As U.S. lawmakers resume negotiations over spending and climate-based policies, now is the time for interested parties to engage with their representatives about carbon credit values. Current trends underscore the importance of this timing. For example, despite pledges made during the 2021 United Nations Climate Change Conference (COP26) to reduce carbon emissions and limit global warming to 1.5 degrees Celsius, several stakeholders continue to warn that additional efforts are needed to achieve those goals. Additionally, under the Biden administration, the United States is part of the global community working toward carbon neutral by 2050 (while also hitting interim carbon reduction targets between 2030-2035), which will likely amplify the role carbon credits will play.
The fate of President Biden’s Build Back Better Act (BBB), which includes ~$2 trillion in federal funds to implement climate change mitigation efforts among other policies, is unclear and changes by the moment.
Despite the murky path ahead for BBB, there is more agreement on increasing the value of “Section 45Q” tax credits, otherwise known as carbon capture credits, created under the Internal Revenue Code (26 U.S.C. § 45Q). Section 45Q awards a tax credit up to $50 for each metric ton of qualified carbon oxide captured and sequestered (depending on when the carbon is capture and the type of project). In its current form, the BBB includes revising Section 45Q by increasing the tax credit to $85 per metric ton for capture and sequestration projects.
In what would be a boon for certain carbon market stakeholders, increasing the Section 45Q carbon capture credit has enjoyed bi-partisan support because it would spur technological innovation and help the U.S. reach its climate change goals through potentially lucrative economic incentive. As shown below, Democratic and Republican members in both chambers have introduced legislation that would increase the current value of 45Q credits:
- SB 2230, the Catch Act, would increase the credit to $85 for carbon captured and stored projects and $60 for carbon captured and used projects. The bill was introduced by Senators Ben Ray Luján (D-N.M.) and John Barraso (R-Wyo.).
- SB 986, the Carbon Capture, Utilization, and Storage Tax Credit Amendments Act, introduced Sen. Tina Smith (D-MN), would bolster the credit by bumping it to $75 per ton for carbon captured for use and $120 for direct-air-capture projects.
- SB 1298, the Clean Energy for America Act, introduced by Sen. Ron Wyden (D-Ore.), would increase the credit to $175 for carbon captured and stored and $150 for carbon captured and used.
- HR 2633, introduced by Republican Rep. David Schweikert (R-AZ), would increase the credit to $85 per ton for carbon captured and stored and increase the credit for carbon captured and used to $50.
Since both sides of the aisle and both chambers have expressed support for enhancing Section 45Q tax credit values and because there is ample overlap between the Democratic and Republican proposals, a stand-alone bill focused on 45Q tax credits is possible even if BBB is not passed. So, despite the current gridlock facing the BBB, there is a potential path forward for action on Section 45Q. Increased 45Q tax credit values would be taxpayer-friendly and provide additional incentive to project developers, investors, and lenders to aggressively pursue carbon capture and sequestration efforts as 2030-2050 carbon reduction benchmarks rapidly approach.
Based on these fluid dynamics, interested parties would do well to engage with their representatives in the near term to help influence more optimal carbon credit values. Relatedly, the extent to which project developers and downstream users will be able to “stack” carbon credits (e.g., take advantage of state and federal credits) remains to be seen.
For additional insight on the impact and interplay of carbon capture and sequestration incentives and protocols, please contact a member of Faegre Drinker’s Energy & Environment (carbon services) team. To learn more about the status of BBB, contact a member of Faegre Drinker’s Lobbying & Public Policy team.