Proposed 45Q Tax Credit Reform Could Give a Big Boost to Carbon Capture Projects (2022)

Climate, Energy

Proposed 45Q Tax Credit Reform Could Give a Big Boost to Carbon Capture Projects (1)

(Video) A Carbon Capture Credit with Huge Returns

A pair of coal trains idle on the tracks near Dry Fork Station, a coal-fired power plant being built by the Basin Electric Power Cooperative near Gillette, Wyoming, in April 2010. (AP Photo/Matthew Brown)

A critical aspect of President Biden’s $2 trillion American Job Plan focuses on mobilizing private capital to invest in clean energy production and deployment in order to achieve 100 percent carbon-free electricity production by 2035. These investments are crucial to his strategy to meet the ambitious new national commitments to the Paris agreement and keep global average temperature to a 1.5 degree C limit. The plan earmarks $15 billion to fund clean energy demonstration projects, including carbon capture and storage, and $46 billion in federal buying power, including of recycled CO2. To spur the expansive deployment of carbon capture, utilization, and storage (CCUS), the plan aims to reform and expand the bipartisan Section 45Q tax credit.

One important provision being considered by lawmakers and the administration is direct pay. On March 25, a group of senators led by Tina Smith (D-MN) and Shelley Moore Capito (R-WV) introduced the 45Q Carbon Capture, Utilization, and Storage Tax Credit Amendments Act of 2021, a crucial bipartisan piece of legislation that provides amendments to the 45Q tax credit. This amendment seeks to boost project financing and scaling of CCUS projects in the United States. This is important considering that growing consensus across governments, researchers and businesses points to CCUS as a critical strategy to achieving deep decarbonization of power and industrial facilities, and moving the world closer to a net-zero emissions scenario.

Crucial components of the legislation include:

(Video) Money Is Pouring Into Carbon Capture Tech, But Challenges Remain

  • Extending by an additional five years the date for projects to qualify for the 45Q tax credit — projects that begin construction by the end of 2030 would qualify;
  • Creating a direct pay option for the 45Q and 48A tax credits; the direct pay option allows developers to treat the credits as an overpayment of taxes, so that the credit is delivered in the company’s tax returns;
  • Increasing the value of the 45Q tax credit for direct air capture of CO2 — from $50 to $120 per metric ton for facilities that capture and store captured CO2 in saline formations, and from $35 to $75 per ton for such facilities that store CO2 via enhanced oil recovery; and,
  • Allowing existing power and industrial carbon capture facilities to combine 48A investment tax credit with the 45Q tax credit to finance CCUS retrofits.

These provisions may not necessarily achieve the level of support required to finance the volume of CCUS projects needed to contribute to decarbonizing the hard-to-abate sectors (sectors such as heavy industry that are currently carbon-intensive but have limited alternatives), but they will still have a big impact. Broadly, the amendments will improve direct revenues to developers and investors in CCUS projects. They can use this revenue for debt repayments, reducing the risk of project financing, and improving the attractiveness of CCUS projects to debt financing, while reducing the added cost of tax equity transactions.

With direct pay, more companies can take part in carbon capture, and the cost of CO2 reduction and removal becomes lower.

Without the direct pay capability, the nature of the 45Q tax credit requires that the CO2 injectors or users must have predictably large annual tax payments due in order to make full use of the credits, which adds some complexity to the project financing arrangements and excludes some prospective projects. Direct pay helps eliminate the need to seek tax equity investors, who would usually charge higher rates of return to support projects, increasing the capital cost of CCUS projects. With direct pay, CCUS projects’ capital costs become relatively cheaper, lower-cost debt financing can be more easily accessed, more companies can take part, and the cost of CO2 reduction and removal becomes lower. This is important because a lower capital cost can encourage more investors, and more projects can be financed.

But for U.S. power plants, what is the value of making the 45Q tax credit direct pay? Will direct pay make 45Q adequate to finance substantial deployment of CCUS projects in power plants in the United States?

