Captured: Regulating to 1.5C Through Tax and Escaping from Regressive Pitfalls

For example, A-Commercial Activities provide no benefit other than the reduction of atmospheric CO₂. There is no upstream or downstream commercial activity that is being incentivized by A-Commercial Activities. If section 45Q is meant to encourage R&D investment in CCUS, it is hard to imagine that, absent some other regulatory influence, this R&D would occur with respect to A-Commercial Activities because Probably Regulated Activities and CO₂-EOR Qualifying Activities involve other commercial activities that should result in additional revenue and income to the section 45Q credit. Parties engaged in R&D are instead encouraged to pursue these other activities. Further, if A-Commercial Activities serve any other purpose for regulating energy markets or GHG-emitting activities under the Code, the basis of serving these other goals must be that there is a social cost of carbon, such that removing atmospheric GHG emissions would also address these other goals. Rather, if the credit for A-Commercial Activities makes sense at all, it must mean that the social cost of carbon identified by Congress through section 45Q is equal to $34.81 per ton of CO_2e in 2021, increasing to $50 per ton of CO_2e by 2026.

As a baseline, this Article notes that, to the extent section 45Q can be thought of as a Pigouvian subsidy meant to incentivize the displacement of atmospheric GHG emissions, $34.81 per ton of CO is not an adequate value for the social cost of carbon in 2020. In 2021 and not 2026, the overwhelming weight of evidence is that the social cost of carbon is higher than $50 per ton. This does not take into account any additional incentives for CCUS infrastructure or R&D that should be considered and addressed separately so as to avoid confusion with any carbon price. To better achieve the 1.5C Goal, section 45Q should be revised to incorporate a credit amount representing the social cost of carbon determined to the best of our scientific and economic knowledge and subject to automatic statutory adjustments as that knowledge evolves.

With respect to the other categories of activity, section 45Q is a production tax credit for otherwise GHG-emitting energy or industrial production activities. That is, section 45Q makes it more profitable to engage in production activities that already occur without related CCUS activities, including fossil-fuel related activities. Otherwise, producers would not incorporate CCUS and pursue section 45Q. This is in contrast to the PTC for wind, for example, which incentivizes an intrinsically different type of power production from fossil-fuel production. In other words, there must be a social cost of carbon justifying the section 45Q production tax credit.

If this is the case, section 45Q should be drafted in a way to maximize GHG displacement by creating a Pigouvian subsidy that mimics a carbon price per the earlier analysis in this Article.

Unfortunately, and to the benefit of oil and gas producers and coal-fired electricity plants, section 45Q is not drafted in this way. We can see this by evaluating the ways in which section 45Q fails to incorporate the five components of a comprehensive Pigouvian regulation regime.

1. Section 45Q Does Not Really Address Atmospheric Carbon as an Externality, Which Is Potentially Wasteful

Section 45Q has a problem when it is acting as a production tax credit for Other Commercial Qualifying Activities, CO₂-EOR Qualifying Activities, and Probably Regulated Activities: it only selectively addresses all related GHG emissions of incentivized production activities. Each category of production activities incentivized by section 45Q creates varying levels of GHG emissions, including when CCUS is incorporated, as noted in Table 1. Yet, section 45Q only contemplates demonstrated net displacement of atmospheric GHG emissions in connection with Other Qualifying Commercial Activities. In other words, we might say that section 45Q is poorly designed because it makes a production-tax-credit mess out of a Pigouvian subsidy.

Failing to consider associated emissions connected to the other activities implies that section 45Q is not really meant to address atmospheric carbon as an externality—at least not in a comprehensive manner. For example, consider that Probably Regulated Activities—such as a coal-fired electricity plant that captures a portion of its emissions and buries them underground—is entitled to the same section 45Q credit as A-Commercial Activities and a higher credit than Other Qualifying Commercial Activities.

In this context, section 45Q applies without regard to the related GHG emissions of the underlying activity creating the GHG emissions subject to capture—i.e., coal-fired electricity. These GHG emissions are unlikely to be entirely captured, implying that there is no social cost of carbon associated with “free” GHG emissions that are not subject to capture. That makes little sense if section 45Q inherently implies a social cost of carbon.

At the same time, Other Qualifying Commercial Activities are entitled to the same, lower section 45Q credit as CO₂-EOR Qualifying Activities. Underlying oil and gas production, however, could result in wildly varying GHG emissions and carbon capture percentages, whereas Other Qualifying Commercial Activities must demonstrate net GHG displacement. In fact, potentially “free emissions” associated with either CO₂-EOR Qualifying Activities or Probably Regulated Activities (which is paid the higher credit amount) necessarily skew any implied carbon price under section 45Q to the inexplicable advantage of oil and gas producers and those producing electricity from fossil fuels. Even the vast improvements put forward by the Build Back Better Act would not completely fix these flaws—to the noticeable benefit of the oil and gas industry (and to a lesser extent, the coal industry).

Viewed another way, these potentially “free emissions” mean that the public may not receive commensurate value for certain applications of section 45Q—or, that section 45Q may be wasteful. This can be seen by comparing the PTC for wind, which may result in negative energy prices, to the coal-fired electricity plant that captures 80% of its GHG emissions. Whereas in the case of negative electricity prices we might wonder whether GHG-emitting activities are really being displaced, in the case of coal electricity with “free emissions” we might ask why we would incentivize new investment in emitting fossil-fuel technologies when carbon-free energy sources are available.

One could argue that any ton of coal sequestered by the coal-fired plant should be entitled to a Pigouvian subsidy equal to the social cost of carbon. However, this argument would assume that the government has an inherent interest in making coal-fired electricity plants more profitable—the effect of section 45Q as a production tax credit—not in displacing GHG emissions from power production. If the latter were the case, the fact that the coal-fired plant produced any emissions should be compared to the displacement potential afforded by all power producing options, including carbon-free wind and solar power.

Just as a PTC for wind should arguably only be available for positive-priced sales, so too should the credit for sequestered carbon in connection with a GHG-emitting activity be limited to the actual displacement of GHG emissions associated with the activity based on all comparative sources in the market. If this is not the case, the public may be forced to wastefully pay too much for GHG displacement while private, polluting taxpayers that are directly subsidized for mitigating GHG emissions are not directly held responsible for related GHG emissions.

For example, as previously discussed, assuming the PTC was corrected to better represent positive displacement of GHG emitting power, the cost for displacing or mitigating emissions via the PTC for wind would cost $16.29 per ton of CO_2e that would otherwise be emitted by coal and $39.13 per ton of CO_2e that would otherwise be emitted by natural gas in 2021. In contrast, section 45Q might be viewed as offering an incentive equal to $34.81 per ton of CO_2e displaced via coal-fueled electricity production utilizing CCUS. That’s more than double the incentive offered for replacing coal-powered electricity with wind; only the PTC for wind ensures carbon-free energy production.

