Enhancing and expanding the 45Q tax credit for direct air capture
How 45Q can catalyze equitable DAC development and deployment
by Erin Burns, executive director and Rory Jacobson, deputy director of policy
The 45Q tax credit could receive an update and expansion with the drop of yesterday’s bipartisan bill, which includes an increase in the credit value specifically for direct air capture (DAC). In a few weeks, we’ll be releasing our largest ever set of federal policy recommendations for scaling carbon removal, but seeing many of our priorities reflected in this bill got us excited to give a sneak peek of our thinking on how 45Q can catalyze equitable DAC development and deployment.
A little background
In 2018, the 45Q tax credit was updated to include DAC for the first time, which has arguably been the single most significant federal incentive for engineered carbon removal. In fact, as a result of this and other state-level incentives, we’ve seen the first ever megaton scale plant announced. While this is an enormous victory, the current credit level — $50 per ton of carbon captured and locked into saline storage and $35 per ton used for carbontech and enhanced oil recovery (EOR) — was designed for point source carbon capture, a far more mature technology. At the current value, the credit will not be sufficient to deploy DAC at the levels and in the timeframe needed to meet climate goals. What we need now are specifications and enhancements to 45Q that take into account the unique needs of DAC.
The 45Q tax credit has been around for over a decade. The push for updates that culminated in enacted legislation in 2018 stemmed from a number of needs. On the capture side, the original credit focused on power generation, unintentionally omitting industrial and air capture opportunities. On the storage side, the policy initially emphasized geologic storage and enhanced oil recovery (EOR), neglecting opportunities to use CO2 to make useful products and materials known as carbontech. And across all eligible activities, the credit was too low to make many projects economical. The former language also prevented certain kinds of entities (e.g. co-ops) from taking advantage of it. After years of the tax credit being around, it was clear there were some ways in which it could be improved.
In the three years since 45Q was updated (even with delayed IRS guidance), it’s quickly become apparent just how impactful the credit could be in developing carbon capture technology. We’ve seen 40 million tons of annual CCS project capacity come under development or consideration, signaling that at the appropriate value, the credit can incentivize widespread deployment. We know this credit can work for scaling carbon management technologies. But we also understand the capture thresholds — how much carbon a given project needs to capture each year to qualify for 45Q — and credit values associated with the 2018 iteration are insufficient to support the widespread commercial deployment of DAC, which faces arguably greater engineering and project finance challenges, as well as a more nascent market.
In 2018, DAC existed at the periphery of most mainstream climate mitigation conversations and was a new concept to most policymakers. Getting it included at all in 45Q was a major achievement. Since then, interest in and support for the technology has skyrocketed and there has been more detailed analysis of what policies are needed to scale the technology — including what’s needed for 45Q.
In response to the 2018 updates to the 45Q credit, significant economic research has been done on the capacity of the credit to drive the deployment of DAC projects. Most notably, the Rhodium Group published an analysis that estimated the cost gap (for a facility to break even) with the current 45Q credit values on a per-ton basis. We recommend the following, for DAC specifically:
Raise credit value
The value of the credit should be raised from the current level of $50 per ton in 2026 to $180 per ton upon enactment for saline reservoir storage and the value for carbontech be raised from $35 per ton to $130 per ton. The current values were set for point source carbon capture and enhanced oil recovery — both significantly more commercially mature than DAC and carbontech.
Eliminate annual capture thresholds for qualified facilities
Current DAC pilot projects operate at the scale of several thousand tons per year, yielding a significant finance and infrastructure gap to achieving the current 100,000 ton per year threshold. Moreover, the elimination of capture thresholds would enable all DAC technologies to compete equally, while enabling greater and more rapid learnings and cost-reductions, with less project finance risk.
Extend commence construction deadline
The commence construction deadline should be extended to at least 2030 to enable a pipeline of projects that will benefit from near-term deployment experience. Rigorous project development and community engagement take time and extending the commence construction deadline would enable more and better projects to develop.
Enact direct pay
Providing direct pay (as opposed to the current tax credit with transfer limitations) would allow project developers to more easily and effectively cash the 45Q credit.
Implement a checks and balances system
A checks and balances system with clear communication between EPA and IRS should be implemented so that 45Q credits are only granted to projects that demonstrate validated and confirmed compliance with EPA Class VI UIC and associated monitoring, reporting, and verification (MRV) protocols.
Capturing the full opportunity
Many of these recommendations, including eliminating thresholds, direct pay, and extending the commence construction deadline could also spur more point source carbon capture projects and have wide support from carbon capture and storage (CCS) advocates. Importantly, increasing the value for 45Q for point source industrial projects, particularly those where deployment costs are far higher than $50 per ton, could help reduce emissions in hard-to-decarbonize sectors like steel.
The 2018 updates to 45Q have shown that right-sizing this incentive can drive significant carbon capture deployment; it’s time now to make sure it works just as well for DAC. These updates are just one of dozens of Carbon180’s recommendations that can help us equitably reach emissions goals, drive bipartisan climate action, and quickly deploy carbon removal. We’re looking forward to sharing our full suite of ideas in the coming weeks.