Carbon Storage Requirements in the 45Q Tax Credit
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Updated June 28, 2021
Carbon Storage Requirements in the 45Q Tax Credit
The Internal Revenue Code Section 45Q tax credit is
Connection to EPA’s Greenhouse Gas
intended to promote investment in carbon capture and
Reporting Program Requirements
sequestration (CCS), a process designed to reduce
In 2009, IRS Notice 2009-83 provided interim guidance
atmospheric emissions of greenhouse gases (GHGs) from
(superseded by the 2021 IRS rule) on specific requirements
power plants and other industrial sources. Geologic
for secure geological storage, pending issuance of
sequestration of carbon dioxide (CO2), a type of carbon
regulations. The guidance established that taxpayers
storage, is a process aiming to permanently store the
claiming the 45Q tax credits must demonstrate secure
captured gases deep underground. The Section 45Q tax
geological storage by calculating the amount of CO2 at the
credit can be claimed for the sequestration of carbon oxides
source of capture using methodologies contained in EPA’s
that are disposed of through either injection into an
2009 Mandatory Reporting of Greenhouse Gases Rule (40
underground reservoir for geologic sequestration, injection
C.F.R. Part 98). This rule does not regulate GHG emission
into aging oil fields for enhanced oil recovery (EOR), or
levels but requires facilities designated as GHG sources to
another qualified use. In tax year 2020, Section 45Q
report annual GHG emissions as part of EPA’s Greenhouse
provides tax credits of $31.77 per ton for carbon oxide that
Gas Reporting Program (GHGRP) and to follow
is injected for sequestration and $20.22 per ton for carbon
monitoring, recordkeeping, and verification requirements.
oxide that is stored during enhanced oil recovery (EOR), or
Title 40, Part 98, Subparts RR and UU, of the Code of
used in other qualified industrial processes. These tax
Federal Regulations, added to the EPA regulations in 2010,
credits increase to $50 and $35 per ton, respectively, by
apply to GHG sources associated with the underground
2026.
injection and sequestration of CO2.
In January 2021, the Internal Revenue Service (IRS) issued
Subpart RR
a final rule, “Credit for Carbon Oxide Sequestration,”
Subpart RR applies to facilities with wells that inject CO2
which includes requirements for demonstrating the “secure
for long-term geologic sequestration. This includes all wells
geological storage” of carbon oxides in underground
classified by EPA as Underground Injection Control (UIC)
formations needed to qualify for 45Q tax credits (86
Class VI geologic sequestration wells. The facilities must
Federal Register 4728-4773). Section 45Q and this rule
calculate and report (1) the mass of CO2 received; (2) the
cover a larger set of chemical substances (i.e., carbon
mass of CO2 injected into the subsurface; (3) the mass of
oxides) compared to some other federal GHG-related rules,
CO2 produced (mixed with produced oil, gas, or other
which specifically target CO2.
fluids); (4) the mass of CO2 emitted by surface leakage; (5)
the mass of CO2 emitted as equipment leakage or vented
Issues for Congress include the clarity of secure geologic
from surface equipment; (6) the mass of CO2 sequestered in
storage requirements for CO2, the long-term status of
subsurface geologic formations; and (7) the cumulative
injected CO2, and the sufficiency of agency resources for
mass of CO2 sequestered since the start of required
program management, as discussed under “Issues for
reporting. Subpart RR also requires facilities to submit a
Congress” below.
proposed monitoring, reporting, and verification (MRV)
plan meeting certain requirements to EPA (Table 1). Once
Secure Geological Storage in 45Q
approved, EPA issues a final MRV plan.
Section 45Q tax credits were enacted as part of the Energy
Extension and Improvement Act of 2008 (P.L. 110-343,
Table 1. Subpart RR MRV Plan Requirements
Division B). Section 45Q(f)(2) of the act required the
Delineation of the maximum and active monitoring areas
Department of the Treasury, in consultation with the
Environmental Protection Agency (EPA), the Department
Identification of potential CO2 leakage pathways in the
of Energy, and the Department of the Interior, to establish
maximum monitoring area and the likelihood, magnitude,
regulations for the secure geological storage of qualified
and timing of surface leakage through these pathways
carbon oxide to prevent release into the atmosphere.
