The phrase “cap and trade” has, for years, been a reality for power plants, industrial plants and other high carbon oxide emitters in the United States. Essentially, American industries must limit their carbon oxide emissions to governmentally mandated caps or pay a “carbon” tax, unless the company has either earned or acquired carbon credits that offset the carbon tax. Under section 45Q of the Internal Revenue Code, credits were established to help power plants and high carbon oxide emitters to decarbonize. The United States is a global leader in carbon capture technology, hosting nearly one-half of all carbon capture facilities operating world-wide.
A combination of recent Federal legislation  has expanded the benefits of carbon capture through both direct air capture (“DAC”) and carbon capture underground storage (“CCUS”) methods. Through the Inflation Reduction Act of 2022, the value of such credits has been increased to USD $60 per ton for carbon dioxide injected for use in enhanced oil recovery projects and, for straight sequestration projects, to $85 per ton of carbon dioxide injected.  Further, the earlier deadline of January 1, 2026 for the commencement of construction of carbon capture facilities was further extended to January 1, 2033.
Due largely to the development of green technologies and the incentives recently enhanced under the 2022 Inflation Reduction Act,  private equity (“PE”) has seized on energy transition, including CCUS-focused portfolio companies. One authority noted that in 2022, private equity dollars invested in “transition energy” exceeded for the first time PE investment in conventional oil and gas. For example, Encap reported investing “up and down the energy value chain” and indicated a high volume of “low-carbon energy deal flow.” 
Oil companies are well-positioned to take advantage of section 45Q credits, whether through enhanced oil recovery (i.e., CO2 injection to enhance oil production during secondary recovery) or straight sequestration projects.
Section 45Q Primer
A clear section 45Q candidate in the upstream oil and gas space is the operator of a secondary recovery unit, e.g., “waterflood unit” or, more specifically, CO2 utilized in enhanced oil recovery projects. The holder of the tax credits can benefit by “playing both sides” – by enjoying enhanced oil recovery and by claiming or monetizing the section 45Q tax credits. However, any operator of an oil well or gas well that is approaching depletion might also prove a viable candidate for claiming the section 45Q credits through straight sequestration projects. In other words, rather than directly proceeding to plug a well at depletion, consideration might be given to utilizing the depleted zone (if regulatory requirements are met, ensuring that injected CO2 will remain in place) by utilizing the wellbore and investing in the other carbon capture equipment (“CCE”) necessary to implement a CO2 sequestration project.
Without intending to supplant a section 45Q candidate’s need to involve its tax advisor, the following summarizes the baseline requirements for earning and benefiting from section 45Q credits.
How are section 45Q credits earned?
A. First, the candidate for section 45Q credits must acquire the legal right to sequester carbon oxides below ground. If the candidate is utilizing CO2 as an injectant in an enhanced oil recovery (“EOR”) project, its right to inject CO2 into the producing formation generally will have been established through its leasehold and unitization rights, i.e., the establishment of the secondary recovery unit. If a candidate is the operator of a producing well that is approaching depletion, the applicant should initiate the permit application process prior to depletion and reversion of the pore space to the surface owner. Of course, if a candidate is undertaking a straight sequestration project by unitizing a non-producing geologic formation, such party will need, through private agreement with the surface owner, to secure its sequestration rights within the pore space prior to filing applications to unitize such formation or securing a sequestration permit.
B. Upon securing its legal right to inject carbon oxides below ground, the candidate must either commence construction of CCE or place existing CCE into service on or before January 1, 2033.
What are examples of CCE?
In the context of EOR or straight sequestration projects, CCE generally consists of the following:
· The pipeline that takes delivery of CO2 from the emitter and transports the CO2 to the unit boundaries;
· Flowlines from the unit boundaries to the injection wells; and
· The injection wells and associated surface and downhole equipment.
Who may claim the section 45Q credits?
A. For CCE placed in service prior to February 9, 2018, the section 45Q credit is attributable to “the person that captures and physically or contractually ensures the disposal, injection or utilization of such qualified carbon oxide.”
B. For CCE placed in service on or after February 9, 2018, the section 45Q credit is attributed to the owner of the CCE who physically or contractually ensures the capture of the CO2 and the ensuing disposal, injection or sequestration within a single process train.
May only one taxpayer claim the section 45Q credit?
Yes, only the taxpayer that is the owner of the CCE that ensures the capture and disposal, injection or sequestration of the qualified carbon oxide or contracts with another to capture, dispose, inject or sequester the qualified carbon oxide may claim the 45Q credit.
What if there are multiple owners of the CCE and/or the qualified carbon oxide?
A. In the context of EOR projects, there will more likely be multiple owners of the pipeline, injection wells and CO2 itself – not exclusively the operator of the secondary recovery unit. However, 26 C.F.R. § 1.45Q-1 limits the credit to a single owner, which will typically be the operator who has secured the necessary permits. Notably, a special purpose entity can be utilized as the permitting party and credit claimant, thereby allowing the co-owners to share in the section 45Q credit based upon their relative membership or partnership interests in such special purpose entity.