If the two provisions are intended to achieve the 1.5C Goal, this structure is nonsensical—rather, both should entitle taxpayers to the same credit in an amount equal to the carbon price for demonstrable GHG mitigation or displacement. This requires revisions to section 45Q (as well as the PTC, and other provisions of the Code) to ensure that the Code only awards a credit for demonstrable net GHG displacement. In part, section 45Q already does this.

By requiring a life-cycle analysis demonstrating net GHG displacement in connection with commercial activities utilizing CCUS, the section 45Q credit addresses potentially wasteful and “free” GHG emissions in the context of Other Qualifying Commercial Activities. A similar life-cycle mechanism could be required for all section 45Q activities requiring GHG displacement in connection with the underlying activity—such as power generation in the case of a coal-fired electricity plant. Alternatively, a more industry-friendly credit may require a life-cycle analysis requiring demonstrable net displacement of GHG emissions for any activity in excess of certain thresholds in comparison to average emissions of the stated activity absent CCUS (i.e., such that 82% of all emissions must be captured for any given coal electricity plant) until our emission goals are realized, at which time the credit may start phasing out.

The Build Back Better Act employs an altered version of the latter. It would include carbon capture thresholds before a credit can exist for taxpayers engaged in electricity production; however, the House-passed version of this bill does not require any demonstrable net GHG displacement for taxpayers engaged in oil and gas production. From a purely Pigouvian perspective, these amendments still skew investment incentives based on varying emission profiles of qualifying activities. Consider that the 75% capture threshold for electricity producing taxpayers is the same for coal-fired plants as it is for natural-gas fired plants, when coal emits more than twice as much CO_2e as natural gas.

Consider also that maximum available PTC credits for wind (as extended, increased, and otherwise modified) under the Build Back Better Act appears to be equal to $0.03 per/kWh. If that is the case, then the revised PTC might be viewed as providing a credit equal to $27.15 per ton of CO_2e of displaced coal emissions or $65.22 per ton of CO_2e of displaced natural-gas emissions. Neither of these compares favorably to the $85 maximum credit that would be available under section 45Q reforms proposed under the Build Back Better Act available to coal-fired and natural-gas fired electricity producing facilities that employ CCUS to capture 75% of emissions.

Currently and based on proposed section 45Q reforms at the time of this Article, section 45Q improperly directs investors toward activities that perpetuate GHG emissions. These include fossil-fuel energy production. This improper signaling directly costs the public at large.

2. Section 45Q Does Not Adequately Address All Externality-Causing Factors

In comprehensively applying a Pigouvian subsidy meant to include a carbon price, no particular industry or activity should be comparatively favored. Yet, section 45Q does seem to structurally favor CO₂-EOR Qualifying Activities and Probably Regulated Activities in comparison to Other Commercial Qualifying Activities. Notably, and perhaps purposefully, these are the categories of activity that will increase returns to fossil-fuel producers and investors.

This may not only perpetuate emitting activities in an undesirable manner but also keep in place the infrastructure that caters to these activities in a way that even further entrenches our economy’s reliance on GHG emissions. As discussed above, this is made obvious when only Other Commercial Qualifying Activities require a life-cycle analysis demonstrating aggregate net displaced GHG emissions. A similar life-cycle analysis requirement would not constitute an undue burden on any other category of activity, as is evidenced by the very studies that demonstrate reductions in GHG emissions that may be possible through CCUS for oil and gas production or electricity production from fossil fuels.

Further, each class of activity should incorporate a life-cycle analysis demonstrating a mitigation of all GHG emissions. There is no reason to limit the section 45Q credit based on methane produced by decaying trash, as may be the case with respect to Other Commercial Qualifying Activities, and not consider methane leakage from oil and gas production or sulfur-dioxide released in connection with coal combustion when CO_2e creates a standardized scale for understanding the warming effect of each GHG.. Yet, section 45Q only considers the social cost of all GHG emissions on a CO_2e basis in the case of Other Commercial Qualifying Activities. Instead, in regulating to achieve the 1.5C Goal, section 45Q should apply to all GHG emissions based on their respective contribution to meeting (or failing to meet) the 1.5C Goal.

Similarly, whether or not sequestered or utilized carbon is an input in a production activity should not matter. At this point, it could be argued that this Article is missing the point in understanding the varied pricing of the section 45Q credit, as it would be “wasteful” if Other Qualifying Commercial Activities and CO₂-EOR Qualifying Activities were incentivized in a manner similar to Probably Regulated Activities. This argument is based on Other Commercial Qualifying Activities and CO₂-EOR Qualifying Activities using CO₂ as an “input” in a commercial enterprise. But this argument misses the destroyed forest for the strip coal mine in its place today.

Whether efficiencies can be achieved by pricing the section 45Q credit lower for Other Qualifying Commercial Activities and CO₂­-EOR Qualifying Activities, which use carbon as an “input,” is only relevant because there is no comprehensively applied carbon price in the economy. That is, coal-fired electricity plants and CO₂-EOR producers operate without taking a carbon price into account with respect to upstream or downstream emissions, as applicable. The distinction between “inputs” and “outputs” simply reinforces the market failure addressed by section 45Q, which is problematic. If instead a uniform section 45Q credit equal to the social cost of carbon were applied based on net CO_2e displaced, the public would receive commensurate value for the section 45Q credit regardless of the underlying activity.

3. Section 45Q Is Not Refundable, Creating Odd Results

The section 45Q credit is nonrefundable, meaning that it only has value to taxpayers to the extent it may offset taxable income. Section 45Q highlights the confusion created by relying on nonrefundable credits in the context of a Pigouvian subsidy meant to displace GHG emissions.

Absent state regulatory policies (which the federal government cannot really depend on) or a comprehensive carbon price, it is not even clear how A-Commercial Activities could possibly utilize the nonrefundable section 45Q credits. This is because there is no related upstream or downstream commercial activity generating revenues to be offset by nonrefundable section 45Q credits with respect to A-Commercial Activities. Nonetheless, if there is a social benefit to burying carbon, it stands to reason that A-Commercial Activities themselves should be considered a business in which the public might want to invest based on returns associated with mitigating climate change.