Strategy to detect and quantify CO2 surface leakage
Further, the provision defined secure geological storage
Strategy to establish the expected baselines for
locations to include “deep saline formations, oil and gas
monitoring CO2 surface leakage
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
carbon oxides used as a tertiary injectant and consequently
UIC well number, if permitted under the UIC program
stored during EOR operations or injected into underground
Proposed date to begin col ecting data for calculating the
formations solely for geologic sequestration.
total amount of CO2 sequestered
Source: 40 C.F.R. Part 98, Subpart RR.
https://crsreports.congress.gov
Carbon Storage Requirements in the 45Q Tax Credit
From 2016, the first year of reporting, through 2019, the
Requirements for Enhanced Oil Recovery
latest year for which GHGRP data are available, five
The 2021 regulations establish two options for
facilities injecting CO2 have reported CO2 data to EPA
demonstrating secure geological storage for carbon oxides
under Subpart RR. This includes one facility in Illinois
stored during EOR operations. Taxpayers can meet the
injecting CO2 from an industrial source into a saline
requirements by either (1) storing carbon oxides in
aquifer, which reported injecting 1,551,431 tons of CO2 for
compliance with Subpart RR requirements or (2) storing
sequestration, as of 2019. The other reporting facilities
carbon oxides in compliance with a standard adopted by the
injected CO2 for EOR purposes, with incidental CO2
International Organization for Standardization (ISO) and
storage. Although it is not required for the latter facilities,
endorsed by the American National Standards Institute
all of the above facilities have EPA-approved MRV plans.
(CSA/ANSI ISO 27916:19). According to the Treasury
Department, the methodology of this standard is similar to
Subpart UU
the Subpart RR methodology in that both “require an
Subpart UU applies to GHG source facilities with wells
assessment and monitoring of potential leakage pathways;
used to inject CO2 during EOR operations or for any
qualification of inputs, losses and storage through a mass
purpose other than geologic sequestration. These facilities
balance approach; and documentation of steps and
are required to report the volume of CO2 received and its
approaches.” In the preamble to the proposed Section 45Q
origin (if known). An MRV plan is not required, but
rule, the department observes that many stakeholders
facilities may choose to submit a plan. Nearly 130 facilities
requested flexibility in the requirements and suggested this
have reported to EPA under Subpart UU since the first year
standard as an alternative for demonstrating secure
of required reporting in 2011, including three facilities that
geological storage.
received research and development exemptions from
The regulations also specify that EOR facilities can self-
Subpart RR reporting. Subpart UU does not require
certify carbon oxide volumes claimed for the tax credit if
facilities to report the amount of CO2 sequestered.
they choose to demonstrate secure geological storage
Section 45Q Regulations
through compliance with Subpart RR. If a facility uses the
ISO standard, however, the documentation must be certified
The 2021 IRS Section 45Q regulations set out requirements
annually by a qualified independent engineer or geologist.
for taxpayers to demonstrate “secure geological storage”
(26 C.F.R. Part 1, §1.45Q-3). The regulations establish that
Issues for Congress
compliance with relevant provisions of the EPA’s
Many CCS proponents assert that clarity of CO
Mandatory Reporting of Greenhouse Gases Rule satisfies
2 secure
storage requirements as to measurement, testing, and
the 45Q secure storage demonstration requirements. In
verification may lead to increased interest in the 45Q tax
addition, §1.45Q-3 requires that carbon oxides also must be
credit and further development of CCS projects, which
injected through a well that complies with applicable EPA
some in Congress see as necessary to meet GHG emissions
UIC regulations to be considered secure geological storage.
reduction targets. These requirements also may help the
The Section 45Q regulations include separate requirements
IRS identify improper claims for the 45Q tax credit.
for geologic sequestration and EOR operations. Previous
Opponents of the tax credit and requirements contend that
IRS guidance on secure geological storage, issued prior to
the credit encourages continued burning of fossil fuels for
both the addition of Subparts RR and UU to EPA
energy and that the requirements for EOR facilities do not
Mandatory Reporting of Greenhouse Gases regulations in
include sufficient testing or validation of CO2 amounts.
