By Valerie Volcovici and Leah Douglas

WASHINGTON (Reuters) - The U.S. Environmental Protection Agency has found that Archer-Daniels-Midland violated federal safe drinking water rules and its underground injection permit with a leak at the first major U.S. underground carbon sequestration facility in Illinois, the agribusiness company confirmed on Friday.

The Illinois Industrial Carbon Capture and Sequestration (CCS) Project is meant to demonstrate the ability of carbon dioxide to be stored safely underground.

The Biden administration's Inflation Reduction Act expanded tax credits for CCS projects from $50 a tonne to $85, generating more interest in these projects.

In an Aug. 14 letter to ADM, the EPA said a July inspection of the site found that carbon dioxide injected into the subsurface flowed into "unauthorized zones," and that the company failed to follow an emergency response and remediation plan and or to monitor the well in accordance with its permit.

Leaks from fractures in the rock layers or from injection could contaminate both the soil and groundwater in the area surrounding the storage site.

ADM responded to the EPA's notice on Aug. 22 and said that it had detected some corrosion in one of its two deep monitoring wells and subsequently plugged it and reported it to the agency, according to a copy of the letter seen by Reuters.

"At no time was there any impact to the surface or groundwater sources or any threat to public health," ADM spokesperson Jackie Anderson said in a statement.

"We continue to be confident in the safety, security and effectiveness of CCS as a greenhouse gas mitigation technology and its potential to bring new industries and economic opportunities to the entire state of Illinois."

The trade group for the carbon capture industry said the incident showed that the monitoring system for CO2 injections was working.

"We look forward to learning more about best practices that ADM and EPA identify from this incident," said Carbon Capture Coalition executive director Jessie Stolark.

Food & Water Watch Policy Director Jim Walsh said the underscores concerns by local communities about the safety of the practice.

(Reporting by Valerie Volcovici; Editing by Marguerita Choy)