Overview of Section 45Q - Credit for Carbon Oxide Sequestrations

In February 2018, the U.S. Congress enacted significant amendments to Section 45Q of the Internal Revenue Code through the Bipartisan Budget Act. These amendments were designed to accelerate the adoption and financial viability of carbon capture, utilization, and storage (CCUS) technologies. The revised Section 45Q extends tax credits not only to CO2 but to all carbon oxides, offering a broader incentive for industries to engage in carbon management.

Key Changes to the Section 45Q Tax Credit:

  • Expansion of Eligible Substances: The credit now encompasses all carbon oxides, enhancing its applicability beyond CO2.
  • Increase in Credit Amounts: The financial benefit provided by the tax credits was raised, offering greater monetary incentives for CCUS projects.
  • Extended Deadlines and Claim Period: The project start-of-construction deadline was extended from January 1, 2024, to January 1, 2026. Projects can now claim the credit for 12 years, up from the previously undefined duration.
  • Removal of Tonnage Cap: The original cap of 75 million tonnes of carbon oxide storage has been removed, allowing unlimited volume claims as long as other criteria are met.
  • Inclusion of Direct Air Capture and Utilization: Credits now apply to direct air capture technologies and the utilization of captured carbon, broadening the scope of qualifying projects.
  • Flexible Ownership Structures: The amendment permits the owners of the carbon capture equipment to claim the credits and allows these credits to be transferred to the entities responsible for storing the carbon oxides. This change introduces flexibility in project ownership and finance.

In January 2021, the IRS issued final regulations that define the implementation of these credits, including:

  • Secure Geological Storage: Requirements for proving that the carbon oxides are stored securely in geological formations.
  • Credit Recapture: Conditions under which the IRS could reclaim the credits if the storage does not meet regulatory requirements.
  • Life Cycle Analysis: Requirements for a life cycle analysis to demonstrate the net reduction in emissions achieved through CO2 utilization.
  • Clarification on Taxpayer Eligibility: Detailed guidelines on which entities can claim the tax credits, ensuring clear compliance pathways.

These regulatory enhancements aim to bolster the business case for CCUS projects by reducing financial risk and encouraging investment. The U.S. Treasury estimates that the cost of these tax credits will amount to approximately USD 2.3 billion over the decade from 2020 to 2029. With nearly half of all global CCUS facilities currently operating in the United States, these credits are expected to help further position the country as a leader in carbon capture technology, assisting power and industrial plants in reducing their carbon emissions effectively.

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