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.
45Q is considered the most progressive CCS-specific incentive as it provides a stable and predictable cash flow for CCS projects. The tax credit was expanded and extended in 2018 in the Bipartisan Budget Act to provide better opportunities for large and small businesses to reduce their emissions and expenses.
The credit was updated again in 2022 as part of the Inflation Reduction Act (IRA), signed into law on August 16th by President Joe Biden. It includes an increase in the amount of the carbon capture tax credits and other benefits to the industry that aim at incentivizing it and expanding carbon capture projects. It is considered a substantial improvement to the previous 2018 version.
The reason for the increased credit values is that those established in 2018 were not sufficient enough to drive the early development needed in the industry to scale up, decrease costs and reach widespread deployment. They were also insufficient for power plants with carbon capture and permanent storage and direct air capture projects that traditionally come with higher costs, to justify their investment and risks.
The Inflation Reduction Act is a “game-changer” for the industry. It increased the amount of the credit to the necessary levels to bring investment value. Essentially, it provided the required federal policy support to adequately incentivize the widespread carbon capture deployment.
Changes To 45Q Tax Credit
Since 2018, the 45Q tax credit has been updated to include direct air capture (DAC) projects for the first time, which was arguably the single most significant federal incentive for engineered carbon removal. In 2022, the Inflation Reduction Act update raised substantially the amount for DAC facilities, which became eligible for $180/t for geologically sequestered CO2 and $130/t for captured CO2 and used in EOR or utilized.
Since 2018, the tax credit has been available for the management of other harmful gases including carbon monoxide and suboxide. Prior to that, the tax credit was exclusively for carbon dioxide. In 2022, the monetary credit for projects was raised to $85/t CO2 for carbon capture and geologic storage (CCS) and $60/t CO2 for carbon capture and storage via utilization (CCUS) including enhanced oil recovery (EOR).
The tax credit regulations are very specific and highly detailed in the IRA update to determine:
- the credit amount in general
- characteristics of a 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
The changes made significantly boosted the credit’s availability to projects and have led to enhanced investors’ interest in carbon capture utilization and storage.
The 45Q enhancements in the Inflation Reduction Act, in more detail, include:
- Increasing the amount of the incentive from $50 (2018) to $85/tonne for carbon capture and storage in saline geologic formations from industrial and power generation facilities.
- Increasing the amount of the incentive from $35 (2018) to $60/tonne for carbon capture and utilization from industrial and power generation facilities, including enhanced oil recovery.
- Increasing the amount of the incentive from $50 (2018) to $180/tonne for direct air capture and storage in saline geologic formations.
- Increasing the amount of the incentive from $50 (2018) to $130/tonne for direct air capture and utilization, including for enhanced oil recovery purposes.
- Extending the commence construction window for projects to 2033 from 2026: the 2022 changes include a seven-year extension to qualify for the tax credit, meaning the projects have until January 2033 to begin construction to be able to receive the credit.
- The credit can be realized for 12 years after the carbon capture equipment is placed in service and will be inflation-adjusted beginning in 2027.
- Providing a direct pay and transferability option for developers who claim the credit which significantly unburdens developers and investors from complex processes and allows them to reap more of the benefits of the 45Q tax credit.
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.
Eligible for the tax credit are CCUS facilities that have begun construction before January 1, 2033. The IRS provides two tests to assess compliance with the beginning of the construction regulation: the Physical Work Test and the Five Percent Safe Harbor.
The IRA’s broadened eligibility criteria for qualified facilities are:
- The threshold for electricity-generating facilities that permanently store the emissions underground or via enhanced oil recovery was lowered to 18,750 tonnes of CO2 from the previous threshold of 500,000 tonnes of CO2 in a taxable year.
- The threshold for other industrial facilities that permanently store the emissions underground or via enhanced oil recovery was lowered to 12,500 metric tonnes of CO2 from the previous 100,000 tonnes of CO2 in a taxable year.
- The threshold for direct air capture facilities that permanently store the emissions underground or via enhanced oil recovery to just 1000 metric tonnes of CO2 from the previous 100,000 tonnes of CO2 in a taxable year.
- Power generation facilities must meet a capture design capacity requirement of not less than 75% of the CO2 from an electricity-generating unit that will install the capture equipment.
The updated regulations in the IRA 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. The IRA includes changes that eases the manner in which 45Q credits are monetized and diminishes the need for complicated tax equity structure so that one can benefit from the credits. The owner of a qualified CCUS project can sell any portion of its 45Q credits to third parties for cash or after certain years seek direct payment for the credits from the Treasury.
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.
