Carbon Capture: Tax Impacts of Utilization & Storage

To fully appreciate how the IRA affected CCUS projects, it is important to understand the cost differentials between methods of capture, storage, and utilization:

Capture Methods

There are two methods for capturing CO₂: either (a) from dilute streams (e.g., byproduct gas from ethanol production), or (b) directly from the air (“direct air capture”). Carbon capture from a dilute stream is akin to placing a filter on a smokestack, while direct air capture is like vacuuming CO₂ from the air. Although these concepts are simple, the technologies are complex and costly. Capture costs range from $11 to $68 per metric ton of CO₂ for dilute streams, and $230 to $630 per metric ton for direct air capture.

To account for these vast differences in project cost Section 45Q provides different tax credit amounts for each method. For CO₂ captured in a dilute stream, credits generally scale from $60 to $85 per metric ton of CO₂ captured and stored or utilized for facilities that pay prevailing wages and satisfy certain apprenticeship requirements. For direct air capture, credits generally scale from $130 to $180 per metric ton of CO₂ captured and stored or utilized for facilities that pay prevailing wages and satisfy certain apprenticeship requirements. [1] 

Traditional Geological Storage

CO2 is typically stored through geologic sequestration, where it is injected into saline aquifers, depleted hydrocarbon reservoirs, or coal seams. The CO₂ is injected into tiny pores in rock formations, which can hold large amounts of fluid. The CO₂ remains trapped due to impermeable layers above the storage site.

CO₂ is also used for enhanced oil recovery (EOR), where it helps extract additional hydrocarbons from depleted reservoirs. However, EOR projects qualify for lower tax credits than non-EOR storage. CO₂ captured from a dilute stream for EOR earns $60 per metric ton (with prevailing wages and apprenticeship requirements), while CO₂ stored in saline aquifers or coal seams for non-EOR purposes earns $85 per metric ton. For direct air capture, the tax credit is $130 per metric ton for EOR and $180 for geologic storage.

Beyond Geological Storage

Geological injection is not the only method for carbon storage, and permanent underground storage limits potential utilization. The 45Q tax credit offers $60 per metric ton of CO₂ for dilute CO₂ capture facilities that pay prevailing wages and satisfy certain apprenticeship requirements, and $130 per metric ton for direct air capture facilities with prevailing wages and apprenticeship requirements. There are three types of qualified carbon utilization:

1. Fixation of CO₂ through algae or bacteria by photosynthesis or chemosynthesis.
2. Chemical conversion of CO₂ into materials or compounds that are securely stored.
3. Use of CO₂ for any other commercial purpose approved by the Treasury Secretary.

Biological carbon fixation, such as using algae or bacteria, converts CO₂ into organic compounds. The second and third categories support diverse uses like producing polymers, concrete, and other products that secure carbon, fostering technological innovation. New projects include direct air capture technology that produces potable water, ocean-based carbon capture, and CO₂ conversion into formic acid or ethylene. Federal incentives are encouraging more solutions for permanent carbon storage

Section 45Q and the Inflation Reduction Act

Section 45Q of the US Tax Code (“45Q”) provides a performance-based tax credit for carbon management projects which capture and store or utilize carbon oxides.[2] These tax credits were first introduced by Congress in 2008 through the Energy Improvement and Extension Act and provided credit only for capture of carbon dioxide.[3] Although Congress later expanded eligibility for the tax credits, [4]they did not exceed the cost of a carbon capture project in almost all circumstances, and it was difficult for developers to achieve eligibility.

The IRA introduced multiple needed changes to fully incentivize investment in carbon capture technology and CCUS. The key features of the IRA’s changes to 45Q include:

• Increases in credit values
  • A near doubling in credit values for storage in traditional geological storage and more than tripling in credits for direct air-captured CO₂ stored in traditional geological storage
• Creating clear timing for eligibility
  • Eligible projects must begin construction before January 1, 2033, and may receive credit for 12 years once in service, improving financial certainty of the credit for investment
• Providing a direct pay mechanism
  • For-profit entities can access direct pay for the full tax credit value for the first five years after the equipment has been placed in service.
  • Tax-exempt entities can access direct pay for the entire twelve years of credit that 45Q provides.
• Dramatically lowering the requirements to qualify for the program
  • For industrial emitters the capture threshold for credit-eligible facilities is now 12,5000 metric tons captured per year from the previous 100,000 metric tons per year.
  • For direct air capture facilities, the capture threshold for credit- eligible facilities is now 1,000 metric tons captured per year from the previous 100,000 metric tons per year.
• Enabling the owner of the equipment to transfer the credit to other tax paying entities
  • Carbon capture equipment owners can now receive a direct cash payment when transferring credit instead of applying against their tax liability

These comprehensive changes introduced by the IRA have significantly enhanced the attractiveness and feasibility of CCUS projects. According to the Global CCS Institutes’ Global Status of CCS 2023 report, nearly 200 CCUS projects have been announced in the US Since the IRA’s passage.

Conclusion

In summary, CCUS presents a multifaceted approach to mitigating climate change, with the Inflation Reduction Act providing significant incentives to encourage its adoption. By understanding the intricacies of capture, utilization, and storage, and the associated tax credits, stakeholders can better navigate the opportunities and challenges presented by this promising technology.

[1] Credits are significantly less if a facility does not pay prevailing wages or satisfy certain apprenticeship requirements. For example, the direct air capture credit scale would be $26-36 per metric ton of CO₂ if a facility does not pay prevailing wages or satisfy certain apprenticeship requirements.

[2] 26 U.S.C.A. § 45Q

[3] H.R.6049 – 110th Congress (2007-2008): Energy Improvement and Extension Act of 2008, H.R.6049, 110th Cong. (2008), https://www.congress.gov/bill/110th-congress/house-bill/6049.

[4] H.R.1892 – 115th Congress (2017-2018): Bipartisan Budget Act of 2018, H.R.1892, 115th Cong. (2018), https://www.congress.gov/bill/115th-congress/house-bill/1892/text.

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