The 45Q tax credit is an incentive tax credit introduced in the US by The Internal Revenue Service (IRS) in October 2008. It provides a certain amount of monetary credit for carbon oxide that is geologically stored permanently, stored through enhanced oil recovery, or via other utilization. It is named after the relevant section in the US tax code – 45Q. The tax credit is applicable to carbon dioxide (CO2), carbon monoxide, and carbon suboxide emissions.
Although carbon dioxide is the most common and has a greater effect on the environment, carbon monoxide and suboxide are also a concern. The monetary credit for projects is $50/t CO2 for carbon capture and geologic storage (CCS) and $35/t CO2 for carbon capture and storage via utilization (CCUS).
45Q is considered the most progressive CCS-specific incentive as it provides a stable and predictable cash flow for CCS projects. The tax credit has been in effect since 2008. It was updated in 2018 to provide better opportunities for large and small businesses to reduce their emissions and expenses.
How Does the 45Q Tax Credit Work?
In January 2021, the Treasury Department and the IRS issued final regulations presenting the updated tax credit. The credit is given for 12 years from the time the equipment is placed in a condition or state of readiness and availability to store CO2. The regulations provided, include very specific and highly detailed requirements to determine:
- the credit amount in general
- characteristics of qualified facility
- definition of qualified carbon oxide
- the definition of qualified carbon capture equipment
- the security measures for the geological storage of qualified carbon oxide
- procedures for a taxpayer to make an election to allow third-party taxpayers to claim the credit
- the rules for credit recapture
Eligibility For 45Q Tax Credit
To be eligible for the 45Q tax credit, the project must be a “qualified facility”. A qualified facility is one that meets certain minimum emission thresholds and the construction of which has begun before a certain date.
Any taxpayer who owns equipment placed in service on or after February 9, 2018, and physically or contractually ensures the capture and disposal – injection or utilization of carbon oxide, is entitled to the tax credits. Projects placed in service prior to February 9, 2018 – the date of the enactment of the Bipartisan Budget Act of 2018, would receive lower-value credits.
Furthermore, eligible for the tax credit are CCS facilities that have begun construction before January 1, 2026. The IRS provides two tests to assess compliance with the beginning of the construction regulation: the Physical Work Test and the Five Percent Safe H
Another criteria that must be met is the minimum threshold for released CO2 emissions. Facilities must emit no less than:
- 500,000 tons of CO2 in a taxable year for electricity generating facilities that permanently store the emissions underground or via enhanced oil recovery
- 100,000 tons of CO2 in a taxable year for other industrial and direct air-capture facilities that permanently store the emissions underground or via enhanced oil recovery
- 25,000 tons of CO2 in a taxable year for all type of facilities that use the emissions for other utilization processes
The final regulations also simplify the definition of qualified carbon capture equipment. Components included are all that are necessary to compress, treat, process or perform other physical action to capture carbon oxide.
The term secure geological storage is also explained. It refers to the proper disposing of the carbon oxide in storage space. It includes storage in deep saline formations, oil & gas reservoirs, and unmineable coal seams. If a facility uses carbon oxide for EOR, the existence of a “secure geological storage” requires compliance and reporting. That is done either under Subpart RR of the Federal Environmental Protection Agency’s Greenhouse Gas Reporting Program or under the International Organization for Standardization (ISO) standard.
If a qualified facility uses, rather than simply stores, carbon oxide, that must be done in several approved ways. They include: chemical conversion into a compound; fixation through photosynthesis or chemosynthesis (such as growing bacteria); use for other purposes for which a commercial market exists.
It is also clarified how and when a taxpayer can transfer Section 45Q credits. Any disposer, injector, or utilizer who enters into a “binding written contract” with the original taxpayer can qualify as a credit claimant. The original taxpayer can make an election to transfer partial amounts of credits to multiple eligible claimants.
Under the rules of credit recapture, credits must be repaid if carbon oxide leaks into the atmosphere during a three-year period after the initial storage or injection.
Equivalent Of 45Q Tax Credit In Other Countries
In the European Union, there is no official tax credit system for CCS and CCUS. The cornerstone of the EU’s policy to combat climate change is the EU emissions trading system (EU ETS). The EU ETS works on the ‘cap and trade’ principle.
A cap is the limit of the amount of certain greenhouse gases that can be emitted. Companies can trade the so-called emission allowances, which they can buy or sell with one another as needed. The cap is reduced over time so that total emissions could fall.
Currently, the price of carbon credits trade at €34.25 per tonne of CO2. However, analysts have estimated that an EU carbon permit could cost €89 per tonne of CO2 by 2030. That is the amount needed for the EU to reach its 55% emissions cutting goal by that time.
In Europe, carbon capture technologies could benefit from initiatives like the Innovation Fund. It provides around €10 billion over 2020-2030 for the commercial demonstration of innovative low-carbon technologies including CCS and CCUS.
In Canada, the implemented approach to mitigating climate change is a carbon tax introduced in June 2007. The country does not have a comparable financial incentive such as the 45Q carbon capture tax credit.
However, an increasing number of stakeholders and organizations have come together to make policy recommendations. They call on the government to support the growth of Canada’s unique carbon capture technology. The goal is for the country to achieve its carbon targets and advance its leadership position in carbon capture. Ottawa is debating the introduction of a carbon capture tax credit but no concrete strategic plans have been released.
Other countries like Australia are investing directly in CCS projects focusing on increasing scalability and commercial operation.
Proposed Changes To 45Q Tax Credit
Several amendments have been proposed by advocates and taxpayers regarding the 45Q tax credit. The most vocal one has been an extension of the commencement of construction deadline by at least two years. That is to compensate for the two-year delay of the release of 45Q regulations after they were amended and expanded in 2018. Some carbon capture advocates demand a five to ten-year extension.
In addition, supporters of CCS have also proposed a direct pay mechanism. The goal is to directly benefit taxpayers without the cash tax liability. To further expand the pool of available tax equity investors, interest groups have also suggested an allowance of 45Q under the Base Erosion and Anti-Abuse Tax (BEAT), which is an alternative minimum tax.
It is an indisputable fact that 45Q is the most CCS-specific incentive in the world. However, its ability to fully lock vast emissions and reduce technology costs depends on the full guidance of how to claim the credit. Further clarifications are yet to be issued. They have to facilitate access and allow markets that are in need of carbon capture tax credits to acquire them. The US 45Q also provides a significant help for other countries seeking to develop markets for carbon capture based on established policies.