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Carbon sequestration is the process of capturing and storing atmospheric carbon dioxide. It’s one of the most promising methods invented in efforts to curb global warming.  Well, this process occurs both naturally and because of anthropogenic activities. The United Nations Environment Programme and other environmental organizations, in response to worldwide concerns about climate change resulting from augmented carbon dioxide concentrations in the atmosphere, have drawn considerable interest to the probability of snowballing the rate of carbon sequestration through changes in land use and forestry and via reengineering techniques like carbon capture and storage.

With that in mind, fifteen members of the U.S. House of Representatives sent an official letter to the U.S. Department of the Treasury, urging it to issue the guidance for carbon capture projects under section 45Q of the tax code. The letter aims to throw light on the fact that there’s a significant amount of money sitting on the sidelines. This was the second such letter to be sent by members of Congress in the past couple of months.

The section 45Q of the Internal Revenue Code of 1986, as revised, offers a federal tax credit for the carbon oxides sequestration and other greenhouse gases netted*- from an industrial source that would under any other circumstances be discharged into the atmosphere as an industrial emission. It was initially enacted in 2008 to offer credit for the sequestration of carbon dioxide, but as most expected, it did not meet the required needs, which was the widespread use by carbon dioxide generating companies and their investors due to a yearly aggregate program-wide aggregate cap on the available credits.

Due to amendments in 2009 and more revisions under the Bipartisan Budget Act of 2018 (BBA), the program-wide cap was withdrawn, and the suitability of the credit has been extended to cover the sequestration of all “qualified carbon oxides.”

This carbon sequestration credit offers a dollar-for-dollar decrease in federal income tax liability for each metric ton of carbon oxide captured at an eligible plant and then

(i) Permanently buried,

(ii) Used as a tertiary injectant in an improved oil or natural gas recovery project or

(iii) Used in another profit-making process that would result in the long-lasting disposal of the carbon oxide. Just like the production tax credit, the carbon sequestration credit is available as a credit stream for 12 years, starting on the date the carbon capture device is first placed in service. 

Latent tax-equity shareholders have expressed interest in carbon capture projects, but the market has yet to grow mainly because of a lack of guidance around the vital aspects of the statute and how tax-equity financing can work.

Open questions about this issue include:

  • Conditions to which the credit is subject to recapture.
  • Provision of the credit among partners in an established partnership.
  • And procedures for making an election allowed by the statute to sanction the entity that permanently buries or otherwise uses the carbon oxide to declare the credit in place of the proprietor of the carbon recapture tool.

The proper guidance for the carbon sequestration credit is on the Department of the Treasury and the IRS’s priority guidance plan for 2020. Practitioners all around the world expect that the guidance will be dispensed in multiple tranches. An IRS attorney, who is part of the team working on the guidance recently confirmed to several media outlets, at the American Bar Association Section of Taxation meeting, that the first two pieces of the guidance will be out in a couple of months.

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