Credit Where Credit is Due: Tax Incentives under 45Q

In this article, we will provide an overview of the tax credit provided in the Internal Revenue Code Section 45Q, commonly referred to as the “45Q tax credit” or “45Q,” and the benefits provided therein for carbon capture, usage, and storage (“CCUS”) projects. The 45Q tax credit is an incentive tax credit introduced in the US by the IRS in October 2008. It provides a certain amount of monetary credit to CCUS operations for each ton of CO2 geologically stored permanently, through enhanced oil recovery (“EOR”), or via other utilization. 45Q was updated first in 2018 and then again in 2022, coupled with the Inflation Reduction Act, to increase the number of tax credits for CCUS projects and reduce overall CO2 emissions.

A CCUS operation must take place at a “qualified facility” to be eligible for the 45Q credit. Qualified facilities must meet minimum capture thresholds to qualify for the 45Q credit:

1.  Direct Air Capture (“DAC”) facilities must capture at least 1,000 metric tons of CO2 annually to qualify for 45Q. DACs extract CO2  directly from the atmosphere at any location, unlike carbon capture, which is generally carried out at the point of emissions, such as a steel plant. It is the most expensive method of carbon capture.

2. The minimum capture threshold for electricity-generating facilities is 18,750 metric tons annually.

3. For any other industrial facility that stores CO2 underground or uses EOR, the minimum capture threshold is 12,500 metric tons per year.

An additional requirement for secure geologic storage facilities to qualify for the 45Q tax credit is their compliance with the Environmental Protection Agency’s (“EPA”) Subpart RR regulations (“Subpart RR”) which require reporting of greenhouse gases from facilities that inject CO2 underground for geologic sequestration. To comply with Subpart RR, these facilities must calculate and report (1) the mass of CO2 received; (2) the mass of CO2 injected into the subsurface; (3) the mass of CO2 produced (mixed with produced oil, gas, or other fluids); (4) the mass of CO2 emitted by surface leakage; (5) the mass of CO2 emitted as equipment leakage or vented from surface equipment; (6) the mass of CO2 sequestered in subsurface geologic formations; and (7) the cumulative mass of CO2  sequestered since the start of required reporting. Subpart RR also requires facilities to submit a proposed monitoring, reporting, and verification plan meeting specific requirements to the EPA.

EOR facility operators have two options for demonstrating secure storage of CO2 for EOR purposes. They can either comply with the Subpart RR requirements set forth above or comply with the standards adopted by the International Organization for Standardization (ISO) and endorsed by the American National Standards Institute. ISO Standard 27916 promulgates an industry-standard quantifying injecting CO2 in EOR operations. It includes (1) safe, long-term containment of CO2, (2) CO2 leakage from the EOR facilities through leakage pathways, and (3) on-site CO2 EOR project loss of CO2 from wells, equipment, or other facilities. Unlike Subpart RR, if an EOR facility operator elects to utilize the ISO qualification standard, it must be certified annually by a qualified independent engineer or geologist.

This flexibility in compliance options results from stakeholder requests for an alternative standard during the 2022 updates to the 45Q rulemaking process. The main difference between the two standards is the self-certifying feature that compliance with Subpart RR offers and the more rigid “one size fits all” application of ISO Standard 27916. From a cost perspective for EOR facility operators, the seemingly more efficient option is to self-certify in-house under the Subpart RR requirements rather than hiring an outside engineering firm to certify compliance under ISO requirements. However, third-party financing opportunities may require an outside opinion on ISO compliance.

Coordinating these matters will require the early engagement of tax counsel and RR&A to confirm compliance with the specific thresholds for qualification for these tax credits. The anticipated growth in the CCUS industry due to the vast expansion of 45Q will require developers and investors to obtain quality legal counsel with an acute understanding of all the variables at play. 

At RR&A, we have extensive knowledge of CCUS and are prepared to provide support at any point in the CCUS process or transaction to help our clients receive the maximum 45Q benefits. Please don’t hesitate to contact us today to discuss your operations and options.

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