IRA Incentives for Carbon Sequestration and Low Carbon Fuels

Yesterday, President Biden signed the Inflation Reduction Act, creating a law that contains the most significant climate-related incentives in U.S. history. In the few short weeks since the bill was introduced in the Senate, a flurry of economic activity has already begun, with entities already beginning to align their business practices to the incentives laid out in the bill.

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

  • Expansion of the 45Q tax credit. Among many changes to the 45Q carbon sequestration and utilization tax credit, the law increases the maximum available credit for sequestration to $85 per ton, and $60 per ton for utilization, up from $50 and $35 respectively. These increased incentives should enable sequestration and utilization activities at many sites around the country where these activities were previously not viable. Further, the law allows for “direct pay” with respect to 45Q, meaning that tax liability is not needed to receive a refund from the IRS.
  • Sustainable aviation fuel (“SAF”) tax credit. The law introduces a new tax credit targeted towards sustainable aviation fuel that starts at $1.25 per gallon and increases with increased climate benefits. SAF is generally defined as a non-petroleum based aviation fuel with lifecycle greenhouse gas emissions of at least 50%.
  • Clean fuel production credit. In addition to the SAF tax credit, the law provides for a more broadly available tax credit available to any transportation fuel that achieves approximately a 50% carbon intensity reduction from a petroleum baseline. (The law’s calculation methodology is odd on relies on non-standard units.) For non-aviation fuel, the credit amount goes from scales from nothing to $1 per gallon based on the degree of emissions reduction achieved by the fuel. The SAF can credit could be as high as $1.75 per gallon, and may be available in addition to the SAF-specific tax credit described above.
  • Biofuel infrastructure funds. The law provides $500 million for infrastructure to dispense biofuels, through 2031.
  • Aviation fuel and technology grants. The IRA provides approximately $244 million for grants related to SAF, and another $46 million for other low-emission aircraft technologies.

These programs have the promise to radically transform carbon management and transportation in America. However, many details related to these provisions remain to be fleshed out through regulation. For example, the clean fuel production credit requires the IRS to assign carbon intensity values to various fuel categories, transforming the tax collection agency into a pseudo-environmental regulator. The nuances of these regulations will greatly affect the types of behaviors that are incentivized for years to come.

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