Equal credits, unequal recognition: the emerging policy mismatch between US section 45Q reforms and EU’s carbon border adjustment mechanism

Carbon capture and storage (CCS) has become a central component of U.S. climate policy, particularly through the federal tax credit provided under Internal Revenue Code § 45Q. Recent legislative developments have strengthened incentives for carbon capture projects by increasing credit values and expanding eligibility, including for projects that utilize captured carbon dioxide for enhanced oil recovery (EOR). At the same time, the European Union has introduced the Carbon Border Adjustment Mechanism (CBAM), which imposes tariffs on certain imported goods based on their embedded carbon emissions. This paper argues that a potential policy mismatch exists between U.S. incentives and EU carbon accounting rules. While U.S. policy increasingly treats EOR as a qualifying form of carbon management eligible for significant tax benefits, EU frameworks emphasize permanence and may not recognize EOR as a permanent carbon removal. If EOR is not treated as a qualifying removal under EU methodologies, U.S. exporters relying on § 45Q credits could face additional carbon costs under CBAM, potentially undermining the competitiveness of U.S. industries despite substantial domestic policy support. By examining the interaction between § 45Q incentives, CBAM embedded emissions calculations, and emerging EU carbon removal standards, this paper highlights the importance of definitional consistency in global climate policy. The analysis demonstrates that differences in how jurisdictions classify carbon management activities may create unintended trade consequences, even where both regimes seek to encourage emissions reductions. Greater alignment between U.S. and EU carbon accounting approaches may be necessary to ensure that climate incentives function as intended without creating hidden trade barriers.