Further, prevailing tax-equity structures (discussed below) do not benefit these activities, as there is no operating cash flow to pay the operator or property owner. Even flexible transfer rules provided in the statute and the section 45Q regulations do little to address this issue, as the parties that may receive the transferred section 45Q credits include taxpayers that dispose of the Qualified CO, utilize Qualified CO in Other Qualifying Commercial Activities, or use the Qualified CO in CO₂-EOR. The latter two categories are excluded from this category of activity by definition, and transferring the credit to a separate entity that disposes of the Qualified CO in secure geological storage still requires that third-party entity to engage in other commercial activities. If an entity must engage in activities other than A-Commercial Activities to generate revenue with which to offset the section 45Q credits, then query whether the subsidy is properly viewed as a subsidy of those other, potentially less desirable, commercial activities. In regulating to mitigate or displace GHG emissions, there is no need to tie section 45Q to any other commercial activity.

As Professor Michelle Layser has written, nonrefundable regulatory credits relating to GHG-displacing activities, such as the PTC for wind, have also resulted in unnecessarily high transaction and capital costs. These same arguments apply to section 45Q. For example, commercial solar, wind, and CCUS facilities require considerable up-front capital expenditures, which typically involve large amounts of financing and which are also accompanied by large depreciation deductions (or tax losses) in an amount that may dwarf any initial revenues. In other words, most wind and solar operations, and likely CCUS operations, will not initially have any taxable income that can be offset by nonrefundable tax credits.

These attributes have contributed to the use of tax-equity investment structures. In short, tax-equity investors invest in projects that generate nonrefundable tax credits due to their ability to take advantage of such credits. The pool of possible tax-equity investors is relatively small and comprised mostly of large banks and other financial institutions that have large amounts of reasonably predictable taxable income. The pool of investors declines during economic recessions when even stable institutions may face large losses.

A limited pool of investors and high transaction costs created by complex tax-equity investment structures has led to a bias toward large projects expected to generate significant credits and higher-than-normal returns to tax-equity investors. High transaction costs associated with structuring tax-equity investments cannibalize amounts that could be directed toward operational investments.

Additionally, estimates suggest that tax-equity investors may require rates of return that are seven to ten percent higher than comparable debt products in more widely accessible markets. Making the section 45Q credit refundable would avoid these increased transactional and capital costs. While doing so could increase utilization and related costs of these subsidies, this is only a problem if these subsidies continue to incentivize proxies for GHG displacement. By revising these subsidies to specifically incentivize GHG-displacing activities, any increased cost would still represent commensurate value to the public.

Further, it is important to note that avoided transaction and capital costs potentially have distributional consequences. If a Pigouvian subsidy results in excess transaction and capital costs (or must necessarily fund some other commercial activity), then less of the incentivized activity occurs. This makes GHG-displacing activities more expensive to the public. In this instance, the excess cost to the public is paid to the limited pool of high-income financial institutions that can take advantage of nonrefundable credits, and to the banks and lawyers who benefit from increased transactional fees. Although this transfer of wealth does not necessarily indicate that wealthy individuals disproportionately benefit from nonrefundable regulatory credits such as those under sections 45 and 45Q, there is at least some reason to believe this may be the case. Regardless, the regressive nature of climate change is such that the failure to deliver commensurate value to the public for any expense paid to mitigate or displace atmospheric GHG emissions will be borne primarily by low-income and marginalized groups that will be disproportionately affected by climate change. The nonrefundable nature of section 45Q might be considered regressive as a result.

While the transferability of the section 45Q credit in certain circumstances may alleviate certain of these issues, the failure to make the credit refundable raises additional issues. For example, taxpayers normally entitled to the credit may elect to allow a third party that disposes of Qualified CO or utilizes the Qualified CO, such as through CO₂-EOR, to take the section 45Q credit, and thereby avoid the use of more costly tax-equity structures in certain cases. As discussed above, however, this does little for A-Commercial Activities.

Further, neither section 45Q nor the section 45Q regulations expressly indicate whether compensation paid (or reduced compensation for services owed) in exchange for electing to allow a third-party taxpayer to take section 45Q credits constitutes gross income under the Code. It seems difficult to imagine that the election in section 45Q(f)(3) is intended to result in any taxable income or deductions, and it is worth noting that the word “transfer” (or a different exchange synonym) is not used. Nonetheless, a taxpayer would assumedly be compensated for allowing a third party to take these credits, including through increased prices for the captured Qualified CO or decreased pricing for disposal services.

By not explicitly carving out implicit payments when exercising this election, the provision suggests that any amounts paid (including discounts for services) for the transfer of these credits could well be taxable. While it should theoretically not matter to the government as long as income and deductions net to zero, timing differences could occur based on taxpayer profiles. If the desire is to allow more flexibility in “transferring” credits, a simple clarification should be made on this point, carving out these transactions from section 61. Alternatively, if the pool of credit beneficiaries is expanded to third-party taxpayers connected to the CCUS activities, simply making the credit refundable would avoid any of these complications.

4. Section 45Q Is Bound by False Time Limitations

If the plain language of section 45Q is indicative of its regulatory purpose, the fact that section 45Q is a temporary provision is noteworthy. This is true both as it applies with respect to any facility seeking to qualify for the credit and with respect to the 12-year duration of the credit for any qualifying facility. Is section 45Q regulating energy markets and GHG-emitting activities to address a temporary problem? Not if the problem relates to the social cost of carbon.

There is no reason for Pigouvian subsidies meant to incorporate a carbon price to sunset or expire. Likewise, it does not make sense for a Pigouvian subsidy incentivizing any particular externality-displacing activity at a particular externality-displacing facility to last a limited number of years. While the social cost of carbon may change, the existence of atmospheric carbon as an externality is not a temporary societal problem.

CCUS activities are particularly problematic for subsidies that do not align with Pigouvian principles. This is because they create ongoing operational expenses in addition to any underlying production activities beyond the 12-year duration of the section 45Q credit. Unlike solar or wind generating facilities that represent fixed investments for producing future revenues, CCUS activities may only represent increased costs beyond the 12-year duration of the section 45Q credit absent some other regulatory regime requiring carbon mitigation or reduction. Assuming some other regulatory regime does require lower GHG emissions in connection with industrial processes and energy production on the scale proposed in President Biden’s American Jobs Plan (but without the nontax subsidies contemplated in that regime), who will bear these increased costs?

Assuming some decoupled regulatory regime is not in place, will taxpayers just stop engaging in CCUS? Might this end up in undesirable wealth transfers to utility investors at the expense of consumers in a regressive manner no differently than any concerns about a carbon tax (without the added benefit in a carbon tax of visible revenues to redistribute as discussed below)? In any event, the artificial timing restrictions included in section 45Q undermine the effectiveness of section 45Q in regulating to achieve the 1.5C Goal. They should be reconsidered.

