Understanding the 45Q Carbon Capture Tax Incentive Program

The Inflation Reduction Act of 2022 (IRA22) introduced several financial incentives for the energy industry—some brand new and some that enhance or extend previous incentives. For the power generation industry, however, one enhanced incentive has received particular attention: the 45Q tax credit, relating to projects involving carbon capture and sequestration. This article offers a brief overview of the 45Q tax credit including key enhancements that emerged from IRA22 provisions.

 What is 45Q? 

The 45Q tax credit—formally outlined in 26 U.S. Code § 45Q - Credit for carbon oxide sequestration—is a federal tax incentive program designed to promote the capture and storage of carbon oxide emissions, primarily carbon dioxide (CO2). The credit was originally created under the Energy Improvement and Extension Act of 2008, then expanded under the Bipartisan Budget Act of 2018. IRA22 is merely the latest in a series of updates and enhancements to 45Q. 

The IRA22 provisions for 45Q include a dollar-per-ton ($/ton) tax credit for the amount of CO2 captured and either permanently stored underground (sequestration) or otherwise used in commercial applications such as enhanced oil recovery (EOR). The credit is available annually for up to 12 years of eligible carbon capture activities; however, the actual $/ton value of the credit depends on the method of capture, as well as other factors described below. 

Who qualifies for the tax credit? 

Facilities qualifying for a 45Q tax credit include power plants, industrial facilities, other stationary sources that emit CO2 and direct air capture (DAC) facilities. Only facilities physically located within the U.S. are eligible.

For power generation facilities to qualify, at least 75% of each unit’s CO2 must be captured. To put this in context, let’s say one facility has two units emitting CO2 and both have a carbon capture installed. If one unit captures 70% of emissions and the other captures 80%, only the unit capturing 80% qualifies for the credit. The facility is not allowed to average the captured emissions to claim the credit for both units.

Additionally, ongoing eligibility requires that facilities capture at least 18,750 metric tons of CO2 per year. Non-generation facilities have no percent-capture threshold; however, DAC facilities must capture at least 1,000 metric tons per year and other facility types must capture at least 12,500 metric tons of CO2 each year to remain eligible. These are significant decreases from the previously established 45Q thresholds and will make the tax credit accessible to significantly more facilities.

Construction—either of a new facility that includes carbon capture equipment in the original design or established facilities retrofitting carbon capture equipment—must commence before January 1, 2033. IRA22 extended this “construction commencement” date by seven years, from the original start-by date of January 1, 2026.

When can facilities apply the 45Q tax credit? 

Taxpayers can use the 45Q tax credit to offset federal income tax liability for the calendar year the CO2 is captured, stored or otherwise-used in commercial applications. If the credit exceeds the taxpayer's liability for the year, the unused credit can be carried forward for up to 20 years or be retroactively applied for the one previous year.

How much are the tax credits worth?

Calculating the credit is complicated. To simplify, let’s first consider new carbon capture projects. The value calculation starts with a base rate of $17/ton for sequestered CO2 and $12/ton for otherwise-used CO2 in a qualified commercial application, such as EOR.

Facilities can increase the applicable credit if they meet the prevailing wage and apprenticeship requirements noted in 45Q. This means they pay all laborers and mechanics no less than prevailing wages as determined by the Secretary of Labor. Plus, they ensure that the percentage of total labor hours worked by apprentices meets the thresholds outlined in the definitions. In these cases, the aforementioned base rates can increase by a five-times multiplier, increasing the sequestered CO2 tax credit to $85/ton, and the otherwise-used tax credit to $60/ton.

For DAC facilities, base rates are even higher: $36/ton and $26/ton for sequestered and otherwise-used CO2, respectively. With the prevailing wage and apprenticeship escalators, the tax credit increases to $180/ton if sequestered and $130/ton if otherwise-used. These are significant increases from the previous 45Q values, which were the same for both DAC and other facilities: $50/ton for sequestered and $35/ton for otherwise-used CO2.

The updated 45Q tax credits adjust for inflation beginning in tax year 2027. This is likely to further increase the $/ton values for all applicable CO2 tax credits.

Why is 45Q important? 

With the push toward decarbonization, the U.S. has made significant investment in reducing our reliance on carbon-based fuels and identifying and using low- or no-carbon fuels. Additionally, we have increased our efforts for using renewable energy where feasible and capturing CO2 either from the atmosphere or from the direct point of emission.

Ultimately, the tax incentives in 45Q are intended to financially motivate companies to continue developing and implementing carbon capture to support these decarbonization goals.