The Inflation Reduction Act (IRA) contained an enormous benefit—valued in the billions of dollars—for the U.S. hydrogen industry in the form of a Production Tax Credit (PTC) for “qualified” green hydrogen produced over the next 10 years.1
The IRS recently requested comments on how it should implement this provision.2 While there are numerous technical compliance aspects of the statute, the most important element will certainly be how the IRS calculates the “lifecycle greenhouse gas emissions rate.” Depending on how this number is calculated, existing methods of producing hydrogen that do not themselves produce additional greenhouse gases may be eligible for this lucrative tax credit.
The IRA’s hydrogen PTC is codified in section 45V of the Internal Revenue Code. It defines “qualified green hydrogen” as “hydrogen which is produced through a process that results in a lifecycle greenhouse gas emissions rate of not greater than 4 kilograms of CO2e per kilogram of hydrogen.”3 The credit is valued between $0.6 and $3 per kilogram of hydrogen produced, depending on the emissions associated with the hydrogen production.4 The statute pegged the definition of “lifecycle greenhouse gas emissions” to the Clean Air Act but specified that it should “only include [emissions] through the point of production (well-to-gate).”5 The relevant Clean Air Act section defines lifecycle emissions as including indirect emissions and those from feedstock sourcing.6 When a lifecycle emissions rate has not been determined, the statute allows a taxpayer to “file a petition with the Secretary” for such a determination.7
The IRS has asked for comment on topics including “[w]hat, if any, guidance is needed to clarify the definition of qualified clean hydrogen?”8 The IRS further asked for comment on the following specific questions:
(b)(i) How should lifecycle greenhouse gas emissions be allocated to co-products from the clean hydrogen production process? For example, a clean hydrogen producer may valorize steam, electricity, elemental carbon, or oxygen produced alongside clean hydrogen.
(ii) How should emissions be allocated to the co-products (for example, system expansion, energy-based approach, mass-based approach)?
(iii) What considerations support the recommended approaches to these issues?
(c)(i) How should lifecycle greenhouse gas emissions be allocated to clean hydrogen that is a by-product of industrial processes, such as in chlor-alkali production or petrochemical cracking?
(c)(ii) How is byproduct hydrogen from these processes typically handled (for example, venting, flaring, burning onsite for heat and power)?9
Comments are requested by December 3, 2022; however, the IRS stated that it will consider comments submitted after then “if such consideration will not delay the issuance of guidance.”10 Entities that currently own, sell, employ, or license technologies they believe could be eligible should consider responding to the IRS request, tracking this matter for further development, or submitting a later request to the IRS per I.R.C. § 45V(c)(2)(C).
Many businesses that already own, sell, employ, or license hydrogen production methods should consider whether they have, or could have, such low lifecycle emissions. Of note, while the renewable electricity PTC contained in I.R.C. § 45 is allowed only for power “sold . . . to an unrelated person,”11 the hydrogen PTC contained in I.R.C. § 45V applies to hydrogen “produced . . . for sale or use.”12 Therefore, businesses such as refineries or chemical plants that produce hydrogen onsite for their own consumption should be able to qualify for this credit as well. However, only facilities that are modified (or placed into service) to produce eligible hydrogen after the guidance is issued will be eligible for the PTC.13
Experimental hydrogen recovery technologies may become more viable with the incentive the PTC offers. For instance, some are pursuing methods of creating hydrogen in addition to sulfur for fertilizer out of the large amounts of toxic hydrogen sulfide (H2S) produced as a result of hydrotreating to remove sulfur from finished products and prevent acid rain.
Additionally, while most fossil hydrogen is produced by steam methane reforming (which directly creates carbon dioxide emissions), that is not the only method. In particular, the refining industry—the largest user of hydrogen by far—often produces hydrogen as a by-product of its other operations. For instance, naphtha reforming (the conversion of heavy naphtha into gasoline blendstocks) results in hydrogen as a by-product that refiners use in other operations. In fact, such naphtha reformers are sometimes called “hydroskimmers,” after their ability to skim surplus hydrogen. Many refiners also own, sell, employ, or license various types of “hydrogen recovery” technology to capture hydrogen that would otherwise be wasted or burned. Numerous other industrial processes produce hydrogen as a by-product that is not captured or utilized but instead is discarded and allowed to dissipate into the air, such as at chlorine plants. In fact, the Department of Energy’s Argonne National Laboratory has estimated the “well-to-plant” GHG of vented hydrogen from chlorine plants to be less than 1 kilogram of CO2e per kilogram—well below the IRA’s threshold.14
Overall, the PTC is an exciting new tax credit that could be available to many businesses that produce hydrogen as part of normal operations. Venable’s energy and tax groups have experience navigating complex energy-related rulemaking proceedings and applying for and receiving renewable energy-related tax credits. Please reach out with any question on how they might assist your business in navigating this and other issues presented by the IRA and the decarbonization of the energy economy.
[1] Pub. L. 117-169, § 13204, 136 Stat. 1818, 1935-41 (August 16, 2022) (codified as I.R.C. § 45V).
[2] I.R.S. Notice No. 2022-58 (Nov. 3, 2022).
[3] I.R.C. § 45V(c)(2)(A).
[4] I.R.C. § 45V(b).
[5] I.R.C. § 45V(c)(1)(A)(B).
[6] 42 U.S.C. § 7545(o)(1)(H) (defining lifecycle emissions as “including direct emissions and significant indirect emissions such as significant emissions from land use changes, . . . all stages of fuel and feedstock production and distribution, from feedstock generation or extraction through the distribution and delivery and use of the finished fuel to the ultimate consumer, where the mass values for all greenhouse gases are adjusted to account for their relative global warming potential.”).
[7] I.R.C. § 45V(c)(2)(C).
[8] I.R.S. Notice No. 2022-58 at 4.
[9] Id. at 5
[10] I.R.S. Notice No. 2022-58 at 11.
[11] I.R.C. § 45(a)(2)(B).
[12] I.R.C. § 45V(c)(2)(B)(i)(III). However, the sale or use must be verified by an unrelated party. I.R.C. § 45V(c)(2)(B)(ii).
[13] I.R.C. §§ 45V(d)(4); 45V(e)(2)(A).
[14] Amgad Elgowainy, Resourcing Byproduct Hydrogen from Industrial Operations at 19, Argonne Nat’l Lab (May 24, 2017) https://www.energy.gov/sites/prod/files/2017/05/f34/fcto_may_2017_h2_scale_wkshp_elgowainy.pdf
