Federal Tax Incentives:

Carbon Dioxide Sequestration Credit

Background 

Section 45Q was enacted by § 115 of the Energy Improvement and Extension Act of 2008, Division B of Pub. L. No. 110-343, 122 Stat. 3765, 3829 (October 3, 2008), to provide a credit for the sequestration of carbon dioxide. Section 45Q was amended by § 1131 of the American Recovery and Reinvestment Tax Act of 2009, Division B of Pub. L. 111-5, 123 Stat 115 (February 17, 2009) and more recently by section 41119 of the Bipartisan Budget Act of 2018 (BBA), Pub. L. No. 115-123 (February 9, 2018).

As a result of the modifications made by the BBA amendment, the credit under § 45Q now applies to the sequestration of “qualified carbon oxide,” a broader term than qualified carbon dioxide. The amount of the credit is also increased for carbon oxide captured with equipment originally placed in service on or after the date of enactment of the BBA.

In general, § 45Q(a)(3) allows a credit of the applicable dollar amount (as determined under § 45Q(b)(1)) per metric ton of qualified carbon oxide. The applicable dollar amounts under section 45Q(b)(1)(A)(i)(I) are $25.70 for 2018 and $28.74 for 2019.

Bipartisan Budget Act of 2018 

New law largely leaves intact the tax credit regime in place for facilities using carbon capture equipment placed in service before February 2018. Provides pre-Act facilities which expand the benefits under the new law for incremental capacity.

Section 45Q was originally enacted in 2008 and amended in 2009, as a policy intended to incentivize the construction and deployment of carbon capture and sequestration (CCS) projects. However, the credit previously imposed a 75 million metric ton cap on the metric tons of carbon dioxide (CO2) that would qualify for the credit, which created uncertainty as to whether a project would receive any tax credits. This uncertainty prevented the credit from being considered in project financing and having the incentive effect necessary to encourage the development of carbon capture projects. 

As such, amendments to Section 45Q of the Internal Revenue Code (Title 26 of U.S. Code) were enacted in the Bipartisan Budget Act of 2018 (BBA), which became law on February 9, 2018. The modifications in the BBA were designed to enhance the existing tax incentive for carbon capture, utilization, and storage (CCUS) to promote investment in CCUS technology and carbon capture project implementation at electric generating plants and industrial facilities. 

Bipartisan Budget Act of 2018: Enhancements to the New Section 45Q Tax Credit
The new Section 45Q credit promotes investment in new CCUS projects by:

  • removes the prior 75 million metric ton cap for new projects;

  • expands the credit to include all carbon oxides (COx) (e.g. important for emissions from steel production facilities);

  • requires new projects to begin construction before January 1, 2024 in order to qualify for the credit;

  • makes the credit available for COx captured and stored during the 12-year period beginning on the date the project is placed in service;

  • adds a new sequestration category for COx utilization;

  • increases the value of the tax credit from $10 to $35 for COx used in enhanced oil recovery (EOR) and sequestered in secure geologic storage or sequestered in a utilization project and from $20 to $50 for secure geologic storage without using the COx in EOR or a utilization project;

  • expands the eligibility for claiming the credit to include COx captured through direct air capture technology;

  • modifies the definition of the taxpayer receiving the credit from the owner of the qualified facility (the power plant or industrial facility) to the owner of the capture equipment;

  • reduces the annual capture requirement from 500,000 metric tons to 100,000 metric tons for industrial facilities other than electric generating units;

  • implements a new category of qualified facilities for certain pilot projects that capture at least 25,000 metric tons per year of COx sequestered in a utilization project; and

  • allows taxpayer(s) to transfer the credit to the person that purchases the carbon oxide to dispose of it, use it as a tertiary injectant, or utilize it.

