The tax credit for carbon capture and sequestration has been in the news this month. Congress is considering whether to extend and expand the credit, and environmental groups like Green Scissors are voicing opposition.
This post explains the carbon capture tax credit, found in Section 45Q of the Internal Revenue Code, and it explores whether the credit has a future.
What is the Section 45Q tax credit and who can benefit?
The carbon capture tax credit was enacted in 2008 as part of the Energy Improvement and Extension Act, and it was amended by the 2009 stimulus bill. Notably, the carbon capture tax credit is distinct from more familiar credits like the credits for wind and solar power, which are found in Section 45 (not 45Q) of the Internal Revenue Code. The carbon capture tax credit is available to any person who (1) captures “qualified CO2” (i.e., CO2 that otherwise would have been released into the atmosphere) and (2) ensures (either physically or contractually) that the CO2 is captured in secure geological storage or is used as a tertiary injectant (i.e., pumped into oil and gas reservoirs in order to enhance the amount of oil that is extracted from the reservoir).
If the CO2 is geologically stored, the credit is $21.85 per metric ton of qualified CO2 . If the CO2 is used as a tertiary injectant, the credit is $10.92 per metric ton of qualified CO2. Generally, a taxpayer who owns a “qualified industrial facility” (i.e., a facility that emits more than 500,000 metric tons of carbon dioxide each year) should be looking at the carbon capture tax credit.
Finally, taxpayers should know that the tax credit may not be available in the future. Section 45Q is set to disappear when the Treasury Department and the EPA together determine that 75 million metric tons of qualified carbon dioxide have been captured or injected.
Why is the tax credit so controversial?
Friends of the Earth, R Street Institute, and Taxpayers for Common Sense (the “Green Scissors Coalition”) take the position that the tertiary injectant portion of tax credit subsidizes oil-extraction practices that companies would be using anyway. Green Scissors recently submitted a Freedom of Information Act (“FOIA”) request to the IRS because it wants to know how many credits have been awarded for geological storage as opposed to reservoir injection since Section 45Q was first enacted.[1]
While the Green Scissors Coalition is questioning whether the U.S. should, as a policy matter, subsidize the development of carbon capture technology and infrastructure through the carbon capture tax credit, a number of legislators are in favor of the tax credit. Representative Mike Conaway (R-TX) introduced a bill this past February to make the tax credit permanent. And, Senators Heidi Heitkamp (D-ND) and Sheldon Whitehouse (D-RI) introduced a bill last month to, among other things, increase the amount of the tax credit. In contrast, a 2011 report from Green Scissors opposes not only the carbon capture tax credit but a number of other credits like the open-loop biomass credit.[2] Although this blog post will not resolve the larger policy questions, the tax code supports a myriad of different energy technologies, including wind, solar, geothermal, hydropower, municipal solid waste, etc., and any policy discussion needs to consider the merits of each type of energy tax credit. Although the future of the carbon capture tax credit is not clear, taxpayers can still take advantage of the credit before the 75 million metric ton quota is exhausted.
[1] FOIA request, available at http://webiva-downton.s3.amazonaws.com/877/cd/d/8952/2016_8_8_IRS_final_FOIA_letter_pdf_foe_rs_tcs.pdf. The FOIA request does not ask for information about individual companies or taxpayers, and the IRS would not provide this information in any event.
[2] Green Scissors 2011 Report, available at http://greenscissors.taxpayer.net/assets/documents/Green_Scissors_2011_Web.pdf.
