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March 12, 2020
The Tax Credit for Carbon Sequestration (Section 45Q)
Carbon capture and sequestration technologies can reduce
coal seams.” Tax credits claimed for captured and
greenhouse gas (GHG) emissions from coal- and natural-
sequestered carbon oxide may be recaptured, meaning the
gas-fired power plants, as well as other large industrial
taxpayer has to return the amount of the tax credit to the
sources. The tax credit for carbon oxide sequestration
Treasury if the carbon oxide ceases to be captured, disposed
(Internal Revenue Code [IRC] Section 45Q) is intended to
of, or used in a qualifying manner (i.e., if it escapes into the
promote investment in carbon capture and sequestration.
atmosphere).
What Is Carbon Sequestration?
Table 1. Key Elements of the Section 45Q Credit
Geological sequestration of carbon is primarily the process
Equipment Placed in
of storing carbon oxides by injecting them into underground
Equipment Placed in
Service on 2/9/2018 or
geological formations. Usually this process involves carbon
Service Before 2/9/2018
Later
dioxide (CO2), although sequestration of other carbon
Credit Amount (per Metric Ton of CO
oxides (e.g., carbon monoxide) is also possible. Geological
2)*
sequestration is the final step in a Carbon Capture,
Geologically Sequestered CO2
Utilization, and Storage (CCUS) system. Geological
$23.40 in 2019.
$28.74 in 2019.
sequestration is intended to permanently trap CO2 emitted
Inflation-adjusted annually.
Increasing to $50 by 2026,
from stationary anthropogenic sources, such as power
then inflation-adjusted.
plants or industrial facilities, thereby reducing net emissions
Geologically Sequestered CO2 with EOR
of this GHG into the atmosphere. CO2 can also be stored
underground when injected for enhanced oil recovery
$11.70 in 2019.
$17.76 in 2019.
(EOR) from aging oil fields, a process used in the United
Inflation-adjusted annually.
Increasing to $35 by 2026,
States since the 1970s. Currently, CO
then inflation-adjusted.
2 used for EOR comes
predominantly from natural underground CO2 reservoirs,
Other Qualified Use of CO2
although small quantities also come from anthropogenic
None.
$17.76 in 2019.
sources.
Increasing to $35 by 2026,
then inflation-adjusted.
An emerging technology to capture CO2 directly from the
Claim Period
atmosphere—“direct air capture” (DAC)—could also serve
as a source of CO
Available until 75 mil ion tons
12-year period once facility is
2 for geological sequestration or EOR. For
additional information on the technical aspects of CCUS,
of CO2 have been captured
placed in service.
see CRS Report R44902, Carbon Capture and
and sequestered.
Sequestration (CCS) in the United States, by Peter Folger.
Qualifying Facilities
The Sequestration Tax Credit (45Q)
Capture carbon after
Begin construction before
10/3/2008.
1/1/2024.
The tax credit for carbon oxide sequestration—often
Annual Capture Requirements
referred to using its IRC section, 45Q—is computed per
metric ton of qualified carbon oxide captured and
Capture at least 500,000
Power plants:
sequestered. (Before 2018, the tax credit was exclusively
metric tons.
capture at least 500,000
for CO2.) The amount of the credit, as well as various
metric tons.
features of the credit, depend on when the qualifying
Facilities that emit no more than
capture equipment was placed in service (Table 1). The
500,000 metric tons per year:
Bipartisan Budget Act of 2018 (P.L. 115-123), which was
capture at least 25,000 metric
signed into law on February 9, 2018, made numerous
tons.
changes to the Section 45Q tax credit, as discussed below.
DAC and other capture facilities:
capture at least 100,000
For the purposes of the tax credit, qualified carbon oxide is
metric tons.
that which would have been released into the atmosphere if
Eligibility to Claim Credit
not for the qualifying equipment. To claim a tax credit for
emissions, the emissions must be measured at the point of
Person who captures and
Person who owns the capture
capture as well as point of disposal, injection, or other use.
physically or contractually
equipment and physically or
If the captured carbon oxide is being stored, it must be
ensures the disposal,
contractually ensures the
disposed of in “secure geological storage.” Per IRC Section
utilization, or use as a tertiary
disposal, utilization, or use as a
45Q, secure geological storage includes “storage at deep
injectant of the CO2.
tertiary injectant of the CO2.
saline formations, oil and gas reservoirs, and unminable
Source: CRS analysis of IRC Section 45Q.
https://crsreports.congress.gov
link to page 1 The Tax Credit for Carbon Sequestration (Section 45Q)
*After 2017, the credit can be claimed for al carbon oxides, not just
At this time, no large-scale commercial sequestration
CO2. “CO2” is used throughout the table for simplification.
projects are operating and injecting large volumes of CO2
for the sole purpose of geologic sequestration. The Petra
CO2 captured using equipment placed in service before
Nova facility in Texas is the first operating industrial-scale
February 9, 2018, may qualify for tax credits until tax
coal-fired electricity generating plant with a CCS system in
credits have been claimed for 75 million metric tons of
the United States. The captured CO
CO
2 is transported by
2. In May 2019, the Internal Revenue Service (IRS)
pipeline to an oil field where it is injected for EOR.
reported that the credit had been claimed for nearly 63
million metric tons, or 84% of the limit.
