The One Big Beautiful Bill Act (the “OBBBA”) modifies the federal income tax credit for carbon oxide sequestration. Such tax credit, in place since 2008, was previously increased by the Inflation Reduction Act of 2022.
Credit Parity
The OBBBA provided a surprising benefit in choosing a method of carbon oxide sequestration by including long sought after parity within the 45Q credit. As a result of the OBBBA, the $85 per metric ton credit ($180 for direct air capture), previously only available for carbon oxides permanently sequestered and not used in enhanced oil or natural gas recovery projects, will also apply to projects placed in service after July 4, 2025, that (i) use the permanently sequestered carbon oxides in EOR projects or (ii) utilize carbon oxides in other permitted forms.
Prior to the OBBBA, the maximum tax credit available for carbon oxides that were permanently sequestered through EOR projects or other utilization methods was $60 per ton. All permitted forms of carbon oxide sequestration under the credit may now see the maximum available credit.
Limitation of Covered Nation Influence
The OBBBA takes a strong stance against the ownership, control, or influence over U.S. clean energy projects by North Korea, China, Russia, and Iran. As a result, no credit under 45Q shall be permitted for any tax year after the date of enactment if the taxpayer is a “specified foreign entity” or “foreign-influenced entity.”
The term “specified foreign entity” includes a foreign entity of concern, a terroristic organization, and entities controlled by governments, agencies, or citizens of North Korea, China, Russia, or Iran. A “foreign-influenced entity” is an entity owned or controlled by a specified foreign entity.
In addition to not being eligible to receive tax credits from clean energy projects, including carbon oxide sequestration, specified foreign entities will not be eligible to receive tax credits as a transferee under Code Section 6418.
Enhanced Sequestration Opportunities in Texas – Class VI Primacy
On June 9, 2025, the Environmental Protection Agency (the “EPA”) proposed approving the grant to Texas of primacy with respect to Class VI underground injection wells in the state. Class VI wells permit the injection and permanent sequestration of anthropogenic carbon oxides from multiple sources, not just oil and gas activities. The EPA stated that “Texas is best positioned to protect its underground sources of drinking water while advancing economic growth and energy dominance.” The approval is still subject to public comment, with a hearing set for July 24, 2025.
