Very few of the Inflation Reduction Act’s tax credits made it through the House’s recently passed budget bill unscathed. One of the apparently lucky ones, however, was the 45Q credit for carbon capture projects. This provides up to $180 per metric ton for direct air capture and $85 for carbon captured from industrial or power facilities, depending on how the CO2 is subsequently sequestered or put to use in products such as low-carbon aviation fuels or building materials. The latest version of the bill doesn’t change that at all.
But while the preservation of 45Q is undoubtedly good news for the increasing number of projects in this space, carbon capture didn’t escape fully intact. One of the main ways the IRA supercharged tax credits was by making them transferable, turning them into an important financing tool for small or early-stage projects that might not make enough money to owe much — or even anything — in taxes. Being able to sell tax credits on the open market has often been the only way for smaller developers to take advantage of the credits. Now, the House bill will eliminate transferability for all projects that begin construction two years after the bill becomes law.
That’s going to make the economics of an already financially unsteady industry even more difficult. “Especially given the early stage of the direct air capture industry, transferability is really key,” Giana Amador, the executive director of an industry group called the Carbon Removal Alliance, told me. “Without transferability, most DAC companies won’t be able to fully capitalize upon 45Q — which, of course, threatens the viability of these projects.”
We’re not talking about just a few projects, either. We’re talking about the vast majority, Jessie Stolark, the executive director of another industry group, the Carbon Capture Coalition, told me. “The initial reaction is that this is really bad, and would actually cut off at the knees the utility of the 45Q tax credit,” Stolark said. Out of over 270 carbon capture projects announced as of today, Stolark estimates that fewer than 10 will be able to begin construction in the two years before transferability ends.
The alternative to easily transferable tax credits is a type of partnership between a project developer and a tax equity investor such as a bank. In this arrangement, investors give project developers cash in exchange for an equity stake in their project and their tax credit benefits. Deals like this are common in the renewable energy industry, but because they’re legally complicated and expensive, they’re not really viable for companies that aren’t bringing in a lot of revenue.
Because carbon capture is a much younger, and thus riskier technology than renewables, “tax equity markets typically require returns of 30% or greater from carbon capture and direct air capture project developers,” Stolark told me. That’s a much higher rate than tax equity partners typically require for wind or solar projects. “That out of the gate significantly diminishes the tax credit's value.” Taken together with inflation and high interest rates, all this means that “far fewer projects will proceed to construction,” Stolark said.
One DAC company I spoke with, Bay Area-based Noya, said that now that transferability is out, it has been exploring the possibility of forming tax equity partnerships. “We’ve definitely talked to banks that might be interested in getting involved in these kinds of things sooner than they would have otherwise gotten involved, due to the strategic nature of being partnered with companies that are growing fast,” Josh Santos, Noya’s CEO, told me.
It would certainly be a surprise to see banks — which are generally quite risk averse — lining up behind these kinds of new and unproven technologies, especially given that carbon capture doesn’t have much of a natural market. While CO2 can be used for some limited industrial purposes — beverage carbonation, sustainable fuels, low-carbon concrete — the only market for true carbon dioxide removal is the voluntary market, in which companies, governments, or individuals offset their own emissions by paying companies to remove carbon from the atmosphere. So if carbon capture is going to become a thriving, lucrative industry, it’s likely going to be heavily dependent on future government incentives, mandates, or purchasing commitments. And that doesn’t seem likely to happen in the U.S. anytime soon.
Noya, which is attempting to deploy its electrically-powered, modular direct air capture units beginning in 2027, is still planning on building domestically, though. As Santos told me, he’s eyeing California and Texas as promising sites for the company’s first projects. And while he said that the repeal of transferability will certainly “make things more complicated,” it is not enough of a setback for the company to look abroad.
“45Q is a big part of why we are focused on the U.S. mainly as our deployment site,” Santos explained. “We’ve looked at places like Iceland and the Middle East and Africa for potential deployment locations, and the tradeoff of losing 45Q in exchange for a cheaper something has to be significant enough for that to make sense,” he told me — something like more cost efficient electricity, permitting or installation costs. Preserving 45Q, he told me, means Noya’s long-term project economics are still “great for what we’re trying to build.”
But if companies can’t weather the short-term headwinds, they’ll never be able to reach the level of scale and profitability that would allow them to leverage the benefits of the 45Q credits directly. For many DAC companies such as Climeworks, which built the industry’s largest facility in Iceland, Amador and Stolark said that the domestic policy environment is causing hesitation around expanding in the U.S.
“We are very much at risk of losing our US leadership position in the industry,” Stolark told me. Meanwhile, she said that Canada, China, and the EU are developing policies that are making them increasingly attractive places to build.
As Amador put it, “I think no matter what these projects will be built, it’s just a question of whether the United States is the most favorable place for them to be deployed.”
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