Impacts of the Increase in 45Q Tax Credits for Enhanced Oil Recovery in the OBBBA Bill

The “One Big Beautiful Bill Act” (OBBBA) budget reconciliation bill that passed in the U.S. Congress eliminated tax credits for renewable energy, hydrogen, residential energy efficiency, and other energy-related programs. It also maintained tax credits for biofuels and nuclear power. In stark contrast, it actually increased the 45Q tax credit for utilizing carbon dioxide (CO2) captured from industrial processes for “Enhanced Oil Recovery” (EOR) by a whopping 42% from $60 per metric ton to $85 per metric ton.

The OBBBA’s authors describe this increase as creating “parity” with the existing tax credit for “sequestering” (storing) CO2 of $85 per metric ton, but in practical effect this increase creates a powerful commercial incentive to use CO2 for EOR rather than sequester it. It may also spur faster development of carbon capture facilities, but only when the CO2 captured from these facilities is used for EOR. The reason the oil industry wanted this massive tax credit increase is because CO2 EOR is so expensive that its use is rarely economic – absent federal subsidies. The oil extracted using the 45Q tax credit will not be free market oil. Taxpayers will pay for fuel at the pump and also via their federal taxes.

“Parity” between EOR and Sequestration Tax Credits Means that CO2 Producers Will Earn More Revenue from CO2 EOR than CO2 Sequestration

Increasing the 45Q tax credit for CO2 EOR to be the same as for sequestration ($85 per metric ton) has been described as creating “parity,” but this change actually creates a strong commercial bias for using captured CO2 for EOR. If a CO2 capture facility sends its CO2 to a sequestration facility, the capture facility owner would get the $85 per metric ton 45Q tax credit. In contrast, if a CO2 capture facility owner sells its CO2 to an EOR operator, the CO2’s owner would get the $85 per metric ton 45Q EOR tax credit plus any payment made by the oil industry for the CO2. Or, the oil industry could simply buy the carbon capture facility and pocket any profits made from the 45Q tax credits plus any profits made from selling oil. Nothing in federal law prohibits a capture facility owner from being paid for its CO2 beyond the financial benefits from use of the 45Q tax credit. Nothing in federal law requires that CO2 owners prioritize sequestration over EOR. As a consequence, capture facility owners will make more money from selling their CO2 to EOR operators than they would from sending the CO2 to sequestration facilities. The OBBBA’s EOR tax credit increase ensures that captured CO2 will be used for EOR if at all possible. Only CO2 not needed by the oil industry would be sequestered.

Massive Taxpayer Subsidies for Uneconomic Oil

The EOR tax credit will subsidize extraction of oil that would otherwise be uneconomic to produce. CO2 EOR was developed in the 1970s and has been in active use on a limited basis since then, currently accounting for about 2-3% of current US oil production. Check out this paper for background on why the oil industry needs to use EOR, how EOR works, and why no economically viable at-scale substitutes for CO2 exist. There are two primary reasons why CO2 EOR has seen limited use. First, there are limited supplies of natural affordable geologic CO2, and all of these natural CO2 sources are fully committed to existing EOR operations. The EOR industry has not been able to grow because natural supplies of CO2 are limited. Second, the cost of capturing CO2 from most industrial facilities and transporting it to EOR fields has, with limited exception, been far too high to make CO2 EOR economic. If capturing industrial CO2 for use in EOR had been economic in prior decades, then presumably the oil industry would have developed carbon capture facilities on a free market basis. But, very few industry-funded carbon capture facilities exist and those that do have depended on the 45Q tax credit, which started in 2008 at about $10 per metric ton, increased in 2018 to $35 per metric ton, and further increased in 2022 to $60 per metric ton. The lack of rapid expansion of CO2 EOR even with these past subsidies shows that this technology is not economically viable, such that the oil industry’s dreams of widespread application of this technology will requires massive government subsidies. Bottom line, taxpayers will pay for EOR oil at the pump and through their federal taxes and higher federal deficits. The Institute for Energy Economics and Financial Analysis estimates that if all currently planned carbon capture facilities are built, the cost of the 45Q tax credit to the U.S. Treasury between now and 2042 would be approximately $830 billion dollars, and that extensions of this tax credit could cost taxpayers trillions. Oil produced using the 45Q tax credit is taxpayer subsidized oil, not free market oil.

