Qualifying taxpayers can claim the carbon capture and sequestration credit—often referred to by its section in the tax code (45Q)—for every metric ton of carbon oxide they capture and sequester that would have otherwise been released into the atmosphere.
Congress created the 45Q credit in the Emergency Economic Stabilization Act of 2008 (commonly, the “Bank Bailout”) and set the credit to expire the year after the Internal Revenue Service (IRS) certifies that credits have been claimed for 75 million metric tons of carbon dioxide. In June 2020, the IRS reported that credits had been claimed for 72 million metric tons. In the Bipartisan Budget Act (BBA) of 2018, Congress greatly expanded and extended the section 45Q credit. Carbon oxides captured by equipment placed in service after enactment of the BBA of 2018 are not subject to the 75-million-ton cap. Instead, taxpayers can claim the credit for every ton captured for the first 12 years after the equipment is operational.
The Inflation Reduction Act of 2022 again dramatically expanded and extended the 45Q credit. Point source carbon capture can qualify for up to $85 per ton, or $60 if the carbon is injected into an oil and gas well to increase production (EOR), or otherwise “utilized.” Direct air capture can qualify for $180 per ton, or $130 if the carbon is used for EOR or other “utilization”. The project size and design capacity requirements were reduced and the credit was extended to be available for projects starting construction before January 2033. 45Q was further amended to give all claimants a direct pay option for the first five years of the credit, with certain tax-exempt entities eligible for direct pay for all twelve years.
Noncompliance with U.S. Environmental Protection Agency (EPA) standards for carbon sequestration reporting and increased oil and gas production from injected carbon oxides have undermined the 45Q credit’s effectiveness in reducing carbon emissions.
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