Climate Tech

The carbon removal industry sees the Inflation Reduction Act as a big win for DAC

Here’s what you need to know about the changes to the 45Q tax credit in the IRA.
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Illustration: Dianna “Mick” McDougall, Photo: Climeworks

· 4 min read

Few parts of the tax code spark excitement for businesses, but the Inflation Reduction Act (IRA) that President Biden signed into law last week includes a game-changer for carbon removal.

The historic climate legislation could deliver $100+ billion to carbon-capture projects in tax credits, according to BNEF, due in part to one particular credit that the carbon-removal industry has been pushing to expand for years.

Known as 45Q (the name of its section in the tax code), the tax credit for carbon sequestration has been in place for more than a decade, but the industry has argued it could be broadened to incentivize development of emerging tech in the space.

Following the creation of 45Q, climate experts have said that carbon removal technologies like direct air capture (DAC) will be a necessary piece of any plan to prevent more than 1.5C degrees of warming by 2100. This tech needs to scale rapidly in the coming decades to help meet this goal, experts say, and the IRA includes changes to 45Q that increase financial incentives and make it more accessible to DAC startups.

“This is exactly the type of policy that we’ve been hoping to have for tech CDR [carbon dioxide removal] for a long time,” Peter Minor, director of science and innovation at Carbon180, told Emerging Tech Brew.

What is 45Q?

This tax credit isn’t new. 45Q was created in 2008, but it was initially designed with point-source carbon capture (or CCUS) in mind. It provided $50 per tonne of captured carbon permanently stored and $35 per ton reused in processes that require CO2 or for enhanced oil recovery—a form of oil extraction that can extend the life of an oil field using CO2.

In 2018, updates to the credit expanded it to include DAC for the first time, providing $50 per tonne of CO2 that DAC projects pull directly from the air and permanently store.

But because the original parameters were based on much more mature carbon capture tech, the scale requirements and size of the incentives still limited how much tax credit could help the emerging DAC industry.

The IRA increased the value of the tax credit for companies that meet certain labor requirements: The maximum credit available for industrial carbon capture increased from $50 to $85 per tonne and from $50 to $180 per tonne for DAC.

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“I’ve talked to several companies who have said this is really the one policy they’ve been hoping to see,” Minor said. “It could be the difference between them being able to really accelerate their progress by 5x or 10x from what they expected, versus really struggling in the early days of the markets.”

Developers of DAC and other carbon capture projects will be able to receive this money as direct payments during the first five years of operation, rather than claiming it on their taxes.

In addition, the IRA decreased the scale necessary for DAC projects to qualify for the 45Q tax credit from 100,000 metric tons of CO2 per year to 1,000 tonnes. The law also extends the deadline for a project to qualify to 2033, giving new projects more time before they have to begin construction.

Why it matters: These changes give smaller DAC companies an opportunity to benefit from federal support as the industry works to scale from removing thousands of tonnes of CO2 each year to billions of tonnes annually.

While the US lags behind China and the European Union on metrics like battery-manufacturing capacity and renewable-energy installations, DAC and carbon removal is one industry where the country could emerge as a leader.

“This is the US’s to lose,” Minor said. “If government can stand up and really set up the right regulatory incentive framework, then it’s very possible that US technologists can be the ones who really lead the pack on this.”

The update to the 45Q tax credit in 2018 spurred new DAC projects and the industry is now seeing record levels of investment. In the second quarter of this year alone, carbon-removal startups raised $912 million.

More affordable carbon capture also makes a circular carbon economy more feasible and could help drive down the cost of sustainable aviation fuel and other biofuels.

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