Way Down in the Hole, Part 5 - Proposed Changes to 45Q Tax Credit Could Survive a 'Build Back Better' Defeat

The Internal Revenue Code’s tax credit for carbon oxide sequestration, better known as 45Q, is fortunate to enjoy something very rare in Washington, DC, these days — generally bipartisan support. A host of changes aimed at bolstering the tax credit were included in the House-approved version of the Democrats’ central piece of legislation, the Build Back Better (BBB) Act, but it appears to have no way forward in the Senate — it was declared “dead” Tuesday by West Virginia Senator Joe Manchin, a must-have vote — which means it will likely be split into separate pieces, further complicating its path to passage. Several proposed changes to the 45Q tax credit have already been included in separate legislation, so they could still become a reality. In today’s RBN blog, we’ll look at some potential changes to the tax credit as well as measures that might restrict its use.

Part 1 of this series began with a look at carbon sequestration, the permanent storage of carbon dioxide (CO₂) deep underground with the aim of keeping that 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 carbon capture, use, and sequestration (CCUS). We looked at the CO₂ value chain in Part 2, tracing CO₂ from its initial sources of supply through enhanced oil recovery (EOR) and onto a variety of end uses. In Part 3, we examined the 45Q tax credit — what it is and how the credits are intended to work, along with a couple of notable examples where they do not. In Part 4, we looked at how those tax credits can add up for individual projects and how widely variable costs can often make carbon capture uneconomic.

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. Each tax credit is earned by capturing and sequestering 1 metric ton (MT) of QCO. The credit was added to the federal tax code in the Energy Improvement and Extension Act of 2008 and was expanded and extended in the Bipartisan Budget Act of 2018.