Clean Hydrogen Tax Credits: Treasury Department and IRS Propose Regulations on Production and Investment Tax Credits Under the Inflation Reduction Act

8 minute read | January.11.2024

The Treasury Department and IRS have published proposed regulations relating to credits for producing clean hydrogen under the Inflation Reduction Act  (“IRA”), a key step in implementing the National Clean Hydrogen Strategy.

The proposed regulations offer guidance on a credit for producing clean hydrogen under Section 45V of the Internal Revenue Code or an election to take an investment tax credit (“ITC”) for equipment that produces clean hydrogen under Section 48(a)(15).

The Clean Hydrogen Production Credit

Section 45V provides a production tax credit for qualified clean hydrogen. The amount varies based on the level of greenhouse gases (“GHGs”) generated (in terms of CO2 equivalents) in production, using a lifecycle analysis on a “well-to-gate basis.”

The statute refers to the GREET model to calculate the lifecycle greenhouse gases. A carbon dioxide equivalent is a metric measure used to compare the emissions from greenhouse gases on the basis of their global warming potential.

The Section 45V credit is available for facilities that began construction before 2033. 

  • The credit is available for 10 years from when the facility was placed in service.
  • The base credit amount is $0.60 per kilogram of hydrogen produced or $3 per kilogram if a taxpayer meets prevailing wage and apprenticeship requirements.
  • The credit value is adjusted for inflation.

In More Detail: The Investment Tax Credit

Taxpayers may seek an ITC for a facility placed in service after 2022. The ITC is available for the taxable year in which the hydrogen facility was placed in service. The base credit amount is six percent of the energy property’s eligible basis or 30 percent if the prevailing wage and apprenticeship requirements have been met.

CO2e Emitted During Production Credit Percentage
Not greater than 4 kilograms and not less than 2.5 kilograms per kilogram of hydrogen 20 percent
Less than 2.5 kilograms and not less than 1.5 kilograms per kilogram of hydrogen 25 percent
Less than 1.5 kilograms and not less than .45 kilograms per kilogram of hydrogen 33.4 percent
Less than 0.45 kilograms per kilogram of hydrogen 100 percent

The Proposed Regulations: Novel and Controversial

The Proposed Regulations are novel in the way they address the need for verification of greenhouse gas emissions.

They are controversial in how they set the standard for the maximum credit by adding “incrementality,” “temporal matching,” and “deliverability” requirements. Some argued that these requirements were outside the statutory framework. Others saw them as necessary to ensure people and companies would not cannibalize existing renewable energy sources to qualify for the credit.

  • Incremental” means incremental to existing power sources.
  • Temporal matching” means time-matched to the period during which the electrolyzer operates.
  • Deliverability” means being located in the same grid region.

The goal is to ensure that hydrogen credits benefit taxpayers that create new renewable energy capacity and do not simply reallocate existing renewable energy or increase emissions. Environmental groups championed such requirements. Some in the industry sought flexibility on requirements they say may hinder hydrogen development.

The proposed regulations would apply to tax years after final regulations are published in the Federal Register. Taxpayers may rely on these proposed regulations for tax years after 2022 and before the final regulations are published in the Federal Register, provided the taxpayers follow the proposed regulations consistently and in their entirety.

A Lifecycle Analysis: The Most Important Step in Determining the Amount of the Section 45V or Section 48 Credit

The proposed regulations base the amount of the Section 45V credit on the lifecycle GHG emissions rate of all hydrogen produced. The lifecycle GHG emissions rate is determined under the most recent GREET model. The latest GREET model, 45VH2‑GREET, includes these production pathways:

  • Steam methane reforming ("SMR") of natural gas, with potential carbon capture and sequestration ("CCS").
  • Autothermal reforming ("ATR") of natural gas, with potential CCS.
  • SMR of landfill gas with potential CCS.
  • ATR of landfill gas with potential CCS.
  • Coal gasification with potential CCS.
  • Biomass gasification with corn stover and logging residue with no significant market value with potential CCS.
  • Low-temperature water electrolysis using electricity.
  • High-temperature water electrolysis using electricity and potential heat from nuclear power plants.

Where a lifecycle GHG emissions rate has not been determined under the most recent GREET model, a taxpayer may petition for a provisional emissions rate (“PER”) with the IRS for the Secretary’s determination of the lifecycle GHG emissions rate. Notable exclusions from the latest GREET model are some biomass feedstocks, and hydrogen production technologies including geologic hydrogen and trigeneration. A petition for a PER must be attached to the first return on which a taxpayer claims a credit under Section 45V or Section 48(a)(15), and it must include the emissions value obtained from the United States Department of Energy (“DOE”). The process to submit requests for DOE emissions values opens April 1, 2024.

