May 3, 2023

Tax Credit for Carbon Oxide Sequestration, IRA Section 45Q

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The Inflation Reduction Act of 2022 (“IRA”) was signed into law on August 16, 2022.  The IRA contains tax incentives for environmental matters, with one being Section 45Q, Credit for Carbon Oxide Sequestration.

Geological sequestration of carbon entails the injection of carbon oxides into underground geological formations, where they are permanently trapped or transformed.  Generally, the process involves carbon dioxide (“CO2”); however, injection and sequestration of other carbon oxides, such as carbon monoxide, is possible.  Geological sequestration is the last step in the carbon capture and sequestration system.

Background on Section 45Q

In general, Section 45Q is designed to incentivize and promote investments in carbon capture, utilization, and storage (“CCUS”) projects to reduce greenhouse gas emissions and mitigate climate change by capturing and storing CO2 from industrial processes, such as power plants or manufacturing facilities.

Section 45Q was originally introduced as part of the Energy Improvement and Extension Act in 2008 (Division B of P.L. 110-343) and permitted a credit for CO2 sequestration in a bid to encourage environmentally responsible use of coal specifically and to reduce greenhouse gas emissions. 

In 2018, the Bipartisan Budget Act (P.L. 115-123) widened and expanded the Section 45Q tax credit.  The changes were (1) a larger credit amount; (2) a start-of-construction deadline and 12-year claim period instead of the 75 million metric ton cap; (3) allowing the credit for CO2 utilization in addition to enhanced oil recovery (“EOR”) and for direct air recapture (“DAC”); and (4) permitting owners of carbon capturing equipment to claim tax credits instead of the person capturing CO2, creating flexibility in ownership structures facilitating tax-equity investment.

The IRS issued final regulations in January 2021, for claiming Section 45Q credits.  These regulations addressed securing geological storage, credit recapture, and taxpayers eligible to claim the credit.

What The IRA Does with Respect to Section 45Q

The act extends the construction deadline date for carbon capture or direct air capture facilities under Section 45Q until January 1, 2033.  It also modifies the capacity requirements and base credit amounts for the credit.

Increases the credit amount:
  • From $50 to $85 per ton for CCUS for industrial facilities and power plants for saline geological formations.
  • From $35 to $60 per ton for utilization of captured CO2 and its precursor, carbon monoxide, to produce low and zero-carbon fuels, chemicals, building materials, and other products, or for EOR.
  • From $50 to $180 per ton for DAC stored in saline geologic formations and from $35 to $130 per ton for utilization or EOR.
Decreases the minimum plant size eligibility requirement:
  • From 100,000 to 1,000 tons per year for DAC.
  • From 500,000 to 18,750 metric tons per taxable year for an electric generating facility paired with the design capacity requirement discussed below.
  • From 25,000 to 12,500 metric tons per taxable year for any other facility.

For design capacity requirements, point-source carbon capture projects on electric generating units[1] will be required to design capture equipment to capture at least 75 percent of the baseline carbon oxide production of such of unit.

In a direct pay compromise, projects will receive direct pay for the first 5 years after the carbon capture equipment is placed in service, but there is no direct pay option for the final 7 years of the credit.  However, nonprofit organizations and co-ops are able to receive direct pay for all 12 years of the credit.

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If you would like to discuss anything contained in this alert or have questions please reach out to a member of our team below.

The information provided in this communication is of a general nature and should not be considered professional advice.  You should not act upon the information provided without obtaining specific professional advice.  The information above is subject to change.

[1] Section 45Q(e)(1), The term “applicable electric generating unit” means the principal electric generating unit for which the carbon capture equipment is originally planned and designed.

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