.png)
Today, let´s look into the most significant tax incentive for CDR in existence. While the EU often uses a stick to scale markets, the #US tends to use a carrot. The #45Q tax credit, first introduced in 2008, is a major incentive driving the scale-up of the CDR industry in the US.
What is the US 45Q tax credit?
💵Section 45Q of the Internal Revenue Code, extended by the Inflation Reduction Act (#IRA), provides a tax credit for CO2 storage – recently increased to $180/t of CO2 permanently stored through direct air capture (#DAC) and $130/t for CO2 utilisation.
🗂 The value of the tax credit depends on the type of CO2 storage – e.g., CO2 used for saline storage would receive more USD per tonne of CO2 stored compared to utilization in products, including controversial enhanced oil recovery (#EOR).
🔍 The credits last for up to 12 years. A project is eligible if it meets a minimum threshold for released CO2 emissions – 18,750 tons of CO2 for permanent electricity-generating facilities, 12,500 tons for other permanent industrial facilities, and 1,000 metric tons for permanent DAC facilities.
What does Section 45Q mean for CDR?
❗This law primarily addresses saline deposits and geological storage, which excludes many efficient CDR approaches, such as DAC that uses mineralisation or any other form of CDR for that matter, a big bag in my opinion.
❌ The recently increased 45Q tax credit should spur investment in CCUS projects across the US, though controversial effects emerge regarding carbon capture and storage (#CCS) technologies enabling EOR. A major issue with including EOR in the 45Q tax bracket is the oil and gas industry’s exploitation of tax credits under the guise of removing while re-emitting.
✅The 45Q tax credit provides a significant base income for developers of DAC in the US. Buyers, however, seem to be picking up on this: some are apparently asking suppliers to disclose if they are receiving 45Q and, if so, requesting to discount the value from the per tonne price.
Increased tax credits for carbon sequestration technologies are a major step forward to encourage corporate responsibility in a country like the US. However, there is room for improvement, as carbon credits should be used to reduce and permanently remove emissions, not to subsidise questionable practices such as EOR. Further, limiting 45Q to a single technology - and not even all of DAC - is a major shortcoming of this promising policy.
This is just the beginning for the US as it develops a more robust CDR policy. I am pleased that the US is taking actionable measures to promote carbon management alongside emissions reductions, and I hope that CDR technologies like DAC will take center stage over time instead of the primary oil and gas partnerships with CCUS.
What do you think? What are your pros and cons? What should be changed?