The powerful momentum behind clean energy promises real progress in the fight against global climate change. Mounting scientific evidence urges, however, that to win: We cannot just reduce the carbon-intensity of the energy we use – we also need to catch the carbon pollution already in the atmosphere. To achieve our climate stabilization targets, we will likely need to achieve negative emissions at the gigaton scale within a decade, and quickly ramp up.[1] And although the technology to achieve this feat is known, it has not hit its stride commercially.
Fortunately, this technology for carbon removal – catching carbon pollution to either sequester or use – is now getting an additional boost from the federal government. Building on earlier investments through direct spending and tax incentives, the U.S. Congress passed a new tax credit in February 2018 designed to spur investment in carbon removal technology. In addition, the U.S. Congress is currently debating legislation that would create yet additional grant and prize authorities for certain federal agencies to directly spend on innovation in this arena, and encourage the rapid regulatory development needed to remove barriers to at-scale deployment of carbon removal technologies.
Revamped Tax Incentive
On February 9, 2018, Section 41119 (“Enhancement of Carbon Dioxide Sequestration Credit”) of the Bipartisan Budget Act of 2018 became law.[2] The law revises the current Section 45Q carbon dioxide tax credit, which has been part of the federal tax code since late 2008. The law revamps the tax incentive in a number of key ways, including:
Figure 1
Use Case |
New Law ($/ton CO2)[3] |
Old Law ($/ton CO2)[4] |
Geologically Sequestered CO2 (with Enhanced Oil Recovery) |
Increasing annually from $12.83 (2017) to $35 (2026) |
$10 (2017 value was $11.24) |
Geologically Sequestered CO2 (without Enhanced Oil Recovery) |
Increasing annually from $22.66 (2017) to $50 (2026) |
$20 (2017 value was $22.48) |
Non-Geologically Sequestered CO2 (e.g., used as feedstock) |
Increasing annually from $12.83 (2017) to $35 (2026) |
N/A |
Figure 2
Source + Use Case Profile |
New Law (ton/yr.) |
Old Law (ton/yr.) |
Electric Power Plant |
> 500,000 |
> 500,000 |
Industrial Facility |
> 100,000 |
> 500,000 |
Industrial Facility + Non-Geologically Sequestered CO2 (e.g., used as feedstock) |
25,000 – 500,000 |
N/A |
The new law, however, does leave a number of unanswered questions regarding how IRS will implement the credit. For example, developers and investors need additional information regarding:
In the coming months, the IRS – in consultation with the EPA and U.S. Departments of Energy and the Interior – is expected to issue both guidance and new rules that will likely add clarity to these and other open issues and aid in robust implementation of the incentives. We noted, however, that the IRS 2017-2018 Priority Guidance Plan does give a time frame for the issuance of new 45Q guidance beyond just the notice setting the inflation adjustment factor for the 45Q credit for 2018. We may understand the IRS’ timing more clearly when the third quarter update to the Priority Guidance Plan is published.
Sustained Federal Focus
Congress is not done legislating on carbon removal. Already this month, Congress is debating a new law S. 2602, the Utilizing Significant Emissions with Innovative Technologies Act, or USE IT Act.[6] This bill could build on the new tax law by providing additional grant and prize authorities for federal agencies to directly spend on innovation in this arena and encouraging the rapid regulatory development needed to remove barriers to at-scale deployment of carbon removal technologies. While the law remains in committee and continues to evolve, the directionality is clear: on a bipartisan basis, the Congress appears to be backing carbon removal.
The full potential of the incentives in place and being contemplated is not yet realized, but the federal government has reinvigorated this climate opportunity for developers and investors. The tax credits alone could deliver tens – if not hundreds – of millions per project in tax cuts for developers and investors in carbon removal.
[1] See, e.g., Johan Rockström, Owen Gaffney, Joeri Rogelj, Malte Meinshausen, Nebojsa Nakicenovic, Hans Joachim Schellnhuber, A roadmap for rapid decarbonization. Science24 Mar 2017: 1269-1271 available at http://science.sciencemag.org/content/355/6331/1269.
[2] Public Law No: 115-123, see https://www.congress.gov/bill/115th-congress/house-bill/1892/.
[3] Annual adjustment for inflation in years after 2026. For years 2017-2026, increases to be based on linear interpolation.
[4] Annual adjustment for inflation started after first year of enactment.
[5] See https://www.epa.gov/sites/production/files/2015-07/documents/subpart-rr-uu-factsheet.pdf.
[6] See https://www.epw.senate.gov/public/index.cfm/hearings?ID=55DD866C-BEE0-49C7-8491-E042F051C947.
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