PAYNE INSTITUTE COMMENTARY SERIES: COMMENTARY

By Emma Jones Fredrickson and Anna Littlefield

August 18, 2025

The “One Big Beautiful Bill Act” (OBBBA) was signed into law on July 4^th of this year. Its evolution included multiple iterations of the existing regulations on 45Q tax credits, which are aimed at incentivizing carbon capture and storage. Many of these changes were debated extensively throughout the process. Here, we aim to provide a clear description of its final form and implications for stakeholders.

What are 45Q tax credits and how do they work?

45Q was first introduced in the Energy Act of 2005 and officially established in 2008 in an effort to increase federal investment in carbon capture as a means of large-scale carbon management. Since then, the program has undergone two expansions: in 2018 through the FUTURE Act, and in 2022 with the Inflation Reduction Act. To receive a credit, claimants must demonstrate either secure geologic storage or beneficial use of captured CO₂, with adherence to EPA regulations.

Historically, the value of credits for pure storage has been higher than for those repurposing captured carbon for other uses. Geologic storage involves injecting compressed CO₂ directly into the subsurface where it is stored permanently. Alternatively, reuse projects utilize captured carbon for industrial operations such as enhanced oil recovery (EOR) or building materials and chemical manufacturing. In these cases, some fraction of the carbon is sequestered as a result of the process (e.g. EOR) or transformed into a secondary marketable product.

Prior to the OBBBA, the value of 45Q has also been dependent on the carbon capture method. Point-source capture (i.e. capturing concentrated emissions directly from industrial facilities, power plants, etc.) was associated with a credit value of $85 for storage and $60 for reuse projects. Direct air capture (DAC) (a process of capturing diffuse CO₂ directly from ambient air) generated higher value credits through 45Q at $180 per ton for permanent storage and $130 for reuse projects.

What has changed and what was preserved from July 2025?

The credit value of $85 per metric ton of carbon oxides captured by point-source and $180 for DAC was maintained for projects in calendar years 2024 to 2026 with inflation adjustments for projects beginning after the start of 2027. A key change implemented by OBBBA is the creation of a parity between permanent storage and utilization for secondary products or in EOR. Now, all three sequestration uses qualify for the same, higher credit value. This shift is expected to support  increases in EOR operations, the U.S. market share of EOR-produced oil, and potentially the value of American EOR, reflecting the current administration’s well-documented commitment to bolstering the U.S. oil and gas industry. 

The transferability of 45Q tax credits was preserved by OBBBA, a decision that was widely contested. This allows for developers that receive 45Q credits that have relatively low tax liabilities to sell their credits directly to a third party with greater tax liabilities for cash. The profit can be used to pay off capital investments for carbon capture infrastructure or other associated costs. While earlier revisions of OBBBA had restricted transferability provisions, the core framework is ultimately preserved in the bill as adopted, with one key change: significant restrictions on foreign entities of concern (FEOCs).

FEOCs include both specified foreign entities (SFEs) and foreign-influenced entities (FIEs) (Table 1). OBBBA specifies that 45Q tax credits cannot be claimed by nor transferred to SFEs for any taxable year beginning after July 4, 2025, or to FIEs for any taxable year after July 4, 2027. These FEOC rules and restrictions also apply to section 45Z which outlines the clean fuel production credit.

Who stands to gain – or lose?

While historically, 45Q tax credits have been developed and expanded through bipartisan efforts, there are some specific stakeholders that stand to benefit significantly more from the recent reform. For example, since the use of captured CO₂ in EOR now qualifies for equal compensation, oil companies implementing EOR operations will see a better return on investment. Additionally, the continuation of transferability can benefit large scale C-Corporations planning to leverage tax-transfer deals to offset large tax liabilities as well as smaller operators with sufficiently low tax liabilities to allow projects to be supported from the sale of excess earned tax credits. The changes might also benefit American-based emitters and DAC facilities with less influence from foreign entities while also reducing foreign competition.

Critics of the CCUS industry argue that any preservation of 45Q is problematic, citing concerns for negative environmental impacts from CO₂ capture and storage operations. For example, recent pipeline projects that would transport CO₂ from multiple ethanol plants into western North Dakota have come under fire. Lawsuits are underway with plaintiffs claiming a lack of consideration for human health and safety for communities along the pipeline route. The parity for utilization has also been described as a subsidy for oil companies and criticized for its potential burden on taxpayers for otherwise uneconomic oil extraction.

Moving Forward: What’s next for 45Q?

In the future, stakeholders may wonder if the credit will grow more business friendly, or more climate oriented. Emitters that take advantage of 45Q advocate for continued inflation adjustments to support more sequestration and utilization projects while others like Erin Burns, director of Carbon180 argue that “Federal policy should prioritize durable carbon removal projects that can create prosperity for communities across the country – not expanded oil production”.

The sustenance and expansion of 45Q ultimately provides greater opportunities for investment in carbon capture infrastructure. Still, environmental risks and concerns over the prioritization of oil and gas suggest possible challenges. Because of the complexity of carbon capture, storage, and emissions balances, 45Q has faced both bipartisan support and criticism, which is likely to continue under the new rules.

ABOUT THE AUTHORS

Emma Jones Fredrickson, Payne Institute Low Carbon Energy Technologies Student Researcher and M.S. Student, Geochemistry, Colorado School of Mines

Emma Jones Fredrickson is a graduate student in the Mines chemistry department finishing up her master’s degree in geochemistry. Her research focuses on critical mineral characterization of Colorado mine drainages and associated microbiology. Emma joins the student researcher team for the summer as a former educator with 5 years of experience teaching secondary agriculture, food, natural resources, and science. Her academic background spans interdisciplinary fields with a B.S. in Geoscience from Southern New Hampshire University and a B.S. in Agricultural Education from Colorado State University. Emma is excited to be contributing to the dissemination of science topics that impact our world, communities, and future.

Anna Littlefield, Payne Institute Payne Institute Geothermal and CCUS Program Manager, Research Associate, and PhD Student, Geology and Geological Engineering, Colorado School of Mines

Anna Littlefield is the Payne Institute Geothermal and CCUS Program Manager for the Payne Institute at the Colorado School of Mines. As a current PhD student in the Mines geology department, her research focuses on the geochemical impacts of injecting CO2 into the subsurface as well as the overlap of geotechnical considerations with policymaking. Anna joins the Payne Institute with 8 years’ experience in the oil and gas industry, where she worked development, appraisal, exploration, new ventures, and carbon sequestration projects. Her academic background is in hydrogeology with an M.S. in geology from Texas A&M University, and a B.S. in geology from Appalachian State University. Anna is passionate about addressing both the societal and technical challenges of future of energy and applying her experience to advance this effort.

ABOUT THE PAYNE INSTITUTE

The mission of the Payne Institute at Colorado School of Mines is to provide world-class scientific insights, helping to inform and shape public policy on earth resources, energy, and environment. The Institute was established with an endowment from Jim and Arlene Payne and seeks to link the strong scientific and engineering research and expertise at Mines with issues related to public policy and national security.

The Payne Institute Commentary Series offers independent insights and research on a wide range of topics related to energy, natural resources, and environmental policy. The series accommodates three categories namely: Viewpoints, Essays, and Working Papers.

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DISCLAIMER: The opinions, beliefs, and viewpoints expressed in this article are solely those of the author and do not reflect the opinions, beliefs, viewpoints, or official policies of the Payne Institute or the Colorado School of Mines.