Tax Breaks Causing Earthquakes (literally)? Never Say, “Never.”

If you were looking for answers in last night’s State of the Union Address, you were probably as satisfied as if you had spent your time perusing the Internal Revenue Code looking for logic.

I was hoping for some insight on how President Obama intended to simplify the tax code and specific examples of “loopholes” he intended to see closed. But answers were perhaps as strategically omitted as were further jabs at the Supreme Court. (As soon as “loopholes” were mentioned, I should have known specificity was not the President’s intention. Of course, specifics, like the truth, tend to offend somebody, and the State of the Union should leave everyone feeling warm, fuzzy, and patriotic, right?)

Without hearing anything of substance about the tax code (or much else, for that matter), my mind wandered to some of the tax code provisions that, not for my lack of understanding their language, but rather, for not being able to comprehend their purpose, made me say, “What?!?!” The most significant such provision being the “environmentally-friendly” tax credit under IRC §45Q.

In October 2008, Congress passed the infamous $700 Billon “Bailout Bill” (Public Law 110-343). Even before it was passed, news analysts chewed and regurgitated the anticipated and then final “pork” provisions ad infinitum. I scanned the Bill myself. While I was amused by the tax break for wooden arrow manufacturers, something else caught my attention: The Credit For Carbon Dioxide Sequestration. I rubbed my eyes, focused, and read it again.

Yes, it looked like a huge tax credit for burying CO₂ underground. The idea alone sounds absurd, but not nearly as much as its cost. The total value of the allowed credit was $1,500,000,000[1]. Yes, that’s $1.5 BILLION.

Then I started asking questions: (1) Is there a fiscal policy behind § 45Q?; (2) Does it help reduce greenhouse gases?; and (3) Overall, is it “worth” it?

Answers:

1. If the “fiscal policy” is helping a very small number of constituents save $1.5 billion, YES.

2. Maybe not. There is no conclusive research.

3. In light of the research showing that the underground storage of CO₂ increases the risk of significant seismic events (earthquakes), the health and safety hazards in the case of accidental emissions, and the fact that the cost of capturing and storing CO₂ may exceed the cost of implementing renewable energy sources, probably NOT.

IRC § 45Q provides a tax credit of $20 for every metric ton of “qualified CO₂” that is captured and stored in secure geological storage and which is not used as a “tertiary injectant.” The credit expires when credits with respect to 75,000,000 metric tons are claimed.

Okay, okay, in the grand scheme of things (say, the GDP), $1.5 billion is a pittance. It accounts for only 0.00009% of the U.S. Gross Domestic Product. However, every penny counts…Compare the $1.5 billion CO₂ tax credit to the annual student loan subsidy ($5.5 billion), and it starts to look significant.

Does capturing and storing CO₂ underground help save Mother Earth and the growing hole in her atmosphere? The verdict is out, but it’s not looking good.

The act of capturing and storing CO₂ creates CO₂, for example, in building facilities for the processes and building and maintaining storage reservoirs. Further, through natural tectonic movements, rock fissures, or design failures, CO₂ may unintentionally be released either into the ocean or the atmosphere, both with significant risks to marine and human life. In one study, it was determined that the sequestration process at a coal plant consumed 25% of its output capacity. Thus, more coal must be processed to account for the energy consumed in sequestering the carbon output of the coal production. Most interesting, however, are studies showing that the process may induce earthquakes. It has long been known that “fracking” can cause earthquakes. In fact, government scientists in 1970 intentionally induced earthquakes by increasing injections of liquid and gas into the ground (“fracking”). And while “fracking” carries a low risk of causing earthquakes, carbon sequestration “may have potential for inducing larger seismic events.”

Congress uses the tax code to influence behavior and to implement behavioral changes: e.g. the home mortgage interest deduction and the first-time home buyer’s credit encourage home ownership. But what if the very behavior Congress encourages is made more difficult by the incentive itself? For example, when a buyer knows they will get an $8,000 tax credit for the year in which they buy their first house, they may rationalize purchasing a home $8,000 more expensive than one they otherwise would have purchased. What they forget, however, is that the credit must be paid back in installments when they file their tax returns. They are then left with a higher mortgage debt in addition to a higher tax liability. What behavior was encouraged exactly? Did the credit in fact encourage the purchase of a more expensive home before individuals were financially ready (so they could take advantage of the temporary credit)? It’s very possible. Does the carbon-sequestration credit create more harm than good? Perhaps.

The § 45Q tax credit was facing the chopping block under Senator Baucus’s recent tax proposals. However, now that he will most likely be serving as Ambassador to China, the credit may be here to stay. Unfortunately, his proposed revenue-neutral environmentally-minded tax credits may be lost as well.

When it comes to environmental protectionism, China is the last country that comes to mind. However, all things being equal, with respect to a credit for burying greenhouses gasses in the dirt, perhaps China’s non-existent environmental policies are more environmentally sound than any policy at all.