On January 6th, the U.S. Department of Treasury issued the final regulations implementing the carbon capture tax credit under I.R.S. Code Section 45Q (REG-112339-19). These regulations provide clarity to largely oil and gas companies and their investors. Clarification was needed in part to respond to a report by the U.S. Treasury Inspector General for Tax Administration confirming that fossil fuel companies improperly claimed nearly $1 billion in 45Q tax credits because of failure to comply with the EPA’s approved site-specific monitoring, reporting and verification plan.
Experts suggest that large scale carbon capture sequestration is a technology that has the potential to assist in stabilizing climate change by decreasing the amount of carbon pollution from current fossil fuel energy generators. The problem has been that these projects have not been proven to work at scale nor are they economically viable. Enacted by Congress in 2008 to incentivize the storage of greenhouse gases in the ground, the Section 45Q tax credit allows oil and gas companies to take a per-ton of carbon oxide sequestered. Failing to gain traction for lack of I.R.S. guidance and uncertainty by oil and gas companies and investors, Congress revised Section 45Q in 2018 to expand the availability of the credit to a broader range of commercial applications.
Because carbon sequestration projects are very expensive, requiring lots of equity capital investment, the new final regulations make the credit broadly available and as flexible as possible for businesses, primarily oil and gas and equity investors, to claim. The new regulations allow taxpayers to allocate contractual and physical risk in ways to make investing in carbon oxide sequestration projects more appealing to certain tax equity investors.
The credit allows companies to take a credit on a per-ton basis of carbon oxide sequestered for 12 years after a qualified facility is place in service. The credit is only available for the amount of carbon oxide captured and utilized, not the CO2 equivalence reduction of other greenhouse gases based on lifecycle analysis. Industry stakeholders have indicated that they continue to seek modifications of the rule including the option of paying direct cash payments in lieu of 45Q tax credit to companies.
Given the importance of mitigating the adverse effects of climate change, it is vital that regulatory agencies and law enforcement oversight validate that the tax credits given to fossil fuel companies for sequestering harmful carbon oxide emissions are true and accurate. Likewise, it is equally important that individuals with knowledge of any fraud, abuse or misrepresentation associated with the 45Q provide this information to regulators and law enforcement. Fortunately for those individuals who become IRS whistleblowers, the IRS whistleblower program provides protection, anonymity and the possibility of an award for their assistance.