Researched and written by Doug Koplow (Earth Track) and edited by Lorne Stockman

Key Findings:

 

• The 45Q tax credit has been greatly expanded in scope and cost since it was first enacted in 2008. 
• There is very little transparency surrounding the amount of tax credit claimed by companies so far. 
• However, what information there is suggests around $1.3 billion was claimed through 2022.
• The Inflation Reduction Act’s generous expansion of 45Q provisions could lead to as much as $100 billion in claims through 2031, according to one estimate. 
• An audit found significant amounts of fraud in claims made between 2010-2019
• There is an urgent need to increase transparency and accountability as new projects come online under the IRA’s generous tax credit terms.

With the goal of expanding carbon capture, sequestration, and use (CCUS), the United States has implemented increasingly generous subsidies for CCUS activities. CCUS aims to pull carbon dioxide (CO2) out of the atmosphere or from industrial waste streams and inject it back underground or use it in products.

Increasingly generous subsidies to CCUS are shifting the cost of managing CO2 onto taxpayers and the benefits to carbon-intensive industries. CCUS subsidies include federal grants and partnerships, as well as tax subsidies through 45Q. Oil Change International has tracked over $8 billion in direct grants or loans to CCUS research and projects in the past. However, this figure could easily be dwarfed by tax credit claims over the coming decade following increases in claimable allowances passed under the Inflation Reduction Act (IRA).

45Q tax credits to CCS have become increasingly generous

First enacted in 2008, the 45Q credit has been revised, extended, and expanded multiple times, most recently and most generously in the IRA. Each revision has relaxed or removed “guardrails” previously in place to constrain revenue losses and target claimants more narrowly. 

Changes have included much larger credit amounts with no cap on claims, broader project eligibility, and new options allowing claimants with no or insufficient tax liability to nonetheless monetize the tax credit. Table 1 provides a more detailed list of changes; all increase the size of, and eligibility for, subsidies from 45Q.

Table 1: 45Q tax credits have become much more lucrative since first enacted in 2008

Value of 45Q subsidy to date: rising costs, fraudulent use, but little transparency
The subsidy burden from 45Q on taxpayers hinges on the size of the tax credits as well as the scale, number, and timing of CCUS projects coming online in the United States. The type of project (e.g., sequestration, EOR, and DAC), as well as whether the capture facility abides by prevailing wage and apprenticeship requirements within IRA to earn the highest credit in its category, will determine the size of the credit per metric ton of CO2 captured.

The ramp-up of CCUS projects since 2008 has been slow, though the revisions in 45Q within the IRA are expected to drive a surge of new projects. This section provides a quick review of the scale of subsidies to date that is projected going forward.

 Despite the required reporting of tax credit claims on the 45Q-specific form 8893, the IRS provides no public data on costs. This specificity means annual tabulations on the exact amount claimed by the type of capture strategy used should be possible. While tax filing confidentiality rules (under section 26 USC 6103) restrict the publication of most firm-specific data, the IRS is free to release aggregate data.

This includes total credits claimed, the amount claimed by type of capture, and even some state-level breakouts. Indeed, in the January 2021 final regulations for 45Q, the IRS wrote that it would “continue to provide the total metric tons of credits that have been taken into account claimed, without publishing taxpayer information.”¹ Recent inflation adjustment bulletins did not contain this data; upon inquiry, the IRS confirmed that the aggregate reporting mentioned in the Federal Register filing applied only to versions of 45Q prior to the passage of the Inflation Reduction Act.²

An audit of 45Q claims found significant fraud
The US Treasury and the Joint Committee on Taxation (JCT) independently estimate tax expenditure costs, including for 45Q. Both showed no revenue loss prior to 2010 and then small losses in the subsequent years, reflecting a small base of CCUS-eligible facilities (minimum sizes were larger than now) and much lower tax credits per mt captured. The first quantified losses were in 2010 for Treasury, though not until 2017 for JCT. Using the most conservative estimates from Treasury, the cost of 45Q was $950m for the 2010-2019 period. ³

This time frame is a useful benchmark because it includes the same range as a formal IRS audit of 45Q claims by the Treasury Inspector General for Tax Administration (TIGTA). TIGTA reported actual 45Q claims of $1.026 billion, quite close to the Treasury estimates from their tax expenditure reports.⁴

A critical finding of the TIGTA audit was that almost 90% of the total credits claimed had been claimed fraudulently because the claimants did not have approved Monitoring, Reporting, and Verification (RMV) Plans. RMV plans certify the integrity of CO2 sequestration and estimate the portion likely to leak, both critical engineering assessments to generate accurate tax credit claims on sequestered carbon. The audit led to these claims being rejected, though it does appear that the firms were permitted to go through the RMV approval process and then submit amended returns for any year within the statute of limitations to regain the rejected credits.⁵ Whether and to what degree that happened is confidential business information.

