The Inflation Reduction Act: A Historic Win for Carbon Management

The enactment of the Inflation Reduction Act of 2022 represents the most robust and comprehensive climate and energy policy in our nation’s history. The law includes groundbreaking federal policies needed to realize economywide deployment of carbon management technologies, prioritize industrial decarbonization, and scale infrastructure at the rate required to meet midcentury climate goals, foster domestic energy and industrial production, and provide environmental and economic benefits to affected communities.

 Coupled with historic investments in the Bipartisan Infrastructure Law, this package provides the most transformative and far-reaching policy support in the world for the economywide deployment of carbon management technologies, making a critical down payment on the investments in American innovation required to achieve net-zero emissions. The law makes several critical enhancements to the federal Section 45Q tax credit providing investment certainty, additional credit value, and the flexibility needed to drive greater project deployment across multiple sectors. These incentives are critical to the continued growth and development of the carbon management industry, and their enactment into law is yet another indication of the vital role these technologies must play in meeting both net-zero emissions and midcentury climate goals. 

Though the Inflation Reduction Act (IRA) was passed through the budget reconciliation process, this landmark law contains broadly supported carbon management priorities drawn from bipartisan legislation introduced earlier this year by Congress and subsequently endorsed in President Biden’s American Jobs Plan, including:

Increased Credit Values for Power, Industry, and Direct Air Capture Projects
Recent analyses and commercial experience underscore that 45Q credit values established by the 2018 passage of the FUTURE Act are insufficient to drive the early deployment of carbon capture technologies in industry, electric power generation, and direct air capture. Higher credit levels are necessary to bring costs down and reduce commercial risk to carbon management project deployment in high-emitting sectors. The IRA makes critical increases to the credit values for these projects, which traditionally feature higher costs of capture and greater commercial risk, providing the necessary federal policy support to adequately incentivize private investment in these sectors.  

Extension of the 45Q Commence Construction Window
The IRA includes a seven-year extension of the current commence construction window deadline, which will allow for additional investment certainty around projects and increase 45Q’s efficacy. Moving forward, any carbon capture, direct air capture, or carbon utilization project that commences construction before January 1, 2033 will qualify for 45Q, altered from the January 1, 2026 deadline extended by the fiscal year 2021 Omnibus. This extension establishes a crucially needed investment horizon to give carbon management projects the necessary lead time to reach a critical mass between now and 2030.

Lower Annual Capture Thresholds
Based on 2021 data from the EPA,  approximately 54 percent of power plants and 75 percent of industrial facilities fall below 45Q eligibility thresholds — tons of CO2 captured on an annual basis. Additionally, more nascent carbon management technologies simply lack the scale to meet these capture requirements. With this in mind, the IRA expands the number of projects which are eligible for 45Q by dramatically lowering the capture thresholds required to claim the tax credit. Previous thresholds hinder the overall technological innovation and emissions reduction potential of the incentive. These lowered thresholds will enable more projects to qualify for the 45Q program, significantly expanding the program and carbon management technologies’ climate mitigation potential captured on an annual basis. Additionally, more nascent carbon management technologies simply lack the scale to meet these capture requirements.

Direct Pay and Transferability
The IRA provides additional financial flexibility to project developers by establishing a direct pay mechanism and expanding credit transferability. Direct pay provides project developers, for the first time, the option to directly receive the full value of the tax credit as an overpayment on their annual tax filings rather than entering complex and inefficient tax equity financing structures. 

Going forward, project developers may elect direct pay for the first five years after carbon capture equipment has been placed in service; the remaining seven years of the credit still must be financed through alternative means. These enhancements are even more expansive for tax-exempt organizations (including nonprofit projects, cooperatives, and municipal utilities) which may access direct pay for the entire twelve years of the credit. Providing a direct pay option allows project developers to directly access the full value of the tax credits and leverage greater private capital for investment in projects, given that traditional tax equity investors typically require a significant portion of the value of the tax credit for less commercially mature technologies such as carbon capture, and direct air capture.

Additionally, the bill creates a transferability mechanism, allowing project developers to transfer tax credits to another taxpaying entity, receiving a cash payment for the transfer, not included in the capture owner’s taxable income. This option provides additional flexibility to project developers to transfer tax credits to taxpayers with tax liability, in turn, creating a significantly larger market for monetizing the 45Q tax credits. This will further incentivize the deployment of new carbon capture technologies by increasing the universe of potential investors and allow for project developers to fully realize the benefits of the credit.

For every dollar expended by the federal government through the 45Q incentive, direct pay and transferability will deliver greater value for the American taxpayer by yielding more deployment of carbon capture, removal, and utilization technologies—and thus greater climate, jobs, and economic benefits.

The Inflation Reduction Act of 2022 represents the most significant policy support for carbon management technologies since the foundational 45Q tax credit was significantly restructured in the 2018 FUTURE Act. In tandem with the historical investments made in the 2021 Bipartisan Infrastructure Law, the portfolio of complementary policies included in this package will deliver an estimated 13-fold scale-up of carbon management capacity and 210-250 million metric tons in annual emissions reductions by 2035. There is still more work to be done, but the IRA is a major step in putting America’s economy on the track toward midcentury decarbonization, while ensuring the long-term viability of key domestic industries, safeguarding high-wage jobs that sustain families and regions, and providing economic and environmental benefits from project deployment to affected communities.

Authors: Leo Duke and Madelyn Morrison
[email protected]

Convened by the Great Plains Institute, the Carbon Capture Coalition is a nonpartisan collaboration of more than 100 companies, unions, conservation and environmental policy organizations, building federal policy support to enable economywide, commercial scale deployment of carbon management technologies. This includes carbon capture, removal, transport, utilization, and storage from industrial facilities, power plants, and ambient air.

Printed in Issue 2, 2022 of Carbon Capture Magazine