U.S. Senate Proposal to Raise 45Q Tax Credit for Oil Recovery Aligns Incentives

A U.S. Senate panel has proposed a significant amendment to the federal 45Q carbon capture tax credit, aiming to equalize incentives for carbon dioxide used in enhanced oil recovery (EOR) and permanent carbon sequestration. If enacted, the measure would raise the tax credit for EOR to $85 per metric ton, matching the credit already granted for geologic storage, and potentially shifting investment dynamics in the oil, gas, and carbon capture sectors.

The proposed change is embedded in a draft bill from the Senate Finance Committee and forms a cornerstone of the Republican-led budget package. This revision directly responds to industry calls for policy parity, especially as energy producers seek economically viable decarbonization pathways.

Policy Realignment and Sectoral Implications

Currently, under the Inflation Reduction Act of 2022, the 45Q tax credit offers $85 per metric ton for carbon permanently stored underground, while EOR applications receive only $60 per ton. The Senate’s proposal to equalize both rates at $85 could dramatically alter the financial calculus for carbon capture, utilization, and storage (CCUS) investments.

By boosting the credit for carbon used in oil field rejuvenation, the legislation is poised to catalyze more CCUS projects by making EOR financially competitive. This policy move may also extend the economic lifespan of mature oil fields, improve domestic output, and simultaneously lower net emissions—aligning fossil fuel recovery with emissions abatement strategies.

The House of Representatives’ version of the bill, passed narrowly, had retained the $60/ton credit for EOR. The Senate version marks a clear divergence and will require reconciliation if both chambers pass their respective versions.

Quick Facts:

• 🏛 Legislation Involved: Draft budget bill by the U.S. Senate Finance Committee

• 💰 Tax Credit Increase: From $60/ton to $85/ton for enhanced oil recovery (EOR)

• 🌍 Policy Mechanism: Amendment to 45Q tax credit under the Inflation Reduction Act

• 🛢 Target Beneficiaries: Oil and gas producers utilizing carbon capture for EOR

• ⚖ Status: Senate draft diverges from House-passed version

Market Reactions and Expert Commentary

The equalization of the 45Q tax incentive is expected to have ripple effects across both energy markets and environmental policy circles. Supporters argue that offering the same incentive for both sequestration and utilization aligns with the broader goal of decarbonizing hydrocarbons, particularly by unlocking private capital for CCUS ventures that might otherwise be financially marginal.

Critics, however, warn that enhanced oil recovery, despite its emissions offset, still results in additional hydrocarbon extraction and eventual combustion. From a climate accounting perspective, this remains contentious, as net emissions depend heavily on capture efficiency, site integrity, and lifecycle assessments.

Economically, the revision could benefit midstream carbon transport firms, upstream producers, and engineering, procurement, and construction (EPC) companies that design and implement capture infrastructure.

Key Takeaways:

1. Policy Shift — Senate proposal raises EOR tax credit to $85/ton, aligning it with permanent sequestration rates.

2. Industry Impact — Oil and gas producers may scale up CCUS initiatives, improving field economics.

3. Legislative Divergence — Senate version departs from the House’s $60/ton stance, requiring reconciliation.

4. Climate Debate — Environmental groups are divided on whether EOR should qualify for full decarbonization incentives.

5. Capital Allocation — Higher credit value could shift capital toward commercial CCUS projects, particularly in the Permian Basin and Gulf Coast regions.

6. Energy Security vs Emissions — The change illustrates the U.S. balancing domestic energy production with emissions reduction goals.

Strategic Incentives May Accelerate Carbon Capture Adoption

The Senate’s proposal to increase the 45Q credit for EOR represents a strategic shift in how U.S. policy incentivizes carbon capture and fossil fuel production. If passed, it may drive greater private sector investment into CCUS, accelerate technological deployment, and integrate decarbonization into traditional oilfield operations.

However, the broader implications will depend on how the final legislation reconciles differing versions and whether the expanded tax credit genuinely results in measurable net carbon reductions. In the context of global energy transition, this development underscores how fiscal policy continues to shape decarbonization pathways in politically and economically pragmatic ways.