The Section 45Q Tax Credit for Carbon Sequestration

Updated August 25, 2023

The Section 45Q Tax Credit for Carbon Sequestration

Carbon capture and sequestration (CCS) technologies are

intended to reduce carbon dioxide (CO2) emissions from

fossil fuel-fired power plants, as well as other large

industrial sources. The tax credit for carbon sequestration—

often referred to using its Internal Revenue Code (IRC)

section, Section 45Q—is intended to incentivize investment

in carbon capture and sequestration.

What Is Carbon Sequestration?

Geological sequestration of carbon (i.e., carbon

sequestration) is the process of injecting carbon oxides into

underground geological formations, where they are to be

either permanently trapped or transformed. Geological

sequestration is the final step in a CCS system. The process

usually involves carbon dioxide (CO2), although injection

and sequestration of other carbon oxides (e.g., carbon

monoxide) is also possible. Geological sequestration is

intended to permanently trap CO2 emitted from

anthropogenic sources, such as power plants or industrial

facilities, thereby reducing net emissions of this greenhouse

gas (GHG) into the atmosphere. An emerging technology to

capture CO2 directly from the atmosphere—“direct air

capture” (DAC)—could also serve as a source of CO2

injected for geological sequestration. CO2 may be

sequestered by injecting it underground solely for

sequestration purposes or as part of “tertiary” oil recovery,

also known as enhanced oil recovery (EOR), from aging oil

fields. EOR has been used in the United States since the

1970s. For additional information on the technical aspects

and deployment status of CCS, see CRS Report R44902,

Carbon Capture and Sequestration (CCS) in the United

States.

Sequestration Tax Credit (Section 45Q)

The amount that a taxpayer may claim as a Section 45Q tax

credit is computed per metric ton of qualified carbon oxide

captured and sequestered (before 2018, the tax credit was

exclusively for CO2). For the purposes of the tax credit,

qualified carbon oxide is a carbon oxide that would have

been released into the atmosphere if not for the qualifying

equipment.

The amount of the credit, as well as various features of the

credit, depend on when the qualifying capture equipment is

placed in service (Table 1). The taxpayer has to repay the

tax credit (credit recapture) to the Treasury if the carbon

oxide ceases to be captured, disposed of, or used in a

qualifying manner (i.e., if it escapes into the atmosphere).

To claim a tax credit, the carbon oxide emissions must be

measured at the point of capture as well as at the point of

disposal, injection, or other use. To be eligible based on

geological sequestration, the captured carbon oxide must be

disposed of in “secure geological storage.” Per IRC Section

45Q, secure geological storage includes “storage at deep

saline formations, oil and gas reservoirs, and unminable

coal seams.”

Legislative and Regulatory Background

The Energy Improvement and Extension Act of 2008

(Division B of P.L. 110-343) added a credit for CO2

sequestration to the tax code. The legislation included

several provisions designed to encourage cleaner, more

efficient, and “environmentally responsible” use of coal

specifically, and to encourage GHG emissions reductions

broadly. CO2 captured using equipment placed in service

before February 9, 2018, was eligible for tax credits until

tax credits were claimed for 75 million metric tons of CO 2.

In September 2022, the Internal Revenue Service (IRS)

reported that the cap had been met and that 2022 would be

the last calendar year that facilities placed in service prior to

February 9, 2018, could claim the credit.

The Bipartisan Budget Act of 2018 (P.L. 115-123)

expanded and extended the Section 45Q tax credit. Changes

included (1) a larger credit amount; (2) a start-ofconstruction deadline and 12-year claim period; (3)

allowing the credit for CO2 utilization in addition to EOR

and for DAC, as well as allowing smaller facilities to claim

the credit; and (4) allowing owners of carbon capture

equipment to claim tax credits instead of the entity

capturing the CO2, which facilitates tax-equity investment.

The deadline to begin construction was further extended for

two years, to January 1, 2026, in the Taxpayer Certainty

and Disaster Tax Relief Act of 2020 (Division EE of the

Consolidated Appropriations Act, 2021; P.L. 116-260).

P.L. 117-169, commonly referred to as the Inflation

Reduction Act of 2022 (IRA), modified and further

extended the Section 45Q tax credit. In addition to

modifying the base credit rates and definition of qualified

facilities, the IRA allowed a larger credit for qualified

facilities or carbon capture equipment that meet certain

prevailing wage and apprenticeship requirements. In

addition, the IRA extended eligibility to claim the credit to

certain nonprofits (“direct pay”) and entities without

ownership interests (“transferability”) and extended the

deadline to begin construction to the end of 2032.

https://crsreports.congress.gov

The Section 45Q Tax Credit for Carbon Sequestration

Table 1. Key Elements of the Section 45Q Credit

Equipment Placed in Service

after 2/8/2018 and before 1/1/2023

Equipment Placed in Service after 12/31/2022

and Construction Beginning Prior to 1/1/2033

Credit Amount (per Metric Ton of CO2)

Geologically Sequestered CO2

$40.89 per Metric Ton of CO2 in 2023.