2010 and EPA’s separate 2010 regulations on underground
To date, five facilities have reported volumes of CO
injection of CO
2
2 for geologic sequestration, did not
sequestered under Subparts RR, one of which is required to
distinguish between the two types of injection or GHG
have an MRV plan. If growth in commercial-scale CCS
sources.
expands in the coming years, as some anticipate, more
Requirements for Geologic Sequestration
facilities throughout the United States may begin to inject
CO
The 2021 IRS regulations require taxpayers seeking the
2 for sequestration, report CO2 sequestration data to
EPA, and claim the 45Q tax credit. Notwithstanding the
45Q credit for geologic sequestration of CO2 to dispose of
regulations discussed above, some stakeholders have
carbon oxides in secure geological storage so that no
expressed concerns about the long-term security of geologic
qualified carbon oxides escape into the atmosphere. Under
sequestration of CO
these requirements, to meet the conditions of secure
2 that could be heightened as both the
number of CCS projects and the volume of CO
geological storage required to qualify for the tax credit,
2 injected
increase. Congress may consider expanding oversight of
carbon oxide storage must be in compliance with Subpart
implementation of its directives for 45Q and the GHGRP as
RR requirements. Therefore, a taxpayer who fulfills
part of an overall GHG reporting policy. Congress also may
Subpart RR requirements for calculating the volume of
consider whether EPA and the IRS have sufficient
carbon oxides sequestered and has an EPA-approved MRV
resources to effectively manage potential increases in GHG
plan, along with other applicable Subpart RR provisions,
reporting and MRV plans submitted for approval and
meets the requirements for secure geological storage. All
oversee 45Q tax credit claims and other programmatic
UIC Class VI wells already subject to Subpart RR, so the
needs associated with the new regulations.
rule does not add any new requirements for the owners or
operators of these wells.
Angela C. Jones, Analyst in Environmental Policy
IF11639
https://crsreports.congress.gov
Carbon Storage Requirements in the 45Q Tax Credit
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11639 · VERSION 4 · UPDATED
Updated June 28, 2021
Carbon Storage Requirements in the 45Q Tax Credit
The Internal Revenue Code Section 45Q tax credit is
Connection to EPA’s Greenhouse Gas
intended to promote investment in carbon capture and
Reporting Program Requirements
sequestration (CCS), a process designed to reduce
In 2009, IRS Notice 2009-83 provided interim guidance
atmospheric emissions of greenhouse gases (GHGs) from
(superseded by the 2021 IRS rule) on specific requirements
power plants and other industrial sources. Geologic
for secure geological storage, pending issuance of
sequestration of carbon dioxide (CO2), a type of carbon
regulations. The guidance established that taxpayers
storage, is a process aiming to permanently store the
claiming the 45Q tax credits must demonstrate secure
captured gases deep underground. The Section 45Q tax
geological storage by calculating the amount of CO2 at the
credit can be claimed for the sequestration of carbon oxides
source of capture using methodologies contained in EPA’s
that are disposed of through either injection into an
2009 Mandatory Reporting of Greenhouse Gases Rule (40
underground reservoir for geologic sequestration, injection
C.F.R. Part 98). This rule does not regulate GHG emission
into aging oil fields for enhanced oil recovery (EOR), or
levels but requires facilities designated as GHG sources to
another qualified use. In tax year 2020, Section 45Q
report annual GHG emissions as part of EPA’s Greenhouse
provides tax credits of $31.77 per ton for carbon oxide that
Gas Reporting Program (GHGRP) and to follow
is injected for sequestration and $20.22 per ton for carbon
monitoring, recordkeeping, and verification requirements.
oxide that is stored during enhanced oil recovery (EOR), or
Title 40, Part 98, Subparts RR and UU, of the Code of
used in other qualified industrial processes. These tax
Federal Regulations, added to the EPA regulations in 2010,
credits increase to $50 and $35 per ton, respectively, by
apply to GHG sources associated with the underground
2026.
injection and sequestration of CO2.
