Included as part of the $369 billion energy and climate spending deal struck between Senators Chuck Schumer and Joe Manchin on Wednesday night is a significant expansion and enhancement of the 45Q tax credit for carbon capture, utilization, and sequestration (CCUS). Schumer and Manchin’s deal—which is memorialized in the text of the Inflation Reduction Act of 2022 (IRA)—extends the 45Q commence construction deadline out to 2033, increases the credit amounts, provides a broader definition of what facilities may qualify for the credit through a material reduction in annual thresholds, allows developers to elect to take direct payment in lieu of the credit for the first five years, and favorably adjusts the amount that the credit is reduced by for CCUS projects financed by private activity bonds. If signed into law, the IRA will provide a significant boost to an industry that appears increasingly likely to play a major role in mitigating greenhouse gas emissions as global energy demand increases.
Credit Amount. The IRA establishes a new baseline credit amount for qualifying CCUS facilities of $17 per ton of carbon permanently sequestered and $12 per ton of carbon captured for enhanced oil or gas recovery (EOR) or commercial utilization of captured carbon. The baseline amounts, however, may be multiplied by five if the qualifying facility meets certain wage, hour, and apprenticeship requirements resulting in 45Q credit amounts for sequestration and EOR/utilization of $85 and $60 per ton, respectively. The IRA also creates separate direct air capture (DAC) 45Q baseline credit amounts of $36 per ton for permanent carbon sequestration and $26 per ton for EOR and carbon utilization. The DAC credits may also be multiplied by five if prevailing wage, hour, and apprenticeship requirements are met resulting in 45Q credits for sequestration and EOR/utilization of $180 and $130, respectively. The following chart shows the IRA’s proposed changes to the 45Q credit amounts.
|Existing 45Q||IRA 45Q|
|CCUS Baseline Amount||$50—for sequestration $35—for EOR or utilization||$17—for sequestration $12—for EOR or utilization|
|CCUS Bonus Amount (if prevailing wage, hour, and apprenticeship requirements are met)||No bonus||$85—for sequestration $60—for EOR or utilization|
|DAC Baseline Amount||$50—for sequestration $35—for EOR or utilization||$36—for sequestration $26—for EOR or utilization|
|DAC Bonus Amount (if prevailing wage, hour, and apprenticeship requirements are met)||No bonus||$180—for sequestration $130—for EOR or utilization|
Qualified Facilities. The IRA also proposes to broaden 45Q’s existing definition of qualified facility by lowering the annual carbon capture threshold requirements. Under the revised definition, a qualified facility includes any CCUS facility placed on an electric generating facility that captures 18,750 tons of carbon annually and has a capture rate of at least 75% as measured by an applicable electric generating unit’s—as opposed to the entire electric generating facility’s—baseline carbon oxide production. This would be a significant change from the current version of 45Q that requires an electric generating facility not otherwise qualified to capture at least 500,000 tons of carbon a year. Under current law there is no capture rate requirement for CCS at electric generating facilities. The IRA also relaxes the qualified facility definition for industrial facilities by requiring only that they capture at least 12,500 tons of carbon a year. And the IRA establishes that a DAC facility will be treated as a qualified facility for purpose of 45Q if it merely captures 1,000 tons of carbon annually. While many CCUS developers would have preferred to see the 75% capture rate threshold reduced or removed entirely from the requirement for electric generating qualified facilities, if it becomes law the IRA would nevertheless provide those developers with significantly more flexibility to develop qualifying CCUS projects.
Direct Pay. A hurdle to developing CCUS projects under the existing 45Q scheme is that CCUS developers require tax equity investors that are comfortable enough with these relatively new and generally large scale projects in order to monetize the credit. The IRA takes a step toward solving this issue by allowing CCUS developers to elect to receive a direct payment in lieu of and for the same amount as the 45Q credit. However, unless the CCUS developer is a tax-exempt entity, the direct payment option is only available for the first five years following the date the CCUS facility is placed in service. Tax-exempt entities such as states, municipalities, the Tennessee Valley Authority, and Tribes that develop a CCUS project under the IRA would be eligible to take direct payment for the entire twelve years of the 45Q credit’s duration.
Private Activity Bonds. The IRA proposes to revise the amount by which the 45Q credit is reduced for CCUS facilities financed with private activity bonds. Under the bipartisan Infrastructure Investment and Jobs Act the 45Q credit is reduced for CCUS projects financed by private activity bonds by the lesser of either 50% or the percentage of private activity bonds used for the project. The IRA would revise this reduction to the lesser of either 15% or the percentage of private activity bonds used for the project and thus make private activity bond financing a more realistic option for CCUS projects.
Transferability of Credit. The IRA includes a new provision providing the taxpayer the ability to elect to monetize the 45Q credit (and certain other tax credits) through a cash sale thereof. This is a major departure from established IRS tax credit guidance. Specifically, a taxpayer may transfer all (or any portion of) a 45Q credit on an annual basis during the entire 12-year credit period to unaffiliated third parties in exchange for a cash payment. The payment received will not be included in the taxpayer’s taxable income, nor deductible by the transferee. By not requiring tax equity partnerships to monetize the 45Q credit, CCS developers will be provided with a significantly streamlined approach to financing. While there is a potential 20% penalty for overpayment for the credit by the transferee, the proposed language of the bill provides that the seller may provide “reasonable cause” to rebut such determination. Regulations promulgated with respect to a safe harbor partnership for 45Q tax credits provide for the possible payment by tax investors of operating expenses for CCS projects outside of the required committed equity contributions. If the IRA is passed, we may see similar guidance in the future with respect to permissible “excess amounts” for transfers of 45Q tax credits to unaffiliated third parties.
The IRA, if enacted, has the potential to provide CCUS developers and investors with the credit amount, project flexibility, and financing structures necessary to bring more of these essential greenhouse gas mitigation projects to fruition.