Availability and Duration:

  • Continues to be a Business Tax Credit under IRC § 38

  • Credit on New Equipment No Longer Capped at 75,000,000 MTC

    • Carbon capture equipment originally placed in service at a qualified facilities after Feb 2018 no longer subject to 75,000,000 cap

    • No allocation restrictions or limits

    • No competitive process of awarding credits

  • Duration – Credit is now provided for 12 years beginning on the date equipment is placed in service

Credit Value:

  • Dollar Value of Credit Increased — For new carbon capture equipment, dollar value established by

    • linear interpolation for geologic storage through EOR and other commercial uses from $12.83 to $35 per million tonnes of carbon  (MTC) (2016-2026) and

    • Credit for other commercial uses is based upon MTC emissions reduced in the process on a lifecycle basis​for geologic storage between $22.66 to $50 per MTC. ​

  • Dollar value after 2026, calculated based on product of $50/$35 and inflation adjustment factor determined under IRC § 43(b)(3)(B) for such year.

  • Lifetime (12 yr) credit value for an industrial facility capturing 100,000 MTC py approx. $42-$60 million and for a large scale coal power plant capturing 90% of its CO2 emissions py approx $1.89-$2.7 billion

Deadlines and Capture Thresholds:

  • Deadline for Start of Construction.

    • Credit applies to industrial facilities and clean air capture facilities provided the construction of which begins before January 1, 2024 and either the construction of the carbon capture equipment begins before such date or the original planning and design includes carbon capture equipment. Allows for “add-on” carbon capture equipment to existing facilities.

  • Capture Thresholds (IRC § 45Q(f)(5)):

    • Establishes separate carbon oxide capture thresholds for

      • (1) Electricity Generating Facilities,

        • Electric Generating Facility (“EGU”) emitting > 500,000 MTC per tax year (must capture at least 500,000 MTC per tax year)

      • (2) direct air capture facilities, and

        • Direct Air Capture and all industrial facilities other than EGUs for which credits for EOR and other geologic storage are being claimed, minimum capture not less than 100,000 MTC per tax year​

      • (3) facilities using carbon for other commercial purposes.

        • Facility emitting ≤ 500,000 MTC per tax year must capture at least 25,000 MTC per tax year for 45Q(f)(5) use​

Taxpayers Who May Claim Credit?

Carbon Capture Equipment Owner (“CCE Owner”):

  • Except as otherwise provided in any regulations prescribed by Secretary, the credit shall be “attributed to” in the case of qualified carbon oxide captured using carbon capture equipment originally placed in service at a qualified facility after Feb 2018, the person that owns the carbon capture equipment and physically or contractually ensures the capture and disposal, utilization or use as a tertiary injectant of such qualified carbon oxide.

  • As such, the CCE Ownership rules for credit claiming may lead to partnerships with flip structures, similar to those in the wind industry and safe harbor rules established under Rev. Proc. 2007-65

Transfer of Credit by CCE Owner to Carbon Users
Owner may elect to transfer credit in such time and manner as the Secretary may prescribe, to a person disposes of, utilizes the qualified carbon oxide or uses the qualified carbon as a tertiary injectant

  • IRC § 45Q(f)(3)(B)(i) silent as to whether a Carbon User may similarly “contractually ensure” the capture and disposal, utilization or use” of carbon.

  • More flexible approach to address situations where the CCE Owner lacks tax appetite, including in the case of electric cooperatives, municipal utilities or developers.

  • This ambiguity will need to be addressed in regulations to provide clarity to financial parties interested in monetizing the credit using structures where they are not a CCE Owner. 

Broader Definition of Qualified Carbon Oxide and Use of Carbon Eligible for Credit

Expands use of carbon eligible for Credit to include other commercial activities beyond EOR, including:

  • Photosynthesis or chemosynthesis (e.g.  algae, bacteria growth)

  • Chemical conversion to material or chemical which stores carbon (e.g. utilization of carbon in the making of concrete)

  • Other commercial uses as determined by the Secretary

 

Expanded definition of “qualified carbon oxide”

Now includes both “carbon dioxide” or “carbon oxide” which is captured from an industrial source by carbon capture equipment which would otherwise be released into the atmosphere as industrial emission of greenhouse gas or lead to such release and measured at point of capture and verified at point of disposal, injection or use.

  • Expansion allows capture of carbon monoxide from industrial facilities (e.g. steel industry).

  • Direct air capture, any carbon dioxide which is captured from the ambient air.