5. Section 45Q Is Limited to Domestic Borders

The value in displacing or mitigating GHG emissions is the same domestically or abroad. Nonetheless, section 45Q only applies to domestic activities. Without a comprehensive carbon price in the economy, it is arguably unreasonable to apply section 45Q to international activities. However, if section 45Q existed in combination with a carbon tax that applied the same carbon price, the border adjustments that should accompany the carbon tax might recognize international CCUS activities or other carbon-mitigating activities if appropriate adjustments would be merited for imported goods.

D. Broader Implications—Where Is the Carbon Tax?

At this point, it may be fair to ask: “Why should we care that section 45Q, by itself or within the framework of the Code’s regulation of energy markets and GHG-emitting activities, is structurally flawed in the context of the 1.5C Goal of lowering GHG emissions in line with President Biden’s objectives?”

We should care because section 45Q and the rest of the Code’s regulation of energy markets and GHG-emitting activities is an ineffective, entrenched transfer of wealth to a limited pool of investors in the face of a regressive problem that cannot deliver commensurate value to the public in discouraging or mitigating the effect of atmospheric GHG emissions. Section 45Q and these other provisions of the Code thus represent inefficient regulation in advancing the 1.5C Goal. The fact that section 45Q is poorly designed to further the 1.5C Goal is particularly frustrating given that CCUS activities have no apparent regulatory purpose other than to displace GHG emissions.

Perhaps the most glaring issue with section 45Q is that it is missing its regulatory soulmate: a comprehensive carbon tax. The natural result of comprehensively applying a carbon price in the economy through a carbon tax is simultaneously acknowledging that the capture, and permanent sequestration or utilization of atmospheric GHGs, has a value to the public in an amount equal to the levied carbon tax. Whether section 45Q should be thought of as the equivalent of a PTC, or whether it should apply differently with respect to “inputs” and “outputs,” would be irrelevant when the social cost of carbon is uniformly internalized throughout the economy via a carbon tax.

Similarly, with a comprehensive carbon tax in place, it follows that section 45Q should be permanent with respect to when a facility may qualify or whether any given facility may claim the credit. Further, CCUS activities incentivized by section 45Q or equivalent might be incorporated into any appropriately border-adjusted carbon-pricing regime and there would be less “cost” concern around making section 45Q credits permanently refundable, within a comprehensive carbon-pricing regime. This is because section 45Q could be revised to represent the exact inverse and complement of the comprehensive carbon tax. Indeed, if we are explicitly acknowledging that GHG displacement through CCUS should be subsidized through section 45Q—and it is good policy to do so—it almost seems unreasonable that a carbon tax has not yet been adopted.

If the adoption of a carbon tax is not politically feasible, then the Code requires substantial revisions to ensure that various tax incentives like section 45Q work together to create a clearer carbon price for investors. That is, section 45Q should be revised to encourage technologically neutral displacement of all GHG emissions on a refundable and permanent basis. Further, the PTC of section 45 and carbon sequestration credit of section 45Q should provide the same displacement-focused subsidy. Incentives encouraging R&D into GHG-displacing technologies and investment into GHG-displacing infrastructure should remain in the Code in addition to (and not as substitutes for or components of) these displacement-focused incentives. This is generally consistent with proposals in the Senate to consolidate, expand, and simplify credits meant to encourage atmospheric GHG displacement as well as calls to repeal all fossil fuels subsidies; however, even these proposals should consider the observations in this Article to better displace GHG emissions.

Importantly, implementing a carbon tax or revising section 45Q and similar subsidies in the Code has distributional effects that should not be ignored in the context of climate change. For example, one key political argument against implementing a carbon tax relates to its potentially regressive effects. Greater attention to this argument is necessary when considering any revisions to section 45Q or the broader reforms being contemplated by the Biden Administration or Congress inside and outside of tax, as well as the regressive effects of climate change itself.

IV. Tax, Redistribution, and the Regressive Problem of Climate Change

President Biden seems to have subscribed to the idea that a carbon tax may disproportionately burden low-income and marginalized Americans. Because the President has promised not to raise taxes on individuals making less than $400,000 per year, a carbon tax is not a part of his American Jobs Plan. Although the President is right to focus on distributional effects resulting from his sweeping climate agenda, further consideration should be given as to whether a carbon tax with a progressive dividend might actually lower the current carbon burden already disproportionately borne by low-income and marginalized Americans.

Specifically, given the regressive nature of the climate-change problem and the redistributive capabilities of the Code, dismissing any potentially effective regulatory tool in addressing climate change because of its potentially regressive effects is premature. Rather, because of the redistributive capabilities of the Code, a comprehensive carbon tax might result in a transparently progressive solution with fewer administrative burdens than other alternatives that more appropriately reflects the current burden of climate change. This is true whether the alternatives involve relying solely on federal tax expenditures, federal regulation outside of taxation that raises the costs of private actors without simultaneously raising government revenues, or state regulatory options.

If a carbon tax is a political impossibility, and the President remains committed to creating a more equitable recovery, then changes to the Code remain an appropriate way to explicitly address the distributional impacts of climate change and regulations meant to combat it. These might involve an explicit reimbursement of current climate burdens likely to be disproportionately borne by low-income households.

A. Our Baseline: We Already Have a Regressive Carbon Tax Due to Climate Change

Any statutory or regulatory action—including a carbon tax—that might seriously further GHG-emission reduction goals cannot be dismissed as regressive without acknowledging what we know for certainty today: climate change, caused (in substantial part) by human action, is implicitly a form of regressive taxation. Consider anew that GHG-emitting activities benefit (and have always benefited) from a market failure that allows GHG-emitting activities to be less expensive than they should be. Correcting this market failure does not provide an unfair disadvantage to emitters. Rather, failing to correct the market failure benefiting GHG-emitting activities on a comprehensive basis can be viewed as an inappropriate subsidy of such activities (absent some other comprehensive regulatory regime). This is an inherently regressive subsidy because high-income households are responsible for an average of at least 25% more GHGs than low-income households.

The flip-side of this implicit subsidy is the very real social cost imposed. Failing to adequately regulate GHG emissions is expected to cost the U.S. economy at least $8 trillion by 2050. Climate-change costs directly impact the financial bottom-line of American households in a manner that does not reflect each household’s contribution to these financial impacts. There is no explicit policy in tax—or any other regulatory regime in place today—that is meant to ensure that these costs are borne in an intentional manner. This represents a policy choice to levy these costs—similar to any tax—on the American public in lieu of taking away the subsidization of GHG-emitting activities, primarily to the benefit of wealthy households.