Anti-Abuse Rule

The Proposed Regulations include an anti-abuse rule that seeks to prevent a Section 45V credit from being allowed if the primary purpose of producing, selling or using qualified clean hydrogen is to obtain the benefit of the Section 45V credit in a manner that is wasteful, such as producing hydrogen that will be vented, flared or used to produce hydrogen.

Observation: This anti-abuse rule means that taxpayers cannot generate Section 45V credits in situations where the hydrogen produced would not otherwise be useful.

Energy Attribute Certificates and Renewable Energy Certificates

The Proposed Regulations introduce the possibility of using Energy Attribute Certificates (or “EACs”) to document energy inputs and assess emission input use. The Proposed Regulations identify Renewable Energy Certificates (“RECs”) as a form of an EAC.

Federal regulators have preliminarily determined that EACs may be considered under certain conditions in documenting purchased electricity inputs and assessing emissions impacts of electricity used in the production of hydrogen for purposes of the Section 45V credit. “EACs” refers solely to EACs that represent attributes of electricity generated by a specific facility or source.

The EPA has advised that EACs:

  • Are an established mechanism for substantiating the purchase of electricity from zero GHG-emitting sources.
  • Constitute an appropriate way to document electricity inputs to electrolytic hydrogen production.
  • Can serve as a reasonable methodological proxy for quantifying indirect emissions associated with electricity.

Federal regulators also have reached an initial determination that using certain EACs is consistent with the Clean Air Act and most recent GREET model.

For the purposes of Section 45V, a taxpayer may specify that a hydrogen production facility used electricity from a specific facility rather than the regional grid. Taxpayers may do this if they acquire and retire a qualifying EAC for each unit of electricity the taxpayer claims, and the taxpayer determines the lifecycle GHG emissions rate for hydrogen produced at the hydrogen production facility using the most recent GREET model or a PER.

What EACs Will Be Eligible?

Only EACs that have been verified by a qualified verifier to meet the “incrementality,” “temporal matching” and “deliverability” requirements will be eligible.

  • To meet the incrementality requirement, EACs must be generated from a facility that did not begin commercial operations or increase its nameplate capacity in the amount used in hydrogen production no more than 36 months prior to when the hydrogen production facility is placed in service.
  • The temporal-matching requirement includes a transition rule for EACs that represent electricity generated before January 1, 2028. Under the rule, the EAC is considered generated in the same hour that the taxpayer’s facility uses electricity to produce hydrogen—if the electricity represented by the EAC is generated in the same calendar year that the taxpayer’s hydrogen production facility uses electricity to produce hydrogen. This transition rule is intended to allow time for tracking systems to be developed and improved so that beginning January 1, 2028, hourly matching will be required.
  • The deliverability requirement requires the EAC to have been generated in the same “region” as the hydrogen production facility.

Observation: Hydrogen developers will be pleased that RECs can satisfy the renewable energy requirement; however, the “incrementality,” “temporal matching” and “deliverability” requirements are more stringent than some developers desired.

Verification Procedures

Part of Section 45V says “an unrelated party” must verify the production, sale and use of qualified clean hydrogen. The verification must be performed by a person or organization with accreditation as a validation and verification body from the American National Standards Institute National Accreditation Board or as a verifier, lead verifier or verification body under the California Air Resources Board Low Carbon Fuel Standard program.

Placed-in-Service Date

For Section 45V, the 10-year period for the production credit begins on the date the hydrogen production facility is placed in service. 

The Proposed Regulations provide guidance on when a hydrogen production can be modified or retrofitted to establish a new placed-in-service date. The modification rules are designed to enable taxpayers that own hydrogen production facilities that were constructed prior to 2023 to receive the Section 45V credit by making capital improvements to meet the minimum permitted GHG emissions, excluding simply changing the feedstock from natural gas to a renewable biogas.

Additionally, the Proposed Regulations use the 80/20 rule for retrofits, which is consistent with the IRS’s prior guidance for wind turbines.

Election to Treat a Qualified Clean Hydrogen Facility as Energy Property

A taxpayer that owns and places in service a clean hydrogen production facility can make an irrevocable election to treat any qualified property that is part of the facility as energy property for purposes of Section 48. 

No ITC will be allowed if a credit has been allowed under Section 45V or 45Q. Third-party verification must be performed in the initial year the credit is claimed and then annually for the five-year recapture period.

The ITC is subject to recapture if:

  • The taxpayer does not receive the annual verification report in time to file its tax return.
  • The lifecycle GHG emissions rate supports a lower energy percentage of credit or had an emissions rate higher than the threshold required to claim a credit (greater than 4 kg per kg of hydrogen).