Treasury Establishes 45Q Carbon Capture Tax Credit Safe Harbor For Verifying CO2 Sequestration

Executive Summary

On December 19, 2025, Treasury and the IRS released Notice 2026-1 (the "Notice") establishing an alternative method for taxpayers to substantiate carbon oxide sequestration volumes for section 45Q carbon capture tax credits in light of the EPA's proposed elimination of subpart RR reporting under the Greenhouse Gas Reporting Program (GHGRP).

The Notice provides a safe harbor for reporting for calendar year 2025, allowing taxpayers to rely on independent engineer/geologist verification of sequestration volumes in lieu of subpart RR reporting, addressing the possible verification gap created by EPA's proposal to end subpart RR monitoring, reporting and verification (MRV) requirements after the 2024 reporting year.

Key Takeaways

• New verification pathway for 45Q. Taxpayers claiming section 45Q tax credits for secure geologic storage of carbon oxide will be able to rely on third-party technical verification (i.e., independent engineer/geologist) as an alternative to subpart RR reporting for calendar year 2025 reporting if the EPA does not launch its 2025 reporting system by June 10, 2026. While the EPA has proposed to extend the reporting deadline for 2025 from March 31, 2026, to June 10, 2026, if it does not launch its system by that date, taxpayers will need an alternative means of verifying and reporting their injected volumes, which the Notice offers.
• Bridges the subpart RR gap. The Notice is designed to preserve 45Q eligibility for 2025 injected volumes in the expectation that EPA will eliminate subpart RR MRV requirements for underground injection and sequestration of carbon oxides.
• Treasury will propose revisions to existing section 45Q regulations. The Notice provides "interim guidance pending the issuance of forthcoming proposed regulations." Proposed regulations will presumably offer a similar means of verification to be implemented on a go-forward basis.
• Financing and tax equity implications. Clear, IRS-blessed verification standards should help unlock and de-risk project finance and tax equity for CCS projects that would otherwise face uncertainty due to the loss of an ability to rely on subpart RR MRV standards.
• Overlay with the One Big Beautiful Bill Act changes. The One Big Beautiful Bill Act preserved and, in some respects, enhanced section 45Q tax credit amounts. The Administration's commitment to section 45Q is further evidenced by this helpful guidance.

Background: Section 45Q, subpart RR, and the Regulatory Gap

Internal Revenue Code section 45Q provides a per-ton federal income tax credit for qualified carbon oxide that is:

• Captured from an industrial facility or direct air capture (DAC) facility, and
• Securely stored, used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project (EOR) or otherwise utilized in a qualifying manner.

Treasury Regulations section 1.45Q-3(b) provides that carbon oxide is considered disposed of in secure geological storage if it is injected into a well that complies with applicable EPA Underground Injection Control regulations.

Subpart RR of 40 CFR Part 98 has long provided reporting rules for geological sequestration of carbon dioxide. Facilities that are subject to subpart RR, including Class VI wells, have been required to report basic information on carbon dioxide received for injection, develop and implement an EPA-approved site-specific MRV Plan, and report the amount of carbon dioxide geologically sequestered using a mass balance approach and annual monitoring activities. The EPA has required that such reports be submitted annually, on a calendar year basis, no later than March 31 of each year through the EPA's electronic reporting system, e-GGRT, and the EPA has historically launched the e-GGRT system in mid-February for any given reporting year.

On September 16, 2025, the EPA proposed a rollback of the Greenhouse Gas Reporting Program, including the permanent removal of subpart RR obligations after the 2024 reporting year. This proposal would leave section 45Q credit claimants without the reporting framework the existing tax regulations rely upon to substantiate sequestration volumes. The EPA also proposed to extend the reporting deadline for 2025 from March 31, 2026, to June 10, 2026.

In reaction, industry stakeholders have warned that eliminating subpart RR reporting without a viable alternative would jeopardize the ability of CCS projects to claim section 45Q credits and undermine billions of dollars of planned investment.

With the Notice, Treasury and IRS officials have provided a safe harbor that taxpayers may use to satisfy the section 45Q reporting requirements for calendar year 2025 in the event that the EPA does not launch the e-GGRT for reporting year 2025 by June 10, 2026, while also stating that the safe harbor does not apply in the event the EPA launches the e-GGRT for reporting year 2025 by June 10, 2026.

