Carbon Tax Credit

Many people believe that putting a price tag on carbon emissions would help reduce fossil fuel use and promote a shift to green energy. While there are several ways to do this, carbon taxes and carbon tax credit are two of the most popular methods.

A carbon tax places a price on fossil fuels, including the environmental costs of burning them, which disincentivizes their use and encourages consumers to switch to alternative energy sources. A carbon tax credit is a tradable certificate that is bought and sold to reduce a business’s carbon footprint. Both carbon taxes and carbon credits have their pros and cons. A carbon tax may lead to higher prices for goods and services, hurting the economy and lowering consumer spending. However, it is considered more equitable than other types of taxes, as the burden is spread equally among all businesses and individuals.

A carbon tax credit, also known as a Section 45Q tax credit, is a federal tax incentive for investments in carbon dioxide capture and utilization (CCUS) projects. The Bipartisan Budget Act of 2018 amended the Section 45Q program to increase its value for investors by eliminating limits on the number of credits available in the market and lowering thresholds for project eligibility. Generally, taxpayers owning a CCUS project that sequesters or disposes of 100,000 (for industrial facilities) or 500,000 (for power plants) metric tons or more of carbon dioxide or carbon oxide can claim the credits for a 12-year period starting in the year the equipment is placed in service.

Who Can Claim Carbon Tax Tredit
Carbon Tax Credit 1

Who Can Claim Carbon Tax Tredit?

Carbon credits are a way for individuals and businesses to offset their unavoidable emissions with investments in certified activities that reduce carbon dioxide. These activities are generally carried out by farmers, ranchers, and foresters, whose activities are supervised and verified by a third party. This investment can be tax deductible depending on the activity and the number of credits purchased.

In 2008, Congress created Section 45Q of the Internal Revenue Code to provide an incentive for carbon capture and utilization projects. The original credit valued each metric ton of captured carbon oxide at $50 per ton, with only 75 million of those credits available at any time. The low value of the credit, coupled with uncertainty about how much of the overall pool could be claimed, stalled interest in developing 45Q projects.

The CCUS Tax Credit Amendments Act will significantly increase the value of the Section 45Q credit to $85 per ton and increases the credit for DAC with geologic storage and DAC to enhanced oil recovery. These changes will help re-ignite interest in developing carbon capture and sequestration technologies to combat climate change.

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