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Updated June 8, 2021
The Tax Credit for Carbon Sequestration (Section 45Q)
Carbon capture and sequestration (CCS) technologies are
includes “storage at deep saline formations, oil and gas
being proposed as an option to reduce greenhouse gas
reservoirs, and unminable coal seams.” The taxpayer has to
(GHG) emissions from coal- and natural-gas-fired power
repay the tax credit (credit recapture) to the Treasury if the
plants, as well as other large industrial sources. The tax
carbon oxide ceases to be captured, disposed of, or used in
credit for carbon oxide sequestration (Internal Revenue
a qualifying manner (i.e., if it escapes into the atmosphere).
Code [IRC] Section 45Q) is intended to incentivize
investment in carbon capture and sequestration.
Table 1. Key Elements of the Section 45Q Credit
What Is Carbon Sequestration?
Equipment Placed in
Equipment Placed in
Service on 2/9/2018 or
Geological sequestration of carbon is the process of
Service Before 2/9/2018
Later
injecting carbon oxides into underground geological
Credit Amount (per Metric Ton of CO
formations, where they are either permanently trapped or
2)*
transformed. Usually this process involves carbon dioxide
Geologically Sequestered CO2
(CO2), although injection and sequestration of other carbon
$23.82 in 2020.
$31.77 in 2020.
oxides (e.g., carbon monoxide) is also possible. Geological
Inflation-adjusted annually.
Increasing to $50 by 2026,
sequestration is the final step in a CCS system. Geological
then inflation-adjusted.
sequestration is intended to permanently trap CO2 emitted
Geologically Sequestered CO2 with EOR
from anthropogenic sources, such as power plants or
industrial facilities, thereby reducing net emissions of this
$11.91 in 2020.
$20.22 in 2020.
GHG into the atmosphere. CO
Inflation-adjusted annually.
Increasing to $35 by 2026,
2 can also be sequestered
when injected underground for “tertiary” oil recovery, also
then inflation-adjusted.
known as enhanced oil recovery (EOR), from aging oil
Other Qualified Use of CO2
fields, a process used in the United States since the 1970s.
None.
$20.22 in 2020.
Currently, CO2 used for EOR comes predominantly from
Increasing to $35 by 2026,
natural underground CO2 reservoirs, although small
then inflation-adjusted.
quantities also come from anthropogenic sources.
Claim Period
An emerging technology to capture CO
Available until 75 mil ion tons
12-year period once facility is
2 directly from the
atmosphere—“direct air capture” (DAC)—could also serve
of CO2 have been captured
placed in service.
as a source of CO
and sequestered.
2 injected for geological sequestration or
EOR. For additional information on the technical aspects of
Qualifying Facilities
CCS, see CRS Report R44902, Carbon Capture and
Capture carbon after
Begin construction before
Sequestration (CCS) in the United States.
10/3/2008.
1/1/2026.
The Sequestration Tax Credit (45Q)
Annual Capture Requirements
The tax credit for carbon oxide sequestration—often
Capture at least 500,000
Power plants:
referred to using its IRC section, 45Q—is computed per
metric tons.
capture at least 500,000
metric ton of qualified carbon oxide captured and
metric tons.
sequestered. (Before 2018, the tax credit was exclusively
Facilities that emit no more than
for CO2.) The amount of the credit, as well as various
500,000 metric tons per year:
features of the credit, depend on when the qualifying
capture at least 25,000 metric
capture equipment is placed in service (Table 1). The
tons.
Bipartisan Budget Act of 2018 (P.L. 115-123), which was
DAC and other capture facilities:
signed into law on February 9, 2018, made numerous
capture at least 100,000
changes to the Section 45Q tax credit, as discussed below.
metric tons.
Eligibility to Claim Credit
For the purposes of the tax credit, qualified carbon oxide is
a carbon oxide that would have been released into the
Person who captures and
Person who owns the capture
atmosphere if not for the qualifying equipment. To claim a
physically or contractually
equipment and physically or
tax credit, the emissions must be measured at the point of
ensures the disposal,
contractually ensures the
capture as well as at the point of disposal, injection, or other
utilization, or use as a tertiary
disposal, utilization, or use as a
use. If the captured carbon oxide is intended to be
injectant of the CO2.
tertiary injectant of the CO2.
sequestered, it must be disposed of in “secure geological
Source: CRS analysis of IRC Section 45Q.
storage.” Per IRC Section 45Q, secure geological storage
https://crsreports.congress.gov
The Tax Credit for Carbon Sequestration (Section 45Q)
* After 2017, the credit can be claimed for al carbon oxides, not just
States. One project, Illinois Industrial Carbon Capture and
CO2. “CO2” is used throughout the table for simplification.
Storage, has injected large volumes of CO2 (over 1 million
metric tons) from an ethanol production plant for geologic
CO2 captured using equipment placed in service before
sequestration into an underground sandstone formation. The
February 9, 2018, may qualify for tax credits until tax
other 11 projects, according to GCSSI, are capturing and
credits have been claimed for 75 million metric tons of
injecting CO
CO
2 for EOR after using CO2 from natural gas
2. In June 2020 (the last data available), the Internal
processing, hydrogen production, or fertilizer production
Revenue Service (IRS) reported that the credit had been
operations. The Petra Nova facility in Texas was the first
claimed for approximately 72 million metric tons, or 96%
industrial-scale coal-fired electricity generating plant with a
of the limit.