  • In the case of EOR, only CO2 that is stored based upon monitoring and reporting the mass balance of CO2, after subtracting any recycled CO2, may attract the credit.

(IR-2020-108): The U.S. Treasury & IRS recently issued proposed regulations to clarify prior 2018 legislation

The proposed regs provide guidance regarding two new credits for carbon oxide captured using equipment originally placed in service on or after 2/9/2018, allowing up to:

  • $50 per metric ton of qualified carbon oxide for permanent sequestration, and

  • up to $35 for Enhanced Oil Recovery purposes.

Neither of these new credits is subject to a limitation on the number of metric tons of qualified carbon oxide captured. The new law also expanded carbon capture to include “qualified carbon oxide,” a broader term than “qualified carbon dioxide.” Prior to the change in law, carbon capture was limited to a total of 75,000,000 metric tons of qualified carbon oxide.

Additionally, the proposed regulations address prior taxpayer questions, including: (1) procedures to determine adequate security measures for geological storage of qualified carbon oxide, (2) exceptions to the general rule for determining who the credit is attributable to, (3) procedures for a taxpayer to elect to allow third-party taxpayers to claim the credit, (4) standards for measuring qualified carbon oxide utilization & rules for recapture.

Credit Calculation Summary & Authority

Section 45Q(a)(1) allows a credit of $20 per metric ton of qualified carbon oxide

  • (i) captured by the taxpayer using carbon capture equipment which is originally placed in service at a qualified facility BEFORE the date of the enactment of BBA,​

  • (ii) disposed of by the taxpayer in secure geological storage, and​

  • (iii) NOT used by the taxpayer as a tertiary injectant in a qualified enhanced oil or natural gas recovery project.​

Section 45Q(a)(2) allows a credit of $10 per metric ton of qualified carbon oxide

  • (i) captured by the taxpayer using carbon capture equipment which is originally placed in service at a qualified facility BEFORE the date of the enactment of BBA and

  • (ii) either

    • (I) used by the taxpayer as a tertiary injectant in a qualified enhanced oil or natural gas recovery project and disposed of by the taxpayer in secure geological storage or​

    • (II) utilized by the taxpayer in a manner described in § 45Q(f)(5).​

In general, the credit is the sum of the following:

  • $20 (adjusted for inflation) per metric ton for qualified carbon oxide which is

    • (1) captured using carbon capture equipment originally placed in service at a qualified facility before February 9, 2018, the date of enactment of the Bipartisan Budget Act of 2018, disposed of in secure geological storage, and NOT used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project; and

    • (2) the section 45Q(a)(3) applicable dollar amount; and 

  • ​$10 (adjusted for inflation) per metric ton for qualified carbon oxide which is

    • (1) captured using carbon capture equipment originally placed in service at a qualified facility before February 9, 2018, the date of enactment of the Bipartisan Budget Act of 2018, disposed of in secure geological storage, USED as a tertiary injectant in a qualified enhanced oil or natural gas recovery project, and NOT used in a manner described in section 45Q(f)(5) as further detailed below; and

    • (2) the section 45Q(a)(4) applicable dollar amount.

For the purpose of calculating the credit, a metric ton of carbon oxide generally includes only the contained weight of the carbon oxide. The weight of any other substances, such as water or impurities, isn't included in the calculation. 

Section 45Q(f)(1) provides that the credit under § 45Q shall apply only with respect to qualified carbon oxide the capture and disposal, use, or utilization of which is within (A) the United States (within the meaning of § 638(1)), or (B) a possession of the United States (within the meaning of § 638(2)).

See below for additional information defining qualified carbon oxide, credit calculation authority, the applicable dollar amount, and other special rules specific to claim the credit.

