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Updated September 18, 2020
Carbon Storage Requirements in the 45Q Tax Credit
The Internal Revenue Code Section 45Q tax credit is
issuance of regulations. The guidance established that
intended to promote investment in carbon capture and
taxpayers claiming the 45Q tax credits must demonstrate
sequestration (CCS), a process designed to reduce
secure geological storage by calculating the amount of CO2
emissions of greenhouse gases (GHGs) from power plants
at the source of capture using methodologies contained in
and other industrial sources. Geologic sequestration of
EPA’s 2009 Mandatory Reporting of Greenhouse Gases
carbon dioxide (CO2), a type of carbon storage, is a process
Rule (40 C.F.R. Part 98). This rule does not regulate GHG
aiming to permanently store the captured gases deep
emission levels but requires facilities designated as GHG
underground. The Section 45Q tax credit can be claimed for
sources to report annual GHG emissions as part of EPA’s
the capture and sequestration of carbon oxides, categorized
Greenhouse Gas Reporting Program (GHGRP) and to
as (1) CO2 captured directly from industrial facilities
follow monitoring, recordkeeping, and verification
originally placed in service before February 9, 2018; (2)
requirements. Title 40, Part 98, Subparts RR and UU, of the
CO2 and other carbon oxides captured directly from
Code of Federal Regulations, added in 2010, apply to GHG
industrial facilities originally placed in service on or after
sources associated with the underground injection and
February 9, 2018; and (3) CO2 captured directly from the
sequestration of CO2.
ambient air (“direct air capture”). In 2020, Section 45Q
provides tax credits of $31.77 per ton for carbon oxide that
Subpart RR
is geologically sequestered and $20.22 per ton for carbon
Subpart RR applies to facilities with wells that inject CO2
oxide that is sequestered during enhanced oil recovery
for long-term geologic sequestration. This includes all wells
(EOR), or used in other qualified industrial processes.
classified by EPA as Underground Injection Control (UIC)
These tax credits increase to $50 and $35 per ton,
Class VI geologic sequestration wells. The facilities must
respectively, by 2026.
calculate and report (1) the mass of CO2 received; (2) the
mass of CO2 injected into the subsurface; (3) the mass of
In June 2020, the Internal Revenue Service (IRS) issued a
CO2 produced (mixed with produced oil, gas, or other
notice of proposed rulemaking, “Credit for Carbon Oxide
fluids); (4) the mass of CO2 emitted by surface leakage; (5)
Sequestration,” which includes proposed requirements for
the mass of CO2 emitted as equipment leakage or vented
demonstrating the “secure geological storage” of carbon
from surface equipment; (6) the mass of CO2 sequestered in
oxides in underground formations needed to qualify for
subsurface geologic formations; and (7) the cumulative
45Q tax credits (85 Federal Register 34050). Section 45Q
mass of CO2 sequestered since the start of required
and this proposed rule cover a larger set of chemical
reporting. Subpart RR also requires facilities to submit a
substances (i.e., carbon oxides) compared to some other
proposed monitoring, reporting, and verification (MRV)
federal GHG-related rules, which specifically target CO2.
plan meeting certain requirements to EPA (Table 1). Once
approved, EPA issues a final MRV plan.
Secure Geological Storage in 45Q
Section 45Q tax credits were enacted as part of the Energy
Table 1. Subpart RR MRV Plan Requirements
Extension and Improvement Act of 2008 (P.L. 110-343,
Delineation of the maximum and active monitoring areas
Division B). Section 45Q(f)(2) of the act required the
Department of the Treasury, in consultation with the
Identification of potential CO2 leakage pathways in the
Environmental Protection Agency (EPA), the Department
maximum monitoring area and the likelihood, magnitude,
of Energy, and the Department of the Interior, to establish
and timing of surface leakage through these pathways
regulations for the secure geological storage of qualified
Strategy to detect and quantify CO2 surface leakage
carbon oxide to prevent release into the atmosphere.
Strategy to establish the expected baselines for
Further, the provision defined secure geological storage
monitoring CO2 surface leakage
locations to include “deep saline formations, oil and gas
reservoirs, and unmineable coal seams ,” under conditions
Considerations intended to be used to calculate site-
as determined in regulations. Secure geological storage is
specific variables in the mass balance equation
required whether the taxpayer is claiming the credit for
UIC wel number, if permitted under the UIC program
carbon oxides used as a tertiary injectant and consequently
Proposed date to begin col ecting data for calculating the
stored during EOR operations or injected into underground
total amount of CO2 sequestered
formations solely for geologic sequestration.
Source: 40 C.F.R. Part 98, Subpart RR.
