The Section 45Q Tax Credit for Carbon Sequestration

The Section 45Q Tax Credit for Carbon Sequestration

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Updated August 25, 2023
The Section 45Q Tax Credit for Carbon Sequestration
Carbon capture and sequestration (CCS) technologies are
To claim a tax credit, the carbon oxide emissions must be
intended to reduce carbon dioxide (CO2) emissions from
measured at the point of capture as well as at the point of
fossil fuel-fired power plants, as well as other large
disposal, injection, or other use. To be eligible based on
industrial sources. The tax credit for carbon sequestration—
geological sequestration, the captured carbon oxide must be
often referred to using its Internal Revenue Code (IRC)
disposed of in “secure geological storage.” Per IRC Section
section, Section 45Q—is intended to incentivize investment
45Q, secure geological storage includes “storage at deep
in carbon capture and sequestration.
saline formations, oil and gas reservoirs, and unminable
coal seams.”
What Is Carbon Sequestration?
Geological sequestration of carbon (i.e., carbon
Legislative and Regulatory Background
sequestration) is the process of injecting carbon oxides into
The Energy Improvement and Extension Act of 2008
underground geological formations, where they are to be
(Division B of P.L. 110-343) added a credit for CO2
either permanently trapped or transformed. Geological
sequestration to the tax code. The legislation included
sequestration is the final step in a CCS system. The process
several provisions designed to encourage cleaner, more
usually involves carbon dioxide (CO2), although injection
efficient, and “environmentally responsible” use of coal
and sequestration of other carbon oxides (e.g., carbon
specifically, and to encourage GHG emissions reductions
monoxide) is also possible. Geological sequestration is
broadly. CO2 captured using equipment placed in service
intended to permanently trap CO2 emitted from
before February 9, 2018, was eligible for tax credits until
anthropogenic sources, such as power plants or industrial
tax credits were claimed for 75 million metric tons of CO2.
facilities, thereby reducing net emissions of this greenhouse
In September 2022, the Internal Revenue Service (IRS)
gas (GHG) into the atmosphere. An emerging technology to
reported that the cap had been met and that 2022 would be
capture CO2 directly from the atmosphere—“direct air
the last calendar year that facilities placed in service prior to
capture” (DAC)—could also serve as a source of CO2
February 9, 2018, could claim the credit.
injected for geological sequestration. CO2 may be
sequestered by injecting it underground solely for
The Bipartisan Budget Act of 2018 (P.L. 115-123)
sequestration purposes or as part of “tertiary” oil recovery,
expanded and extended the Section 45Q tax credit. Changes
also known as enhanced oil recovery (EOR), from aging oil
included (1) a larger credit amount; (2) a start-of-
fields. EOR has been used in the United States since the
construction deadline and 12-year claim period; (3)
1970s. For additional information on the technical aspects
allowing the credit for CO2 utilization in addition to EOR
and deployment status of CCS, see CRS Report R44902,
and for DAC, as well as allowing smaller facilities to claim
Carbon Capture and Sequestration (CCS) in the United
the credit; and (4) allowing owners of carbon capture
States.
equipment to claim tax credits instead of the entity
capturing the CO
Sequestration Tax Credit (Section 45Q)
2, which facilitates tax-equity investment.
The deadline to begin construction was further extended for
The amount that a taxpayer may claim as a Section 45Q tax
two years, to January 1, 2026, in the Taxpayer Certainty
credit is computed per metric ton of qualified carbon oxide
and Disaster Tax Relief Act of 2020 (Division EE of the
captured and sequestered (before 2018, the tax credit was
Consolidated Appropriations Act, 2021; P.L. 116-260).
exclusively for CO2). For the purposes of the tax credit,
qualified carbon oxide is a carbon oxide that would have
P.L. 117-169, commonly referred to as the Inflation
been released into the atmosphere if not for the qualifying
Reduction Act of 2022 (IRA), modified and further
equipment.
extended the Section 45Q tax credit. In addition to
modifying the base credit rates and definition of qualified
The amount of the credit, as well as various features of the
facilities, the IRA allowed a larger credit for qualified
credit, depend on when the qualifying capture equipment is
facilities or carbon capture equipment that meet certain
placed in service (Table 1). The taxpayer has to repay the
prevailing wage and apprenticeship requirements. In
tax credit (credit recapture) to the Treasury if the carbon
addition, the IRA extended eligibility to claim the credit to
oxide ceases to be captured, disposed of, or used in a
certain nonprofits (“direct pay”) and entities without
qualifying manner (i.e., if it escapes into the atmosphere).
ownership interests (“transferability”) and extended the
