The oil and gas industry is pressing for changes to the Carbon Capture and Storage (CCS) tax credit that could leave taxpayers on the hook. A coalition of major players, including ExxonMobil, Battelle, Climeworks, and Honeywell, is advocating for greater ease in claiming the Section 45Q tax credit for CCS. Specifically, they want carbon dioxide (CO2) to be considered “fungible” for claiming 45Q, meaning that CO2 from different sources could be treated as interchangeable in a shared pipeline system. 

The industry is requesting the IRS to codify carbon as “fungible” for the purpose of claiming 45Q, as the current rules do not explicitly do so. Making carbon “fungible”, however, could entrench a system that makes it harder to track and verify where carbon originates and whether it is properly sequestered. If the IRS grants this request, it could pose significant risks for taxpayers. 

This push from the oil and gas industry coincides with the IRS’s release of guidance on lifecycle analysis (LCA) for utilization projects seeking to claim 45Q credits. With full guidance on the expanded and extended tax credit expected soon, the industry’s letter to the IRS raises concerns about the program’s long-term fairness and effectiveness. By advocating for looser rules, these companies could end up claiming larger credits than they deserve, at taxpayers’ expense. 

The Section 45Q tax credit, established in 2008, incentivizes industrial facilities, like power plants, to capture and store carbon rather than release it into the atmosphere. Captured carbon can be stored through geological sequestration, used for Enhanced Oil Recovery (EOR), or utilized in other applications. The Inflation Reduction Act of 2022 (IRA) boosted the credit’s value—up to $85 per ton for geological storage and up to $180 per ton for direct air capture. While the IRS has issued initial guidance for utilization projects, no commercial CCS facility in the U.S. currently captures carbon for this purpose. A more comprehensive rule, reflecting the IRA’s updates to 45Q is still pending. This rule will apply to all CCS facilities seeking the tax credit, including those storing carbon through geological sequestration, injecting it for EOR, or using it in other ways. 

If the IRS allows CO2 to be treated as fungible, companies could claim credits on the amount of carbon sequestered, regardless of its source, as long as the sequestered amount matches what was captured. In a fungible system, it would be impossible to determine the carbon’s origin once it’s commingled in pipelines. Shared pipelines could contain carbon from naturally occurring reservoirs, which are ineligible for 45Q. In fact, most EOR operations use cheaper, naturally deposited CO2 in rocks and sediments, which offers no climate benefits and creates more downstream emissions. This natural CO2 would likely never have been extracted were it not for EOR. According to EPA data, around two-thirds of the CO2  supply in the U.S. comes from natural sources, with only one-third captured from industrial sources.  

This system could invite fraud, as companies could inflate the amount of carbon they claim to capture and store to maximize tax credit payouts. Fungibility would make 45Q even more vulnerable to fraud and abuse as current rules already lack transparency and oversight—particularly for EOR injection sites. Current rules allow operators to self-certify the amount of carbon injected, making it difficult to verify if they truly store the claimed amounts for credits. 

Here’s the problem: A carbon capture facility sends captured CO2 into a shared pipeline, where it mixes with naturally sourced carbon for transport to a storage site. If a leak occurs along the way, a substantial amount of commingled CO2 could escape into the atmosphere, negating any potential benefit of CCS. Under a fungible system, the facility could still claim the full credit amount, as long as the sequestered volume at the storage site matches the volume of CO2 captured—regardless of whether the sequestered carbon came from eligible sources or if the original captured CO2 was released back into the atmosphere.  

This scenario is reminiscent of the “book and claim” system used for the Sustainable Aviation Fuel tax credit, where producers can claim emissions reductions even when the feedstock is mixed with conventional fuel, making it nearly impossible to verify if claimed reductions offset emissions. The same risks apply to CCS projects under a fungible system: taxpayers will never know if know that the carbon eventually being sequestered is the carbon that would otherwise be released into the atmosphere. 

In short, companies could maximize their 45Q payout while continuing to emit carbon, all while claiming to fight climate change. This undermines the integrity of the 45Q program and misuses taxpayer dollars—funds that could be better spent on initiatives with proven climate benefits. 

The push to codify carbon as fungible under Section 45Q may seem like a technical tweak, but its consequences for taxpayers are significant. The oil and gas industry, alongside other major CCS players, seeks a loophole that could cost billions in subsidies with little oversight. Demanding greater transparency and stronger verification systems is critical to prevent these tax credits from being wasted and abused. Anything less would be another industry handout that puts taxpayers and communities at risk.