B. In the case of multiple owners who share CCE and/or qualified carbon oxide but do not form a joint venture or special purpose entity as the credit claimant and permitted injector, the section 45Q regulation states that the permitted injector may elect to allow multiple credit claimants. Importantly, it is completely discretionary to the permitted injector whether it will allow co-owners to share in the section 45Q credits. If permitted, the credit claimant will allow each other co-owner to share in the credit proportional to the amount of qualified carbon oxide disposed of, utilized or used in the secondary recovery project by each sharing co-owner.
What is the applicable amount of the section 45Q credit?
A. The credit for carbon oxides (including, but not limited to, CO2) is USD $60 per ton injected if used for enhanced oil recovery. For carbon oxides used in straight sequestration projects (i.e.,carbon oxides permanently stored), the credit is equal to USD $85 per ton injected and sequestered.
B. If the credit owner does not need to use the 45Q credits as offsets, but instead sells or otherwise markets the section 45Q credits, the cash consideration received will vary, depending on whether the credit claimant is selling directly to a power plant or other emitter wishing to secure credits as offsets or is selling through a broker utilizing established carbon markets.
What is the period for claiming section 45Q credits?
The credit claimant may claim carbon credits in the year that the CCE was first placed in service, then continuing through the next four (4) years of operation.
May a taxpayer that owns CCE that was placed in service before February 9, 2018 still, retroactively, claim the section 45Q credit?
No. The 2022 calendar year was the last year a taxpayer was allowed to retroactively claim section 45Q credits for CCE placed in service prior to February 9, 2018.
May section 45Q credit holders transfer such credits to unrelated third parties for cash?
Yes. Beginning with the 2022 calendar year, the holder of section 45Q credits (or any portion of such credits) may, under section 6418 of the Internal Revenue Code, transfer carbon oxide sequestration credits to an unrelated third party for cash. The cash payment received by the transfer or will not be treated as taxable income and the transferee may not deduct the cash payment on its tax return.
What options exist for a section 45Q credit holder who wishes to sell the credits? 
There are three (3) primary markets for section 45Q credits: direct sales, selling to offsetting companies and selling to brokers.
Direct sales. This option would involve the section 45Q claimant contacting emitters (e.g., power plants, fertilizer plants, factories) who wish to acquire such credits to offset their excess carbon oxide emissions. This option is most commonly used for complex offsets such as methane reduction projects and involves reaching out to a small market of companies that might be interested.
Selling to offsetting companies. The market for this option consists of companies that specialize in generating and selling offsets. Such companies have existing projects which utilize the section 45Q credits and then sell the same in the carbon marketplace. However, such specialized companies are often also interested in acquiring additional offsets from outsiders to diversify their portfolios.
Selling through brokers. The third option is to seek out brokers in the carbon trading market. Similar to a stock exchange, carbon markets have brokers who receive quotes from buyers and find offsetting section 45Q credits in the market. A potential downside to some in utilizing brokers is the broker fees that are sure to be charged.
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Part 2 of this article will be posted next month and will focus on the requirements under Oklahoma law for earning and utilizing carbon oxide credits under Oklahoma’s Carbon Sequestration Enhancement Act,  the Oklahoma Carbon Capture in Geologic Sequestration Act  and administrative regulations, to date, promulgated by the Oklahoma Conservation Commission, the Oklahoma Corporation Commission and/or the Oklahoma Department of Environmental Quality.
For further information about carbon capture matters, contact
Donald S. Smith at email@example.com,
Ethan T. Mock at firstname.lastname@example.org, or
Grace A. DeJohn at email@example.com.
 Carbon capture credits, initially confined to carbon dioxide, now apply to all carbon oxides. Carbon oxides means any variation of carbon and oxygen molecules.
 www.iea.org/policy/4986-section-45q-credit-for-carbon-oxide-sequestration (August 21, 2023).
 The Bipartisan Budget Act of 2018; the Infrastructure Investment and Jobs Act of 2021; and, most recently, the Inflation Reduction Act of 2022.
 Though direct air capture is not the focus of this article, the credit for DAC projects was increased under the Inflation Reduction Act to $180 per ton, if the CO2 is permanently stored.
 As reported in www.newprivatemarkets.com (April 12, 2022), the Inflation Reduction Act earmarked $370 billion in incentives for “energy transition,” including utility scale solar and wind projects, low cost battery storage systems, renewable natural gas and hydrogen projects.
 www.netprivatemarkets.com (April 12, 2022), quoting Chuck Bauer (Encap 2021).
 https://8billiontrees.com/carbon-offsets-credits/selling-carbon-credits/. Selling Carbon Credits: How Does it Work? Take the First Step (November9, 2022).
 27A O.S. § 3-4-101, et. seq. (effective November 1, 2009).
 27A O.S. § 3-105-101 – 106 (effective June 1, 2009).