• Carbon Initiatives
  • Carbon Taxes
  • Federal Tax Credits

Enhancements to the 45Q Tax Credit Can Boost CCUS Deployment

Serkan Birgel
Jan 06, 2022

Guidehouse Insights Sustainability

Section 45Q of the US Internal Revenue Code allows eligible parties to claim a tax credit of $34.81 for each metric ton of CO2 permanently sequestered and $22.68 for projects that store captured CO2 in oil & gas fields (having been used for enhanced oil recovery) alongside other industrial uses. In 2026, this level of credit will increase to $50 and $35, respectively, and be adjusted for inflation in the following years. Facilities that qualify for 45Q fall into three broad categories defined by the type of facility from which the carbon is captured, the amount captured, and the final disposition of the CO2. Credits are allocated to the owners of carbon capture equipment and can be claimed for up to 12 years after the facility is operationalized. Project construction must commence by January 1, 2026. The tax credit has been described as a major catalyst for the expansion of new carbon capture, utilization, and storage (CCUS) plants. However, proposals to modify 45Q have been made through a range of legislative proposals that have been introduced to the U.S. Congress.  

The Biden Administration’s Approach

Proposals from the Biden administration in particular would raise the 45Q tax credit from $50 to $85 for hard-to-abate industrial sectors (including cement production, steelmaking, hydrogen production, and petroleum refining) and earmark a $120 credit for the use of direct air capture to secure geological storage. The qualifying construction deadline would be extended to 2030 and a direct pay option would also be introduced. Direct pay would allow tax credits to be treated similarly to tax overpayment, where credits are monetized as cash refunds after annual tax returns are filed. Payments would be made directly to project developers from the U.S. Department of the Treasury without the need for third-party tax equity investors. The proposal further allows projects to commence construction by January 1, 2031. Tenets of the proposal are echoed in other bipartisan proposals that have been introduced to both the U.S. House of Representatives and the U.S. Senate.

Financial Support Key to CCUS Momentum 

In the US, the 45Q tax credit and the generation and trade of credits in California’s Low Carbon Fuel Standard have helped generate momentum in the large-scale CCUS application via the bioethanol industry. Metrics in this industry, such as the carbon intensity of fuels produced, have become a key industrial measure. There are now two large-scale bioethanol carbon capture and storage (CCS) projects in advanced development in the US Midwest, which could account for around 12 Mtpa of installed carbon capture capacity.

With the US and Europe leading the way in terms of project development, momentum for the potential growth of commercial CCUS deployment has increased. According to the Global CCS Institute, projects totaling 111 Mtpa are in the development pipeline (i.e., in construction, advanced development, or in early development). Per the International Energy Agency, there are a number of reasons to believe that upscaling CCUS will be far more successful than in the past. Heightened financial support and long-term market options, the emergence of new business models that use economies of scale, and shared infrastructure across industrial heartlands that potentially incorporate emitters from multiple industries and reduce the hazard rates of CCUS projects will likely decrease risks and increase returns.