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Signature Sponsor
September 27, 2022 - The Inflation Reduction Act includes a significant increase in the 45Q tax credit, the main subsidy aimed at catalyzing carbon capture projects. The legislation increased the amount of the 45Q tax credit from $50/ton to $85/ton. If the captured carbon dioxide emissions are used for enhanced oil recovery (EOR), the tax credit increases from $35/ton to $60/ton. The bill also creates a direct pay option for the carbon capture tax credit, which the bill did not create for clean energy tax credits for most taxpayers. In a letter to the West Virginia Coal Association, Senator Joe Manchin explained that he made that change specifically to benefit the coal industry: The reality is I specifically ensured that the Inflation Reduction Act provides incentives that would benefit coal. That includes increasing the value of the 45Q CCUS tax credit and providing direct pay for the first 5 years to help fossil plants. This is in contrast to the electricity tax credits that benefit renewables, which do not have direct pay. Many of the energy provisions of the Inflation Reduction Act derived from the earlier Build Back Better bill, passed by the House of Representatives in November 2021 but never taken up by the Senate due to Manchin’s opposition. The Build Back Better bill also increased the value of the 45Q carbon capture tax credits, but it paired those increases with a key guardrail to help ensure that the subsidies led to actual emissions reductions. To qualify for the carbon capture tax credit, Build Back Better would have required power plants to capture “not less than 75 percent of the carbon oxide that would otherwise be released into the atmosphere by such facility during such taxable year.” That language was changed in the Inflation Reduction Act; instead of requiring the carbon capture project to actually capture 75% of a power plant’s emissions, the carbon capture project just has to have a “capture design capacity” of 75% of the baseline emissions. Moreover, the Inflation Reduction Act language was also changed to apply at the unit level, instead of Build Back Better’s requirement that emissions be reduced at the facility level. That means that a power plant with multiple units could install carbon capture equipment on just one unit, receive subsidies through the 45Q tax credit, and continue to operate other units without carbon capture.
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