(Video) Carbon Capture, Use and Storage Projects: Tax Credits, Measurement Stands and Transaction Structures

Columbia University’s Center on Global Energy Policy has published work examining what policy configurations would incentivize the widespread deployment of CCUS in the U.S. power sector. These configurations included designed sets of policy support, in addition to the 45Q tax credit — such as capital incentives (private activity bonds, investment tax credit, etc.) and revenue treatments (production tax credits, contracts for differences, etc.) — needed to finance retrofits in U.S. power plants to capture, utilize and store carbon emissions. Detailed analysis from the report showed that the additional capital cost of retrofitting a typical combined cycle natural gas power plant and a pulverized coal power plant in the United States creates a financing gap, which makes investment in CCUS unattractive without an incentive. The work found that neither a 45Q tax credit of $35 per metric ton of CO2 captured and injected in enhanced oil recovery, nor $50 per metric ton of CO2 captured and stored safely in geological formations, is sufficient to clear this financing gap for all types of power plant ownerships — largely investor-owned utilities and independent power producers. Consequently, to reduce investment risks and attract private capital to finance CCUS projects, the 45Q credit value would need to be further enhanced to between $60 to $110 per metric ton, or combined with revenue treatments such as production tax credits or contracts for differences.

To understand the potential effect of the direct pay options on financing CCUS power projects in the U.S., we modified the existing peer-reviewed model that we used for this report and incorporated the impact of the direct pay option. In addition, we assumed that the rates of return demanded by equity investors would reduce with direct pay, and adjusted the hurdle rate from 10% to 8% for investor-owned utilities and from 15% to 10% for independent power producers. This reduced the capital cost of the CCUS project.

These initial analyses indicate that direct pay matters. The initial observable impact of the reduction in equity rates of return on CCUS project capital cost is significant. Additionally, the extra benefit of including debt financing in the project financing mix further enhances the benefit of direct pay. A summary of the initial findings shows the value of direct pay 45Q in closing the financing gap created by including the capital cost of CCUS equipment on existing or new coal and natural gas power plants. More specifically, we found that:

  1. For investors for typical U.S. natural gas power plants, a 45Q credit of $50 per metric ton for CO2 capture into saline formations is not quite enough to clear the hurdle rate, but it’s close. The direct pay option, if passed, is expected to improve the viability of combined cycle natural gas CCUS projects by reducing the value of incentive required. This would close the financing gap from $8.41 per megawatt to $2.17 per megawatt. This means that the value of the direct pay in this scenario is about $6.24/MW. And if direct pay is combined with a production tax credit of $24 per megawatt-hour, the value is about $5.6/MW, completely closing the $2.17/MW financing gap.
  2. In the case of the investor-owned utilities using pulverized coal with CCUS, the direct pay option, worth $2.94/MW, completely clears the hurdle rate and closes the $0.16/MW financing gap. Thus, the direct pay option makes 45Q adequate to incentivize investor-owned utilities coal with CCUS projects in the United States.

We plan to publish a more detailed piece reflecting our findings in the coming weeks.

(Video) International approaches to carbon capture and carbon removals

The other provisions of the 45Q CCUS Tax Credit Amendments Act of 2021 are also important. The five-year extension could provide opportunities to complete ongoing CCUS projects and open up additional opportunities for more developers and investors to make project decisions and start construction to take advantage of the 45Q tax credit. This financial certainty and increased time horizon is expected to help scale CCUS technologies towards meeting mid-century climate goals, which means many more projects could reasonably be expected to achieve lift-off. The direct air capture provisions could provide certainty to help finance the first-of-a-kind large-scale plants—megabucks for megatons of abatement. Together, these provisions and other proposed legislation (like the SCALE Act) will help get more carbon capture and storage projects deployed more quickly, reducing our local and national greenhouse gas emissions and creating new jobs and a new industry through U.S. leadership.

Emeka Ochu is a research associate at the Center on Global Energy Policy at Columbia University. He focuses on financial and policy analyses for the development of clean energy applications such as carbon capture, use and storage to power and industrial facilities.


carbon capture and storageCarbon Capture and utilizationCenter on Global Energy Policydecarbonizationtax credits

(Video) The FUTURE of CCS: What Do Updated 45Q Tax Credits Mean for Carbon Capture - Part 1


What is the 45Q tax credit? ›

45Q, a tax credit for carbon sequestration, already provides an incentive for capturing carbon and storing it underground in geologic or saline formations, underground through oil recovery and in products through CO2 utilization.

When was 45Q introduced? ›

The tax credit under section 45Q was originally enacted by the Energy Improvement and Extension Act of 2008 to incentivize the reduction of carbon dioxide emissions and support redeployment of carbon dioxide energy through efforts such as enhanced oil recovery.