Let’s consider a very rudimentary example. The National Oceanic and Atmospheric Administration tracks billion-dollar weather and climate disasters. These costs vary year by year. From 2016–2020, average annual U.S. climate disaster costs totaled $128.3 billion per year. From 1980–2020, these costs only averaged $48.3 billion per year (CPI-adjusted). Very conservatively, we might assume that the difference between these amounts—$80 billion dollars per year—could be interpreted as the real-time cost of climate change exacerbated weather events. The current incidence of these storm costs might imply a carbon tax of $241 per person or $662.50 per household in the United States based on recent census numbers.

These storm-related costs are merely meant to represent a very narrow subset of current climate-change-related costs creating a present “incident of carbon taxation.” This tax is levied without consideration of any taxpayer’s ability to pay. Simplistically, we might say that it is essentially a flat tax. This alone makes it regressive. However, we are also seeing in real time that this tax is disproportionately borne by low-income and marginalized communities—often in targeted geographic areas. This trend is expected to continue. Right now—without any action by Congress—an implicit, and regressive, carbon tax already exists.

This simplistic example is not meant to be comprehensive. It takes inflation into consideration but ignores the growth of the U.S. economy. It also does not take into account the federal role in addressing climate change costs and disasters—such as through currently regressive forms of Federal Emergency Management Act relief or how the overall progressive nature of the Code might impact this analysis if we assumed that taxation, generally, was meant to fund climate change responses.

Nonetheless, currently there is no clear indication of how tax policy (or other policy that might be meant to directly regulate GHG emissions in the economy) impact the overall progressive nature of the Code in light of climate change. Similarly, there is no redistributive compensation in the Code for failing to properly regulate carbon emissions. To the contrary, this regressive policy failure makes the federal tax system less progressive.

It is here that a theoretical distinction might be made. The implicit carbon tax discussed refers to the current incident of taxation as a result of failing to previously regulate carbon externalities. This is a tax borne of our current reality that will not immediately dissipate should a carbon tax be put into place. Proper regulation of carbon through the Code might then contemplate redistribution as necessary to correct the currently regressive carbon tax, in addition to the carbon tax necessary to properly price carbon emissions put into the atmosphere today. Combining these policies might look very much like the carbon tax with dividend discussed below and previously suggested by others.

So, when we talk about whether a carbon tax is regressive, context matters. In the words of well-known economist William Nordhaus, we cannot state that regulation that addresses climate change is regressive without asking, “compared to what?”

Right now, low-income and marginalized groups are disproportionately paying for each ton of GHG emitted into the atmosphere, thereby contributing to rising sea levels, exacerbated storms, human migration, and food insecurity. Predictably, this form of carbon tax is not slowing GHG emissions because wealthy taxpayers are not bearing a proportionate burden for the tax, and also because they are subsidized for behavior that creates the tax in the first place. Current tax policy that has very little discernable effect on GHG emissions perpetuates this implicit carbon tax and its regressive incidence.

B. Tax Is a Redistributive Regulatory Tool

The extent to which tax policy should be redistributive by design is a controversial topic. The fact that regulation through tax has redistributive effects is not, however, debatable. Tax policy should seek to ensure that any intended redistributive effects are actualized in light of unintended consequences or related regulatory choices. The same is true for tax regulation of GHG-emitting or displacing activities.

Based on the above analysis, the implicit (and regressive) carbon tax that is already being borne by low-income and marginalized groups might act to make the Code less progressive. A related inquiry might ask how nontax federal regulations meant to promote or deter GHG emissions, when viewed as substitutes for regulating GHG emissions through the Code (such as through a carbon tax), should be viewed in light of making the Code more or less progressive. As discussed below, there is no reason to believe that GHG regulations outside of tax will have less regressive effects than a carbon tax.

On the other hand, a tax is well positioned to progressively redistribute income and wealth affected by climate change and related regulatory policies. This is true because the Code could be a means through which low-income and marginalized groups are compensated for their disproportionate burden in bearing climate-change-related costs. Most obviously, redistributive policy might involve replacing the current implicit carbon tax with an explicit carbon tax and accompanying carbon dividend to more appropriately price externality-causing actions, as well as to ensure that the current implicit carbon tax is borne consistent with the ability to pay.

Absent a carbon tax, one could alternatively imagine tax policy that seeks to make the Code more progressive by creating a refundable subsidy for low-income and marginalized taxpayers based on their disproportionate financial burden with respect to climate change. This policy, combined with more efficient regulation through the Code that effectively deters GHG-emitting activities to help to curb climate change might also be considered progressive redistribution, as the costs of climate change itself are regressive.

C. A More Detailed Look at the Redistributive Effects of Regulating GHG-Emitting Activities Through Tax

Arguments against the adoption of a comprehensive carbon tax or the funding of true Pigouvian subsidies (i.e., subsidies that are equal to the social cost of carbon based on demonstrated net GHG displacement and that are technologically neutral, refundable, and permanent) require a closer look based on the current realities of climate change. It is true that the immediate effect of a carbon tax is inherently regressive. A carbon tax does increase prices associated with carbon-emitting activities, such as fossil-fuel generated electricity. Increased costs will likely be passed along to consumers. If so, this would represent a disproportionate burden on low-income individuals. Potentially increased costs to implement true Pigouvian subsidies if a carbon tax is not feasible, may also be considered in conflict with other potentially progressive forms of spending through the Code. This may pit egalitarianism today against progressive results in the distant future.

Recent economic literature exploring whether a carbon tax is inherently regressive does challenge the simplicity of these conclusions, however. Some recent studies go as far as to suggest that a carbon tax may not be regressive, even without an accompanying redistributive policy, when taking into account the fact that social welfare programs based on consumer price indices may simultaneously increase due to the carbon tax. Additionally, a carbon tax may not necessarily be entirely passed on to consumers, and amounts not passed on to consumers are more likely to be borne by capital rather than labor for GHG emitters. This increases the progressivity of a carbon tax.

Importantly, the many studies that have determined that a carbon tax may be regressive rely on a premise that does not exist. That is, they fail to take into account the increasingly regressive results of climate change over time. In any case, a carbon tax assessed on carbon used accompanied by appropriate redistributive policies to address the regressive incidence of the existing implicit carbon tax may be inherently less regressive than today’s base case scenario.

Ignoring the incidence of the implicit tax on carbon today, and focusing only on the immediately regressive nature of any carbon tax going forward, also completely ignores the redistributive design available to tax policymakers. A comprehensive carbon tax coupled with redistributive policies that progressively “spend” revenues generated by a carbon tax and correct for the incidence of today’s implicit tax on carbon is far less likely to be regressive than current policy.