In the bloc, carbon capture technologies could benefit from initiatives like the Innovation Fund. It aims to allocate around €38 billion over the 2020-2030 period from the auctioning of allowances under the EU Emissions Trading system, for the commercial demonstration of innovative low-carbon technologies including CCS and CCUS.
In November 2022, the European Commission adopted a proposal (COM/2022/672) for an EU-wide voluntary framework known as the Carbon Removal Certification Framework (CRCF), as a response to the support for carbon capture development in the US.
The framework aims to boost industrial carbon removal technologies like bioenergy with carbon capture and storage (BECCS) or direct air carbon capture and storage (DACCS).
In June 2023, the European Commission published a call for evidence and open public consultation on the Industrial Carbon Management Strategy – a preparation for a new EU strategy for carbon capture, utilisation and storage (CCUS) deployment in the bloc.
The strategy will define the role carbon capture and storage and carbon capture and utilization will have in decarbonizing the EU economy by 2030, 2040 and 2050, respectively, and what measures are needed to optimize their potential, including in the deployment of EU-wide CO2 transport and storage infrastructures.
Another development in 2023 was also seen as supportive of the industry. On October 25th, the European Parliament ITRE Committee adopted a report on the Net-Zero Industry Act (NZIA) by MEP Christian Ehler that suggests the proposed development of 50 million metric tons of annual operational CO2 injection capacity on the EU territory by 2030. EU-based oil and gas extractors are also called to take responsibility for building EU CO2 storage infrastructure.
In the United Kingdom
Similar to the EU, the United Kingdom does not have a generalized incentive structure for carbon capture projects. The country has announced a target to capture approximately 30 million metric tons of CO2 by 2030 and to reach zero emissions by 2050. In 2021 it also announced a CCUS supply chain roadmap that aims to outline how the government and the industry can work together to maximize the potential of carbon capture.
In March, 2023 the Chancellor of the Exchequer Jeremy Hunt announced a £20 billion ($24 billion) investment boost directly at carbon capture projects.
Through this cash injection £1 billion ($1.25 billion) will be distributed each year to four of its six industrial clusters: North Wales, the North West of England and the East Coast. This amount builds on previously announced funding of £1 billion each ($1.25 billion) for projects in the HyNet Cluster and the East Coast.
In Canada, the implemented approach to mitigating climate change is a carbon tax introduced in June 2007. In April 2022, Prime Minister Justin Trudeau’s government proposed a tax credit to cover 50% of carbon capture technology cost with the goal of spurring investment in carbon capture and storage. The measures was one the largest and most eagerly anticipated, outlined in the federal government’s new fiscal plan.
The proposed tax credit is expected to cost the federal government $2.6 billion in the first five years of the program and up to $8.6 billion by 2030. An additional credit of 37.5% are allocated to cover equipment for transportation, storage and use of carbon dioxide emissions.
It will also include a 60% credit for investment in direct air capture technologies to remove CO2 from the atmosphere. The credit excludes projects that include the use of CO2 for enhanced oil recovery.
Other countries like Australia are investing directly in CCS projects focusing on increasing scalability and commercial operation.
The 45Q tax credit is the most CCS-specific incentive and the most significant policy support for the carbon capture sector in the world. The IRA of 2022 exponentially boosts the capabilities of the sector and the benefits of the structures outlined in the 2018 Act. It also serves as an example and use-case for other countries seeking to develop markets for carbon capture based on policy decisions.
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.
The qualifying facilities for monetary support from the 45Q tax credit include power plants, industrial facilities, other stationary sources that emit CO2, and direct air capture (DAC) facilities. Only facilities physically located within the U.S. are eligible.
The last changes to the 45Q tax credit were introduced in 2022 and included as part of the Inflation Reduction Act. The credit was expanded to comprise all carbon oxides, not only CO2, the amount of the tax credits was raised high enough to substantially speed up the scale and deployment of the technology in the US. The captured emissions threshold for qualified facilities was lowered to include a broader range of installations.
Yes, the IRA gives a direct payment option. The 45Q can be received as a fully refundable direct payment as if it were an overpayment of taxes. For-profit, tax-paying entities can only realize the direct pay option for five years after the carbon capture equipment is placed in service while tax-exempt entities such as states, municipalities, Tribes, and cooperatives can realize the direct pay option for the full 12 years after the carbon capture equipment is placed in service.
Section 45Q(e)(1) provides that the term “direct air capture facility” means any facility that uses carbon capture equipment to capture carbon dioxide directly from the ambient air. The tax credit also covers emerging technologies that capture CO2 directly from the atmosphere.