and credit amounts carved out for specified technologies. Another drawback to nearly any form of

tax credits is the limited benefit provided to firms that do not pay taxes.

S. 2287 would also establish a new investment tax credit for carbon capture and sequestration equipment.

National Enhanced Oil Recovery Initiative, Recommended Modifications to the 45Q Tax Credit for Carbon Dioxide

Sequestration, Washington, DC, February 2012, http://www.c2es.org/docUploads/EOR-45Q.pdf.

Another proposal, the Expanding Carbon Capture through Enhanced Oil Recovery Act (S. 2288), would expand and

substantively reform the existing tax incentives for carbon capture and sequestration, introducing a certification process

for the allocation of redesigned §45Q credits.

For details on this proposal, see U.S. Congress, Joint Committee on Taxation, Technical Explanation of the Senate

Committee on Finance’s Staff Discussion Draft to Reform Certain Energy Tax Provisions, 113th Cong., December 18,

2013, JCX-21-13, available at https://www.jct.gov/publications.html?func=startdown&id=4537.

For a general discussion of economic considerations, see Martin A. Sullivan, “Tax Credits Ease Economy’s Shift to

Coal,” Tax Notes, September 11, 2006, pp. 901-907.

Congressional Research Service

Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief

Author Contact Information

(name redacted)

Specialist in Energy and Natural Resources Policy

[redacted]@crs.loc.gov, 7-....

Congressional Research Service

(name redacted)

Specialist in Public Finance

[redacted]@crs.loc.gov, 7-....

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