The basic structure of the 45Q credit remains the same: taxpayers are eligible for a tax credit (amounts provided below), for 12 years from the year in which the capture equipment is placed in service, per metric ton of CO2 captured from industrial facility emissions (or via direct air capture) and sequestered in secure geologic storage (dedicated storage or as part of enhanced oil recovery (“EOR”), or otherwise utilized such that the CO2 cannot escape into the atmosphere.
Class VI Permit Applications
The surge of interest in CCS is demonstrated by the significant increase in applications over the past year for U.S. Environmental Protection Agency (“EPA”) Class VI permits, which are required for geological sequestration of CO2. Since enactment of the IRA on August 16, 2022, EPA has received over 90 Class VI permit applications.1 In addition, North Dakota and Wyoming, the only states with primary Class VI permitting authority (i.e., “primacy”), have each received two permit applications over the same time period.2
However, EPA has yet to issue a single permit for applications submitted post-IRA enactment.3 As of August 30, 2023, EPA has granted six Class VI permits, all prior to enactment of the IRA. Currently, only two of those approved permits are still active – both originally issued in 2014 to Archer Daniels Midland Company for its Decatur Campus in Illinois.4
As EPA attempts to work through permit applications, several states have taken steps through EPA’s application or pre-application process to obtain primacy to administer their own Class VI permit programs. Earlier this year, EPA announced its intent to approve Louisiana’s primacy request.5 The public comment period on EPA’s proposed approval closed on July 3, 2023 and a final decision could come later this year.6 Meanwhile, Texas, West Virginia, and Arizona are still in the pre-application stage. Even more states, including Pennsylvania, have signaled their intent to apply for primacy. Granting primacy to additional states, in particular those like Texas and Pennsylvania, which have significant industrial CO2 emissions, pipeline corridors, and pore space capacity for sequestration, will only increase the interest in Class VI permits and accelerate investment in CCS.
The IRA’s Expansion of the 45Q Credit
The IRA both broadened the scope of eligible capture and sequestration/use projects, and significantly increased tax credit values per ton of CO2 captured and sequestered/utilized. Specifically:
Extension of Credit Effective Date and Broadening of Eligible Facility Definitions (all effective for facilities/equipment the construction of which began after enactment on 8/16/22)
The IRA extended the 45Q credit to apply to all qualified facilities (industrial emitters or direct air capture facilities) the construction of which begins by the end of 2032, as long as construction of carbon capture equipment has also begun by such date, or the original planning and design for such facility calls for installation of carbon capture equipment.
Owners of electric generating unit CO2 capture facilities will now qualify for 45Q credits as long as at least 18,750 (metric) tons of CO2 per year are captured from such facility. (Pre-IRA, this threshold was 500,000 tons.) The design capacity of such capture equipment, however, must now be at least 75% of the “baseline carbon oxide production” of such generating facility.
Owners of a direct air CO2 capture facility will now qualify for 45Q credits as long as at least 1,000 tons of CO2 per year are captured from such facility. (Pre-IRA, this threshold was 100,000 tons.)
Owners of any other industrial emitter CO2 capture facility will now qualify for 45Q credits as long as at least 12,500 tons of CO2 per year are captured from such facility. (Pre-IRA, this threshold was 25,000 tons.)
Increased Per Ton Tax Credit Amounts with Wage/Apprenticeship Requirements (generally effective for facilities/equipment placed in service January 1, 2023 and after)
For facilities/capture equipment placed in service after 2022, tax credit amounts are increased significantly, with a caveat: to be eligible for the increased credit amounts, developers claiming the credits must satisfy prevailing wage and apprenticeship requirements. Specifically, prevailing wage must be paid to workers, and apprenticeship programs must be in place, during construction and for the first 12 years of operation of the carbon capture equipment.
For facilities that do not satisfy wage and apprenticeship requirements, the 45Q tax credit amount will be 20% of the full amount.
Credit amounts for facilities placed in service in 2023 and after are adjusted for inflation starting in 2026. Amounts for pre-IRA, or pre 2023 placed in service facilities are adjusted for inflation every year.
Full 45Q credit amounts for facilities placed in service starting in 2023 are as follows:
Dedicated geological sequestered CO2 captured from an industrial facility: $85/ton ($40.89 in 2023 for pre-IRA/pre 2023 facilities)
Dedicated geological sequestered CO2 from Direct Air Capture: $180/ton ($40.89 in 2023 for pre-IRA/pre 2023 facilities)
EOR sequestered CO2, or Other Utilization of CO2, captured from an industrial facility: $60/ton ($27.61 in 2023 for pre-IRA/pre 2023 facilities)
EOR sequestered CO2, or Other Utilization of CO2, from Direct Air Capture: $130/ton ($27.61 in 2023 for pre-IRA/pre 2023 facilities)
Direct Pay / Transferability
Another new IRA provision that could make CCS investment significantly more attractive is the ability for CCS developers to either transfer their tax credits – for cash – to other US taxable entities, or, for a limited number of years, to receive a direct payment in the amount of the tax credit they are due for the year (to the extent they have no tax liability to offset) from the Department of Treasury. The direct pay option is only available for a maximum 5-year period, so taxpayers taking advantage of direct pay for this period would have to use the credits against tax owed or else transfer the credits for cash for the 7 remaining years of credit eligibility.
Additional Treasury guidance on 45Q is expected in 2023, which we hope will provide more information on details like the 75% capture requirement (against baseline CO2 emissions) for electricity generation facilities, as well as what will qualify for credits under the utilization category. In addition, we expect further Treasury guidance on the direct pay and transferability options. Finally, there is increasing pressure, including from Capitol Hill, on EPA to start granting Class VI permits, and to process state primacy applications, with Louisiana likely the first to be granted this in 2023. We will provide further notice in the future as relevant new details are made clear.
Authored by Jamie Wickett, Jim Banks, and Brian Malat.
2 https://www.dmr.nd.gov/dmr/oilgas/ClassVI (DCC West Project LLC application submitted Mar. 10, 2023 and Blue Flint Underwood Broom Creek Storage Facility #1 application submitted Sept. 30, 2022); https://deq.wyoming.gov/water-quality/groundwater/uic/class-vi/ (Tallgrass Eastern Wyoming Sequestration Hub application received Mar. 29, 2023 and Frontier Carbon Solutions, LLC Sweetwater Carbon Storage Hub application received Sept. 15, 2022).
3 We have heard rumors that public announcement of the issuance of some permits is imminent, but there is of yet no public information regarding such permits.
4 EPA, Table of Class VI Wells Permitted by EPA, https://www.epa.gov/uic/class-vi-wells-permitted-epa; EPA, Class VI Permitting Report to Congress at 15 (Oct. 28, 2022).
5 88 Fed. Reg. 28450 (May 4, 2023).