Policy Memo: Recognition of Carbon-Negative Technologies and Expansion of ITC Eligibility on Proposed Treasury Regulations Section 48E (REG-119283-23) on Industrial Wastewater Treatment Facilities Capturing Clean Biogas

Introduction

On May 29, 2024, the U.S. Treasury and IRS released new regulations for the Clean Electricity Investment Tax Credit (ITC). The revised ITC framework, which is under Section 48E of the Internal Revenue Code, is set to take effect on January 1, 2025 ("Summary of Inflation Reduction Act provisions related to renewable energy").1 These changes to the Inflation Reduction Act (IRA) introduce significant challenges for biogas producers. Facilities that capture methane from industrial wastewater treatment to produce renewable natural gas (RNG) are particularly affected, as the current ITC provides tax credits of up to 40% of the cost of the project ("Summary of Inflation Reduction Act provisions related to renewable energy"). These credits are instrumental in providing environmental solutions that cost companies less than the current business as usual scenario. Without the ITCs, private companies may not invest in critically needed infrastructure that combines the production of clean energy with clean water. The ITC framework should be amended to enable the use of RNG under Section 48E, ensuring that biogas projects continue to contribute to the clean energy transition.

Threats to Companies Investing in Clean Energy

Cambrian Innovation is a rapidly growing service company transforming industrial wastewater into reusable clean water while producing clean energy (Cambrian Innovation). Cambrian builds and operates wastewater facilities on-site at industrial manufacturers, serving industries such as breweries, wineries and other beverage production as well as cheese and dairy production. Cambrian’s proprietary technologies have the potential to solve industrial wastewater issues in rapidly evolving sectors, such data centers and pharmaceutical manufacturing. Cambrian’s processes generate RNG by capturing methane from anaerobic digesters used to clean wastewater. The methane is processed and directed into pipelines. These projects currently qualify for the ITC under Section 48(a)(3)(A)(x) as “qualified biogas facilities.”

The current ITC is a critical factor in the economic viability of innovative wastewater treatment solutions. Cambrian’s on-site industrial wastewater treatment and energy recovery facilities enable companies to significantly reduce their environmental footprint ("Case Study: Dr. Pepper Snapple Group"). However, companies are often unwilling to make this transition without a corresponding economic advantage. With the ITC, Cambrian can provide customer pricing below their current costs of wastewater removal and treatment. The ITC also drives private investment in companies like Cambrian, correspondingly driving innovation in wastewater treatment and clean energy production.

Clean energy progress does not exist in isolation. Producing RNG through industrial wastewater treatment significantly contributes to the IRA’s broader goal of addressing climate change by contributing to both clean water and clean energy needs ("The White House"). RNG is a vital clean energy source that reduces GHG emissions (EPA). The U.S. Environmental Protection Agency (EPA) has urged RNG projects where feasible (EPA). Biogas captured from wastewater treatment facilities would otherwise be released to the atmosphere or flared to convert its methane content to CO2 (Argonne National Laboratory). Capturing the methane and converting it to RNG on a lifecycle basis reduces greenhouse gas emissions to a potentially negative carbon impact (Argonne National Laboratory). The interconnection between clean water and clean energy is central to comprehensive climate change solutions. However, the proposed regulatory changes threaten to disrupt this synergy.

Policy Issue

The proposed changes to the Internal Revenue Code remove the ITCs available to “qualified biogas facilities” under Section 48(a)(3)(A)(x). In its place, new Section 48E purports to adopt a technology-neutral approach to ITCs. To qualify under the proposed Section 48E, a facility must meet three criteria: 1) it must generate electricity, 2) it must be placed in service after December 31, 2024, and 3) it must have a greenhouse gas emissions rate of no greater than zero ("Section 45Y Clean Electricity Production Credit and Section 48E Clean Electricity Investment Credit"). However, the proposed Section 48E continues to identify certain qualified zero-greenhouse gas technologies, including wind, solar, geothermal and nuclear – but not biogas.

Biogas facilities face two major challenges under the new Section 48E ITC framework. First, Section 48E requires facilities to generate electricity. Many biogas projects, including those associated with wastewater treatment, currently produce RNG rather than electricity. Second, biogas facilities must meet the requirement for zero greenhouse gas emissions by undergoing a lifecycle analysis fraught with ambiguities and delays. However, lifecycle carbon accounting mechanisms proving RNG’s contribution to clean energy have long existed, such as the Argonne National Laboratory’s lifecycle assessment tool (Argonne National Laboratory).

Proposed Changes

The Treasury must amend the proposed Section 48E so it does not exclude biogas projects from the ITC framework. The following changes will ensure the continued viability of biogas production in the clean energy landscape:

1. Recognition of Carbon-Negative Technologies: The Treasury should officially recognize RNG recovered from wastewater treatment facilities as a qualifying technology under Section 48E. “Wastewater treatment biogas recovery facilities” should be on the table that will be published by Treasury listing technologies that qualify for the 48E Credits.
2. Expansion of ITC Eligibility to RNG-Producing Facilities: The first criteria under the proposed Section 48E should be modified to require a qualified facility to generate electricity or produce RNG. The proposed exclusivity of electricity generation unfairly penalizes biogas projects that primarily produce methane for conversion into RNG.

Conclusion

Under the existing regulations, ITCs have presented a crucial opportunity for biogas projects to contribute to greenhouse gas emissions reductions. However, without necessary amendments from the Treasury, the biogas sector is at risk of being sidelined under the proposed Section 48E. The Treasury must act swiftly to fully recognize wastewater treatment biogas recovery facilities within the clean electricity framework, allowing these carbon-negative technologies to continue advancing the country’s renewable energy and clean water goals.

 

^Footnotes

^{Argonne National Laboratory, Renewable Natural Gas (RNG) for Transportation, at 1 (2021), available at https://afdc.energy.gov/files/u/publication/RNG_FAQ_March_2021_FINAL_0.pdf?64c368689c.}

^{Cambrian Innovation, https://www.cambrianinnovation.com/}

^{“Case Study: Dr. Pepper Snapple Group” at https://cdn.prod.website-files.com/6035802baa8fd10ac90273f5/6035802baa8fd152f402750d_Cambrian-Dr-Pepper.pdf}

^{EPA, An Overview of Renewable Natural Gas from Biogas, at 1 (2020), available at https://www.epa.gov/sites/default/files/2020-07/documents/lmop_rng_document.pdf.}

^{EPA, Greenhouse Gas Emissions – Overview of Greenhouse Gases, available at https://www.epa.gov/ghgemissions/overviewgreenhouse-gases (last updated Apr. 11, 2024).}

^{The White House, Inflation Reduction Act Guidebook, available at https://www.whitehouse.gov/cleanenergy/inflation-reductionact-guidebook/ (last updated Sept. 21, 2023).}

^{"Section 45Y Clean Electricity Production Credit and Section 48E Clean Electricity Investment Credit," https://www.federalregister.gov/documents/2024/06/03/2024-11719/section-45y-clean-electricity-production-credit-and-section-48e-clean-electricity-investment-credit}

^{"Summary of Inflation Reduction Act provisions related to renewable energy," at https://www.epa.gov/green-power-markets/summary-inflation-reduction-act-provisions-related-renewable-energy}