What are carbon sequestration credits? ›

Carbon credits are realized when trees take in carbon from the atmosphere and store it in the tree and soil. For a forestry carbon project to qualify as a verified emissions reduction and be claimed as an offset, stringent rules must be met.

Who gets the carbon tax rebate in Canada? ›

Who is eligible for the CAIP. To be eligible, you must be a resident of Alberta, Saskatchewan, Manitoba or Ontario on the first day of the payment month and the last day of the previous month. You must also meet at least one of these conditions during the same period: You are 19 years of age or older.

How does carbon credit work? ›

The carbon credit limits the emission to one tonne of carbon dioxide or the mass of another greenhouse gas with a carbon dioxide equivalent (tCO2e) corresponding to one tonne of carbon dioxide. In other words, 1 carbon credit corresponds to 1 metric tonne of carbon dioxide prevented from entering the atmosphere.

How is carbon credit income taxed? ›

Tax Treatment of Carbon Credits

From what we understand carbon credits are to be treated as ordinary income, because the sale of carbon credits, by definition, is not the disposal of a capital asset.

Are carbon credits taxable income? ›

Carbon credits: If you are growing either timber or trees and earn NZ Units from post-1989 forests under the Emissions Trading Scheme, they are not taxable on issue or surrender, but create taxable income on sale [CB 36].

Are buying carbon credits tax deductible? ›

No. Purchasing carbon offsets is not a donation but a purchase. As such, purchasing carbon offsets is not tax deductible.

Are carbon credits a good investment? ›

Investing in carbon credits can be a profitable way to get involved in a growing market and support the transition to a low-carbon global economy. Since their launch, carbon credit ETFs have increased in value. However, they do come with risks, and past performance is not a predictor of future performance.

Who invented carbon credits? ›

In fact, the kernel of this concept can be traced as far back as the early 20th century. That's when British economist Arthur Cecil Pigou turned his attention to finding a way for polluting industries to pay for the damage done by said carbon emissions.

Who can sell carbon credits? ›

Selling Carbon Credits

Farmers and any landowners can sell carbon credits because ALL land can store carbon. Landowners are eligible to receive carbon credits at the rate of one per every ton of CO2 their land sequesters. LandGate helps landowners understand how much carbon their land can sequesters every year.

Where does the carbon tax money go? ›

Under the federal system, relief is provided for farmers, fishers, residents of rural and small communities, users of aviation fuel in the territories, greenhouse operators, and power plants that generate electricity for remote communities.

Do we get carbon tax rebate in 2022? ›

For residents of small and rural communities, the payment includes a rural supplement of 10 per cent of the base amount. The year 2022 is the first time the rebate is being paid quarterly — with payments on the 15th of April, July, October and next January.

How much is carbon tax rebate 2022? ›

It went up to $50 in 2022, and it will rise $15 every April until it reaches $170 per tonne in 2030. Carbon prices are collected through fuel charges and an output-based pricing system for industry. Drivers may have noticed the fuel charge at the pumps.

What are the advantages of carbon credits? ›

At its core, a carbon credit represents a direct investment in the transition to a low-carbon economy. By purchasing carbon credits, you help reduce greenhouse gas (GHG) emissions, working to keep the planet at a stable climate for all of us (and our children, and their children…).

How do carbon credits help the environment? ›

Proponents of the carbon credit system say that it leads to measurable, verifiable emission reductions from certified climate action projects, and that these projects reduce, remove or avoid greenhouse gas (GHG) emissions.

What is carbon credit in simple words? ›

Carbon Credit Official Definition

According to the Corporate Credit Institute, a carbon credit is a tradable permit or certificate that provides the holder of the credit the right to emit one ton of carbon dioxide or an equivalent of another greenhouse gas.

Why do we need carbon tax? ›

A carbon tax reflecting the social cost of carbon is viewed as an essential policy tool to limit carbon emissions: high prices for carbon-emitting goods reduce demand for them. The carbon tax is generally levied on fossil fuels. Some countries have already adopted such a tax and discussions are ongoing in others.

Does the US have a carbon tax? ›

Despite being one of the world's biggest CO2 emitters, the US currently doesn't have a carbon tax at a national level. But several states, including California, Oregon, Washington, Hawaii, Pennsylvania and Massachusetts, have introduced carbon pricing schemes that cover emissions within their territory.

