What does the inflation reduction act mean for carbon capture and sequestration?

To help mitigate climate change, the bill increases the pre-existing 45Q tax credit for carbon capture and geologic sequestration (CCS). In addition, it promotes other industrial uses for CO₂, including enhanced oil recovery (EOR). The 45Q tax credit amounts are increased for the construction of new facilities fitted for CCUS or additional CCUS equipment installed at existing facilities.

The credit values have increased from January 1, 2023, through to 2026 and will be adjusted for inflation after that.

The cornerstone of the  45Q tax credits is the increase from $50 to $85 per tonne of CO₂ stored in saline formations or depleted oil fields. The increased amount incentivizes hard-to-decarbonize industries that may not have had access to tax credits in the previous structure. Many CCS projects can become feasible, viable projects by making the $85 per tonne available for carbon capture equipment installed after January 1, 2023, and before January 1, 2033. 

Figure 1 below, includes data from the Clean Air Task Force and illustrates the cost ranges for CCS for various industries compared to the increased 45Q tax credits. Even the high-cost estimates for chemical plants, blue hydrogen production, coal power plants, and petrochemical complexes are expected to be within range of the new tax credits by this analysis. Innovation and technology developmentmake CCS feasible for more diffuse point sources of CO₂ such as cement production, refineries, power generated by gas turbines, and steel production plants.

Qualified CO₂ is carbon dioxide that would have been released into the atmosphere without the qualifying equipment. To claim the tax credits, emissions must be measured at the point of capture and the point of disposal, injection, or other use.

A qualified industrial facility or direct air capture facility is one in which construction begins before January 1, 2033. Construction of carbon capture equipment must begin before this date, or the original planning and design for the facility included installing carbon capture equipment.

The emissions must be from a factory, refinery, power plant or other fuel combustion source, fuel cell, pipeline, or manufacturing process. If the CO₂ is underground, drawing it out counts if the commercial goal is to recover some other gas mixed with it.

The minimum volumes of CO₂ that must be captured were reduced significantly with the passage of the new legislation, as follows.

• Direct Air Capture – 1,000 tonnes per annum (tpa)
• Industrial Facilities – 12,500 tpa
• Power Plants – 18,750 tpa, however, 75% of the plant’s baseline carbon dioxide and carbon monoxide emissions must be captured

Power plant baseline emissions for existing plants are calculated at the highest average annual emissions for the three years before construction of the carbon capture equipment begins. Suppose the power plant has been in service for many years. In that case, the highest 3-year period emissions during the preceding 12-year period before the construction of carbon capture equipment must be considered.

The CO₂ should be disposed of in secure geological storage. For EOR, it is a tertiary injectant in a qualified enhanced oil or natural gas recovery project, followed by disposal in secure geological storage.

Permitted commercial uses include affixing the CO₂ to something else through photosynthesis or chemosynthesis, such as growing algae or bacteria. Chemical conversion to a material or compound in which the carbon dioxide is securely stored is allowed and uses for other purposes for which a commercial market exists.

The tax credits belong to the person or company that owns the capture equipment and disposes or contracts another party to dispose of the CO₂. The owner of the capture equipment can transfer the tax credits to the party who disposes of the CO₂ underground, uses it as a tertiary injectant or uses the CO₂ for commercial use. Annually, the owner can choose a percentage of the tax credits to transfer.

The tax credits claimed will be recaptured and must be repaid to the U.S. Treasury should the CO₂ leak from underground storage or ceases to be used as a tertiary injectant. The period when the tax equity investor remains exposed to some level of recapture runs potentially for 15 years (i.e., the 12-year tax credit period plus three years after). Only the net leak in a year is recaptured (i.e., leak after offsetting the CO₂ injected into the ground that year). The IRS will look back as many as three years to recapture tax credits on account of a net leak. 

An oil and gas industry client wanted to negotiate the best price for the purchase and sale of carbon capture sequestration services and CO₂ volumes from various sources in the North Dakota area. We developed an economics model that would help them understand the costs and revenue streams using the new Q45 tax credits.

The project was designed for 2.7 million tpa injection into the wells. As a result, 25 million tonnes of CO₂ are expected to be sequestered for the planned 10-year operating period. Using the economics model better allowed our client to make informed decisions that optimize operational revenue and costs.

The unique value of this analysis allows separate consideration and discussion of capture facilities, compression needs, and compression power costs.