For example, a carbon tax at $49 per ton of CO_2e could conservatively raise near $144 billion annually. These funds could be used to fund some combination of a carbon dividend, reforms to otherwise make the Code more progressive (such as by reducing regressive payroll taxes), or reinvestment in green initiatives to help mitigate the regressive potential of climate change.

Recent scholarship indicates that a carbon dividend would result in particularly progressive results, and this use of funds is also theoretically justified as it can explicitly correct for the implicit carbon tax already disproportionately burdening marginalized households. Consider that the average low-income household is responsible for around 18 tons of annual CO_2e emissions in the United States based on relatively recent estimates. A $50 per ton carbon tax might result in an annual carbon tax burden of around $900 for such a household. If that household is also likely to disproportionately bear an implicit carbon tax of between $662.50 and $7,700 this year, structuring the carbon tax levied in the current year so that it is transparently redistributed to low-income households is only fair.

It is worth noting that support exists for the proposition that these funds would not necessarily result in offsetting, increased emissions. Instead, a progressive carbon tax dividend, coupled with a comprehensive carbon price in the economy, may actually result in more sophisticated “investment” by low-income households and increase GHG displacement. What’s more, following the stimulus checks provided as part of COVID-19 relief, and the monthly payment implementation of the reformed Child Tax Credit, the federal government is obviously able to pay out dividends to the American public on a routine basis. These practices can and should be utilized to fund a green dividend from the revenue generated by a carbon tax as a progressive solution to addressing climate change and the current incidence of the implicit carbon tax that exists today.

This is the approach Canada has taken; however, this Article should note that low initial carbon prices and other regulatory preferences for carbon emitting activities (and imports) have not yet resulted in meaningful reduced emissions. If nothing else, this demonstrates the comprehensive lens that must be taken toward carbon pricing within large, developed economies.

In the event that a carbon tax is not politically feasible, particular care should be taken in evaluating arguments against expanded Pigouvian subsidies on “progressive grounds.” Reasonable minds might differ over whether regulating to achieve the 1.5C Goal may force policymakers to choose between other progressive policies today versus benefiting future generations. To the extent more money invested in regulating to displace or mitigate GHG emissions today results in less money available to achieve progressive goals, this might result in a subsidy of future generations at the expense of present distributional inequalities. This argument is based, in part, on the assumption that future generations will be wealthier and can thus be more “progressive.” The potential costs of climate change may conflict with this assumption, however. Query also whether we should separately discount the likelihood of future progressive policies.

In the same vein, this argument ignores the regressive nature of spending provisions currently included in the Code today (as well as the regressive incidence of the current implicit carbon tax). This includes the necessarily regressive—and implicit—carbon tax discussed above, or the nature of any inefficiency in provisions such as section 45Q that may be meant to address externalities resulting in climate change. That is, to the extent subsidies meant to encourage GHG displacement result in excessive capital and transaction costs or create skewed investment decisions that perpetuate investments in GHG-emitting activities by implying multiple “carbon prices,” these subsidies are actually funding a transfer of wealth to a limited pool of taxpayers in excess of the value of any societal benefit associated with the transfer.

Because the costs of climate change itself are regressive, any inefficiency in regulation designed to curb climate change is inherently also regressive. If subsidies that are meant to result in the displacement or mitigation of GHG emissions incentivize the displacement or mitigation of only 0.9 tons of GHG emissions when the subsidy is priced at the social cost of 1 ton of GHG emissions, then the public may not be realizing an appropriate return on its investment. In the context of climate change—a regressive problem—the cost of this under-realized, and thus inefficient, investment is borne by low-income or marginalized groups. Increased costs from correcting current inefficiencies may compete with other progressive spending provisions today, but these effects should be offset to some extent by the benefit in removing the regressive burden of current inefficiencies.

D. Redistributive Effects of Regulating Without a Carbon Tax

Regulation outside of tax policy should be maintained because of a variety of harms that a carbon tax is not well designed to address and because of the urgency of climate change. But the choice to rely principally on regulation outside of tax policy has distributive implications that cannot be ignored in the context of the problem of climate change or the President’s goal to avoid regressive burdens on households making less than $400,000 annually.

Whether carbon emissions are taxed or emission limits are adopted in the form of fuel-efficiency standards, electricity-emission caps, or trade tariffs, the regulatory effect is to make GHG emissions more expensive, thereby discouraging GHG emissions. These costs may be passed entirely on to consumers through direct exchange or as a result of changing market dynamics, similar to carbon pricing in any relevant market. So, while carbon taxes may make GHG emissions more expensive and these costs may be passed on to consumers, the same is also true for any other federal or state regulation that limits GHG emissions.

Let’s turn back to section 45Q and CCUS for a moment to demonstrate how tax policy might relieve or reinforce some of these regressive effects. Assume that following the imposition of strict emission caps outside of a carbon tax, a coal-fired electricity plant invests in CCUS technology to bury related carbon emissions. Absent a drastic change in the way utilities charge customers for electricity, either explicitly or implicitly (such as through an open electricity market) consumer rates allow the plant to recoup the costs of its CCUS investment. For the first 12 years of operations, the plant might not pass any costs onto consumers if portions of the capital investment were refunded as a result of credits under section 45Q. Consequently, section 45Q might be viewed as a way to help keep costs lower for utility customers.

After the first 12 years, the continued operation and maintenance of its CCUS facility, along with the compliance with any nontax regulations, will result in increased costs to the coal-fired plant. These costs are in addition to the costs that would normally be associated with running the plant, as compared, for example, to a wind farm for which the costs of producing carbon-free energy never represent an increased operating cost. The coal-fired plant might then increase its costs of service in a manner that disproportionately and negatively impacts low-income taxpayers. Alternatively, it may choose to stop using CCUS at that plant and seek to reduce emissions elsewhere (where section 45Q might still be available) to meet an overall emissions cap. Regardless, the plant will make this decision based on whatever maximizes its return and without any regard to consumer costs (and distributive effects) or the environment, other than as necessary.

Similarly, the proposed border tax adjustment in connection with infrastructure spending in the United States highlights the incongruity behind the idea that regulation outside the Code will not increase consumer expenses. The proposal would tax (or impose tariffs) on importers to ensure that the costs borne by domestic producers in connection with other federal, state, and local regulations in achieving green energy goals are also borne by importers. The proposal is to put importers on an even economic footing with domestic producers. Some argue that such a proposal will not be regressive because it will only apply to a small subset of petroleum, gas, coal, steel, aluminum, iron, and cement producers. However, the correct acknowledgment that costs on these items may be passed on to consumers in a regressive manner necessarily ratifies that domestic producers will also have increased costs—which absent some other form of regulation (in addition to the rules around GHG reductions) will result in increased costs passed on to consumers.