deadline to begin construction to the end of 2032.
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The Section 45Q Tax Credit for Carbon Sequestration
Table 1. Key Elements of the Section 45Q Credit
Equipment Placed in Service
Equipment Placed in Service after 12/31/2022
after 2/8/2018 and before 1/1/2023
and Construction Beginning Prior to 1/1/2033
Credit Amount (per Metric Ton of CO2)
Geologically Sequestered CO2
$40.89 per Metric Ton of CO2 in 2023.
Base credit of $17 per Metric Ton of CO2 ($36 for DAC), increased to $85
Increasing ratably to $50 by 2026, then inflation-
($180 for DAC) for facilities that pay prevailing wages during the construction
adjusted.
phase and during the first 12 years of operation and meet registered
apprenticeship requirements. Amounts adjusted for inflation after 2026.
Geologically Sequestered CO2 with EOR
$27.61 in 2023.
Base credit of $12 ($26 for DAC), increased to $60 ($130) for facilities that
Increasing ratably to $35 by 2026, then inflation-
pay prevailing wages during the construction phase and during the first 12
adjusted.
years of operation and meet registered apprenticeship requirements.
Amounts adjusted for inflation after 2026.
Other Qualified Use of CO2
$27.61in 2023.
Base credit of $12 ($26 for DAC), increased to $60 ($130) for facilities that
Increasing ratably to $35 by 2026, then inflation-
pay prevailing wages during the construction phase and during the first 12
adjusted.
years of operation and meet registered apprenticeship requirements.
Amounts adjusted for inflation after 2026.
Claim Period
12-year period once facility is placed in service.
12-year period once facility is placed in service, reduced to 5-year period if
transferred.
Annual Capture Requirements
Power plants:
Power plants:
Capture at least 500,000 metric tons.
Capture at least 18,750 metric tons and a capture design capacity not less
Facilities that emit no more than 500,000 metric tons per than 75 percent of baseline emissions.
year: Capture at least 25,000 metric tons.
DAC facilities: capture at least 1,000 metric tons.
DAC and other capture facilities: Capture at least
Other capture facilities: capture at least 12,500 metric tons.
100,000 metric tons.
Eligibility to Claim Credit
Entity who owns the capture equipment and
Entity who owns the capture equipment and physically or contractually
physically or contractually ensures the disposal,
ensures the disposal, utilization, or use as a tertiary injectant of the CO2.
utilization, or use as a tertiary injectant of the CO2.
Certain tax-exempt entities can claim the tax credit through “direct pay” and
other entities are allowed a one-time transfer to another entity.
Source: CRS analysis of IRC Section 45Q, 26 U.S.C. §45Q.
Notes: After 2017, the credit can be claimed for al carbon oxides, not just CO2. Equipment placed in service prior to February 8, 2018, is no
longer eligible for the 45Q tax credit.
Cost Estimates
promoting CCS development, tax policy is a congressional
Tax expenditure estimates, or estimates of the revenue
option for supporting EOR, DAC, and CCS technologies
foregone due to tax credit claims, provide information on
and projects. Tax incentives may be considered in
the Section 45Q credit’s “cost.” In December 2022, the
conjunction with other legislative options such as CCS
Joint Committee on Taxation estimated that Section 45Q-
R&D and appropriations to related agencies and programs.
associated tax expenditures would be less than $50 million
Specific issues in the 118th Congress related to the Section
per year (the de minimis amount) through 2026, or about
45Q tax credit might include oversight of the IRS’s
$0.2 billion over the 2022-2026 five-year period. The
Department of the Treasury’s March 2022 tax expenditure
implementation of recent changes to the statute, including
verification of tax claims. For example, in recent years,
estimates for Section 45Q were $2.4 billion for the 2022-
concerns have been raised about potentially fraudulent
2026 five-year period and $30.3 billion from 2022 to 2032,
Section 45Q tax credit claims and the need to recapture the
suggesting an expected increase in tax credit claims in later
credit in the case of carbon leakage. Congress may consider
years. The variation in these estimates reflects, in part,
whether the IRS has adequately addressed concerns about
uncertainty about future CCS deployment.
improper claims through its responses to Congress,
Issues for Congress
guidance, and Section 45Q regulations.
Some policymakers and stakeholders support the tax credits
as one mitigation strategy to reduce CO2 emissions into the
Angela C. Jones, Analyst in Environmental Policy
atmosphere. In contrast, others view policies promoting
Donald J. Marples, Specialist in Public Finance
CCS, such as tax credits, as subsidizing the continued
development and combustion of fossil fuels that emit GHGs
IF11455
into the atmosphere. For policymakers interested in
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The Section 45Q Tax Credit for Carbon Sequestration

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