The Treasury Department and the Internal Revenue Service have released new guidance aimed at keeping the federal carbon capture tax credit functioning smoothly through a period of regulatory uncertainty, offering a temporary compliance pathway for companies claiming the incentive in 2025.
The guidance, issued as Notice 2026-01, establishes a safe harbor for businesses seeking to claim the Section 45Q credit for carbon dioxide that is captured and permanently stored underground during calendar year 2025. The credit was expanded and reshaped earlier this year under the One, Big, Beautiful Bill, a sweeping tax and budget package that significantly raised the stakes for carbon management policy.
At the center of the announcement is a contingency plan tied to the Environmental Protection Agency’s greenhouse gas reporting system. Under current rules, companies claiming the 45Q credit must rely heavily on EPA reporting under its Greenhouse Gas Reporting Program, including electronic submission through the agency’s reporting platform. Treasury and the IRS acknowledged that uncertainty surrounding the EPA’s reporting tools could create compliance bottlenecks just as more projects come online.
Contingency Ready For Possible EPA Reporting Gap
If the EPA does not launch its electronic reporting system for 2025 data by June 10, 2026, taxpayers will be permitted to prepare an annual report and submit it instead to a qualified independent engineer or geologist. That third party must certify that the carbon capture and storage activity complies with greenhouse gas reporting requirements as they stood at the end of 2025.
Industry organization Carbon Capture Coalition welcomed the announced by saying: “We are pleased to see Treasury and IRS act with urgency to issue a safe harbor to allow taxpayers who capture and store carbon in dedicated saline geologic formations to claim the tax credit for the taxable year 2025. That said, it remains crucial that this safe harbor guidance is available to current taxpayers conducting all types of permanent geologic storage, including in oil and gas fields, to avoid disruptions to accounting and monitoring requirements.”
The safe harbor applies only to carbon oxide that is disposed of in secure geological storage and not used for enhanced oil or gas recovery. Treasury said taxpayers may rely on the notice until more detailed regulations are issued, including new rules governing measurement and verification standards. The agencies emphasized that the guidance is interim in nature and designed to prevent delays in credit claims while regulatory changes are still in flux.
The move is likely to be welcomed by developers and investors who view regulatory clarity as essential for financing carbon capture projects, many of which require billions of dollars in upfront capital and long development timelines.
Oversight Concerns and Legislavite Changes
The announcement comes amid growing scrutiny of the 45Q program itself. Earlier this week, two policy groups, Taxpayers for Common Sense and the Heartland Institute, urged the IRS to tighten oversight of the credit, warning that weak verification could expose taxpayers to rising costs without proven climate benefits. The groups pointed to past audits showing that most credits were claimed by a small number of taxpayers and that large sums were paid out without sufficient proof that carbon dioxide remained securely stored.
Those concerns have intensified as Congress has expanded the value of the credit. The One, Big, Beautiful Bill equalized credit levels for enhanced oil recovery and geological storage, a change estimated to add tens of billions of dollars in long term expenditure.
Legislative debates earlier this year underscored the program’s complexity. A Senate Finance Committee proposal largely preserved the enhanced 45Q credit while adjusting how it accounts for inflation, delaying indexation and raising questions about whether the incentive will keep pace with rising construction and financing costs. Industry groups have argued that inflation has already eroded much of the credit’s real value, potentially slowing deployment even as federal support remains substantial.
Read more: Senate Largely Preserves 45Q Credit But Inflation Concerns Emerge
