Section 45Q Tax Credit Enhancements Could Boost CCS
Time 4 Minute Read

As part of the Bipartisan Budget Act of 2018, Congress significantly increased and extended the Section 45Q tax credit for sequestration of carbon oxides. This has been a top priority of carbon capture and sequestration (CCS) supporters for several years.

CCS is considered to be essential to global efforts to reduce CO2 emissions. The world’s most respected analysis organizations all estimate that fossil fuel use will increase in the coming decades, even with energy efficiency improvements and vast increases in renewable energy. 

CCS also can add to US energy security. Captured CO2 can be used to produce more energy through techniques like enhanced oil recovery (EOR), in which CO2 is injected into an oil field to produce oil that could not otherwise be released. About 4 percent of US oil production today comes from this technique, and there are large new opportunities for it in the United States. Other countries have great potential for it as well.

A bipartisan group of Senators, spearheaded by Heidi Heitkamp (D-ND), John Barrasso (R-WY), Sheldon Whitehouse (D-RI) and Shelley Moore Capito (R-WV), led the effort to enhance the 45Q credit. Their bill, S. 1535, the Furthering carbon capture, Utilization, Technology, Underground storage, and Reduced Emissions Act (FUTURE Act), was included in Senate Finance Committee Chairperson Orrin Hatch’s (R-UT) larger tax extenders bill, S. 2256, before finally gaining inclusion in the Bipartisan Budget Act of 2018.

Changes to Existing Law

Prior to enactment of this new law, Section 45Q provided a $10 per ton credit for CO2 permanently stored and used as a tertiary injectant (i.e., for EOR), and a $20 per ton credit for CO2 not used as a tertiary injectant and permanently stored—for example, injection into a saline formation.[1] The theory behind the differentiated credit is that the market will pay for CO2 for use in tertiary injection. The credit was limited to the first 75 million tons claimed by all projects, regardless of whether used to claim the $10 per ton credit or the $20 per ton credit. The credit is applicable to the entity that owns the facility, captures the CO2, and uses or disposes of it. More than two-thirds of the credit have been claimed since its enactment in 2008.

The new law largely leaves the above-described tax credit in place for facilities using carbon capture equipment that was placed in service prior to the date of enactment. For facilities placed in service on or after that date, the Act extends and substantially increases the credit. (See chart below). The Act also expands the “EOR credit” to carbon oxides used for other industrial purposes, changes the definition of the entities to whom the credit applies, and sets capture thresholds for small facilities, electric generating facilities, and direct air capture facilities.

Facilities that expand pre-Act carbon capture capacity can obtain the new credit amounts for carbon oxides captured and injected in excess of the pre-Act capture capacity.

Section 45Q continues to require that carbon oxides be placed in “secure geological storage” to qualify for the credit. The enacted language did not include a provision, championed by Sen. John Hoeven (R-ND), to require the Secretary of Treasury to issue regulations by the end of the year to define “secure geological storage” and to define it in the case of carbon oxide used for EOR to encompass reporting under Subpart UU of the US Environmental Protection Agency’s (EPA) Greenhouse Gas Reporting Rule. Since its original enactment in 2008, Section 45Q has included a requirement that the Treasury issue regulations defining the term, in consultation with EPA, the Department of Energy and the Department of Interior. Treasury issued guidance in 2009, but has never issued regulations. This has led to some confusion that needs to be eliminated.

CCS proponents have advocated for a suite of CCS incentives, including the enhanced Section 45Q credit, contracts for differences, and eligibility for use of private activity bonds and master limited partnerships. In addition, a number of regulatory barriers should be addressed. Nevertheless, the increase to the Section 45Q credit alone is spurring project developers to take a renewed look at projects with CCS.



[1] Both credit amounts are adjusted for inflation. “EOR” is used here also to refer to enhanced natural gas recovery, which has been and will continue to be eligible for the Section 45Q credit.

[2] Credit applied to EOR and enhanced natural gas recovery prior to enactment of the Budget Act. After enactment, the category has been expanded to cover sequestration through photosynthesis, chemosynthesis, chemical conversion into a material or chemical compound, or any other purpose for which a commercial market exists, as determined by the Secretary of Treasury.

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    Fred advocates for clients before Congress and federal agencies. Clients trust him for his insightful and practical know-how acquired from years spent as Counsel to the US House of Representatives Energy and Commerce Committee ...

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    Mr. Lowman’s practice focuses on tax issues related to renewable energy and decarbonization. Mr. Lowman’s practice focuses on federal income tax law, with an emphasis on energy related tax credits, tax issues related to ...


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