What the IRA Means for Carbon Capture and Storage

On August 16, 2022, President Joe Biden signed into law the Inflation Reduction Act (IRA) of 2022, designed to help Americans that are struggling with rising costs. However, the law also includes nearly $370 billion in incentives for clean energy and climate-related programs and is considered one of the most significant spending packages in history for climate change mitigation and adaptation. This blog is part of a series whereby Guidehouse Insights’ subject matter experts cut through the 755 pages of legislation to identify the IRA’s most significant elements and synthesize what they really mean for the future of clean energy technologies.

Carbon capture, utilization, and sequestration (CCUS) has always struggled with commercial viability due to high CO2 capture costs that can exceed $300 per ton of CO2 for direct air capture (DAC). Since the first CCUS project came online 50 years ago, CCUS activity has seen several ups and downs, with most projects either capturing the CO2 from highly diluted sources such as natural gas processing, which is among the cheapest ways to capture CO2; or using the captured CO2 for enhanced oil recovery (EOR), which creates value for the CO2, especially when oil prices are high. However, the global push for decarbonization reckons much more investment and many more massive CCUS projects. 

45Q Tax Credit Enhancements

About two-thirds of the 30+ CCUS projects that have come online in the US since 1972 have occurred in the past 15 years. A big reason for that wave of new projects is the 45Q federal income tax credit, which was introduced in 2008 and then enhanced in 2018. Up to now, the 45Q credit was set to rise annually before capping out in 2026, when it would pay projects $35 per ton of CO2 if the emissions were utilized (for EOR, for instance) or $50 per ton if the CO2 was permanently stored underground in secure geologic formations. The 45Q credit helps close the financing gap most projects face and has encouraged a new wave of projects in the past 15 years. However, the 45Q credit has also been criticized for being too small, limited, and shortsighted.

The IRA substantially increases the availability of credits, makes it easier for CCUS projects to qualify, provides significant new avenues for monetizing 45Q credits, and extends the deadline to begin construction on eligible projects from 2026 to 2033. The new law increases the value of the credit for industrial facilities and power plants to $85 per ton if the captured CO2 is sequestered, $60 per ton if the CO2 is utilized, and $60 per ton for CO2 stored in oil & gas fields. For DAC, which filters CO2 from ambient air and is among the most expensive CCUS technologies, the credit increases to $180 per ton for sequestration, $130 for utilization, and $130 for CO2 stored in oil & gas fields.

A New Era for CCUS Activity

Guidehouse Insights' Global CCUS Project Tracker, scheduled to be published in early 2023, shows only four commercial-scale CCUS facilities were brought online since 2015. However, another 38 CCUS projects are in advanced development and are expected online by 2025, mostly at smaller biorefineries in the Upper Midwest, where capturing CO2 is relatively cheap. 

Although targeting the cheapest point sources for CO2 is not new, the recent push to build a massive network of CO2 pipelines to connect the biorefineries and ethanol plants was likely influenced by the push for 45Q enhancements–a key feature of the Build Back Better bill that failed to pass the Senate in 2021. For the IRA, the ink from Biden's signature is still drying, but the resulting changes will undoubtedly facilitate another wave in investment in new CCUS projects, and possibly an entirely new era for CCUS.

To learn more about how the IRA applies to large energy providers, reference the Guidehouse Guide to the Inflation Reduction Act for Energy Providers. For more information on how Guidehouse Insights can help you navigate the impacts of the IRA, please reach out to richelle.elberg@guidehouse.com.