IRA Incentives for Carbon Sequestration and Low Carbon Fuels – Oil, Gas and Power

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Yesterday, President Biden signed the Cut Inflation Act into law, creating legislation that contains the largest climate-related incentives in US history. Within weeks of the bill being introduced in the Senate, a flurry of economic activity has already begun, with entities already beginning to align their business practices with the incentives set out in the bill.

Of the many programs enhanced or created by legislation, a number relate to carbon sequestration and low-carbon transportation fuels. Among these are the following:

  • Improvement of the 45Q tax credit. Among the many changes to the 45Q carbon sequestration and use tax credit, the law increases the maximum credit available for sequestration to $85 per tonne and $60 per tonne for use, from $50 and $35 respectively. These increased incentives should enable sequestration and use activities at many sites across the country where such activities were not previously viable. Additionally, the law allows “direct payment” with respect to 45Q, which means that tax liability is not required to receive a refund from the IRS.

  • Sustainable Aviation Fuel (“SAF”) Tax Credit. The law introduces a new, targeted sustainable aviation fuel tax credit that starts at $1.25 per gallon and increases with increasing climate benefits. SAF is generally defined as a non-petroleum-derived aviation fuel that has at least 50% lifecycle greenhouse gas emissions.

  • Clean fuel production credit. In addition to the SAF tax credit, the law provides for a more widely available tax credit for any transport fuel that achieves a reduction of around 50% in carbon intensity compared to an oil benchmark. (The law’s calculation methodology is odd because it relies on non-standard units.) For non-aviation fuel, the credit amount ranges from zero to $1 per gallon depending on the degree of emission reduction achieved by the fuel. . The SAF can credit can be as high as $1.75 per gallon and may be available in addition to the SAF-specific tax credit described above.

  • Biofuels Infrastructure Fund. The law provides $500 million for biofuel distribution infrastructure through 2031.

  • Subsidies for fuel and aviation technology. The IRA provides approximately $244 million for SAF-related subsidies, and an additional $46 million for other low-emission aircraft technologies.

These programs hold the promise of radically transforming carbon management and transportation in America. However, many details related to these provisions still need to be specified by regulation. For example, the credit for producing clean fuels requires the IRS to assign carbon intensity values ​​to various fuel categories, turning the tax collection agency into a pseudo environmental regulator. The nuances of these regulations will greatly affect the kinds of behaviors that will be incentivized for years to come.

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