This helpful safe harbor signals the Administration's continued support for the section 45Q tax credit. The forthcoming proposed regulations can be expected to provide a means for credit claimants to continue to verify their sequestration volumes even in the absence of an EPA reporting program.

What the Notice Provides

1. Scope of the Safe Harbor

• In the event the EPA does not launch the e-GGRT for reporting year 2025 by June 10, 2026, storage will be deemed to have satisfied the section 45Q subpart RR requirement if:

(i) such storage is in compliance with the applicable requirements of subpart RR as in effect on December 31, 2025, and

(ii) instead of submitting the annual report through e-GGRT, the taxpayer prepares and submits the annual report to an independent engineer or geologist, who certifies the annual report. The annual report must contain all of the information and documentation, including mass balance accounting calculations and monitoring and containment assurance, that would have been required under subpart RR.

• The taxpayer must submit the annual report for reporting year 2025 to a "qualified independent engineer or geologist." The qualified independent engineer or geologist certifying the information must be duly registered or certified in any State.
• The qualified independent engineer or geologist must certify that (i) the capture and disposal is in compliance with subpart RR as in effect on December 31, 2025, and (ii) the information and documentation contained in the annual report for 2025 is accurate and complete based upon the requirements under subpart RR as in effect on December 31, 2025. The certification must contain an affidavit from the certifying engineer or geologist stating that he or she is independent from the taxpayer and must be made under penalties of perjury.

2. Independent Engineer / Geologist

• The Notice does not define "independence." Existing regulations under section 45Q allow use of an independent engineer or geologist for certification of volumes injected in EOR projects in certain circumstances but do not define independence.
• Although there is no definition of "independence" in this context, it is safe to assume that any employee of the credit claimant would not qualify as independent.
• It is unclear whether other relationships between the engineer/geologist and the credit claimant, such as an equity interest, reciprocating transactions, retentions that comprise a significant portion of the revenue of the engineer, etc., are to be taken into account in determining independence. To be conservative, credit claimants should avoid using engineers/geologists that present such relationships.

3. Reporting and Documentation

• Taxpayers claim the section 45Q credit on Form 8933 with their timely filed federal income tax return. In order to rely upon the 2025 safe harbor, a taxpayer must complete all documentation and obtain the certification described above by the time it files its tax return, even though the certification is not filed with the tax return.
• The Notice advises taxpayers to retain the documentation and certification in their books and records.

Recommended Near-Term Actions

CCS project owners should assume that they will need to rely on the 2025 reporting safe harbor and move now to arrange for independent engineer or geologist certification of their 2025 volumes. With the new safe harbor offered by the Notice, taxpayers should:

1. Confirm project timing: Although the Notice is clear that the safe harbor does not apply and is not needed if the EPA launches the e-GGRT system for 2025 by June 10, 2026, CCS project owners will be risking non-compliance with reporting deadlines if they wait to see whether the EPA launches the system by that date. Therefore, most project owners can be expected to make the conservative assumption that the EPA will not launch the e-GGRT for reporting year 2025 by June 10, 2026, and that they therefore need to rely on the 2025 reporting safe harbor provided by the Notice and obtain independent engineer certification for 2025.
2. Move now to engage qualified independent engineers/geologists: Retain verifiers who meet the Guidance's independence and credential standards and build their annual certification timelines into your tax reporting process.
3. Align measurement, monitoring, and documentation practices: Update data collection and recordkeeping systems to match the safe harbor's required documentation standards as interpreted by the independent engineer/geologist.
4. Update transaction documents: Consider whether modifications are needed to any financing or commercial agreements to update references to, or representations regarding, the verification methodology.

How Baker Botts Can Help

Baker Botts has extensive experience in advising on section 45Q tax credit structuring, CCS project development, EPA reporting obligations, and tax equity financing and tax credit monetization through direct pay or credit transfers.

With the new section 45Q verification safe harbor for 2025 now in place and the expectation that similar guidance will be available on a go-forward basis, Baker Botts can assist with structuring credit compliance workflows and navigating project finance and credit monetization impacts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.