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  • Writer's pictureTade Oyewunmi


Updated: Oct 11, 2021

This presentation summarizes my working paper on the regulation of carbon capture, utilization, and storage (CCUS) projects under Section 45Q of the US Internal Revenue Code. The paper develops on the premise that the effectiveness of regulation and statutory instruments is best measured by considering the extent to which they enable the relevant institutions and operators to realize the underlying policy objectives for which the instruments were enacted or issued. Section 45Q, as amended and augmented by applicable guidelines and regulations from the Treasury Department and Internal Revenue Service, extends credit to taxpayers who develop and deploy CCUS projects for qualified carbon oxide and carbon dioxide (CO2) emissions at qualified facilities. The aim is mainly to facilitate decarbonization and necessary net-zero or carbon neutral systems. These are capital-intensive ventures involving understandable legal, project economics, and financial risks, as well as medium to long-term environmental risk issues. With most projects at the nascent and early commercialization stage, it is reasonable to expect adequate support from public and private stakeholders, which may comprise fiscal incentives and relevant policies.

As a means of decarbonization, CCUS regulation and policy measures should enable secure and safe capture, sequestration, and as appropriate the utilization of carbon from major sources in a net-zero and carbon-neutral value chain. In its earlier 2008 form, the US Section 45Q framework was limited in scope and arguably aimed mostly at capturing and sequestration of CO2, without a comprehensive carbon ‘utilization’ and ‘commercialization’ element. It also focused more on enabling the use of captured CO2 for oil and gas production in the Enhanced Oil Recovery (EOR) process. Recent amendments in 2018, new guidelines in 2020 and 2021 seemed to review and expand its scope; while there are considerable reports of lapses in the reporting and verification framework. Since 2009, IRS guidance has required taxpayers to obtain an approved monitoring, reporting, and verification (MRV) plan and annually report the amount of securely stored emissions to the Environmental Protection Agency (EPA) Greenhouse Gas Reporting Program.

Globally and in the US, there is now a growing momentum towards creating new innovative CO2 commercialization and utilization clusters and hubs around industrial processes such as food and beverage, hydrogen production, steel production facilities, etc. An interesting rationale behind such drive is that developing CCUS applications around multiple industrial point sources of CO2 connected to a CO2 transport and storage network and access to large geological storage resources with the capacity to store CO2 securely and safely from industrial sources for decades enables economies of scale and significantly reduce the unit cost of CO2 storage and investment risks. The need to set a reasonable price and value for carbon cannot be over-emphasized at this point. Likewise, the objective of facilitating commercial uses for a net-zero value chain may require a mix of risk-mitigation, performance, and incentive-based packages, involving not just the Federal Government, but state and local level coordination. Policymakers would need to evaluate how effective a subsidy scheme is vis-à-vis the objective of facilitating a net-zero value chain. Another element to consider is what would be the most effective package of incentives and mix of regulatory instruments that may include carbon taxation and pricing, risk-mitigation-centered and performance standards, and a reformed tax credit scheme that does not create perverse incentives.

This paper gives a general overview of the concept of decarbonization and the potential role of CCUS and other innovative technologies; it then discusses the common approaches to regulation through incentives such as tax credits and subsidies, while focusing on the Section 45Q and its relevant provisions. It is worth noting that several international projects such as the Quest CCS project in Canada, the Sleipner and Snøhvit in Norway, and Gorgon in Australia, etc., are not designed around an EOR utilization and storage scheme and neither are they reliant on the type of tax credit framework found under the current US Section 45Q. Although, it should be noted that these other countries have a different commercial and institutional environment when compared to the US, especially regarding the role of government in driving corporate commercial objectives and investments that has a public interest element at its core.

See the slides below and a copy of the working paper:

The working paper is available here:

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