Tax Services • Published 7/12/2022 Carbon Capture and Sequestration Tax Credits

While you may be familiar with the potential income tax credit available to offset the purchase of an electric or hybrid automobile, few taxpayers are aware of the tax credits available to organizations for the purchase and utilization of equipment to capture and sequestrate carbon from the environment.  

What is Carbon Capture and Sequestration (CCS)?  

The Environmental Protection Agency's description of carbon capture and sequestration can be summarized into three main points:  

1. Utilizing technology to capture the CO₂ generated by power stations, plants, and industrial activities.  
2. Compressing and transporting the captured CO₂.  
3. Utilizing geologic sequestration by injecting the CO₂ underground beneath porous rock formations to capture and hold the carbon. A non-porous rock covers the porous rock formations to prevent carbon from migrating to the surface.  

Section 45Q and incentivizing CCS. 

In 2008, Congress passed Section 45Q to provide a tax credit based on the type and amount of CO₂ sequestered. The law was very restrictive, focused purely on CO₂, and designed for oil companies. A taxpayer had to sequester over 500,000 metric tons of CO₂ to qualify for the tax credit. 

However, the investment cost necessary to capture at least 500,000 metric tons of CO₂ was so unattainable for most taxpayers that only a few large oil companies ever qualified for the credits.   

Additionally, this benefit had a limit. The tax credit would be eliminated once the EPA certified that 75,000,000 metric tons of CO₂ had been sequestered.  

Congress updated CCS incentives in 2018. 

In 2018, Congress amended Section 45Q with the goal of increasing industry investment in carbon capture technologies. The taxpayer-friendly changes included:  

• Expanding the law to cover the capture and sequestration of carbon oxide.  
• Lowering the CCS tax credit threshold amounts to 25,000 metric tons of carbon for some industries. 
• Eliminating the 75,000,000 metric ton cap.  

What types of taxpayers can qualify for a CCS credit? 

Taxpayers in the following industries should consider the economic implications of investing in carbon capture and sequestration technologies:  

• Oil companies  
• Metal production companies (steel, aluminum, iron, etc.)  
• Power plants (especially coal) 
• Chemical production facilities 
• Ethanol production plants 
• Gas refineries 
• Carbon-intensive manufacturing 

How is the CCS tax credit calculated? 

The credit is calculated as follows:  

• $50 per ton of CO₂ for carbon capture and geologic storage; or 
• $35 per ton of CO₂ for carbon capture and storage via utilization.  

Carbon capture equipment must be placed in service after February 9, 2018, to qualify for the above rates. Equipment placed in service before that date is subject to lower rates. The taxpayer can claim the credit for 12 years after the date the carbon capture equipment is ready for service at an eligible facility.  
 

An eligible facility begins construction before January 1, 2026, and emits carbon more than the following thresholds:  

• 500,000 metric tons of CO₂ at an electric generation facility.  
• 100,000 metric tons of CO₂ at any other industrial site or direct air capture facility.  
• 25,000 metric tons of CO₂ at other facilities.  

Other considerations: 

A robust discussion of the CCS tax credit is complicated and beyond the scope of this article. The regulations include, but are not limited to, the following:  

• Defining carbon capture equipment. 
• Defining carbon oxide (i.e., greenhouse gases). 
• Approved methods of carbon utilization.  
• How to transfer the credits to a third party.  

Contact your P&N advisor to learn more about the CCS tax credit and to discuss tax strategies related to your carbon capture requirements.