U.S. Incentive to Capture and Store CO2
Section 45Q of the U.S. Internal Revenue Code was first introduced in 2008 as part of the Energy Improvement and Extension Act. This section, referred to as the 45Q tax credit, incentivizes investment and development in carbon capture, utilization, and storage (CCUS) projects. Since 2008, the code has been updated and expanded, allowing more projects to qualify for the tax credit.
2008 Energy Improvement and Extension Act offered $20 per tonne of stored CO2 for dedicated geologic storage projects and $10 per tonne for CO2 utilization projects with associated storage. Dedicated storage projects include injection into a saline aquifer or acid gas disposal. Associated storage projects most often reference enhanced oil/gas recovery operations.
2018 Bipartisan Budget Act (BBA) expanded Section 45Q to provide $50 per tonne of stored CO2 (COx, the Internal Revenue Code uses carbon oxide, which includes CO2) for dedicated storage and $35 per tonne for associated storage. The BBA removed the 75-million-tonne CO2 storage cap from the 2008 act but specified that the 45Q tax credit must be claimed over a 12-year period and that construction or operation must begin prior to 2026.
2022 Inflation Reduction Act (IRA) expanded on the BBA and raised the credit available to $85 per tonne of carbon oxide stored for dedicated storage and $60 per tonne for associated storage. The IRA also implemented a direct-pay option for qualifying facilities, reduced the carbon capture threshold requirements for eligible projects, and extended the deadline to begin construction by January 1, 2033.
2025 One Big Beautiful Bill Act (OBBBA) created parity for utilization and sequestration projects by raising the credit available for associated storage to the same value as dedicated storage—$85 per tonne of carbon oxide stored. The OBBBA also implemented restrictions on taxpayers with ties to certain foreign countries (i.e., China, Russia, Iran, and North Korea) from claiming the 45Q credit. This includes “specified foreign entities” and “foreign-influenced entities”.
State Tax Credit
In addition to federal tax incentives, states have taken the initiative to incentivize CCUS projects. For example, North Dakota eliminates sales tax on all capture-related equipment, CO2 sold for enhanced oil recovery (EOR), pipeline construction, and CO2 EOR infrastructure. In addition, North Dakota reduces the coal conversion tax when CO2 is captured, allows for a 10-year property tax exemption on pipeline equipment, and eliminates the oil and gas extraction tax for 20 years during tertiary CO2 EOR. Wyoming has established tax incentives to spur CO2 utilization. The state eliminates tax on the sale of CO2 used in tertiary CO2 EOR and allows for a severance tax credit when oil is produced from CO2 injection. Montana offers a reduced-market-value property tax rate for carbon sequestration equipment. A notable law in Montana requires that all new coal plants capture and sequester at least 50% of their CO2 emissions.
Canadian Incentives
In its 2021 budget, the Canadian federal government proposed to introduce an investment tax credit for capital invested in CCUS projects, with the goal of reducing CO2 emissions by at least 15 million metric tons annually.
The investment tax credit, the Output-Based Pricing System (OBPS), will be available to multiple industrial sectors, including cement, refining, power generation, hydrogen generation, and direct air capture. The tax credit is not intended for CO2 EOR projects. The proposed legislation would come into effect in 2022.
In October 2016, the Canadian Prime Minister announced the Pan-Canadian Approach to Pricing Carbon Pollution, which gave provinces and territories the flexibility to develop their own carbon pollution pricing system along with guidance to ensure the systems are stringent, fair, and efficient. The Canadian federal government also committed to implementing a federal carbon pollution pricing system in provinces and territories that request it or do not have a carbon pollution pricing system that meets the federal benchmark, a “federal backstop.” As of 2021, the federal carbon price was Can$30/metric ton and will increase to Can$170/metric ton by 2030. All direct proceeds from carbon pollution pricing under the Canadian federal system will be returned to the jurisdiction in which they were generated.