Carbon dioxide that would have otherwise been polluted into the sky is now going into everyday products, ranging from fuel to clothes.

But just when such initiatives could be taking off in the United States, proponents of these technologies say the 2022 Inflation Reduction Act may inadvertently punish their efforts because the law gives companies that recycle or utilize CO2 a lower tax credit than those storing CO2 underground.

“What we want is for the government to be fair. Currently, you qualify for a bigger tax credit if you sequester CO2 than if you utilize it. So, we get punished for utilizing it,” Moji Karimi, CEO of startup Cemvita, which makes sustainable aviation fuel and other products from waste, told Cipher.

Capturing CO2 and either storing it or utilizing it is a crucial part of addressing climate change, particularly for sectors that find it difficult to curb their intensely emitting processes, like making cement and steel.

Most CO2 will likely be stored due to the sheer amount of the gas that will need to be captured (as shown in this Data Dive). But recycling carbon is a key piece of the puzzle because revenue earned from it, along with tax credits, will help bring down high costs of the capture process, experts say.

For instance, a Zara party dress made from recycled CO2 is sold at a premium. The higher price “helps pay for the additional cost of converting CO2 into apparel,” along with the IRA’s tax credits, said Julio Friedmann, chief scientist with Carbon Direct, a carbon management firm. “This in turn helps drive down the costs for carbon capture and CO2 conversion.”

U.S. Senators Sheldon Whitehouse, a Democrat from Rhode Island, and Bill Cassidy, a Republican from Louisiana, introduced a bill earlier this year that would fix what they describe as a tax credit mismatch.

“Our bipartisan Carbon Capture and Utilization Parity Act would bring the value of the tax credits for carbon utilization in line with the incentives for sequestration, while supporting continued investment in carbon-neutral products,” Whitehouse said in a statement when releasing the bill.

Whitehouse and Cassidy make an unlikely pair—one is a climate hawk while the other represents oil-rich Louisiana and has largely opposed the White House climate agenda. The prospects of this bill are nonetheless low without a must-pass tax bill moving or more sponsors.

The senators, who have found common ground as land in their states is being gobbled up by sea-level rise, have worked on at least two other climate-related bills together recently.

Utilizing (or recycling) carbon is often sidelined in carbon management discussions in favor of carbon storage because carbon utilization has been almost exclusively associated with recovering oil and gas for the fossil fuel industry—until now.

LanzaTech, which in February became the first carbon capture and utilization firm to go public, says the tax credits should be more equitable between recycling and storing carbon.

“The public needs to understand we are really talking about the next generation of technologies, including ours and many others that will take carbon emissions and convert those into useful products, not just pump more oil out of the ground,” said Tom Dower, LanzaTech’s public policy vice president.

Capturing CO2 is the most expensive aspect of the overall carbon management process, although the costs can vary depending on whether it will be recycled or stored, according to the U.S. Energy Department.

The IRA increased pre-existing tax credits for utilizing CO2 captured from the air to $130 per metric ton (MT) and directly from industrial processes to $60/MT.

Although experts agree the tax credits will improve the economics of recycling CO2 emissions, those values are roughly 27-29% less than what companies get for storing CO2 from direct air capture and from industrial processes.

One key reason the law has different credit levels is because goods made from recycled CO2 can be sold, while stored CO2 is a sunk cost for the company, experts told Cipher.

“The tax credits are fair in differentiating credits for utilization versus storage,” said Atul Arya, S&P Global chief energy strategist. “These credits reflect the fact that companies using captured CO2 will generate value and earn revenue, while those engaged in storage will not.”

Indeed, storing captured CO2 underground earns no revenue for the developer unless paired with government incentives, like tax credits, or mandates, like the pending U.S. Environmental Protection Agency power plant rule or California’s Low Carbon Fuel Standard.

Further complicating storage efforts is the slow pace in federal approval for carbon storage permits, as Cipher reported recently.

Meanwhile, companies recycling carbon into commercial products can use their revenues to help offset the high costs of carbon capture and large amount of energy needed to convert the CO2 into those products.

That’s what CarbonCure, a company that’s patented an approach to embed CO2 in concrete, is doing. Cost savings and revenues from manufacturing low-carbon concrete “provides all this additional value that covers all of those costs to purchase CO2 and license technologies to handle the process,” said CarbonCure CEO Rob Niven, who supports Whitehouse and Cassidy’s bill.

What’s more, not every company is solely relying on tax credits from carbon utilization efforts.

The IRA has also created tax credits for clean manufacturing, clean fuels and clean hydrogen, as well as grants for advanced industrial facilities that companies could tap in tandem with the credits for carbon recycling. Cemvita Factory’s Karimi hopes to tap into the credit for sustainable aviation fuel, for example.

Of course, tax credits are just one part of a complex, overlapping web of factors—including infrastructure buildouts, economic conditions and other types of government policy like procurement—that will determine to what degree carbon recycling companies ultimately flourish or perish.

Any major industry today “has always been built with government support to get it off the ground—with research money, with development money, with loans,” Volker Sick, director of the Global CO2 Initiative at the University of Michigan, told Cipher.

Pointing to solar photovoltaics, Sick said the German government “singlehandedly triggered” the explosive growth of that sector by subsidizing its deployment.

The carbon utilization business should be no different if a government steps up, Sick said.

Editor’s note: CarbonCure’s investors include Breakthrough Energy Ventures, a program of Breakthrough Energy, which also supports Cipher.