Carbon Capture Pipeline Considerations for Landowners

Three companies are seeking to build carbon capture pipelines across Iowa. The goal of the projects is to capture carbon dioxide from ethanol plants, fertilizer plants, and other industrial agricultural plants to prevent greenhouse gas from escaping into the environment. The projects each propose liquefying the carbon dioxide and transporting it through underground pipelines to secure, permanent storage facilities in remote sites.

Summit Carbon Solutions, LLC, was first out of the gate, with a proposal to partner with more than 30 ethanol plants across Iowa, Minnesota, North Dakota, South Dakota, and Nebraska. Summit filed its petition seeking a permit from the Iowa Utilities Board (IUB) on January 28, 2022. It seeks to build 687 miles of pipeline through western and northern Iowa. Summit has been purchasing voluntary easements from Iowa landowners in the path of its proposed pipeline for the past year.

On October 25, 2022, Navigator CO2 Pipeline Ventures LLC, filed its petition with the IUB seeking a permit to build a pipeline to transfer carbon dioxide emitted from biofuels plants, including Poet ethanol plants, to an underground storage facility in Illinois. Navigator seeks to build 900 miles of pipeline across Iowa.

Wolf Carbon Solutions LLC is partnering with Archer Daniels Midland to propose the third carbon sequestration project in Iowa. Wolf has not yet filed a petition seeking a permit, but has held informational meetings to educate landowners about its plans.

Process

The legal process is the same for all three projects. Before construction may commence, the companies must seek a permit for a so-called “hazardous liquid pipeline” from the IUB. Iowa Code § 479B. The IUB has sole discretion to determine whether to grant operational authority to these companies within Iowa. The decision of the IUB will ultimately turn on whether it believes the pipeline will “promote the public convenience and necessity.” Iowa Code § 479B.9. This decision will be made after a public hearing. Although the IUB has determined that the Summit hearing will be held at the Webster County Fairgrounds, a date for the hearing has not been scheduled.

Although the goal of the companies is to secure voluntary easements from impacted landowners, Iowa law provides that a company granted a pipeline permit “shall be vested with the right of eminent domain, to the extent necessary and as prescribed and approved by the IUB, not exceeding seventy-five feet in width.” Iowa Code § 479B.16. The law also requires the Board to establish standards for the “restoration of agricultural lands during and after” the construction of the pipeline. As of August 8, Summit had secured voluntary easements from approximately 40 percent of the landowners in its path. It has continued to purchase easements since that time.

Landowner Considerations

Although the terms of the agreements will vary, landowners signing a contract with one of these companies must understand the rights they are granting and the tax impact of the sale. We advise landowners to seek legal counsel to review the terms of the agreement before signing.

Permanent Easements

These projects require the companies to secure permanent easements. Although landowners continue to “own” their property, the companies’ easements grant them a permanent right to operate a carbon sequestration pipeline under the surface of the land. That right remains if the property is sold or passed down through a will or trust. Landowners should review the scope of the easement granted to ensure that the company may only use the easement for the operation of a carbon sequestration pipeline. They should also consider whether the companies have the ability to transfer ownership of the easement to other companies and what would happen in the event the company were to stop operating the pipeline, seek to rebuild the pipeline, or need to repair the pipeline.

Temporary Easements

In addition to the permanent easement required to house the pipeline, these contracts also convey temporary easements for the construction period. During the construction phase of the project, the companies  may generally access a larger portion of the owner’s property in exchange for additional compensation. Landowners reviewing these agreements should consider when this construction phase would begin and end and what access rights are granted in the event the company wishes to repair or restore the pipeline once initial construction is completed.

Crop Damages

These contracts also generally agree to compensate landowners for crop damage during the construction phase, as well as potentially reduced yields in the immediate aftermath of the construction. Landowners must review these provisions carefully to ensure adequate access to planting and harvest and to ensure that adequate compensation is provided for any periods during which cropping is restricted or impossible.

Tile and Land Restoration

Landowners should also ensure that the contract requires the company to repair any damaged drainage tile and adequately restore agricultural land after the construction phase ends. 

Liability and Indemnity

Landowners should carefully review the liability and indemnity provisions of the contract to ensure that they are protected from any liability flowing from the construction or operation of the pipeline on their property. They should also make sure they would be adequately compensated for related harm they might incur themselves.

Tax Considerations

Landowners should seek the advice of a tax professional before signing a contract to understand the tax liability of the transaction. Generally, the sale of a permanent easement is treated for tax purposes like the sale of land. This means it will be eligible for capital gains treatment. Because the landowner is selling only a portion of the rights to the property, however, tax rules require a basis allocation, meaning that only that portion of the property impacted by the easement will be considered when calculating taxable gain. If the purchase price does not exceed the basis, the landowner will reduce the basis of the affected parcel by the amount of the purchase price. If the purchase price exceeds the basis, the difference is taxable gain that must be reported as a sale of real property.

Example

A development company paid $25,000 for an easement along the southern boundary of Nancy’s farm for the construction and maintenance of a carbon pipeline. The easement crossed about 3 acres of Nancy’s 400-acre farm. Nancy’s basis was $3,000 per acre. Because the easement immediately affected only 3 acres, Nancy can use only $9,000 (3 acres × $3,000 per acre) of basis to compute her gain on the sale of the easement. Nancy must report a $16,000 ($25,000 sales price – $9,000 basis) gain from her sale of the easement. The gain is reported on Form 4797, Sales of Business Property, Part I.

Conversely, if the basis of Nancy’ affected property was $30,000, instead of $9,000, Nancy would have no reportable gain. She cannot report a loss because she has not sold her entire interest in the property. Instead, she reduces her basis by the $25,000 payment so that on a subsequent sale, her basis for gain or loss is $5,000 ($30,000 – $25,000).

Payments to secure a temporary easement for construction purposes are generally treated as rent payments. This means they are reported as ordinary income on Schedule E (Form 1040). They are not subject to self-employment tax. Any payments made to a farmer for crop damage are treated as replacement farm income. This means they are reported on Schedule F (Form 1040), subject to ordinary income tax and self-employment tax.

Final Thoughts

Landowners in the path of these projects may receive significant compensation for the sale of an easement. Before signing such a contract, however, landowners must consider many factors. This article has provided only a high-level review of several of the key considerations. It is important to seek knowledgeable legal and tax counsel to ensure a full understanding of the terms of the agreement. We at the Center for Agricultural Law & Taxation will continue to monitor the progress of these projects and provide updates on our website at www.calt.iastate.edu.