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Inflation Reduction Act Enhances Carbon Capture Tax Credit

Client Updates

The Inflation Reduction Act of 2022 (“IRA”) has enhanced and extended the credit in section 45Q of the Internal Revenue Code for carbon capture and sequestration.  The significant increase in the amount of the credit is expected to accelerate the development and construction of many carbon capture projects through better economic returns.

The section 45Q credit is a dollar amount per metric ton of qualified carbon oxide that is captured and sequestered in secure geological storage or otherwise utilized.  The section 45Q credit was originally enacted in 2008 and was significantly revamped and increased in 2018.  The IRA made additional enhancements designed to further incentivize carbon capture projects.

The construction period for qualified carbon capture projects has been extended: the tax credit is now available for facilities that begin construction before 2033, whereas previously construction had to begin before 2026.  

Additionally, the amount of the credit has been increased:  as revised, the credit is $85 per metric ton of carbon oxide captured and sequestered in secure geological storage, and $60 per metric ton of carbon oxide captured and used by the taxpayer for enhanced oil recovery or other allowable utilization, in both cases for facilities that meet, or are not subject to, certain prevailing wage and apprenticeship requirements for labor in the construction of the facilities. These rates, which are effective starting in 2023, represent an increase over the pre-IRA credit amounts of $50 and $35 per ton for sequestration or enhanced oil recovery, respectively, that were scheduled to apply in 2026 and later years.  Starting in 2027, these credit amounts will be increased by an inflation adjustment factor.  

With respect to qualified direct air capture facilities, the IRA also provides an enhanced credit at a rate of $180 per metric ton for carbon oxide captured for geological storage and $130 per metric ton of carbon captured and used by the taxpayer for enhanced oil recovery or other allowable use (in both cases again assuming prevailing wage and apprenticeship requirements are met).

While the IRA revisions to section 45Q do not increase the credit period from the pre-IRA period of 12 years, they do 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 reduction requirement) for electricity-producing facilities, for those who begin construction after the date of enactment.  

The IRA amendments to section 45Q are generally applicable to facilities placed in service after 2022.  For facilities already placed in service, IRA also offers an election into the increased 45Q credit for any facility currently in service and as to which no 45Q credits have previously been claimed if the facility is located in a federally-declared-disaster area and the disaster resulted in a cessation of operation of the facility.

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