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Power & Pipes

FERC, CFTC, and State Energy Law Developments

Our colleagues in the tax practice recently prepared a LawFlash examining the final regulation on the Section 45Q carbon capture tax credit issued by the US Department of the Treasury and Internal Revenue Service. We discussed the draft regulations in an earlier LawFlash, which also provides background on the Section 45Q credit. Because the final rule was published and took effect before the inauguration of President Joe Biden, the regulation is not subject to the regulatory freeze issued by the new administration.

The final rule included several key refinements that the LawFlash discusses more fully and we summarize below:

  • Reduced the Section 45Q credit recapture period for disposal and injection facilities from five years to three years
  • Broadly defined “commercial market” for taxpayers seeking to qualify for the credit for “utilization” of carbon oxides
  • Provided revised requirements for the lifecycle analysis necessary to claim the Section 45Q credit for “utilization”
  • Removed examples of types of property constituting or not constituting qualifying carbon capture equipment in favor of a single, generally applicable standard
  • Clarified that the Section 45Q credit only applies to carbon oxides (including carbon dioxide) but not to other greenhouse gasses like methane
  • Explained that carbon capture equipment placed in service on or after February 9, 2018, can be owned by a taxpayer other than the taxpayer that owns the industrial facility where the equipment is installed
  • Permits the aggregation of multiple facilities into a single facility to satisfy the annual carbon oxide capture threshold for credit eligibility
  • Allows the carbon capture equipment owner to elect to pass through the Section 45Q credit to service providers contracting with the owner (e.g., general contractors) but not a person contracting with the service provider (e.g., subcontractors).

The final regulations for Section 45Q provide clarity to the carbon capture and sequestration industry on qualifying for the tax credit. But as our tax group notes, there is still a need for eligibility guidance that taxpayers can prospectively rely on to qualify for the tax credit by utilizing carbon oxides.

We will continue to monitor this area for new developments along with the new administration’s plans to combat climate change.