Even Larger Windfall Profits

The EOR tax credit increase also creates the potential for massive and unjust windfall profits at taxpayer expense, because the cost of capturing and transporting CO2 is highly variable. Costs range from about $30 to $40 metric ton at natural gas processing and ethanol plants near EOR fields, to well over $100 per metric ton at natural gas power plants, steel plants, and cement plants. For example, an ethanol plant might pay $30 per metric ton to capture CO2 from its fermenters and receive $85 per ton in federal tax credits, earning a net windfall profit of $55 per metric ton (more than an 80% profit rate). Yet, the $85 per metric ton tax credit is not high enough to make carbon capture economic at many industrial facilities. In contrast, the Canadian government has proposed to subsidize a percent of carbon capture costs, such that it would provide proportional profits and save taxpayer dollars. The U.S. one-size-fits-all tax credit scheme makes no sense for an industry with highly variable capture costs.

Increased Development of Capture Facilities Contractually Committed to EOR

The EOR tax credit increase may also allow more industrial facilities to install carbon capture equipment, because project economics would be based on revenue from the tax credit plus revenue from oil production. Carbon capture facilities with costs of more than $85 per metric ton are more likely to be built – but only if their CO2 is used for EOR.

Potential for Massive Tax Fraud

The Trump Administration’s reductions in IRS enforcement and EPA emission monitoring programs mean that nobody in the federal government will be monitoring the physical volumes of carbon captured at industrial facilities and tracking the CO2 as it flows to EOR, sequestration, and other use facilities. Without monitoring and enforcement, nothing will stop the carbon capture and oil industries from swindling taxpayers by simply lying about how much carbon they capture and use.

Increased Carbon Dioxide Pollution

The oil industry describes the oil extracted using CO2 as “low carbon oil.” This characterization is misleading because without the 45Q tax credit subsidy almost all of this oil would remain in the ground and not be burned. CO2 is used in EOR because it is an excellent solvent and can wash out oil trapped in microscope rock pores. However, EOR operations require massive amounts of CO2. No other solvents are potentially available in such large amounts. Affordable at-scale alternatives to CO2 do not exist. Moreover, various scientific papers have shown that using CO2 to extract oil results in two to three times more carbon being released by burning the extracted oil as compared to the amount of carbon stored underground as a result of EOR operations. While it is possible to increase carbon storage relative to oil production, a number of scientific papers have shown that optimizing oil production results in reduced carbon storage. Over the long term, CO2 EOR trades CO2 from industrial facilities that can be captured for CO2 from vehicles that cannot be captured, except via extremely expensive direct air capture. In both the short and long-term, CO2 EOR leads to more pollution, not less. The Trump administration and Republican Members of Congress did not support the increase in the CO2 EOR 45Q tax credit because it is a climate change mitigation tool. They all believe that climate change is a fraud. They supported higher taxpayer subsidies for CO2 EOR because their oil industry donors want taxpayer dollars so they can earn profits on uneconomic oil.

Faster Development of Dangerous CO2 Pipelines

By increasing the 45Q EOR tax credit, the OBBBA will increase pressure to build CO2 pipelines throughout the U.S. CO2 pipelines are uniquely risky. When large diameter carbon pipelines rupture, they release plumes of odorless and colorless CO2 that can spread for over a mile and suffocate all living beings that are too close to the rupture site. At lower concentrations, CO2 plumes are intoxicating. First responders to the Sartartia, Mississippi, CO2 pipeline rupture reported that the townspeople acted like “zombies.” They also reported that some vehicles stalled out due to a lack of oxygen. Yet, the information needed to determine the fatality and intoxication zones for CO2 pipelines is kept secret by pipeline companies. From the perspective of landowners and impacted communities, CO2 pipelines are all risk and no reward.

While all of us are dependent on oil, the fact that the oil industry lobbied hard for a massive increase in the 45Q EOR tax credit should be concerning. If new supplies of affordable oil existed in the U.S., the oil industry wouldn’t need federal subsidies, but it does. There is no free lunch; there are just winners and losers. The OBBBA’s increase in the 45Q tax credit for EOR will take more money from you and future generations of Americans and give it to those who stand to make a quick buck off uneconomic oil.