Though the credits have been on the books for over a decade, Congress bolstered them two years ago as part of the 2018 Bipartisan Budget Act.

While a credit amount of $50 per metric ton may sound low, “people are interested because once you look at the total dollar numbers that are potentially on the table, it’s more attractive,” explained Mary Alexander, a senior tax associate at Vinson & Elkins. Alexander noted, for instance, that a project capturing 500,000 metric tons of carbon per year from an electricity-generating facility could generate $300 million in tax credits over the 12-year credit period.

“There’s money there — it’s just a matter of figuring out who gets what and how to make the economics work,” she added.

More recently, new information provided by the IRS on carbon capture projects and tax credits has cleared the way for more investment, said V&E tax counsel Debbie Duncan.

“The IRS set forth guidance for how you can bring in investors to provide capital for the project and what you have to do to obtain the credit, as well as certain other guidance on how that might be helpful in terms of structuring your transactions,” she said.

If you are interested in becoming an investor in a carbon capture project, here are five key questions you should consider:

How long will the operation last?

Because federal law allows a tax credit for a project to be claimed for up to 12 years, the most lucrative carbon capture investment is one that will last at least that long. But volatility in the energy markets can complicate hopes for longevity. For instance, a decline in natural gas prices could prompt a natural gas operation to be mothballed, meaning any carbon capture at the site would be shut down too. In light of such uncertainty, the investor may need to secure contractual guarantees from the carbon emitter.

How expensive is it to capture the carbon?

There are many different sources of carbon, and the source you choose will determine how much capital your project will require. For instance, natural gas processing plants are relatively inexpensive when it comes to carbon capture, because the processing plant already separates carbon dioxide from natural gas before transporting it, making it much cheaper for the investors and their partners to purify the carbon dioxide and transport it to its final destination.

“Where you have this clean stream of carbon dioxide that’s being created by equipment that already exists, that’s a much easier source to tap into,” explained V&E tax partner David Cole.

On the other hand, carbon capture from a coal-fired power plant typically requires the installation of specialized equipment to separate and purify the carbon, which can increase the capital investment on a project. Such projects may also be more vulnerable to operational issues. “It can be a very expensive application and a complicated one,” Cole said.

What will be done with the carbon after capture?

To qualify for the tax credits, captured carbon is generally routed one of two ways: to a storage site or for use in enhanced oil recovery — that is, it is pumped into an oil reservoir to help force loose oil deposits that are tough to recover through standard means. Also known as “EOR,” this option yields investors a smaller tax credit than carbon storage but provides a revenue stream: Investors can earn more from selling the carbon to oil drillers.

Here too, however, energy market volatility is an important variable. The recent drop in oil prices has softened oil companies’ demand for EOR, making carbon for this application a less lucrative opportunity for investors . . . at least for now.

What happens if the sequestered carbon leaks?

In an ideal world, once carbon is stored underground, it will stay there forever. But savvy energy investors know better than to always expect ideal circumstances. Anyone involved in a carbon capture project should keep in mind the risk that carbon may make its way back into the atmosphere. For investors, this is cause for concern not only because of the environmental implications, but also because tax rules require investors to forgo or pay back their tax credits in case of escaped carbon emissions. Investors may have contractual agreements with reservoir owners stipulating that the owners shoulder at least some of the financial risk, but this will likely push up the price of storage.

An open question remains whether insurance companies will offer policies that cover investors in case of carbon capture tax credit clawbacks and if so, how expensive those policies will be.

“Insurance brokers are optimistic they could get it done, but it’s an unusual risk for someone to write insurance for,” Cole said. “There is a whole host of things that could trigger a payout.”

How will the tax credit “pie” be divided?

The economics of carbon capture projects are challenging. Not only do developers and investors have to determine how much they can afford to pay emitters, transportation providers, and reservoir owners, they also have to determine how the tax credits will be shared. Further complicating the credit allocation is the flexibility afforded by this regime under which the parties have the option to allocate some or all of the credits to storage providers. For investors, the tax credit will frequently be the only means to monetize their investment, so the credit allocation is critical.

Services providers will benefit from the tax credit indirectly “because the tax equity investor is going to say, ‘I get this value from this tax credit, so I’ll pay you to perform this service,'” Alexander said. “People are trying to figure out how you divvy up the tax credit pie.”

Concerns and complications notwithstanding, growing interest and investment in carbon capture suggests that many remain undeterred.

“People are actively trying to piece together the puzzle of how to make the economics make sense,” Alexander said. “It’s a big issue, and one we’re excited to help clients solve.”