Recommended Modifications to the 45Q Tax Credit for Carbon Dioxide Sequestration

Introduction

The National Enhanced Oil Recovery Initiative (NEORI) recommends that Congress consider implementing a revenue-positive federal production tax credit to support deployment of commercial carbon dioxide (CO₂) capture and pipeline projects. A new, more robust federal incentive is needed to increase the supply of man-made or anthropogenic CO₂ that the oil industry can purchase for use in enhanced oil recovery (EOR) to increase domestic production from existing oil fields.

NEORI also recommends that Congress undertake immediate modification of the existing Section 45Q Tax Credit for Carbon Dioxide Sequestration,[1] through legislative action and/or working with the Department of the Treasury to revise Internal Revenue Service program guidance.

To avoid stalling important commercial CO₂ capture projects under development, there is an urgent need to improve the functionality and financial certainty of this federal incentive to enable its effective commercial use. To make 45Q immediately accessible to US companies, Congress should pursue the following changes to the program:

• Designate the owner of the CO₂ capture facility as the primary taxpayer;
• Establish a registration, credit allocation, and certification process;
• Change the recapture provision to ensure that any regulations issued after the disposal or use of CO₂ shall not enable the federal government to recapture credits that were awarded according to regulations that existed at that time; and
• Authorize limited transferability of the credit within the CO₂ chain of custody, from the primary taxpayer to the entity responsible for disposing of the CO₂. 

The consensus recommendations below detail the specific 45Q program modifications requested, and the section-by-section summary provides further explanation and context.

Background and Rationale 

Section 45Q makes available a per-ton credit for CO₂ disposed of in secure geologic storage. The program provides $10 per metric ton for CO₂ stored through EOR operations and $20 per metric ton for CO₂ stored in deep saline formations. However, due to unforeseen issues in the original statute (§ 115 of the Energy Improvement and Extension Act of 2008), the 45Q program lacks sufficient transparency and certainty for companies to be able to use the credit to secure private financing for projects.

Large-scale expansion of commercial EOR using industrially-sourced CO₂ later in this decade requires that critical industrial capture projects begin construction now and enter commercial operation within the next few years. If Congress makes modest, functional improvements this year to 45Q that result in little or no additional fiscal cost, the program currently authorized at 75 million metric tons of CO₂ stored can help several significant EOR projects nationwide secure private sector financing and move forward to commercial operation.

Reference:

1. 26 USC §45Q provides a tax credit for carbon dioxide sequestration. Section 45Q was enacted by § 115 of the Energy Improvement and Extension Act of 2008.