Carbon Dioxide Capture Credit Enhanced

The Bipartisan Budget Act of 2018 extended and enhanced a tax credit that incentivized carbon dioxide capture, storage, and utilization.

The enhanced credit, known as the “45Q tax credit,” offers a tax credit of up to $50 per ton for carbon oxide (not just dioxide) that is sequestered and up to $35 per ton for carbon oxide that is reutilized.  The credit amounts began at $22.66 per ton of sequestered carbon oxide and $12.83 per ton of reutilized carbon oxide in 2017, and are set to increase linearly until hitting $50 and $35 per ton of sequestered and reutilized carbon oxide, respectively, in 2026.  Businesses have six years to begin qualifying projects and have twelve years from the time they begin operations to take advantage of the credits.  For sequestered carbon oxide to qualify for the credit, it must be:

  • captured from an industrial source,
  • amounts that would otherwise be released into the atmosphere as an industrial emission, and
  • measured at the point of disposal, injection, or utilization.

To qualify for the credit, construction on the qualifying facility must have begun before January 1, 2024, and the facility must meet one of the following standards:

  • A facility (including a small electric generation facility) that emits less than 500,000 tons of carbon oxide provided it captures at least 25,000 tons of carbon oxide annually, and uses that carbon oxide for a beneficial use (other than EOR);
  • An electric generation facility (not described in (1)) provided it captures at least 500,000 tons of carbon oxide annually; and
  • All other facilities (not described in (1) or (2)), including direct capture facilities (meaning it pulls carbon oxide from the ambient air) which capture at least 100,000 tons of carbon oxide annually.

The credit is generally claimed by the person who owns the carbon capture equipment, but it can be claimed instead by the person who disposes of, or utilizes, the carbon oxide if the parties elect.

The changes to the carbon capture credit imposed by this new legislation are in contrast to the original carbon capture credit, which offers $10 per ton for CO2 that is reutilized and employed for Enhanced Oil Recovery (“EOR”) and $20 per ton for CO2 that is sequestered without application to EOR.  The original credit also had a cap of 75 million tons of sequestered CO2.  In addition, while the original credit limits carbon reutilization to EOR, the new 45Q tax credit permits CO2 utilizations beyond EOR.  Researchers are currently exploring new ways to use CO2, such as in alternative fuels and construction materials; such efforts are expected to be further incentivized under the expanded opportunities offered by the new credit.  Finally, the new credit has been extended to industrial utilization of captured CO2, which is expected to significantly increase the adoption of carbon capture.

These changes provide increased opportunities for projects with carbon capture and storage elements.  The increase in the amount of the credit makes these projects more financially attractive and researchers have suggested that the larger credit may push projects over the edge that previously had not been economically viable.  These changes mean greater opportunities for developers and suggest positive movement in wider efforts to stem climate change, as carbon capture and storage is widely considered to be a significant element of addressing climate change.

A 2015 report from the Office of Fossil Energy estimated that the cost of CO2 capture is approximately $60 per ton for coal fired plants and $70 per ton for natural-gas plants.  An additional $11 per ton is required to transport and store the captured CO2.  Thus, although the tax credit will not cover the full cost of these efforts, it will make a significant dent in them.  The credit is expected, however, to fully offset the cost of carbon-capture systems at other types of facilities, such as those producing ethanol, fertilizer, ethylene oxide, and other processed fuels.  The costs of CO2 capture at these facilities is significantly lower, ranging from $9 to $30 per ton, according to the Office of Fossil Energy.