Why It Matters

The federal government has spent years trying to accelerate carbon capture technology as a climate solution, but a recent GAO report finds that the primary financial tool for doing so faces significant administrative problems.

The 45Q tax credit offers financial incentives to companies that capture and store carbon or use it in products. Since the credit was significantly expanded through the 2022 Inflation Reduction Act, the number of companies attempting to claim it has surged. Yet taxpayers using captured carbon to manufacture products face delays, rejections, and uncertainty in claiming the credit.

No agency is tasked with measuring whether the credit works, and the law set no clear goals. The credit could result in potentially substantial federal revenue expenditures without a mechanism to determine whether it is achieving its objectives.

The Big Picture

The Inflation Reduction Act (IRA) includes a statutory provision directing GAO to review the distribution and use of IRA funds. That mandate produced this report, which examined two questions: how the Internal Revenue Service (IRS) administers the 45Q credit and why evaluating the credit's effectiveness is so difficult. GAO reviewed agency policies and procedures, interviewed officials from the IRS, the Department of Energy (DOE), and the Environmental Protection Agency, and conducted two site visits to carbon capture facilities in Houston. It also interviewed external stakeholders from advocacy, research, and industry.

The 45Q credit was created in 2008 to incentivize the development of carbon capture technology, which reduces atmospheric carbon by storing it underground or using it to make products such as concrete or jet fuel. The IRA amended the credit and added new features. More recently, the One Big Beautiful Bill Act created parity in credit values across different uses of captured carbon.

The expansion has had a measurable effect. As of March, 33 carbon capture facilities were operating in the U.S., with additional facilities planned. The number of 45Q credit claims more than tripled from 2019 to 2023, according to IRS data.

Taxpayers using captured carbon to produce products face the steepest compliance hurdles. As of January, the IRS had received 99 Life Cycle Assessment (LCA) requests since the pre-approval requirement took effect in 2021, 54 original submissions and 45 resubmissions.

GAO identified specific areas where the IRS and DOE could streamline the LCA approval process, including clarifying which datasets are acceptable for calculating displaced carbon and reducing the time burden on both agencies and taxpayers.

Separately, GAO found that evaluating whether the credit works is difficult under current arrangements. No agency is designated to measure the credit's performance, and the law established no specific goals against which to measure it. GAO identified three key questions it says Congress should direct agencies to analyze, including how well the credit is working to achieve its goals, how efficiently it is performing, and how it compares with other policy tools.

What They're Saying

GAO made four recommendations to the IRS commissioner and two to the secretary of Energy, all aimed at reducing taxpayer burdens in the LCA process while preserving compliance safeguards.

The four IRS recommendations are to: (1) determine the minimum period of production system data needed to calculate the displacement factor and update guidance so taxpayers meeting that threshold can submit LCAs before year-end; (2) continue creating additional comparison product system technology baselines and implement a process for taxpayers to request specific baselines, similar to the provisional emissions rate process used for the 45V and 45Z credits; (3) determine the feasibility, including costs and benefits, of developing a Greenhouse gases, Regulated Emissions, and Energy use in Technologies (GREET) model for common 45Q utilization pathways that would allow LCAs to be submitted when a tax return is filed without prior review, as with the 45V and 45Z credits; and (4) modify the IRS-DOE memorandum of understanding (MOU) to give taxpayers a limited opportunity to fix problems in their LCA submissions before rejection rather than forcing a full restart.

The two DOE recommendations include modifying the MOU to give taxpayers a limited opportunity to correct LCAs before rejection and clarifying which GREET model data are acceptable for 45Q LCAs and how and when they can be used.

GAO also issued a Matter for Congressional Consideration, a distinct category from its executive-agency recommendations, asking Congress to direct agencies to collect and analyze data to answer the three performance questions identified above.

GAO identified specific areas where IRS and DOE could streamline the LCA approval process, including clarifying which datasets are acceptable for calculating carbon displaced and reducing the time burden on both agencies and taxpayers.

Separately, GAO found that evaluating whether the credit works at all is structurally impossible under current arrangements. No agency is designated to measure the credit's performance, and the law established no specific goals against which to measure it. GAO identified three key questions it says Congress should direct agencies to analyze: how well the credit is working to achieve its goals, how efficiently it is performing, and how it compares to other policy tools.

Political Stakes

The 45 resubmissions out of 99 total LCA requests indicate that taxpayers have frequently had to restart the process. The current MOU between the IRS and DOE does not provide taxpayers an opportunity to modify elements of an LCA before rejection, requiring them instead to resubmit and restart the review process. GAO found that changing the process could reduce burdens on taxpayers and agencies while still mitigating potential noncompliance.

What's Next

Congress can act on GAO's Matter for Congressional Consideration and direct agencies to collect and analyze data on the credit's performance. The 45Q credit could result in potentially substantial federal revenue expenditures, according to GAO, which said periodic reviews of tax expenditures are crucial for informed congressional oversight.

The Bottom Line

The 45Q carbon capture tax credit is growing in use, but GAO found significant shortcomings in its administration and oversight. Taxpayers using captured carbon to produce products face compliance burdens, delays, and uncertainty, while no agency is responsible for evaluating whether the credit achieves its goals. GAO's six recommendations and one congressional matter offer a path toward addressing those problems, but the IRS and DOE disagreed with five of the six recommendations. Without congressional action or changes by the agencies, the problems GAO identified could persist.

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