Base credit of $17 per Metric Ton of CO2 ($36 for DAC), increased to $85

Increasing ratably to $50 by 2026, then inflation($180 for DAC) for facilities that pay prevailing wages during the construction

phase and during the first 12 years of operation and meet registered

adjusted.

apprenticeship requirements. Amounts adjusted for inflation after 2026.

Geologically Sequestered CO2 with EOR

$27.61 in 2023.

Base credit of $12 ($26 for DAC), increased to $60 ($130) for facilities that

Increasing ratably to $35 by 2026, then inflationpay prevailing wages during the construction phase and during the first 12

adjusted.

years of operation and meet registered apprenticeship requirements.

Amounts adjusted for inflation after 2026.

Other Qualified Use of CO2

$27.61in 2023.

Base credit of $12 ($26 for DAC), increased to $60 ($130) for facilities that

Increasing ratably to $35 by 2026, then inflationpay prevailing wages during the construction phase and during the first 12

adjusted.

years of operation and meet registered apprenticeship requirements.

Amounts adjusted for inflation after 2026.

Claim Period

12-year period once facility is placed in service.

12-year period once facility is placed in service, reduced to 5-year period if

transferred.

Annual Capture Requirements

Power plants:

Power plants:

Capture at least 500,000 metric tons.

Capture at least 18,750 metric tons and a capture design capacity not less

Facilities that emit no more than 500,000 metric tons per than 75 percent of baseline emissions.

year: Capture at least 25,000 metric tons.

DAC facilities: capture at least 1,000 metric tons.

DAC and other capture facilities: Capture at least

Other capture facilities: capture at least 12,500 metric tons.

100,000 metric tons.

Eligibility to Claim Credit

Entity who owns the capture equipment and

Entity who owns the capture equipment and physically or contractually

physically or contractually ensures the disposal,

ensures the disposal, utilization, or use as a tertiary injectant of the CO2.

Certain tax-exempt entities can claim the tax credit through “direct pay” and

utilization, or use as a tertiary injectant of the CO2.

other entities are allowed a one-time transfer to another entity.

Source: CRS analysis of IRC Section 45Q, 26 U.S.C. §45Q.

Notes: After 2017, the credit can be claimed for all carbon oxides, not just CO2. Equipment placed in service prior to February 8, 2018, is no

longer eligible for the 45Q tax credit.

Cost Estimates

Tax expenditure estimates, or estimates of the revenue

foregone due to tax credit claims, provide information on

the Section 45Q credit’s “cost.” In December 2022, the

Joint Committee on Taxation estimated that Section 45Qassociated tax expenditures would be less than $50 million

per year (the de minimis amount) through 2026, or about

$0.2 billion over the 2022-2026 five-year period. The

Department of the Treasury’s March 2022 tax expenditure

estimates for Section 45Q were $2.4 billion for the 20222026 five-year period and $30.3 billion from 2022 to 2032,

suggesting an expected increase in tax credit claims in later

years. The variation in these estimates reflects, in part,

uncertainty about future CCS deployment.

Issues for Congress

Some policymakers and stakeholders support the tax credits

as one mitigation strategy to reduce CO2 emissions into the

atmosphere. In contrast, others view policies promoting

CCS, such as tax credits, as subsidizing the continued

development and combustion of fossil fuels that emit GHGs

into the atmosphere. For policymakers interested in

promoting CCS development, tax policy is a congressional

option for supporting EOR, DAC, and CCS technologies

and projects. Tax incentives may be considered in

conjunction with other legislative options such as CCS

R&D and appropriations to related agencies and programs.

Specific issues in the 118th Congress related to the Section

45Q tax credit might include oversight of the IRS’s

implementation of recent changes to the statute, including

verification of tax claims. For example, in recent years,

concerns have been raised about potentially fraudulent

Section 45Q tax credit claims and the need to recapture the

credit in the case of carbon leakage. Congress may consider

whether the IRS has adequately addressed concerns about

improper claims through its responses to Congress,

guidance, and Section 45Q regulations.

Angela C. Jones, Analyst in Environmental Policy

Donald J. Marples, Specialist in Public Finance

https://crsreports.congress.gov

IF11455

The Section 45Q Tax Credit for Carbon Sequestration

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