45Q Tax Credits & CCS Risk

Let's clear something up.

A 45Q tax credit is not a carbon credit. It's a tax offset. A company that captures and stores carbon dioxide earns the credit — and transfers it to the emitter. Two different things. Two different risk profiles.

That distinction matters a great deal when a well cap fails.

We are not attorneys or accountants. Nothing here is legal or financial advice. This is shared to encourage necessary dialogue.

The Scenario That Keeps Us Up at Night

Here's how it plays out:

1. A corporation purchases ESG credits and hires a CCS well developer and operator.
2. The corporation claims the 45Q benefit.
3. The well completes its work. The cap goes on.
4. A few years later, the cap leaks. CO₂ returns to the atmosphere.

Now the question: Who is responsible? The well operator who capped it? Or the corporation that received the tax incentive?

We don't have a definitive legal answer yet. What we do have is a clear picture of the financial exposure — and the insurance that exists to address it.

Qualifying for the 45Q Credit: Three Requirements

Robert James, Partner at Pillsbury Winthrop Shaw Pittman LLP, identified three conditions that must be met:

1. A qualified industrial facility that is a source of emissions.
2. New carbon capture equipment added to that facility.
3. Disposal of the CO₂ that would otherwise be released into the atmosphere.

The Section 45Q credit is worth $85 to $180 per ton of carbon captured, depending on the program. That's real money — and real exposure if those credits get clawed back.

There are two approved uses for the captured CO₂:

• Disposal in secure geological storage.
• Use as a tertiary injectant in a qualified enhanced recovery project, followed by geological storage.

The Six Classes of Injection Wells

Not all wells are created equal. The EPA classifies injection wells into six categories. The 45Q credit specifically applies to Class VI — wells used for the geologic sequestration of CO₂.

Class VI is where the financial responsibility requirements are most demanding.

Financial Responsibility: What the Regulations Require

EPA Class VI financial assurance requirements cover every phase of a geologic storage project — injection, monitoring, closure, and post-injection care. Texas and Louisiana are leading the way on state-level implementation.

The Texas Railroad Commission's proposed amendments to §5.205 state:

"The director shall consider and approve the applicant's demonstration of financial responsibility for all the phases of the geologic sequestration project, including the post-injection storage facility care and closure phase and the plugging phase, prior to issuance of a geologic storage injection well permit."

— Texas Register, June 30, 2023, §5.205(c)

Brokers working with CCS operators in Texas should be familiar with this language. The ongoing rulemaking process is shaping how financial assurance will be structured for years to come.

The IRS Recapture Rule: A Three-Year Window

In January 2021, the IRS finalized Docket Number TD9944, establishing a three-year recapture period.

If stored or injected carbon leaks during that window, the IRS is authorized to claw back the 45Q credits already claimed. That's not a hypothetical — that's a real financial liability that needs a real insurance solution.

What Insurance Actually Covers This

Liberty Mutual is currently the only insurer offering an endorsement specifically for 45Q tax credit recapture.

The coverage works like this: if the insured is required to repay tax credits due to a qualifying pollution incident — specifically, a release of carbon oxide — the policy reimburses that loss. Incorrect tax filing does not trigger the coverage. The trigger is a pollution event.

Reference pricing: A 10-year term project with $9M/$14M limits (including the $5M 45Q sublimit) has been bound for $450,000. A 3-year term with $2M/$2M limits came in at $80,000 (10-year equivalent: $240,000).

Pricing is not cheap. But compared to the exposure, it's worth the conversation.

The Third-Party Storage Question

A scenario we're seeing more frequently: a well owner earns the 45Q credit but wants to hire a third-party company for long-term carbon storage because they can't find an economic solution internally.

So who carries the insurance?

The 45Q coverage is payable to whichever party obtains the policy. The source facility, injecting party, and storage operator must make their own agreement on credit allocation — the insurance policy doesn't resolve that. What it does is protect the party holding the credit if a pollution event triggers recapture.

Currently, Liberty is only considering CCS projects where CO₂ is stored in underground storage facilities — saline aquifers, depleted reservoirs, or other natural formations. Enhanced oil recovery projects are not eligible at this time.

The Bottom Line

The 45Q credit is a powerful incentive. It's also a financial liability if the storage fails.

The IRS has a three-year window to claw it back. The well cap doesn't care about that window.

Insurance exists for this exposure — but the market is thin, the deductibles are high, and the coverage triggers are specific. Understanding the policy before the well is capped is the only way to manage this risk properly.

If you're working on a CCS project and have questions about financial assurance or 45Q coverage, we'd like to hear from you.

References & Sources

• Pillsbury Winthrop Shaw Pittman LLP — Carbon Capture: Development, Finance and Tax Credits
• IRS Final Rule TD9944 — Recapture Requirements for the Section 45Q Credit (January 2021)
• Texas Register, June 30, 2023 — Proposed Amendments to §5.205
• EPA Class VI Financial Assurance Requirements
• Norton Rose Fulbright — Transferability & Tax Credit Sales Webinar