June 4, 2021
Biden Administration would expand carbon oxide sequestration credit
The Biden Administration's FY2022 budget and Treasury Green Book propose allowing the credits for carbon dioxide sequestration to apply to facilities for which construction begins before January 1, 2031. In addition, the credits for "hard-to-abate" industrial-carbon-oxide-capture sectors would increase.
The Green Book also proposes a direct-pay option, under which taxpayers could elect a cash payment instead of the carbon sequestration credit.
IRC Section 45Q credits can be claimed for any industrial or direct air-capture facility for which construction begins before January 1, 2026, and that captures certain amounts of qualified carbon oxide, depending on its size.
The amount of credits available for captured carbon oxide includes the following (these amounts apply to carbon oxide captured using equipment originally placed in service on or after February 9, 2018; lower amounts apply if the equipment used was originally placed in service before February 9, 2018):
The Administration's proposal would extend the "commence construction" date by five years, so the credits can be used for qualified facilities that begin construction by January 1, 2031.
The proposal would also allow a direct-pay option, under which taxpayers could get a cash payment in exchange for their tax credits. The exact mechanism for the direct pay was not spelled out.
In addition, beginning in 2022, the credit applicable to "hard-to-abate" industrial-carbon-oxide-capture sectors (such as cement production, steelmaking, hydrogen production and petroleum refining) would increase an additional $35 per metric ton of qualified carbon oxide that is captured from such sources and disposed of in secure geological storage. Thus, the total per-ton credit for these projects would be $85 in 2026. This enhanced credit would not apply to ethanol, natural gas processing or ammonia production facilities.
The credit for direct air-capture projects would also increase to an additional $70 per metric ton of qualified carbon oxide that is disposed of in secure geological storage. Thus, the total per-ton credit for direct air-capture projects with secure geological storage would be $120 in 2026.
The proposed revisions to IRC Section 45Q reflect concerns raised by stakeholders about the difficulties in building and profitably operating carbon capture projects in various industries. Those difficulties may be driven by a confluence of circumstances, including the cost of building new projects, the long lead time for the design and construction of these projects, the nascent nature of the related carbon-capture technologies and the economic realities in various industries. Richer incentives would likely encourage the construction of a wider collection of projects, enabling the building cost to become gradually cheaper, as has been demonstrated with other technologies such as wind and solar. The particular applications that might receive the richer incentives (direct air capture and hard-to-abate industrial processes) speak to an evolving understanding of the cost to abate carbon in various industries.
The possibility for a direct-pay option may obviate the need for the development of a tax equity market using the structures provided in Revenue Procedure 2020-12 (see Tax Alert 2020-0432). To date, a tax equity market has been slow to develop due in part to the infancy of the program and the significant differences between projects. Even with a direct-pay option, however, we may see the development of a tax equity market with depreciation-only monetization, as was observed in wind and solar during the time of ARRA 1603 grants (i.e., when Treasury made payments in lieu of investment tax credits to eligible applicants for specified energy property used in a trade or business or for the production of income).