Research | Policy Briefs
Inflation Reduction Act of 2022
45Q
45Q Credit for Carbon Oxide Sequestration
(IRA Section 13104)
Background
The 45Q Credit for Carbon Oxide Sequestration (IRA Section 13104) incentivizes projects that capture and store carbon dioxide, such as carbon capture and storage (CCS) and direct air capture (DAC). The Internal Revenue Service (IRS) first added it to the tax code in 2008 per the requirement under the 2008 Energy Improvement & Extension Act, and it was later updated under the 2018 Bipartisan Budget Act.
What is it?
The Inflation Reduction Act of 2022 further expanded the tax credit, allowing carbon capture project developers to take advantage of it for 12 years after carbon capture equipment is placed in service (adjusting for inflation starting in 2027, indexed to base year 2025).
What types of projects/businesses are eligible?
Power plants, industrial facilities, and other stationary sources that emit carbon dioxide are eligible to receive the tax credit, as well as direct air capture (DAC) facilities.
How do businesses take advantage of it?
Qualified tax-paying developers of carbon capture projects must file a statement of election using IRS Form 8933 with their income tax return for each year in which the credit arises. The IRS offers instructions to developers of qualified carbon capture facilities and equipment for filling out the different elections under the 45Q tax credit. It also provides detailed information outlining eligibility, key terms, prevailing wage and apprenticeship requirements, credit transfer rules, and reporting expectations.
What are the challenges with 45Q?
Despite the expansion of the 45Q tax credit, nearly $1 billion of DOE funding for large-scale carbon capture pilot programs, and proposed EPA carbon pollution standards for power plants, few utilities are prioritizing carbon capture. When it comes to coal, many utilities find it more economic to shutter coal plants than to install CCS technology. While CCS holds more promise with natural gas plants, utilities still question cost recovery potential.
What solutions can spur utility investment in 45Q/CCS?
To increase CCS palatability for utilities, states must work in tandem with federal regulators and legislators to streamline legal and regulatory frameworks for CCS, alleviate utility liability, and complement federal tax credits and funding opportunities. Potential state policy offerings include:
Establishing “primacy” to speed permitting
States can assume primary authority over Class VI wells (for geologic CO2 sequestration) upon receiving EPA approval of a “primacy” application. Once a state assumes this authority, permitting times for new wells can decline from years to months. North Dakota, Wyoming, and Louisiana have all received EPA approval (or EPA intent to approve) of their primacy applications, and Texas is working toward approval.
Passing legislation to clarify pore space and CO2 ownership rights
Assuming liability for stored CO2 after a fixed period
States such as Indiana, Wyoming, Louisiana, and Montana have enacted laws passing liability for stored CO2 to the state, typically 10 to 20 years after injection ceases
Facilitating cost recovery by allowing utilities to pass on costs of carbon capture technology to ratepayers
Establishing CO2 storage funds using fees paid by sequestering parties
Offering tax credits for geologic CO2 storage that reduce corporate income taxes or exempt property or sales taxes for relevant machinery and equipment.
Will the government be sending out future additional guidance?
The only pending aspect of the updated 45Q tax credit centers on transferability, under which taxpayers can transfer the credits to an unrelated taxpayer in exchange for cash. The IRS is expected to release additional guidance potentially limiting this action but has not done so as of July 2023.
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