On December 22, 2023, the U.S. Department of the Treasury (Treasury) and Internal Revenue Service (IRS) published the long-awaited proposed regulations governing clean hydrogen production credits under Section 45V of the Internal Revenue Code (45V Credits). These draft rules serve to clarify the crediting process, eligibility, mechanisms for utilization, and key terminology such as:
- Qualified clean hydrogen
- Qualified hydrogen production facility
- Lifecycle greenhouse gas (GHG) emissions
- Emissions through the point of production (Well-to-gate)
- Provisions for anti-abuse, verification, and sale or use of qualified hydrogen
- Rules addressing the application of 80/20 rules for existing facility retrofits
- Rules for coordination with Section 45Q
- Procedures to claim investment tax credits (ITC) under Section 48 in lieu of Section 45V production tax credits (PTC)
ClimeCo’s High-Level Takeaways
The proposed IRS guidance came down on the stricter side for criteria defining qualified clean hydrogen. Requirements for sourcing renewable energy will limit some opportunities for low-CI hydrogen deployment but may ensure maximum overall emission reductions. The potential ability to utilize “book-and-claim accounting” for renewable natural gas and fugitive methane hydrogen production may unlock supply flexibility for qualifying clean hydrogen at reduced carbon intensity (CI) tier levels, but additional constraints are under consideration. Critical to the impact of the proposed guidance is the specifics of the Department of Energy’s (DOE’s) 45VH2-GREET model (such as the upstream carbon footprint of natural gas and process boundary conditions), which are not open to direct comments through the current stakeholder engagement process.
Overview of Clean Hydrogen Production Credit (Section 45V)
- Established by the Inflation Reduction Act
- A 10-year production credit with a credit amount based on kilograms of qualified hydrogen produced at a qualified facility
- Credit rate based on lifecycle greenhouse gas emissions rate of the hydrogen production process, which must be consistent with the Clean Air Act
- Five times higher if prevailing wage and apprenticeship (PWA) requirements are met
- Available for qualified clean hydrogen produced at facilities beginning construction before January 1, 2033
- Alternatively, taxpayers can make an election to claim ITC (Section 48)
Crediting Framework:
Eligible producers claiming tax credits for Section 45Q carbon sequestration or clean fuel production under Section 45Z cannot stack these credits with 45V credits from the production of qualifying clean hydrogen from that same facility. The Proposed Regulations define tiered credit rates, subject to inflation adjustments and PWA criteria, based on the lifecycle GHG emissions of a hydrogen production process for calculating credit value. For 45V purposes, lifecycle GHG emissions would only include emissions through the points of production (well-to-gate) as determined under the most recent GREET model developed by the US DOE’s Argonne National Laboratory (or a successor model).
| Lifecycle GHG emissions rate (Kg of CO2e/kg of qualifying clean H2) |
Applicable percentage ($0.60 inflation adjusted/kg of hydrogen multiplied by) | Credit amount / if PWA met (Per kg of clean H2 produced) |
| <0.45 | 100% | $0.60 / $3.00 |
| 0.45 to <1.5 | 33.4% | $0.20 / $1.00 |
| 1.5 to <2.5 | 25% | $0.15 / $0.75 |
| 2.5 to ≤4 | 20% | $0.12 / $0.60 |
The lifecycle GHG emissions rate is the critical determinant of value under Section 45v PTC and Section 48 ITC. The proposed regulation defines two paths for evaluating the lifecycle GHG emission rate:
GREET Model
The proposed regulations outline the procedure for determining lifecycle GHG emissions via the use of the DOEs 45VH2-GREET model. The model includes all direct and significant indirect emissions related to the full fuel lifecycle, including all fuel and feedstock production and distribution stages, from feedstock generation or extraction through the distribution and delivery and use of the finished fuel. The GREET model currently has eight hydrogen production pathways, including SMR w/CCS, ATR w/CCS, and electrolysis.