As a final example, consider that the failure by the federal government to comprehensively regulate GHG emissions, such as through a carbon tax, has resulted in a patch-work approach to carbon regulation throughout the states in a potentially regressive manner. For example, California has adopted a Low Carbon Fuel Standard (LCFS). Essentially, the LCFS sets annual carbon intensity standards for any transportation fuel produced (such as by refiners), sold, supplied, or offered for sale in California, taking into account the GHG emissions associated with all steps of producing, transporting, and consuming a fuel. LCFS credits may be generated by producing fuels that emit fewer emissions compared to an annual standard or by removing atmospheric carbon through CCUS; trade involving high-emission fuels results in LCFS deficits, requiring the involved parties to purchase LCFS credits on an open market. The purchase of a full credit is generally equal to the right to emit 1 ton of CO_2e.

As a result of perceived consumer harm via increased fuel prices, a price cap of $200 (in 2016 dollars) per LCFS Credit was formally adopted in 2019, subject to increase by a consumer price index inflation adjuster. While California has implemented some measures to reduce the “regressive” nature of the LCFS, in addition to the $200 price cap, the fact that the LCFS generates negligible state revenues complicates ensuring progressive results. Indeed, state policies tend to be less progressive than the Code. Perceived regressive effects in California have helped defeat similar measures in neighboring, progressive states. By failing to regulate a comprehensive carbon price at the federal level, including through a carbon tax, the federal government is potentially forfeiting its right to ensure progressive policies.

This doesn’t mean that regulation outside of federal tax is a bad thing; much of it—including the LCFS—is absolutely necessary to advance our generational fight against climate change. It simply means that we should not turn a blind eye in tax regulation with respect to redistributive effects, particularly when we are talking about an inherently redistributive problem like climate change. Indeed, recent research from Professor Gilbert Metcalf and others reinforces the conclusion that nontax federal regulations meant to curb GHG emissions currently have regressive effects. In contrast, a well-designed carbon tax is likely to be more progressive than nontax regulations designed to displace GHG emissions. It is not an exaggeration to say that the absence of comprehensive carbon regulation via a tax is therefore likely to be regressive tax policy.

E. We Can and Should Explicitly Address the Social Cost of Carbon and Its Redistributive Effects

When there is honesty about the redistributive impacts of environmental regulation outside of tax and the incidence of an implicit carbon tax that exists today, the transparency afforded by implementing a carbon tax with a progressive dividend as one critical means of regulating GHG emissions in a progressive manner becomes evident. The choice as to how progressive (or regressive) GHG-emission regulation is does not stop with the determination that a carbon tax is, without proper design or taking into consideration the regressive nature of the problem today, potentially regressive. Unlike regulation outside of tax, one clear benefit of a carbon tax is that it can raise revenues to correct redistributive effects in a clearly progressive and transparent manner.

That is not to say that direct revenue collection is a necessary component of environmental regulation. Progressive increases to the individual income tax could fund Pigouvian subsidies (like a revised section 45Q) so as to avoid the costs that are borne by the public in a “regressive” manner, as is reflected in President Biden’s Build Back Better Act. It is hard to imagine that any subsequent attempt to lower tax rates (as was done in the 2017 TCJA) would not focus on “competition” concerns, however, as opposed to the intended redistributive effects for GHG-regulating activities.

A carbon tax, on the other hand, is transparent in its effect, and can be designed to be transparent in its redistributive capabilities. Indeed, transparency is critical for political support. Canada, for example, currently employs a highly progressive model for this type of tax and dividend program but is continuing to struggle with public awareness around the progressivity—or existence--of the benefits. Recognition of redistributive effects caused by other critical climate regulations and the current implicit carbon tax could also be incorporated to determine the overall progressivity of the dividend (i.e., what income brackets might receive what portions of the funds in what years).

So, what to do? The literature on designing and implementing a carbon tax is voluminous and convincing, and this Article only notes that a carbon tax coupled with a progressive carbon dividend may be the simplest and most transparent way to regulate activities toward achieving the 1.5C Goal. That’s a good thing, particularly when we consider that the lack of effective regulation is the equivalent of a regressive carbon tax today.

If enacted, a carbon tax should represent the single carbon price within the Code. For example, a carbon tax would clearly require that incentives for fossil-fuel production be repealed unless the carbon tax is simultaneously raised to counter these effects. Such an unnecessarily complicated and potentially redistributive exercise should be avoided. By the same token, production-based incentives, such as the PTC in section 45, would be unnecessary with the adoption of a comprehensive carbon tax. The continuation of such incentives would only distort the actual carbon price under the Code. On the other hand, an appropriately tailored section 45Q would be given explicit regulatory purpose in the context of a comprehensive carbon tax, as previously discussed.

V. Conclusion

Acting as though we must make a choice between regulating to compel GHG displacement consistent with the 1.5C Goal and progressive policy has resulted in regressive policy that fails to further the 1.5C Goal. It doesn’t have to be this way. A comprehensive carbon tax can simultaneously further the 1.5C Goal and create progressive results.

If comprehensive reform is impossible, we should still consider ways to improve the Code to simultaneously further the 1.5C Goal and address the fact that climate change is already a regressive problem that will only become more regressive if we fail to meet the 1.5C Goal. Because the Code is well suited to both price externalities caused by GHG emissions through Pigouvian taxes or subsidies and redistribute wealth, the Code is a good place to address both of these policies. Revisions to the subsidy for CCUS in section 45Q proposed in this Article are illustrative of the reforms necessary to help achieve both these aims. For example, section 45Q should be revised to be valued at the social cost of carbon based on CO_2e permanently displaced from CCUS activities on a technologically neutral, refundable, and permanent basis. Similar provisions, such as the PTC for wind, can be revised accordingly. And the incident of the implicit tax on carbon should be separately addressed by intentional and transparent redistributive policies. Through these reforms, we can accelerate a transition to a carbon-neutral economy so as to ensure that all taxpayers—not just small pockets of investors—receive a commensurate return on their investments in displacing GHG emissions.

These goals are lofty. But when compared to the $54 trillion cost of climate change even if the 1.5C Goal is achieved, and the exponentially worse consequences if it is not, they seem reasonable by any measure.

Appendix 1: Glossary of Terms

1.5C Goal–The international goal to limit global warming to 1.5C degrees in excess of pre-industrial temperatures.

A-Commercial Activities–Qualifying activities under section 45Q that involve directly capturing only CO_2­ from the atmosphere and the subsequent secure geologic storage of such captured CO₂ without any related commercial activities.