Connection to EPA’s Greenhouse Gas
Reporting Program Requirements
From 2016, the first year of reporting, through 2018, the
latest year for which GHGRP data are available, five
In 2009, IRS Notice 2009-83 provided interim guidance on
facilities injecting CO
specific requirements for secure geological storage, pending
2 have reported CO2 data to EPA
under Subpart RR. This includes one facility in Illinois
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Carbon Storage Requirements in the 45Q Tax Credit
injecting industrial CO
Requirements for Enhanced Oil Recovery
2 into a s aline aquifer. As of 2018,
the facility reported that 1,031,652 tons of CO2 had been
The proposed rule would establish two options for
sequestered at the site. The other reporting facilities
demonstrating secure geological storage for carbon oxides
injecting CO2 do not qualify for the 45Q tax credit because
stored during EOR operations. Taxpayers could meet the
the CO2 originates from natural, underground formations,
requirements by either (1) storing carbon oxides in
so sequestration does not reduce net CO2 emissions into the
compliance with Subpart RR requirements or (2) storing
atmosphere. Although it is not required for the latter
carbon oxides in compliance with a standard adopted by the
facilities, all of the above facilities have EPA-approved
International Organization for Standardization (ISO) and
MRV plans.
endorsed by the American National Standards Institute
(CSA/ANSI ISO 27916:19). According to the Treasury
Subpart UU
Department, the methodology of this standard is similar to
Subpart UU applies to GHG source facilities with wells
the Subpart RR methodology in that both “require an
used to inject CO2 during EOR operations or for any
assessment and monitoring of potential leakage pathways;
purpose other than geologic sequestration. These facilities
qualification of inputs, losses and storage through a mass
are required to report the volume of CO2 received and its
balance approach; and documentation of steps and
origin (if known). An MRV plan is not required, but
approaches.” In the preamble to the proposed rule, the
facilities may choose to submit a plan.
department observes that many stakeholders requested
flexibility in the requirements and suggested this standard
Nearly 120 facilities have reported to EPA under Subpart
as an alternative for demonstrating secure geological
UU since the first year of required reporting in 2011,
storage.
including three facilities that received research and
development exemptions from Subpart RR reporting. These
The IRS also proposes that EOR facilities can self-certify
facilities have reported a total of 2,764,386 tons of CO2
carbon oxide volumes claimed for the tax credit if they
received for injection from 2011 through 2018. Subpart UU
choose to demonstrate secure geological storage through
does not require facilities to report the amount of CO2
compliance with Subpart RR. If the facility uses the ISO
sequestered.
standard, however, the documentation must be certified
annually by a qualified independent engineer or geologist.
2020 45Q Proposed Rule
Section 1-45Q-3 of the IRS proposed rule would require
Issues for Congress
taxpayers to demonstrate “secure geological storage.” The
Many proponents of CCS view clarification of CO2 secure
rule would establish that compliance with relevant
storage requirements as a critical step in the development
provisions of the EPA’s Mandatory Reporting of
and commercial deployment of large-scale CCS projects in
Greenhouse Gases Rule satisfies the 45Q secure storage
the United States. Clear regulatory requirements for secure
demonstration requirements. In addition, the proposal
geological storage may lead to increased interest in the 45Q
would require that carbon oxides must also be injected into
tax credit and further development of CCS projects, which
a well that complies with applicable EPA UIC regulations
some in Congress see as necessary to meet GHG emissions
to be considered secure geological storage.
reduction targets. Clearer regulatory guidance may also
help the IRS identify improper claims for the 45Q tax
The IRS rule proposes separate requirements for geologic
credit.
sequestration and EOR operations. Previous IRS guidance
on secure geological storage, issued prior to both the 2010
To date, five facilities have reported volumes of CO2
EPA Mandatory Reporting of Greenhouse Gases Rule
sequestered under Subparts RR and UU. One facility is
Subparts RR and UU and EPA’s 2010 regulations on
currently required to have an MRV plan under Subpart RR
underground injection of CO2 for geologic sequestration,
and Class VI UIC regulations. If growth in commercial-
did not distinguish between the two types of injection or
scale CCS expands in the coming years, as some anticipate,
GHG sources.
more facilities throughout the United States may begin to
sequester CO2, report CO2 sequestration data to EPA, and
Requirements for Geologic Sequestration
claim the 45Q tax credit. Notwithstanding the regulations
The proposed rule would require taxpayers seeking the 45Q
discussed above, some stakeholders have expressed
credit for geologic sequestration of CO2 to dispose of
concerns about the long-term security of geologic
carbon oxides in secure geological storage so that no
sequestration of CO2—concerns that could be heightened as
qualified carbon oxides escape into the atmosphere. Under
both the number of CCS projects and the volume of CO2
the proposal, to meet the conditions of secure geological
injected increase. Congress may consider expanding
storage, carbon oxide storage must be in compliance with
oversight of implementation of its directives for 45Q and
Subpart RR requirements. Therefore, a taxpayer who
the GHGRP as part of an overall GHG reporting policy.
fulfills Subpart RR requirements for calculating the volume
Congress may also consider whether EPA and the IRS have
of carbon oxides sequestered and has an EPA-approved
sufficient resources to effectively manage potential
MRV plan, along with other applicable Subpart RR
increases in GHG reporting and MRV plans submitted for
provisions, would meet the requirements for secure
approval and oversee 45Q tax credit claims and other
geological storage. All UIC Class VI wells are already
programmatic needs associated with the new regulations.
subject to Subpart RR, so the proposal would not add any
new requirements for the owners or operators of these
Angela C. Jones, Analyst in Environmental Policy
wells.
IF11639
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Carbon Storage Requirements in the 45Q Tax Credit
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https://crsreports.congress.gov | IF11639 · VERSION 3 · UPDATED