In January 2021, the Internal Revenue Service (IRS) issued
Subpart RR
a final rule, “Credit for Carbon Oxide Sequestration,”
Subpart RR applies to facilities with wells that inject CO2
which includes requirements for demonstrating the “secure
for long-term geologic sequestration. This includes all wells
geological storage” of carbon oxides in underground
classified by EPA as Underground Injection Control (UIC)
formations needed to qualify for 45Q tax credits (86
Class VI geologic sequestration wells. The facilities must
Federal Register 4728-4773). Section 45Q and this rule
calculate and report (1) the mass of CO2 received; (2) the
cover a larger set of chemical substances (i.e., carbon
mass of CO2 injected into the subsurface; (3) the mass of
oxides) compared to some other federal GHG-related rules,
CO2 produced (mixed with produced oil, gas, or other
which specifically target CO2.
fluids); (4) the mass of CO2 emitted by surface leakage; (5)
the mass of CO2 emitted as equipment leakage or vented
Issues for Congress include the clarity of secure geologic
from surface equipment; (6) the mass of CO2 sequestered in
storage requirements for CO2, the long-term status of
subsurface geologic formations; and (7) the cumulative
injected CO2, and the sufficiency of agency resources for
mass of CO2 sequestered since the start of required
program management, as discussed under “Issues for
reporting. Subpart RR also requires facilities to submit a
Congress” below.
proposed monitoring, reporting, and verification (MRV)
plan meeting certain requirements to EPA (Table 1). Once
Secure Geological Storage in 45Q
approved, EPA issues a final MRV plan.
Section 45Q tax credits were enacted as part of the Energy
Extension and Improvement Act of 2008 (P.L. 110-343,
Table 1. Subpart RR MRV Plan Requirements
Division B). Section 45Q(f)(2) of the act required the
Delineation of the maximum and active monitoring areas
Department of the Treasury, in consultation with the
Environmental Protection Agency (EPA), the Department
Identification of potential CO2 leakage pathways in the
of Energy, and the Department of the Interior, to establish
maximum monitoring area and the likelihood, magnitude,
regulations for the secure geological storage of qualified
and timing of surface leakage through these pathways
carbon oxide to prevent release into the atmosphere.
Strategy to detect and quantify CO2 surface leakage
Further, the provision defined secure geological storage
Strategy to establish the expected baselines for
locations to include “deep saline formations, oil and gas
monitoring CO2 surface leakage
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
carbon oxides used as a tertiary injectant and consequently
UIC well number, if permitted under the UIC program
stored during EOR operations or injected into underground
Proposed date to begin col ecting data for calculating the
formations solely for geologic sequestration.
total amount of CO2 sequestered
Source: 40 C.F.R. Part 98, Subpart RR.
https://crsreports.congress.gov
Carbon Storage Requirements in the 45Q Tax Credit
From 2016, the first year of reporting, through 2019, the
Requirements for Enhanced Oil Recovery
latest year for which GHGRP data are available, five
The 2021 regulations establish two options for
facilities injecting CO2 have reported CO2 data to EPA
demonstrating secure geological storage for carbon oxides
under Subpart RR. This includes one facility in Illinois
stored during EOR operations. Taxpayers can meet the
injecting CO2 from an industrial source into a saline
requirements by either (1) storing carbon oxides in
aquifer, which reported injecting 1,551,431 tons of CO2 for
compliance with Subpart RR requirements or (2) storing
sequestration, as of 2019. The other reporting facilities
carbon oxides in compliance with a standard adopted by the
injected CO2 for EOR purposes, with incidental CO2
International Organization for Standardization (ISO) and
storage. Although it is not required for the latter facilities,
endorsed by the American National Standards Institute
all of the above facilities have EPA-approved MRV plans.