Carbon Price–The amount equal to the externalized social cost of GHG emissions.

CO₂-EOR Qualifying Activities–Qualifying activities under section 45Q that involve utilizing captured carbon-oxides, from an emitting source or directly from the atmosphere, as a tertiary injectant in oil and gas production.

CCUS–Carbon capture, utilization, and sequestration.

GHG emissions–Greenhouse gas emissions.

Other Qualifying Commercial Activities–Qualifying activities under section 45Q that involve utilizing captured carbon-oxides from an emitting source or directly from the atmosphere (1) by the fixation of such carbon-oxides through photosynthesis or chemosynthesis, such as growing of algae or bacteria; (2) by the chemical conversion of such carbon-oxides into a material or chemical component in which such carbon-oxides are securely stored, such as a synthetic fuel or a plastic; or (3) for any other purpose for which a commercial market exists (other than with respect to CO₂-EOR Qualifying Activities).

Probably Regulated Activities–Qualifying activities under section 45Q that involve capturing carbon-oxides from an emitting source, such as a coal-fired electricity plant, and the subsequent secure geologic storage of such captured CO₂.

Appendix 2: Regulating Toward a Common Purpose

Considerable attention has been paid in prior scholarship as to how other regulatory goals relating to energy markets and GHG-emitting activities, such as promoting national security, encouraging economic growth generally, and deterring rent-seeking behaviors of stock-fuel natural resource holders (sometimes referred to as Hotelling’s Theory), might compete with regulations that address externalities resulting in global warming caused by GHG-emitting activities.

Fossil-fuel advocates may argue that subsidies for domestic fossil-fuel production benefit national security by reducing our reliance on foreign resources and providing stable fuel sources resilient against international supply shocks and power interruptions. These arguments ignore the fact that the perpetuation of fossil fuels in fact strengthens authoritative political regimes that are resource rich when oil is subject to international pricing. In contrast almost every country, and the United States in particular, may stand to gain from more localized power markets based on renewable resources.

These arguments also ignore the immediate and increasing national security threats created by climate change that are recognized by the federal government, including increased severe weather events (and related troop movements), food and water shortages, pandemics, and mass human migration. Similarly, arguments focusing on the negative economic impact of regulating GHG emissions typically focus only on the costs of lost economic activity from such regulation and ignore the economic gains from promoting more healthy, sustainable, and technology-driven industries, as well as the $54 trillion or so that the global economy is expected to lose as a result of climate change. Both sets of arguments ignore national security and economic growth concerns around an “old and tired” fossil-fuel oriented national infrastructure that would benefit from a carbon-neutral overhaul.

Appendix 3: Addressing R&D and Infrastructure Investment Externalities

Incentivizing investment in infrastructure necessary to displace GHG-emitting activities, as well as R&D into marketable solutions to correct for prior market failures or to displace GHG-emitting activities, are worthwhile aims in tax policy that should be addressed in addition to price externality-causing behaviors. Making GHG-emitting activities comparatively more or less expensive based on their externalized costs does not address the additional capital and large-scale coordination needed to reverse at least 100 years of failing to price externalities caused by carbon—and more than that, 100 years of positively subsidizing many carbon-intensive activities like oil and gas production and consumption. These past failures have resulted in an entrenchment of infrastructure that is focused on serving fossil fuels. Large amounts of capital investment are necessary to “correct” infrastructure so that it may service renewable sources and other GHG-displacing activities.

Accordingly, if we treat tax policy meant to force taxpayers to internalize otherwise externalized costs of GHG-emitting activities as including (or substitutes for) incentives meant to encourage investment in GHG-displacing infrastructure, this policy is likely to misprice the costs of the externality being addressed and improperly disadvantage investment in GHG-displacing activities. A separate tax incentive lowering the cost of capital for infrastructure projects enabling GHG-displacing or mitigating activities makes sense in addition to (not separate from) regulation regarding externalized social costs of carbon in furtherance of the 1.5C Goal.

Similarly, R&D may lead to technological advancements that reduce the costs associated with addressing any particular externality, and which may also lead to further innovation and benefits for other externalities or goals entirely, in each case resulting in increased returns to the public. Without some form of compensation, firms may not have sufficient incentives to engage in R&D if gains related to that R&D are not guaranteed to accrue to the party engaged in the R&D. Providing tax incentives for R&D, as opposed to traditional protections like patent protection, may remove barriers to further innovation, allowing society to share in the returns generated by R&D for a relatively low cost.

Because technological innovation as part of the commercial process may produce technological advances necessary to meet emission reduction goals, and the R&D credit in section 41 of the Code remains overly complicated and difficult to apply within ongoing commercial processes, separately increasing incentives for R&D in the Code makes sense. These incentives should be made clearly separate, though. Considering these incentives as “baked into” other renewable energy incentives necessarily defeats the very purpose which they are meant to serve—compensating firms actually engaged in R&D activities.

For example, the Build Back Better Act would separately increase the section 45Q credit for direct air capture activities as recommended in earlier versions of this Article. This makes sense as direct air capture technology is a nascent technology, and current versions of the statute reward taxpayers without any regard to whether taxpayers relied on direct air capture or not, undermining the argument that section 45Q is intended to spur R&D (as opposed to displacing GHG emissions). It is odd then, that after creating a distinct and increased credit amount for direct air capture, the base and bonus credit for section 45Q generally (or for any GHG-displacing activities under the PTC, ITC, or other subsidies in the Build Back Better Act, for that matter) are not made permanent.

That is, if the relevant R&D portion of section 45Q is tied to direct air capture, it makes sense that this increased incentive might be temporary to help drive down costs. On the other hand, the purpose of any portion of the credit not tied to direct air capture must then explicitly be tied to reducing GHG emissions because of a social cost of carbon—a regulatory purpose that merits permanent (or GHG-reduction-related) solutions.

Additionally, serious inquiry should be given as to whether it makes sense to tie an increased portion of the credit clearly tied to R&D to industries that cannot be permanently perpetuated by decreased costs. If oil and gas production in the United States that could rely on direct air capture technology could only provide 11 years’ worth of oil and gas for the United States, perhaps it would be wise to limit any increased section 45Q credits to those actors who are not using direct air capture to further enhanced oil-recovery operations. Further consideration should be given to the harms of making more profitable an industry that specifically contributes to climate change, and which will not be able to provide permanent GHG-reduced solutions in attempting to achieve net-zero emissions by 2050. By making section 45Q refundable and increasing the direct air capture credit, there may be no need to rely on oil and gas operations to make direct air capture R&D profitable.