SECTION 2. BACKGROUND

.01 Congress enacted the credit for the sequestration of carbon dioxide under § 45Q in § 115 of the Energy Improvement and Extension Act of 2008, Public Law 110-343, Div. B, Title I, 122 Stat. 3765, 3829 (October 3, 2008). Congress amended § 45Q several times thereafter, including significantly by § 41119 of the Bipartisan Budget Act of 2018, Public Law 115-123, Div. D, Title II, 132 Stat. 64, 162 (February 9, 2018), to apply to all carbon oxides, and most recently on August 16, 2022, by § 13104 of the IRA, 136 Stat. 1924.

.02 Section 45Q(a)(2)(B)(ii) allows a § 45Q utilization credit of $10 per metric ton of qualified carbon oxide captured by

the taxpayer using carbon capture equipment that is originally placed in service at a qualified facility before February 9, 2018, and utilized by the taxpayer in a manner described in § 45Q(f)(5).

.03 Section 45Q(a)(4)(B)(ii) allows a § 45Q utilization credit of the applicable dollar amount (as determined under § 45Q(b)(1)) per metric ton of qualified carbon oxide captured by the taxpayer using carbon capture equipment that is originally placed in service at a qualified facility on or after February 9, 2018, during the 12-year period beginning on the date the equipment was originally placed in service, and utilized by the taxpayer in a manner described in § 45Q(f)(5).

.04 Section 45Q(f)(5)(A) provides that “utilization of qualified carbon oxide” means (i) the fixation of such qualified carbon oxide through photosynthesis or chemosynthesis, such as through the growing of algae or bacteria; (ii) the chemical conversion of such qualified carbon oxide to a material or chemical compound in which such qualified carbon oxide is securely stored; or (iii) the use of such qualified carbon oxide for any other purpose for which a commercial market exists (with the exception of use as a tertiary injectant in a qualified enhanced oil or natural gas recovery project), as determined by the Secretary of the Treasury or her delegate (Secretary).

.05 Section 45Q(f)(5)(B)(i) provides a methodology to determine the amount of qualified carbon oxide utilized by the taxpayer. Such amount is equal to the metric tons of qualified carbon oxide that the taxpayer demonstrates, based upon an LCA of greenhouse gas emissions and subject to such requirements as the Secretary, in consultation with the Secretary of Energy and the Administrator of the Environmental Protection Agency (EPA), determines appropriate, were (i) captured and permanently isolated from the atmosphere,

1 Unless otherwise specified, all “Section” or “§” references are to sections of the Code or the Income Tax Regulations (26 CFR part 1).

2 Pursuant to § 1.45Q-4(e), taxpayers may choose to apply the rules in § 1.45Q-4 for taxable years beginning on or after January 1, 2018, provided the taxpayer applies §§ 1.45Q-1, 1.45Q2, 1.45Q-3, 1.45Q-4, and 1.45Q-5 in their entirety and in a consistent manner. Alternatively, taxpayers may choose to rely on the rules in § 1.45Q-4 as contained in the notice of proposed rulemaking (REG-112339-19) published in the Federal Register (85 FR 34050) on June 20, 2020 (2020 proposed regulations), for taxable years beginning on or after February 9, 2018, and before January 15, 2021, provided the taxpayer follows proposed §§ 1.45Q-1, 1.45Q-2, 1.45Q-3, 1.45Q-4, and 1.45Q-5 of the 2020 proposed regulations in their entirety and in a consistent manner.

3 Pursuant to § 13801(g) of the IRA, §§ 6417 and 6418 apply to taxable years beginning after December 31, 2022. See 136 Stat. at 2013.

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or (ii) displaced from being emitted into the atmosphere, through use of a process described in § 45Q(f)(5)(A).

.06 Section 45Q(f)(5)(B)(ii) provides that for purposes of determining the amount of qualified carbon oxide utilized by the taxpayer for purposes of § 45Q(a) (2)(B)(ii) or (a)(4)(B)(ii), the term “lifecycle greenhouse gas emissions” has the same meaning given such term under § 211(o)(1)(H) of the Clean Air Act (42 U.S.C. 7545(o)(1)(H)), as in effect on February 9, 2018, except that “product” is substituted for “fuel” each place it appears in 42 U.S.C. 7545(o)(1)(H).

.07 On June 2, 2020, the Treasury Department and the IRS published a notice of proposed rulemaking under § 45Q (REG-112339-19, 85 FR 34050) (proposed regulations). After consideration of all comments received in response to the proposed regulations, on January 15, 2021, the Treasury Department and the IRS published final regulations under § 45Q in the Federal Register (T.D. 9944; 86 FR 4728). .08 For purposes of § 45Q(a)(2)(B) (ii) or (a)(4)(B)(ii) and § 1.45Q-1(b)(ii) and (c)(2)(ii), § 1.45Q-4(b)(2) provides that the amount of qualified carbon oxide determined to be utilized by the taxpayer for purposes of computing the § 45Q utilization credit cannot exceed the amount of qualified carbon oxide measured at the source of capture.

.09 Section 1.45Q-4(c)(1) provides that for purposes of determining the amount of qualified carbon oxide utilized by the taxpayer, the term “lifecycle greenhouse gas emissions” means the aggregate quantity of greenhouse gas emissions (including direct emissions and significant indirect emissions such as significant emissions from land use changes) ⁴ related to the full product life cycle, including all stages of product and feedstock production and distribution, from feedstock generation or extraction through the distribution and delivery and use of the finished product to the ultimate consumer, with the mass values for all greenhouse gases adjusted to account for their relative global warming potential according to Table A-1 of 40 CFR Part 98 subpart A. Such emissions

are expressed in carbon dioxide equivalent (CO2-e).

.10 Section 1.45Q-4(c)(2) provides that the taxpayer verifies the amount of qualified carbon oxide utilized through an LCA. An LCA must demonstrate that the proposed system, inclusive of the taxpayer’s process, results in a net reduction of CO2‑e compared to a comparison system.