(CSA/ANSI ISO 27916:19). According to the Treasury
Department, the methodology of this standard is similar to
Subpart UU
the Subpart RR methodology in that both “require an
Subpart UU applies to GHG source facilities with wells
assessment and monitoring of potential leakage pathways;
used to inject CO2 during EOR operations or for any
qualification of inputs, losses and storage through a mass
purpose other than geologic sequestration. These facilities
balance approach; and documentation of steps and
are required to report the volume of CO2 received and its
approaches.” In the preamble to the proposed Section 45Q
origin (if known). An MRV plan is not required, but
rule, the department observes that many stakeholders
facilities may choose to submit a plan. Nearly 130 facilities
requested flexibility in the requirements and suggested this
have reported to EPA under Subpart UU since the first year
standard as an alternative for demonstrating secure
of required reporting in 2011, including three facilities that
geological storage.
received research and development exemptions from
The regulations also specify that EOR facilities can self-
Subpart RR reporting. Subpart UU does not require
certify carbon oxide volumes claimed for the tax credit if
facilities to report the amount of CO2 sequestered.
they choose to demonstrate secure geological storage
Section 45Q Regulations
through compliance with Subpart RR. If a facility uses the
ISO standard, however, the documentation must be certified
The 2021 IRS Section 45Q regulations set out requirements
annually by a qualified independent engineer or geologist.
for taxpayers to demonstrate “secure geological storage”
(26 C.F.R. Part 1, §1.45Q-3). The regulations establish that
Issues for Congress
compliance with relevant provisions of the EPA’s
Many CCS proponents assert that clarity of CO
Mandatory Reporting of Greenhouse Gases Rule satisfies
2 secure
storage requirements as to measurement, testing, and
the 45Q secure storage demonstration requirements. In
verification may lead to increased interest in the 45Q tax
addition, §1.45Q-3 requires that carbon oxides also must be
credit and further development of CCS projects, which
injected through a well that complies with applicable EPA
some in Congress see as necessary to meet GHG emissions
UIC regulations to be considered secure geological storage.
reduction targets. These requirements also may help the
The Section 45Q regulations include separate requirements
IRS identify improper claims for the 45Q tax credit.
for geologic sequestration and EOR operations. Previous
Opponents of the tax credit and requirements contend that
IRS guidance on secure geological storage, issued prior to
the credit encourages continued burning of fossil fuels for
both the addition of Subparts RR and UU to EPA
energy and that the requirements for EOR facilities do not
Mandatory Reporting of Greenhouse Gases regulations in
include sufficient testing or validation of CO2 amounts.
2010 and EPA’s separate 2010 regulations on underground
To date, five facilities have reported volumes of CO
injection of CO
2
2 for geologic sequestration, did not
sequestered under Subparts RR, one of which is required to
distinguish between the two types of injection or GHG
have an MRV plan. If growth in commercial-scale CCS
sources.
expands in the coming years, as some anticipate, more
Requirements for Geologic Sequestration
facilities throughout the United States may begin to inject
CO
The 2021 IRS regulations require taxpayers seeking the
2 for sequestration, report CO2 sequestration data to
EPA, and claim the 45Q tax credit. Notwithstanding the
45Q credit for geologic sequestration of CO2 to dispose of
regulations discussed above, some stakeholders have
carbon oxides in secure geological storage so that no
expressed concerns about the long-term security of geologic
qualified carbon oxides escape into the atmosphere. Under
sequestration of CO
these requirements, to meet the conditions of secure
2 that could be heightened as both the
number of CCS projects and the volume of CO
geological storage required to qualify for the tax credit,
2 injected
increase. Congress may consider expanding oversight of
carbon oxide storage must be in compliance with Subpart
implementation of its directives for 45Q and the GHGRP as
RR requirements. Therefore, a taxpayer who fulfills
part of an overall GHG reporting policy. Congress also may
Subpart RR requirements for calculating the volume of
consider whether EPA and the IRS have sufficient
carbon oxides sequestered and has an EPA-approved MRV
resources to effectively manage potential increases in GHG
plan, along with other applicable Subpart RR provisions,
reporting and MRV plans submitted for approval and
meets the requirements for secure geological storage. All
oversee 45Q tax credit claims and other programmatic
UIC Class VI wells already subject to Subpart RR, so the
needs associated with the new regulations.
rule does not add any new requirements for the owners or
operators of these wells.
Angela C. Jones, Analyst in Environmental Policy
IF11639
https://crsreports.congress.gov
Carbon Storage Requirements in the 45Q Tax Credit
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11639 · VERSION 4 · UPDATED