Provisional Emission Rates
For any hydrogen producers unable to use the model, the regulation details the procedure to petition for a provisional emission rate (PER) if the hydrogen production technology or feedstock used is not included in the 45VH2-GREET model.
Energy Attribute Certificates (EACs)
The proposed regulations provide provisions by which hydrogen producers may utilize EACs to represent clean electricity generation for application in 45V under “three pillars”:
- Incremental to existing generation (new clean electricity),
- Deliverable to the hydrogen facility and
- Time-matched to when the hydrogen facility is using electricity to produce hydrogen
Incrementality
- EACs are eligible if commercial operations for clean power generation began within three years of the hydrogen facility being placed into service
- Note that the proposed regulations are specifically seeking feedback during the comment period on the following:
- Avoided retirements
- Zero or minimal induced grid emissions through modeling or other evidence
- Formulaic approaches to addressing incrementality from existing clean generators
Deliverability
- EACs must be sourced from the same region, as defined by the DOE, as the hydrogen producer
- Note that the proposed regulations are specifically seeking feedback during the comment period on how to consider delivery between regions
Note: Alaska and Hawaii are treated as two additional regions within the context of the EAC deliverability requirements.
Source: US DOE GREET Manual (Dec. 2023)
Temporal Matching
EACS must be hourly matched. However, because this isn’t widely available, the proposed regulations define a transition rule to allow annual matching through 2027 until hourly tracking systems become widely available.
RNG/Fugitive Methane
The proposed regulations provide rules addressing hydrogen production pathways that use renewable natural gas (RNG) or other fugitive sources of methane (e.g., from coal mine operations) for 45V credits.
- Must originate from the first productive use of such biogas, biogas-based RNG, or fugitive methane
- Hydrogen producers using biogas, biogas-based RNG, or fugitive methane would be required to acquire and retire corresponding attribute certificates
- Existing systems have limited capacity for tracking and verifying RNG pathways
- Requesting comments for the use of RNG certificates
- Producers would use 45VH2-GREET or the PER process to determine a lifecycle GHG emissions rate for hydrogen production facilities that rely on direct use of the landfill gas of any fugitive methane feedstock, provided they meet the aforementioned requirements
- Other types of RNG would not be addressed in 45VH2-GREET, and PER petitions would not be available for those pathways until additional analysis is conducted
In addition to the core framework, these regulations seek further comments on applying the “three pillars” approach to RNG and using book-and-claim in the RNG context.
Request for Comment
The comment period will conclude on February 26, 2024 , while a public hearing is scheduled for March 25, 2024. These regulations are poised to shape the U.S. hydrogen industry significantly, and stakeholder engagement is critical to ensuring these incentives are accessible.
ClimeCo is ready to support your strategic planning and assist in drafting comments. For more details on tax credit and energy-related matters, contact us at +1 484.415.0501, info@climeco.com, or through our website climeco.com to learn more. Follow us on LinkedIn, Facebook, Instagram, and Twitter using our handle, @ClimeCo.
About ClimeCo
ClimeCo is a global sustainability company headquartered in Pennsylvania, with projects and partners all over the world. Our mission is to advance the low-carbon future and restore nature with market-based solutions. We offer comprehensive services spanning environmental asset innovation, ESG and climate strategy consulting, regulatory and policy advisory, environmental credits, API solutions, and climate action certification programs.
Our growing team of respected scientists and industry experts collaborate with companies of all sizes, governmental groups, NGOs, and capital markets players on ESG, decarbonization, and policy issues—allowing us to develop high-quality, purpose-built end-to-end sustainability solutions with measurable impact. We are steadfastly committed to educating and empowering our clients, no matter where they are in their sustainability journey, to be confident in a rapidly evolving marketplace.
Take your climate initiatives to new heights by collaborating with ClimeCo. Contact us at +1 484.415.0501, info@climeco.com, or through our website climeco.com.