CCS system in the United States and used the captured CO2
Legislative and Regulatory Background
for EOR. The facility suspended CCS operations in 2020,
however, citing economic challenges.
A credit for CO2 sequestration was added to the tax code in
the Energy Improvement and Extension Act of 2008
In the near term, most CCS projects will likely continue to
(Division B of P.L. 110-343). The legislation included
capture and inject CO
several provisions designed to encourage cleaner, more
2 for EOR, in part to generate revenue
and offset the costs of capture. The U.S. Department of
efficient, and environmentally responsible use of coal
Energy, as well as governments and private companies in
specifically, and GHG emissions reductions broadly.
several global regions, are currently conducting CCS
research, development, and deployment activities. These
The Bipartisan Budget Act of 2018 (P.L. 115-123)
include research projects for large-scale (over 50 million
expanded and extended the 45Q tax credit. Changes
metric ton) saline formation sequestration and applications
included (1) a larger credit amount; (2) a start-of-
at industrial facilities that emit CO
construction deadline and 12-year claim period instead of
2, such as ethanol,
cement, and chemical production plants.
the 75 million metric ton cap; (3) allowing the credit for
CO2 utilization in addition to EOR and for DAC, as well as
Issues for Congress
allowing smaller facilities to claim the credit; and (4)
Issues in the 117th Congress related to the Section 45Q tax
allowing owners of carbon capture equipment to claim tax
credit might include oversight or potential legislation to
credits instead of the person capturing the CO2, which
modify the statute. In recent years, some Members of
creates flexibility in ownership structures facilitating tax-
Congress have raised concerns about potentially fraudulent
equity investment. The deadline to begin construction was
Section 45Q tax credit claims. In April 2020, the IRS
extended for two years, to January 1, 2026, in the Taxpayer
Inspector General for Tax Administration responded to a
Certainty and Disaster Tax Relief Act of 2020 (Division EE
series of questions from some Members regarding the
of the Consolidated Appropriations Act, 2021; P.L. 116-
taxpayers claiming the credit; monitoring, reporting, and
260).
verification requirements; and potential enforcement
options in cases of fraudulent claims. Congress may
In January 2021, the IRS issued final regulations for
consider whether the IRS has adequately addressed
claiming Section 45Q credits (26 U.S.C §45Q). Among the
concerns about improper claims through its responses to
issues addressed in these regulations were requirements for
“secure geological storage,” credit recapture, and taxpayers
Congress, guidance, and recent Section 45Q regulations.
eligible to claim the credit.
There are differing perspectives regarding tax credits for
Cost Estimates
EOR. Some support tax credits for EOR as a mitigation
strategy to reduce CO
Tax expenditure estimates, or estimates of the amount of
2 emissions into the atmosphere,
revenue foregone due to taxpayers’ ab
while others view policies promoting EOR as subsidizing
ility to claim the tax
credit, provide information on the “cost” of the Section 45Q
the continued development and use of fossil fuels. Congress
may address policy issues regarding the Section 45Q credit
tax credit. In November 2020, the Joint Committee on
for CO
Taxation (JCT) estimated that tax expenditures associated
2 sequestered during EOR and related statutory and
regulatory requirements. There are a range of options for
with the Section 45Q credit would be less than $50 million
modifying and expanding the credit, should a greater tax
per year (the de minimis amount) through 2024, or about
incentive for CCS be sought. For example, an elective
$0.1 billion over the 2020-2024 five-year period. The
payment could be provided as an alternative to the tax
Department of the Treasury February 2020 tax expenditure
credit, making it easier for projects with limited tax liability
estimates for Section 45Q tax expenditures were $0.6
to benefit from the incentive. Another option would be to
billion during the 2019-2023 five-year period, or $2.3
expand the credit for certain technologies, such as DAC.
billion from 2020-2029, suggesting an expected increase in
tax credit claims in later years. The variation in these
Tax policy is an option Congress may use for supporting
estimates reflects, in part, uncertainty regarding the speed
EOR, DAC, and CCS technologies and projects. Tax
of CCS deployment. Neither of these estimates reflects the
incentives may be considered in conjunction with other
additional reduction in federal tax revenue from the credit’s
legislative options such as CCS R&D and appropriations to
two-year extension in P.L. 116-230, which JCT estimated
agencies and programs involved in CCS.
to be of $0.6 billion over the 2021-2030 budget window.
CCS in the United States
Angela C. Jones, Analyst in Environmental Policy
Molly F. Sherlock, Specialist in Public Finance
According to the Global CCS Institute (GCSSI), 12 projects
capturing and injecting CO2 are operating in the United
IF11455
https://crsreports.congress.gov
The Tax Credit for Carbon Sequestration (Section 45Q)
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