For the near future, CCS projects will likely continue to
Legislative Background
capture CO2 for EOR, in part to generate revenue and offset
the costs of capture. CCS projects will also likely involve
A credit for CO2 sequestration was added to the tax code in
coal- and natural-gas-fired power plants, although
the Energy Improvement and Extension Act of 2008,
Department of Energy R&D could help expand CCS at
enacted as Division B of P.L. 110-343. The legislation
industrial facilities that emit CO
included several provisions designed to encourage cleaner,
2, such as fertilizer
production plants, steel plants, or hydrogen and other
more efficient, and environmentally responsible use of coal
chemical production facilities.
specifically and GHG emissions reductions broadly.
Issues for Congress
The Bipartisan Budget Act of 2018 (P.L. 115-123)
Industry stakeholders and lawmakers have expressed
expanded and extended the 45Q tax credit. Key changes
concern regarding the lack of guidance and regulations
included (Table 1): (1) a larger credit amount; (2) a start-
related to implementation of the tax credit. The IRS issued
of-construction deadline and 12-year claim period instead
guidance in February 2020 related to determining the start-
of the 75 million metric ton cap; (3) allowing the credit for
of-construction deadline and the allocation of credits among
use of CO2 in addition to EOR and for DAC, as well as
project partners. This guidance did not address issues
allowing smaller facilities to claim the credit; and (4)
related to determining secure geological storage or tax
allowing owners of carbon capture equipment to claim tax
credit recapture.
credits instead of the person capturing the CO2, which
creates flexibility in ownership structures facilitating tax-
Three bills in the 116th Congress—H.R. 5166, H.R. 5883,
equity investment.
and S. 2263—would modify the 45Q tax credit. H.R. 5166
Cost Estimates
would extend the start-of-construction deadline for one year
until January 1, 2025. H.R. 5883 would increase the tax
Tax expenditure estimates, or estimates of the amount of
revenue foregone due to taxpayers’ ability to claim the tax
credit for DAC facilities, remove the start-of-construction
deadline, and reduce the amount of carbon oxide required to
credit, provide information on the “cost” of the Section 45Q
be captured by DAC facilities. S. 2263 would amend
tax credit. In December 2019, the Joint Committee on
Section 45Q, by changing what is considered “secure
Taxation’s (JCT) estimated that the tax expenditure
geological storage” of carbon oxide. To qualify as secure
associated with the Section 45Q credit would be less than
storage, the carbon oxide would need to be stored in
$50 million per year through 2023 (the de minimis amount),
compliance with existing EPA rules, the Clean Air Act, and
or about $0.1 billion over the five-year period spanning
the Safe Drinking Water Act. S. 2263 would also set out
2019-2023. The Department of the Treasury’s Section 45Q
eligibility requirements for tax credits for carbon oxide
tax expenditure estimates, published in February 2020, are
greater than JCT’s at $0.6 billion over the 2019
storage associated with EOR.
-2023 five-
year period, or $2.3 billion from 2020-2029, suggesting an
Recent discussions have revealed differing perspectives in
increase in tax credit claims in later years. The variation in
Congress regarding tax credits for EOR, which some view
these estimates reflects, in part, uncertainty regarding the
as subsidizing the continued development and use of fossil
speed of CCUS deployment.
fuels. Tax policy is one potential policy option for
CCUS in the United States
supporting CCUS through reducing project cost. Congress
may consider these policies in conjunction with other
To date in the United States, nine projects have injected
legislative options such as CCUS R&D and appropriations
large volumes (i.e., at least 1 million tons each) of CO2 into
to agencies and programs involved in CCUS. For
underground formations as part of CCUS systems or related
discussion of other policy options and legislative proposals,
EOR research and development (R&D) projects. Four of
see CRS Report R46192, Injection and Geologic
these projects are currently injecting and storing CO2. Two
Sequestration of Carbon Dioxide: Federal Role and Issues
projects—a hydrogen production facility in Texas and a
for Congress, by Angela C. Jones.
natural gas processing facility in Michigan—are injecting
CO2 for EOR. The Illinois Industrial Carbon Capture and
Storage Project is injecting CO
Angela C. Jones, Analyst in Environmental Policy
2 from an ethanol production
plant for geologic sequestration into an onsite sandstone
Molly F. Sherlock, Specialist in Public Finance
formation. All of these projects operate through
IF11455
collaborations among the Department of Energy, industry,
and local research institutions.
https://crsreports.congress.gov
The Tax Credit for Carbon Sequestration (Section 45Q)
Disclaimer
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