The law also contains a variety of beneficial changes to existing tax credits aimed at supporting the developing CCUS industry and appears to respond to industry and policy suggestions that will enable meaningful development of CCUS projects, expand the number of CCUS-related projects that can benefit from these tax credits and potentially increase the number and character of participants in the CCUS industry.
CCUS is the process of injecting carbon oxides into underground geological formations for permanent storage so that they are trapped or transformed instead of being emitted into the atmosphere. CCUS has gained momentum in recent years as a means of limiting carbon emissions as part of an effort to combat climate change. The US government has supported this effort by granting certain tax credits to owners and developers of CCUS projects, often referred to as “45Q” tax credits in reference to the section of the Internal Revenue Code that provides these credits.
45Q tax credits are currently based on the amount of carbon oxides captured and sequestered, calculated per metric ton. For projects involving carbon capture equipment commissioned on or after February 9, 2018, these tax credits will accrue to the person or entity that owns the capture equipment and physically or contractually provides for the disposal or the use of carbon oxides. (The value of the existing 45Q tax credit is approximately $50 per ton of carbon monoxide stored.)
A DEEPER DIVE
The law contains several significant expansion changes to the 45Q tax credit, all of which are intended to stimulate project CCUS and technology development, with the ultimate goal of facilitating a self-sufficient, market-driven CCUS industry.
- Increase in the value of the tax credit to $85 per tonne. The law increases the value of the 45Q tax credit for geological sequestration of carbon monoxide to $85 per ton (from $50 per ton currently). Clean air policy advocates have argued that $85 per ton is a tax credit threshold value to entice hard-to-cut industrial companies, such as petrochemicals, cement, steel and refineries. , to integrate the CCUS into their facilities and to fully benefit from the tax credit. to justify the outlay required for the development of CCUS facilities. The Act also extends the tax credit so that it is available for projects beginning construction before 2033.
- Added value of the tax credit for direct aerial capture. The CCUS industry also includes emerging technologies to capture CO2 which is already present in the atmosphere. The law contains a special rule for DAC facilities under which the 45Q tax credit is valued at approximately $180 per ton, as opposed to the $85 per ton for geologic sequestration of carbon monoxide. Since most DAC technologies in today’s market are early stage or experimental in nature, the additional increase in 45Q tax credits for DAC installations is intended to create a synthetic economy for these projects to allow them to receive additional capital to help scale DAC technologies and eventually make DAC businesses widespread and profitable.
- Reduce the size (eligibility thresholds of emissions) of eligible projects. Under the current 45Q tax credit scheme, only some of the largest carbon-emitting projects in the United States are eligible for 45Q eligibility: power plants must emit more than 500,000 tons per year; industrial installations must emit more than 100,000 tonnes per year; and DAC facilities must capture at least 100,000 tonnes per year. The law modifies the definition of “qualified installation” to lower these thresholds to 18,750 for power plants; 12,500 for industrial installations and 1,000 tonnes of CO2 captured per year for DAC installations. These lower thresholds will significantly expand the universe of projects that can economically benefit from 45Q tax credits, potentially broadening the adoption of CCUS and improving its prevalence. Notably, these lower thresholds will likely allow many fossil fuel-based power generation facilities to qualify for 45Q tax credits by implementing CCUS.
- 45Q tax credit by direct payment. Direct payment, or the ability of the affected taxpayer to claim the value of the 45Q tax credit through a tax refund as if it were an overpayment of taxes, has long been prophesied as the fundamental missing piece required for CCUS to raise enough investment capital to accelerate the project’s development to meaningful scale. The logic being that by receiving the tax benefits of 45Q in the form of direct compensation, project developers and sponsors will avoid the overly cumbersome (and often costly) process of increasing tax fairness to use the tax credits. traditional ones generated by the 45Q. The direct payment will, theoretically, allow project developers and developers to reap more of the benefits of the 45Q tax credit instead of having to share or transfer those benefits to financial institutions with large tax appetites. Under the Act, the 45Q tax credit would also qualify, on an alternative basis, for transfer to unrelated persons in a non-taxable cash sale, which is another avenue that could simplify and reduce the costs associated with the development of the CCUS.
Reading these proposed revisions together, it is clear that one of the purposes of the act is for the US government to stimulate the growth of CCUS by encouraging additional investment and broader application and adoption. While the dollar values and law thresholds are not industry-accurate, they should allow for clearer modeling of CCUS project development budgets and returns and, with the direct portability of payments and tax credits, increased liquidity options. At a time when investment dollars are eager to participate in renewable energy and energy transition businesses, these revisions to the 45Q tax credit are likely to help the CCUS industry attract significant capital investment. .
The law remains under consideration by the U.S. Senate House Congressman, but a Senate vote is expected in August 2022. Any tax credits included in the law will take time to take effect, and the fallout will take even more time. , however, an approved and enforceable version of the law will provide much-needed clarity to project developers, investors and lenders active in renewable energy and the energy transition and encourage further investment in CCUS.