Did the Inflation Reduction Act Help Direct Air Capture?

August 15, 2023

Over the Fall 2022 semester, I wrote Subsidies for Direct Air Capture: Lessons From the Solar Industry. In the paper, I use solar – one of the few climate technologies with a history of subsidies – as a case study to project whether the subsidies in the Inflation Reduction Act (IRA) have set Direct Air Capture (DAC) up for success. To do so, I researched the history of federal U.S. solar subsidies, drew lessons from that history, and then applied those lessons to the measures in the IRA supporting DAC.

     1. Solar and its Subsidy History in Brief

Subsidies for climate technologies are a relatively new practice that began with solar. The solar industry’s initial support from the federal government came through research by NASA starting in the 1950s. At that time, solar technology was only being discussed for applications in space and was highly inefficient relative to today. In the 1970s, solar grew into the residential context as a reaction to that decade’s energy crisis. To stimulate solar power’s use, the Energy Tax Act of 1978 gave solar its first subsidy - a 30% tax credit for homeowners investing in rooftop solar.[1] This subsidy model, granting someone a tax credit as an incentive to invest in a climate technology, became the go-to model for future solar subsidies. That same model heavily influenced how the IRA created its subsidy structure for climate technologies like Direct Air Capture (DAC).

     2. Lessons from Solar’s Subsidy History

Analyzing the solar industry subsidies from NASA in 1950 to today revealed five lessons for incentivizing climate technologies. First, the federal government has a concerning tendency to wait until a crisis emerges to act. Second, targeting a specific technology is critical for fast, sustained advancement in that technology. Third, to achieve long-term technological progress in a clean energy technology, the technology needs sustained subsidy support. Fourth, grants for a specific technology have proven better than tax credits (like the one mentioned above) at developing early-stage climate technologies.[2] Finally, to help an early-stage technology achieve success, grants must provide support beyond funding like business coaching and other resources.

     3. Applying the Lessons from Solar to DAC and the IRA

Today, DAC is similar to solar in the 1950s – early stage and expensive. Before the IRA, DAC had little financial support from the federal government. It had a tax credit called Section 45Q; however, the credit was weak and had little impact. Thus, the IRA had a chance to set DAC up for success by following all five lessons I learned from the solar industry.

For the most part, the IRA did address the lessons above laying excellent groundwork for DAC technologies. Through the IRA, the government increased the Section 45Q credit, created a credit monetization system, and extended the credit for 12 years. These improvements have made DAC far more reliable and investable. The IRA also created more incentives, including a “Carbon Shot” program through the Department of Energy (DOE) to support DAC technology with funding and coaching. However, there are two main improvements that the government should make in its current DAC subsidy scheme to encourage innovation and sustain technological progress.

First, Section 45Q should have some upfront grant measure to ensure that low-tax liability projects are subsidized, thus leveraging a wider cast of innovators in the DAC field. As a tax credit, Section 45Q only applies to those that owe taxes. Like solar, DAC projects require large initial inputs of capital, which means entities pursuing DAC facilities have little to no profit to begin with. As taxes largely accumulate based on profit, these entities do not have a significant tax burden to use the 45Q credit for the first few years of their project. Further, the innovation that DAC needs to become practical requires the significant innovation potential that small firms and inventors can bring. These small actors tend to have small tax liabilities, which limits the incentive Section 45Q creates. One way to support small players is to add an upfront grant option to the Section 45Q credit.[3] An upfront grant option for DAC would drive small-scale innovation and increase the adoption of DAC technologies.

Second, the $99.6 billion that the IRA allocated for general carbon capture projects are necessary, but Congress should have worked directly with the DOE to provide specific goals and funding amounts for Carbon Shot and other DAC projects. Currently, the only measurable achievement set for DAC is decreasing its cost of capture to $100/Mt. But Carbon Shot needs to enumerate more goals to help DAC achieve a capture price of $100/Mt while ensuring DAC impacts climate change in the process. These goals could focus on shortening commercialization time for DAC facilities, driving down the input costs, setting energy efficiency minimums, and setting renewable energy quotas for powering the facility.

     4. Conclusion

Overall, by following a typical model for energy technologies the IRA will greatly benefit DAC. Within the context of the solar industry’s past subsidies, however, the federal incentives still have holes in terms of stimulating DAC’s long-term technological progress.

     5. Extra Insights

Through my research, I came away with a broader perspective on where specific subsidy types are most effective. I found that tax incentives, similar to Section 45Q, are better equipped for commercializing a climate technology because they incentivize purchasing and operating the technologies. In contrast, R&D programs similar to Carbon Shot are better suited to drive innovation within a climate technology because they can address specific problems facing the technology. Thus, I believe tax credits should be emphasized more for technologies that need commercialization—like solar today—and R&D funding should be emphasized more for technologies that need to develop—like DAC today.     

The full paper provides much more detail, support, and analysis for what I have discussed above. Subsidies for Direct Air Capture: Lessons From the Solar Industry was published in the July edition of The Environmental Law Reporter.

[1] This means that homeowners could take an amount off of their end of year tax liability equal to 30% of the cost of the rooftop solar.

[2] Grants are money from the government given directly to an entity. Thus, instead of reducing taxes at the end of the year, an entity gets value from a grant immediately.

[3] An upfront grant option would allow someone to choose between redeeming the Section 45Q credit on their taxes at the end of the year or redeeming the credit as a grant immediately. Solar successfully used an upfront grant through its Section 1603 subsidy.

Find the link to the published article here: https://www.elr.info/articles/elr-articles/subsidies-direct-air-capture-lessons-solar-industry