Qualified Carbon Oxide 

In general, the term “qualified carbon oxide” includes the following:

  • IRC § 45Q(c)(1)(A) any carbon dioxide which—

    • (i)is captured from an industrial source by carbon capture equipment which is originally placed in service before the date of the enactment of the Bipartisan Budget Act of 2018,

    • (ii)would otherwise be released into the atmosphere as industrial emission of greenhouse gas or lead to such release, and

    • (iii)is measured at the source of capture and verified at the point of disposal, injection, or utilization,

  • IRC § 45Q(c)(1)(B) any carbon dioxide OR other carbon oxide which—

    • (i)is captured from an industrial source by carbon capture equipment which is originally placed in service on or after the date of the enactment of the Bipartisan Budget Act of 2018,

    • (ii)would otherwise be released into the atmosphere as industrial emission of greenhouse gas or lead to such release, and

    • (iii)is measured at the source of capture and verified at the point of disposal, injection, or utilization, or

  • IRC § 45Q(c)(1)(C)in the case of a direct air capture facility, any carbon dioxide which—

    • (i)is captured directly from the ambient air, and

    • (ii)is measured at the source of capture and verified at the point of disposal, injection, or utilization.

  • IRC § 45Q(c)(2). Recycled carbon oxide. The term “qualified carbon oxide” includes

    • the initial deposit of captured carbon oxide used as a tertiary injectant.

    • Such term does NOT include carbon oxide that is recaptured, recycled, and re-injected as part of the enhanced oil and natural gas recovery process.​​

Applicable Dollar Amount 

Section 45Q(a)(3) allows a credit of the applicable dollar amount (as determined under § 45Q(b)(1)) per metric ton of qualified carbon oxide that is—

  • (i) captured by the taxpayer using carbon capture equipment which is originally placed in service at a qualified facility On OR AFTER the date of the enactment of BBA during the 12-year period beginning on the date the equipment was originally placed in service,

  • (ii) disposed of by the taxpayer in secure geological storage, and

  • (iii) neither used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project nor utilized in a manner described in § 45Q(f)(5).

 

Section 45Q(b)(1)(A)(i)(1) provides that, for any taxable year beginning in a calendar year after 2016 and before 2027, the applicable dollar amount for purposes of § 45Q(a)(3) is an amount equal to the dollar amount established by linear interpolation between $22.66 and $50 for each calendar year during such period.

Section 45Q(b)(1)(A)(ii)(I) provides that, for any taxable year beginning in a calendar year after 2026, the applicable dollar amount for purposes of § 45Q(a)(3) shall be an amount equal to the product of $50 and the inflation adjustment factor for such calendar year determined under § 43(b)(3)(B) for such calendar year, determined by substituting “2025” for “1990.” 

  • Notice 2018-93, I.R.B. 2018-51 1041, 1042, sets forth the applicable dollar amounts under § 45Q(b)(1) of the Internal Revenue Code for purposes of determining the credit for carbon oxide sequestration under § 45Q(a)(3) and (a)(4).

    • The applicable dollar amounts under section 45Q(b)(1)(A)(i)(I) are $25.70 for 2018 and $28.74 for 2019. Amounts are provided through 2026.

  • Pursuant to § 45Q(b)(1)(B), the applicable dollar amount determined under § 45Q(b)(1)(A) is rounded to the nearest cent.

Section 45Q(a)(4)the applicable dollar amount (as determined under subsection § 45Q(b)(1)) per metric ton of qualified carbon oxide which is—

  • (A)captured by the taxpayer using carbon capture equipment which is originally placed in service at a qualified facility On OR AFTER the date of the enactment of the Bipartisan Budget Act of 2018, during the 12-year period beginning on the date the equipment was originally placed in service, and

  • (B) either

    • (i)used by the taxpayer as a tertiary injectant in a qualified enhanced oil or natural gas recovery project and disposed of by the taxpayer in secure geological storage, or

    • (ii)utilized by the taxpayer in a manner described in subsection (f)(5).​

 

Section 45Q(b)(1)(A)(i)(II) provides that, for any taxable year beginning in a calendar year after 2016 and before 2027, the applicable dollar amount for purposes of § 45Q(a)(4) is an amount equal to the dollar amount established by linear interpolation between $12.83 and $35 for each calendar year during such period.

