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Carbon Capture Projects Incentivized by Tax Credit Guidance: Section 45Q

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The federal income tax credit for carbon capture and sequestration, Internal Revenue Code section 45Q (“Section 45Q”), was enacted to incentivize investment in carbon capture and sequestration, just as federal tax credits have supported the growth in wind and solar project investment.  In 2021, motivated at least in part by the Section 45Q tax credit as well as the general push for ESG investments, many companies announced significant investment in carbon capture projects of various sizes and types. Last year, we reported that there were announced plans to build more than 30 large carbon capture facilities, with many more under study.  More than 40 new projects and networks in North America were announced in 2021 alone. 

Nevertheless, the Section 45Q story of 2021 was really the legislative story: throughout 2021, Congress considered numerous iterations of bills that would enhance and extend Section 45Q.  The progress of these legislative proposals drew the intense focus of those considering carbon capture investments and, in some cases, even stalled determinations as to whether to proceed because the proposed changes were significant enough to change the economic outcome of a project and the amount and type of third-party financing that might be needed.  Until the value and availability of the credit can be reliably predicted, investment decisions with respect to some projects will be delayed. 

The various legislative proposals to amend Section 45Q culminated in the release of the Senate Finance Committee’s version of the Build Back Better Act (“BBBA”) in December, 2021. With respect to Section 45Q, the BBBA as proposed would have significantly increased the amount of the credit, providing for a rate of $85 per metric ton of carbon oxide captured for geological storage and a rate of $60 per metric ton of carbon oxide captured and used by the taxpayer for enhanced oil recovery or other allowable use, provided that certain new wage and apprenticeship standards are met. This would represent a substantial increase over the current credit amounts of $50 per ton for sequestration and $35 per ton for enhanced oil recovery or other allowable use. 

While the Senate Finance version of the BBBA would not have increased the credit period  from the existing 12 years, it would reduce the minimum annual capture thresholds that must be met in order to be a qualified facility to 12,500 tons for non-electricity producing facilities and to 18,750 tons (coupled with a 75% of emissions capture requirement) for electricity producing facilities.

 As proposed, the enhancements to Section 45Q would generally only be applicable to facilities that begin construction after 2021, except for an existing facility currently in service if both (i) the facility is located in a federally-declared disaster area and the disaster resulted in a cessation of operation of the facility and (ii) no Section 45Q credits have previously been claimed with respect to the facility. 

Importantly, a “direct pay” election for Section 45Q has been included in most of the versions of the proposed legislation, pursuant to which taxpayers could elect to be treated as having made a payment of tax equal to the value of eligible tax credits and to request a tax refund for the deemed payment of tax.  A direct pay election would allow those who do not have a tax liability (e.g., partnerships and tax exempt entities) to monetize the credit value.    

At this writing, the fate of the BBBA and the clean energy tax incentive provisions therein is uncertain.  There is significant bipartisan support for many of the provisions, however, including carbon capture tax incentives.  If the proposed legislation is enacted in its same or similar form we can expect to see even more growth in carbon capture projects, as those who have adopted a wait-and-see attitude with respect to carbon capture come off the sidelines incentivized by the substantial enhancements to Section 45Q.

Visit 2021 – Traditional Energy Rebounds and Increased Energy Transition, for the complete list of individual, detailed articles associated with this publication.

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