The Tax Credit For Carbon Sequestration (Section 45Q)
The Tax Credit For Carbon Sequestration (Section 45Q)
The Tax Credit For Carbon Sequestration (Section 45Q)
https://crsreports.congress.gov
The Tax Credit for Carbon Sequestration (Section 45Q)
* After 2017, the credit can be claimed for all 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 CO2 for EOR after using CO2 from natural gas
CO2. 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
for EOR. The facility suspended CCS operations in 2020,
Legislative and Regulatory Background 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 CO2 for EOR, in part to generate revenue
several provisions designed to encourage cleaner, more
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 CO2, such as ethanol,
construction deadline and 12-year claim period instead of 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
allowing smaller facilities to claim the credit; and (4)
Issues for Congress
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 Congress, guidance, and recent Section 45Q regulations.
“secure geological storage,” credit recapture, and taxpayers
eligible to claim the credit.
There are differing perspectives regarding tax credits for
EOR. Some support tax credits for EOR as a mitigation
Cost Estimates
strategy to reduce CO2 emissions into the atmosphere,
Tax expenditure estimates, or estimates of the amount of
while others view policies promoting EOR as subsidizing
revenue foregone due to taxpayers’ ability to claim the tax the continued development and use of fossil fuels. Congress
credit, provide information on the “cost” of the Section 45Q
may address policy issues regarding the Section 45Q credit
tax credit. In November 2020, the Joint Committee on
for CO2 sequestered during EOR and related statutory and
Taxation (JCT) estimated that tax expenditures associated 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.
Angela C. Jones, Analyst in Environmental Policy
CCS in the United States 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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