With Reform, the Seldom Heard 48A Investment Tax Credit Can Boost CCUS Projects

Coauthored by Peter Marrin.

The 45Q federal tax credit for carbon capture, utilization, and sequestration (CCUS) projects is a well-known tool to close financing gaps in planned CCUS projects. But what about the 48A Investment Tax Credit (ITC)? In 2005, the US Congress introduced the Credit for Investment in Clean Coal Facilities as part of the Energy Tax Incentives Act (ETIA). In comparison, 45Q was first introduced in 2008, and amended and enhanced as part of the Bipartisan Budget Act of 2018.

Introduction of the 48A ITC 

Targeting coal-based power generation, the ETIA first authorized $1.3 billion in tax credits to support projects for either: 

• New generators that would use gasification or meet 40% efficiency requirements
• Existing generators, which after installing new equipment such as the retrofitting of carbon capture technology, would meet minimal 35% efficiency requirements as well as 4%-7% further efficiency improvements when compared with previous operational baselines

Per the U.S. Internal Revenue Service, the 48A credit amounted to 20% of qualified investment for integrated gasification combined cycle projects, and 15% of the qualified investment for other advanced coal-based generation processes. The 2005 ETIA was amended in 2008 to increase the value of tax credits available, but it also introduced further requirements. At least 65% of the CO2 now had to be captured and stored. However, the prior 2005 efficiency requirements remained unchanged.

Barriers to 48A Utilization

48A has often been criticized for not having carbon capture in mind when being designed, at a time when the carbon capture industry was far more nascent. Today, CCUS is driven by a range of available financial incentives, especially in the US where 45Q in particular has been pivotal to the recent momentum in CCUS deployment, together with various regulated and voluntary carbon credit markets. 

With the 48A ITC, the crux of the issue is that the retrofitting of CCS equipment to new or existing coal-based power plants results in efficiency losses, given the additional electricity necessary to power the carbon capture system. Thus, in existing generators, achieving the additional 4%-7% efficiency improvement is ruled out, whereas new plants may find it difficult to reach the 40% efficiency requirements after incorporating CCUS equipment. Based on Guidehouse Insights’ Global CCUS Project Tracker, scheduled to publish in early 2023, coal to power generation CCUS projects look set to remain a sizable part of the CCUS project outlook, with more than 30 Mtpa of capture capacity across various projects (operational or in various stages of development), around the world. 

Can 45Q and 48A Be Stacked?

One of the first things people want to know upon hearing of 48A is whether it can be stacked with 45Q. At first sight, it does not seem so. The Columbia Climate School suggests that the 45Q Carbon Capture, Utilization, and Storage Tax Credit Amendments Act of 2021, led by Senators Tina Smith (D-MN) and Shelley Moore Capito (R-WV), would have allowed for the combining of 48A and 45Q, alongside other amendments that would have encouraged the utilization of the remaining 48A credits. The Carbon Capture Coalition reached the same interpretation of the statutory language, where legislation reforms to 48A would “allow companies access to existing federal incentives to complement 45Q in financing the retrofit of existing power plants with carbon capture technology.”