Insights and Commentaries
45Q: The “Most Progressive CCS-Specific Incentive Globally” Is Now Open for Business
24th March 2021
A year ago this April, the Global CCS Institute released a Brief detailing new developments to the United States’ Section 45Q Tax Credit for carbon oxide (COx) sequestration (45Q). At the time, the Institute called 45Q the “most progressive CCS-specific incentive globally.” A year later 45Q has become even more favorable for the deployment of CCS facilities.
On 6 January, the Treasury Department and Internal Revenue Service (IRS) released their Final Rule and Regulations governing the administration of the credit. With this last step achieved, the carbon sequestration rules in the U.S. are fully in place. The significance of this is that the U.S. is finally and fully ready for a huge new market to open up – one where CCS investors, project developers and emitters can be certain that if they follow the rules, they will obtain a tax credit that adds significant financial value to their bottom lines while simultaneously ridding the globe of the chief culprit of global warming – carbon dioxide.
Navigating How 45Q Works – A Three-Step Process
To refresh how and to whom 45Q applies, we’ve included a three-step diagram that explains the workings of the credit. All steps in this process are based on statutory law (the Bipartisan Budget Act of 2018 and the Energy Act of 2020) along with Treasury Department and IRS guidance released over the past year and a half.
Step 1 – Determine if your facility/project is eligible to claim 45Q.
Congress has lumped 45Q-eligible carbon capture facilities into three broad categories.
- The first contains projects that capture and use COx to produce fuels, chemicals, concrete or other beneficial products that reduce emissions. This does not include facilities that capture CO2 for use in enhanced oil recovery (EOR) fields. In order for a beneficial use facility to be eligible, it must capture a minimum of 25,000 metric tonnes COx per year (t/yr), and the project credit value is capped at 500,000 t/yr.
- The second category is projects that capture a minimum of 100,000 t/yr from industrial or direct air capture (DAC) facilities, but there is no cap on the credit value.
- Likewise, for facilities that generate power, there is no credit value cap, but the project must still be capturing a minimum of 500,000 t/yr.
Step 2 – Determine your project’s potential credit value.
If you’ve concluded from Step 1 that your facility is eligible for 45Q, the next step is figuring out how much of a tax credit you can claim. If your facility captures carbon oxides and then injects into dedicated geological storage your credit value is $50 (USD)/tCOx. For projects that capture and use COx for EOR or other beneficial uses, the value is $35/tCOx.
Step 3 – Determine the terms under which you qualify for the credit.
There are four major conditions that apply to a project claiming 45Q. Each of these stipulations will significantly influence the growth and appearance of the CCS industry in the U.S. The first and foremost is that you must have tax liability sufficient to claim the credit. Invariably, this will require most project developers to form tax equity partnerships. Second, the credit is given to the owner of the carbon capture equipment. This means that the majority of facilities engaged in the actual capture of CO2 will need to share the value of the credit with businesses that specialize in CO2 transport, utilization or storage. Third, the recently enacted Energy Act of 2020 requires a 45Q-eligible project to commence significant construction by 1 January, 2026 (a two-year extension) in order to realize the credit. Project developers interested in investing in their own CCS project will need to get serious quickly. Finally, a project can claim 45Q tax credits for a total of 12 years after the facility becomes operational.
Final Treasury Department and IRS 45Q Guidance Favorable to CCS Developers
Though first enacted in 2008, Congress passed a major overhaul of 45Q with the Bipartisan Budget Act of 2018. While the Treasury Department and IRS took almost three years to release the implementation guidance for 45Q, this new ruling now clears a significant barrier for investors by providing a level of regulatory and financial certainty that could unlock billions in private capital. Importantly, the ruling establishes three critical precedents favorable for project developers:
- A Commitment to Dedicated Geological Storage. The IRS maintained strict standards for monitoring, reporting and verification (MRV) of underground storage but allowed developers to comply with either the EPA or ISO standards. This means that multinational companies with global experience in underground storage can more easily work in the U.S. regulatory framework.
- The Opportunity to Aggregate CO2 Captured from Multiple Utilization Projects. Project developers have the option to stack individual projects to meet the minimum 25,000 t/yr capture threshold required for credit eligibility for non-EOR beneficial use projects. This means that a cluster of interconnected small projects with storage rates that in total sum to 25,000 t/yr will qualify for the credit.
- Expanded Eligibility for Qualified Carbon Utilization Projects. Prior to this new rule, Congress narrowly defined the scope of qualified “carbon utilization projects” to include only those that had a “commercial market.” The IRS significantly broadened the definition of qualified carbon utilization projects to include a wide range of products manufactured from captured carbon.
To sum up the final ruling, it maintains the objective of the credit – ensuring that COx is sequestered – while simultaneously not being overly prescriptive in the regulations. This should incentivize developers with a fair amount of flexibility and creativity to develop different types of CCS projects that take advantage of different business models.
The Future of 45Q – Where to From Here?
While the final guidance brings certainty to CCS investors and project developers – in a sense it allows the existence of a CCS credit market – it by no means ensures how potent or long-lasting the 45Q credit market will be. CCS advocates maintain that three policy enhancements in particular could work powerfully in conjunction with the new guidance to drive exponential growth of more CCS projects.
- Installing a refundable or “direct pay” option for the tax credit. Essentially, this policy would cut out the middlemen by allowing project developers with insufficient tax equity to realize the value of 45Q without forming tax equity partnerships that dilute the value of the credit to the developer. Instead of deducting money from their taxes, a project developer would receive a check from the government equal to the amount of the tax credit.
- Eliminating the minimum thresholds for projects to qualify for 45Q which would allow thousands of industrial facilities and hundreds of natural gas-fired power plants in the U.S. to become eligible for 45Q.
- Extending the commence construction date for the tax credit. Project developers currently have less than 5 years to begin construction of a project (until 1 January, 2026). Typically, projects take at least a couple years to plan before steel is actually put in the ground. Investors are looking for long-term stability, and extending this commence construction date would go a long way to providing it.
45Q is not the end all and be all for CCS project development. But it certainly provides a big financial incentive. And now, it also provides stability and certainty for investors willing to consider carbon capture and storage. Unlike carbon markets where the value of credits fluctuates significantly there is certainty with 45Q. Moreover, it can be coupled with other incentives like those in California’s Low Carbon Fuel Standard (LCFS) market.
With the 45Q implementation rules and regulations on 45Q finalized, the US is on a very strong standing to see more CCS projects coming online in the next few years.
This piece was written by Matt Bright, the Institute's Washington, D.C.-based Senior Advocacy and Communications Adviser.