Why do companies buy voluntary carbon credits? ›

Voluntary carbon offsets (VCOs) allow a business to create a net reduction in greenhouse gas emissions by funding atmospheric carbon reduction actions of another party. They are becoming more important as companies assess and report their environmental, social, and governance (ESG) goals and activities.

What is income from transfer of carbon credits? ›

Section 115BBG Income Tax – Carbon Credit

A carbon credit can be defined as a certificate showing that a government or company has paid to have a certain amount of carbon dioxide removed from the environment.

Are carbon credits real property? ›

If a carbon credit is created from management of or sequestration upon real property, then likely the carbon credit will be an interest in real property. If a carbon credit is created from activities arising out of the use of personal property, then likely the carbon credit will be personal property.

Are carbon credits GST free? ›

The supply of ACCUs is GST-free, The cost of obtaining an ACCU is tax deductible, and. The proceeds of selling an ACCU are “assessable income on revenue account in the income year the ACCU is sold”.

Are carbon offsets effective? ›

Carbon offsets are a practical and effective way to address climate change and encourage the growth of renewable energy. With them, you can counteract your personal carbon emissions—your “carbon footprint”—while contributing to a more sustainable future.

Where do carbon credits come from? ›

Carbon credits are generated from projects around the world that pull Greenhouse Gases (GHGs) out of the atmosphere or keep emissions from being released. Each time a project verifies they have reduced, avoided, or destroyed one metric tonne of GHG, one carbon credit is created.

How much is a carbon credit? ›

In current carbon markets, the price of one carbon credit can vary from a few cents per metric ton of CO2 emissions to $15/mtCO2e or even $20/mtCO2e for afforestation or reforestation projects to $100 or even $300/mtCO2e for tech-based removal projects such as CCS.

How does Tesla make money from carbon credits? ›

Tesla has been receiving emissions credits from various local regulations sources like California's ZEV program. These credits are then sold which helps the company's bottom line. Tesla has been getting paid by other carmakers for selling its carbon credits for years whose names used to be a secret.

Can individuals buy and sell carbon credits? ›

A carbon credit is a certificate or permit representing the right to emit one tonne of carbon dioxide (CO2). Carbon credits can be traded for money, however many investors have reported they can't sell or trade their carbon credits and so can't make any profit.

Are carbon credits a commodity? ›

Carbon credits are a commodity to be valued and traded. They are also a bell weather of rates of investment in climate and nature.

How big is the carbon credit market? ›

The market value of global compliance carbon credits traded in 2021, which was approximately EUR 760 billion, or USD 851 billion, up 164% from 2020 on higher carbon prices and a modest surge in volumes.

Does Tesla sell carbon credits? ›

Tesla, being a manufacturer of electric vehicles and a contributor to the green energy ecosystem, earns regulatory carbon credits and sells these to other companies which rely on fossil fuels for their energy needs. For many years, Tesla made good money from selling carbon credits.

What is carbon credit and what is carbon trading? ›

A carbon credit is a tradable permit or certificate that provides the holder of the credit the right to emit one ton of carbon dioxide or an equivalent of another greenhouse gas – it's essentially an offset for producers of such gases.

Who are the biggest buyers of carbon credits? ›

' It says that Delta, Alphabet, and Disney are among the biggest buyers of carbon credits. Those companies purchased 7.8 million metric tons of CO2 equivalent, 3.5 million, and 2.5 million, respectively, between 2017 and 2019.

Can I sell my trees for carbon credits? ›

You can't grow money on trees, but you can earn money for letting trees grow. Or at least you can through a pioneering California program that allows forest owners around the United States to sell carbon credits to companies required by the state to reduce emissions.

Can farmers get paid for carbon credits? ›

Growers are guaranteed a minimum payment of $20 per carbon credit, starting with the 2021 crop. However, credits have already been pre-ordered for as high as $40 per credit, and growers take home at least 75% of the credit sale price.

What is direct pay 45Q? ›

Called the “elective payment,” or simply “direct pay,” the change allows taxpayers to now claim the value of a Section 45Q tax credit with respect to carbon capture equipment originally placed in service after December 31, 2022 through a tax refund as if it were an overpayment of taxes.

Is Climeworks tax deductible? ›

Unfortunately, no. The purchase of Climeworks' carbon dioxide removal services isn't tax-deductible as a donation because Climeworks provides a service in return for payment and isn't a charitable organization.

