Carbon Capture, Utilization, and Sequestration Tax Benefits Under the Proposed Inflation Reduction Act

By: Heather Cooper, Carl J. Fleming, Parker A. Lee, Denmon Sigler (August 4, 2022)

The Inflation Reduction Act of 2022, HR 5376, 117th Cong. (Act). introduces several changes aimed at bolstering the Carbon Capture, Utilization, and Sequestration (CCUS) industry, as it responds to industry and policy recommendations for the development of CCUS projects. It significantly increases the value of the 45Q tax credit for carbon oxide geological sequestration from $50 per ton to $85 per ton, which is expected to incentivize large industrial businesses like petrochemicals, cement, steel, and refineries to incorporate CCUS in their operations. Moreover, the Act allows for Direct Air Capture (DAC) technologies, offering a larger credit value of around $180 per ton for these facilities. DAC technologies, which are mostly early-stage or experimental, will benefit from this increased support, helping to advance the sector and foster the development of viable DAC businesses.

Additionally, the Act revises the eligibility thresholds for 45Q tax credits, enabling more projects to qualify. The emission threshold has been reduced from 500,000 tons per year for power plants, 100,000 tons per year for industrial facilities, and 100,000 tons per year for DAC facilities to 18,750, 12,500, and 1,000 tons respectively. This will extend the reach of the 45Q tax credits and broaden the adoption of CCUS. A key amendment is the introduction of Direct Pay, simplifying the benefit collection process and allowing project developers and sponsors to avoid the complex process of raising tax equity. The Act is currently under Senate review, and its approval could offer clarity and foster more investment in CCUS.