Way Down in the Hole, Part 4 - For Many Carbon-Capture Projects, 45Q Tax Credit Just Isn’t Enough

The idea of capturing the carbon dioxide emitted from power plants and industrial facilities and permanently storing it deep underground is widely viewed as one of the more promising ways to reduce greenhouse gas emissions. The catch is, how do you convince private-sector CO₂ emitters to invest tens or hundreds of millions of dollars in carbon capture and sequestration projects? Enter federal government incentives — in this case the Internal Revenue Code’s carbon oxide sequestration tax credits, better known as 45Q, which at first glance would appear to offer certain industries significant financial incentives if they make these investments. However, while the credits — available for a variety of projects and uses — have been around since 2008 and were significantly expanded in 2018, they have not yet made much of an impact. In today’s RBN blog, we look at how the credits can add up for individual projects and how widely variable costs make carbon capture uneconomic for several industries.

We took a deep dive into carbon sequestration in Part 1 of this series. Sequestration is the permanent storage of CO₂ in specially designed wells deep underground with the aim of keeping that important greenhouse gas (GHG) permanently out of the atmosphere. If CO₂ is captured and stored, that’s carbon capture and sequestration (CCS). If the CO₂ is used for some other process before it’s stored, that’s called carbon capture, use, and sequestration (CCUS). Part 2 walked us through the extensive CO₂ value chain, tracing CO₂ from its initial sources of supply (either manmade or naturally occurring) through enhanced oil recovery (EOR) and onto a wide variety of end uses. In Part 3, we introduced the topic of today’s blog: the 45Q tax credit — what it is and how the credits are intended to work, along with a couple notable examples of where projects aimed at capturing CO₂ along with the credits did not ultimately work out.

The 45Q rules provide a federal tax credit for disposing of qualified carbon oxide (QCO) in secure geologic storage or using it in certain approved ways. For the purposes of the tax credit, QCO is a carbon oxide — usually CO₂ — that would have been released into the atmosphere if it had not been otherwise captured. That’s an important distinction because it assigns value to CO₂ produced from anthropogenic (or manmade) CO₂ sources, but not to CO₂ that would have been mitigated regardless or that comes from naturally occurring wells — a significant source of supply for EOR as well as the wider merchant market.