Does biochar qualify for 45Q? ›

For these and other reasons, the Climate Foundation recommends to the IRS that biochar aggregated to sufficient scale be included in the eligibility for tax credits specified under section 45Q.

Why might enhanced oil recovery not reduce carbon dioxide in the atmosphere? ›

Most of the CO2 used in EOR stays underground

When CO2 is injected underground for EOR, most of it, around 90 to 95 percent, stays there, trapped in the geologic formation where the oil was once trapped.

Will geothermal tax credit be extended? ›


The Act extends and enhances the investment tax credit for wind, geothermal, solar, and energy storage projects through 2024. Geothermal is extended through 2034. Taxpayers that meet prevailing wage and apprenticeship requirements are eligible for the full credit of 30 percent.

Will there be new solar incentives in 2022? ›

Solar PV systems installed in 2020 and 2021 are eligible for a 26% tax credit. In August 2022, Congress passed an extension of the ITC, raising it to 30% for the installation of which was between 2022-2032.

What is 48C tax credit? ›

For purposes of section 46, the qualifying advanced energy project credit for any taxable year is an amount equal to 30 percent of the qualified investment for such taxable year with respect to any qualifying advanced energy project of the taxpayer.

Who has invested in Climeworks? ›

Partners Group, a leading global private markets firm, has agreed, on behalf of its clients, to invest in Climeworks (or "the Company"), a designer, developer, and operator of carbon dioxide Direct Air Capture ("DAC") plants. Partners Group co-led a CHF 600 million fundraising round for the Company, together with GIC.

How much CO2 has Climeworks removed? ›

In September 2021, Climeworks opened its first commercial direct air carbon capture and storage plant in Iceland. It is composed of eight carbon capturing modules made from 44 shipping containers with filters inside that are able to remove 4,000 tons of carbon dioxide per year.

Can we pump CO2 into space? ›

In low Earth orbit (where most satellites can be found) gravity is almost as strong as it is on the surface. So if you pump air or CO2 or any kind of matter above the Kármán Line (the generally agreed upon, but arbitrary, boundary of space), it will still be subject to gravity and will fall.

Is biochar a carbon sink? ›

A Solution: Biochar

Biochar (biological charcoal) draws carbon from the atmosphere, providing a carbon sink on agricultural lands. Biochar is biologically unavailable, sequestering fixed carbon in the soil for centuries to millennia, providing a tool to absorb net carbon from the atmosphere.

What is qualified carbon oxide? ›

The term “qualified carbon oxide” includes the initial deposit of captured carbon oxide used as a tertiary injectant. Such term does not include carbon oxide that is recaptured, recycled, and re-injected as part of the enhanced oil and natural gas recovery process.

Is carbon a tax? ›

A carbon tax directly sets a price on carbon by defining an explicit tax rate on GHG emissions or—more commonly—on the carbon content of fossil fuels, i.e. a price per tCO2e. It is different from an ETS in that the emission reduction outcome of a carbon tax is not pre-defined but the carbon price is.

Why is carbon sequestration bad? ›

Their results show that the afforestation of grasslands, scrublands and croplands for carbon sequestration may cause important water and nutrient depletion and increased soil salinity and acidity.

What happens to CO2 in enhanced oil recovery? ›

This process of injecting CO2 into existing oil fields is a well-known “enhanced oil recovery” (EOR) technique: the addition of CO2 increases the overall pressure of an oil reservoir, forcing the oil towards production wells.

Why is enhanced oil recovery bad for the environment? ›

These evaluations revealed some potentially important environmental impacts associated with EOR including (1) pollution of land and surface waters from spills or leaks of oil and brine or other chemicals, (2) loss of biota, (3) excessive erosion and sedimentation (mostly in hilly terrain) and subsequent deterioration ...


1. The Future of Carbon Capture, Utilization and Storage Projects
(Bracewell LLP)
2. The future of 45Q: Carbon capture policy in the Biden-Harris Administration
3. The FUTURE of CCS: What Do Updated 45Q Tax Credits Mean for Carbon Capture - Part 2
4. EnergyInnovates: Accelerating Carbon Capture and Hydrogen Technologies
(U.S. Chamber of Commerce)
5. Carbon Capture and Storage Credits: Opportunities for the RNG Industry
(McGuireWoods LLP)
6. Direct Air Capture: A key technology for net zero
(International Energy Agency)

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