Cost of 45Q in 2020 and 2021, pre-IRA
Although the cost of 45Q in 2020 was estimated to be low, Treasury estimated $450m in revenue losses for 2021, their highest single-year cost since 45Q’s enactment in 2008. The jump could have been caused by more projects coming online, spurred by changes to 45Q in 2018 that expanded eligibility to smaller firms and CCUS equipment owners.

Future subsidies to CCUS expected to surge due to IRA.

At the time of passage, the estimated cost of 45Q to taxpayers under IRA was $3.2 billion for the period 2022-31, roughly half of which was projected to come from the provision’s “direct pay” option for tax-exempt entities.⁶ Treasury’s most recent estimates are markedly higher than pre-IRA, with projected revenue losses at $30.7 billion for 2022-32.⁷

Despite this jump, the government figures are still much lower than what researchers outside of the government are projecting for 45Q claims. Ten-year credit subsidy estimates in multiple studies range from $50-$100 billion. Notably, two of these estimates included only the electrical power sector rather than all sectors likely to utilize the subsidy, so the cost across all sectors could be significantly higher. Further, cost projections in some of the studies have an evaluation window going past 2031 and project total tax credits hundreds of billions of dollars higher still.⁸

The scale of 45Q costs to taxpayers is potentially enormous. In addition, analysis of how 45Q will be used in the power sector suggests that monetizing CO2 flows rather than taxing them may trigger some counter-productive behavior.⁹ This includes increased utilization of fossil-intensive infrastructure and delays in those plants exiting the market. Both could drive up total GHG emissions relative to the no-subsidy baseline. Yet, there remains little transparency on how much is being claimed, even on an aggregate level, and which firms are benefitting most.

 

1. Internal Revenue Service, “Credit for Carbon Oxide Sequestration: Final Regulations,” Federal Register, Vol. 86, No. 10, 15 January 2021, p. 4742.

2. Maggie Stehn, Office of the Chief Counsel, Internal Revenue Service, telephone conversation with Doug Koplow, 6 November 2023.

3. Since both JCT and Treasury generate prospective, multi-year estimates, the same fiscal year will have estimates in multiple tax expenditure budget reports. The value for a specific year frequently changes based on new information or refined estimates. Using only the first year in the range covered for each report is the most conservative since that value benefits most from recent actual tax return data and is less sensitive to mis-estimating long-term growth patterns in the sector.

4.  Internal Revenue Service, Inspector General for Tax Administration, Letter to Senator Robert Menendez, 15 April 2020.

5. Maggie Stehn, Office of the Chief Counsel, Internal Revenue Service, telephone conversation with Doug Koplow, 6 November 2023.

6. Congressional Budget Office, Estimated Budgetary Effects of Public Law 117-169, to Provide for Reconciliation Pursuant to Title II of S. Con. Res. 14, 7 September 2022.

7. Office of Tax Analysis, US Department of the Treasury, “Tax Expenditures, FY2024 update,” 6 March 2023. Since passage of IRA, the JCT has not issued a tax expenditure report reflecting the changes in its quantified estimates, so this is not discussed in this section.

8. Bloomberg New Energy Finance, “Carbon Capture Could Get $100B in Credits from US Climate Bill, Analyst Reaction,” 16 August 2022; Emily Grubert and Frances Sawyer, “US power sector carbon capture and storage under the Inflation Reduction Act could be costly with limited or negative abatement potential,” Environmental Research: Infrastructure and Sustainability, Volume 3, Number 1, 10 March 2023; John Bistline, Neil Mehrotra and Catherine Wolfram, Economic Implications of the Climate Provisions of the Inflation Reduction Act, Brookings Papers on Economic Activity, BPEA Conference Drafts, The Brookings Institution, 29 March 2023.

9. Emily Grubert and Frances Sawyer, “US power sector carbon capture and storage under the Inflation Reduction Act could be costly with limited or negative abatement potential,” Environmental Research: Infrastructure and Sustainability, Volume 3, Number 1, 10 March 2023.