Carbon capture requires significant investment in equipment because separating the carbon oxides from the emissions stream, especially in certain applications, can be challenging. Transportation of captured oxides can also be costly, requiring a pipeline and related infrastructure from the plant site to a secure underground geological structure for injection (or other applicable use). Finally, the regulatory approval process for sequestering captured oxides can be time consuming and involved.
Because of those complexities and costs, only 16 carbon capture, utilization and storage facilities exist in North America today, despite the implementation of the CCUS-focused tax credit in 2008. The majority are found at natural gas processing plants, where separation is relatively simple and there are commercial uses for captured CO2 as well as nearby structures for injection.
The Inflation Reduction Act minimizes many of the barriers to CCUS investment while further incentivizing CCUS projects. Under the new law, the Section 45Q credit is subject to a two-tiered credit regime, with a lower base rate and a higher bonus rate (if the prevailing wage and apprenticeship requirements are met). Specifically, for point source capture projects (where capture equipment is installed directly at the industrial or manufacturing facility), the top potential rate is now $85 per metric ton of qualified carbon oxides captured and sequestered (up from $50 per metric ton), and, for direct air capture projects, the top potential rate is now $180 per metric ton of qualified carbon oxides captured and sequestered (up from $35 per metric ton). Additionally, the annual carbon capture thresholds have been materially lowered (i.e., to 12,500 metric tons per year for many point source capture projects, to 1,000 metric tons per year for direct air capture projects, and to 18,750 metric tons per year for projects related to electricity generating facilities).
Importantly, under the new law, companies can elect a limited, 5-year direct pay option for Section 45Q tax credits that the companies may not have otherwise been able to use, or the companies can sell the Section 45Q tax credits (one time, for cash, per facility, per year). Certain of these changes take effect immediately (such as the lowered capture requirements and the extended beginning of construction dates); whereas certain changes take effect beginning January 1, 2023 (such as the increased credit rates and the potential ability to elect the direct pay or transferability provisions).
The changes are designed to encourage investments related to making certain manufacturing and industrial process operate in cleaner, more efficient manners, by making the addition of carbon capture equipment and related infrastructure more economically viable.
Plus, many CCUS projects that qualify for federal tax credits under Section 45Q of the Internal Revenue Code can also earn state-level tax and economic incentives, making them even more viable.
These changes mean that a much broader range of CCUS projects, across multiple industries, can be economically feasible. We expect that investors and developers alike will increasingly embrace CCUS and that projects will be fast-tracked across the US as companies strive to achieve net-zero goals.