Section 45Q(b)(1)(A)(ii)(II) provides that, for any taxable year beginning in a calendar year after 2026, the applicable dollar amount for purposes of § 45Q(a)(4) shall be an amount equal to the product of $35 and the inflation adjustment factor for such calendar year determined under § 43(b)(3)(B) for such calendar year, determined by substituting “2025” for “1990.” 

  • Notice 2018-93, I.R.B. 2018-51 1041, 1042, sets forth the applicable dollar amounts under § 45Q(b)(1) of the Internal Revenue Code for purposes of determining the credit for carbon oxide sequestration under § 45Q(a)(3) and (a)(4).

    • The applicable dollar amounts under section 45Q(b)(1)(A)(i)(II) are $15.29 for 2018 and $17.76 for 2019. Amounts are provided through 2026

  • Pursuant to § 45Q(b)(1)(B), the applicable dollar amount determined under § 45Q(b)(1)(A) is rounded to the nearest cent.

Under § 45Q(f)(7), in the case of any taxable year beginning in a calendar year after 2009, there shall be substituted for each dollar amount contained in § 45Q(a)(1) and (2) an amount equal to the product of (A) such dollar amount, multiplied by (B) the inflation adjustment factor for such calendar year determined under § 43(b)(3)(B) for such calendar year, determined by substituting “2008” for “1990.”

 

Section 45Q(g) provides that in the case of any carbon capture equipment placed in service before the date of the enactment of BBA, the credit under § 45Q shall apply with respect to qualified carbon oxide captured using such equipment before the end of the calendar year in which the Secretary, in consultation with the Administrator of the Environmental Protection Agency, certifies that, during the period beginning after October 3, 2008, a total of 75,000,000 metric tons of qualified carbon oxide have been taken into account in accordance with (1) § 45Q(a), as in effect on the day before the date of the enactment of BBA, and (2) § 45Q(a)(1) and (2).

 

Pursuant to § 45Q(h) the Secretary may prescribe such regulations and other guidance as may be necessary or appropriate to carry out this section, including regulations or other guidance to (1) ensure proper allocation under § 45Q(a) for qualified carbon oxide captured by a taxpayer during the taxable year ending after the date of the enactment of BBA, and (2) determine whether a facility satisfies the
requirements under § 45Q(d)(1) during such taxable year.

IRS Links, Notices, & Filing Requirements​
  • About Form 8933, Carbon Dioxide Sequestration Credit

  • IR-2020-108, May 28, 2020

    • ​On March 9, 2020, the Treasury Department and the IRS published Revenue Procedure 2020-12,
      2020-11 I.R.B. 511, and Notice 2020-12, 2020-11 I.R.B. 495.

      • Revenue Procedure 2020-12 provides a safe harbor under which the IRS will treat partnerships as properly allocating the section 45Q credit in accordance with section 704(b).

      • Notice 2020-12 provides guidance on the determination of when construction has begun on a qualified facility or on carbon capture equipment that may be eligible for the section 45Q credit.

      • As requested by commenters, the safe harbor in Revenue Procedure 2020-12 and the rules in Notice 2020-12 are similar to those provided in prior guidance

  • Notice 2019-32, Request for Comments on Credit for Carbon Oxide Sequestration
    • ​The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) anticipate issuing regulations and other guidance to implement the provisions of § 45Q of the Internal Revenue Code, as amended by Section 41119 of the Bipartisan Budget Act of 2018 (BBA), Pub. L. No. 115-123 (February 9, 2018).

    • This notice requests general comments on issues arising under § 45Q, as well as specific comments concerning the secure geological storage and measurement of qualified carbon oxide, the recapture of the benefit of the credit for carbon oxide sequestration, and other issues described in section 3 of this notice.

    • Comments received in responseto this notice will help to inform development of future regulations and other guidance implementing § 45Q

  • Notice 2009-83

    • This notice sets forth interim guidance, pending the issuance of regulations, relating to the credit for carbon dioxide (CO2) sequestration under section 45Q of the Internal Revenue Code.

    • Specifically, this notice provides guidance on determining eligibility for the credit and the amount of the credit, as well as rules regarding adequate security measures for secure geological storage of CO2.

    • This notice also sets forth a separate reporting requirement.

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