Introduction
On December 26, 2023, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued proposed regulations (Proposed Regulations) pertaining to the clean hydrogen production credit (Clean Hydrogen Production Credit) under section 45V of the Internal Revenue Code (Code). The Proposed Regulations clarify several aspects of the Clean Hydrogen Production Credit by, among other things:
- Proposing definitions of several key operative terms used by section 45V of the Code, including: (i) “facility”; (ii) “most recent GREET model”; and (iii) “emissions through the point of production (well-to-gate)”;
- Providing that the coordination rule under section 45V(d)(2) of the Code, which generally disallows the Clean Hydrogen Production Credit for a facility that includes carbon capture equipment for which a credit is allowed to any taxpayer under section 45Q of the Code, generally would not apply to retrofitted carbon capture equipment meeting the 80/20 rule requirements under Treasury Regulation section 1.45Q-2(g)(5) if no section 45Q credit has been allowed to any taxpayer for such equipment;
- Establishing a facts and circumstances anti-abuse rule that would apply to taxpayers attempting to exploit the Clean Hydrogen Production Credit under wasteful circumstances, such as the production of qualified clean hydrogen that the taxpayer knows or has reason to know will be vented, flared, or used to produce hydrogen;
- Providing procedures that apply in determining lifecycle greenhouse gas emissions rates resulting from hydrogen production;
- Allowing energy attribute certificates (EACs), such as renewable energy certificates, to be considered under certain conditions in documenting purchased electricity inputs and assessing emissions impacts of electricity used in the production of hydrogen;
- Providing procedures for verification of qualified clean hydrogen production and sale or use required to claim the Clean Hydrogen Production Credit; and
- Elaborating on the impact of a modification or retrofitting of an existing facility.
Background
The Clean Hydrogen Production Credit is a technology-neutral credit for the production of clean hydrogen by a taxpayer at a qualified facility. The credit may be claimed during the ten-year period beginning on the date the facility is placed in service. To qualify for the credit, the production process must result in lifecycle greenhouse gas emissions not greater than 4 kilograms of CO2 equivalent per kilogram of hydrogen produced. For hydrogen production processes below that ceiling, the credit varies from $0.12 to $0.60 per kilogram of hydrogen produced, depending on the lifecycle greenhouse gas emissions resulting from the hydrogen production process through the point of production (well-to-gate). As with other IRA credits, the Clean Hydrogen Production Credit increases, up to $3 per kilogram of hydrogen produced, for taxpayers that meet prevailing wage and apprenticeship requirements. Section 45V of the Code requires that lifecycle greenhouse gas emissions must generally be determined for this purpose under the most recent Greenhouse gasses, Regulated Emissions, and Energy use in Transportation (GREET) model, developed by Argonne National Laboratory, or a successor model as determined by the Secretary of the Treasury.
Highlights of the Proposed Regulations
I. Proposed Definitions:
Proposed Regulation section 1.45V-1 would define several operative terms used within
section 45V of the Code. Notably, the term “facility” would be defined to mean a “single production line” used to produce qualified clean hydrogen. The phrase “single production line” would in turn be defined to include all components of property that function interdependently to produce qualified clean hydrogen. The Proposed Regulations would clarify that a facility would not include equipment used to condition or transport hydrogen beyond the point of production, or electricity production equipment used to power the hydrogen production process, including any carbon capture equipment associated with the electricity production process. This definition of the term facility should be helpful in applying the coordination rule under section 45V(d)(2), discussed below.
Treasury and the IRS would also clarify the meaning of two phrases that are critical to determining the applicable lifecycle greenhouse gas emissions rate. First, the Proposed Regulations stipulate that the phrase “most recent GREET model,” as used by section 45V of the Code, would be defined to generally mean the latest version of 45VH2-GREET developed by Argonne National Laboratory that is publicly available on the first day of the taxpayer’s taxable year in which the qualified clean hydrogen was produced. Additionally, the Proposed Regulations would define “emissions through the point of production (well-to-gate)” to mean the aggregate lifecycle greenhouse gas emissions related to hydrogen produced at a hydrogen production facility during the taxable year through the point of production. This phrase would include both (i) emissions associated with feedstock growth, gathering, extraction, processing, and delivery to a facility and (ii) emissions associated with the production process, inclusive of the electricity used by the facility and the capture and sequestration of carbon dioxide.
II. Coordination with Section 45Q:
Section 45V(d)(2) of the Code prohibits a taxpayer from claiming the Clean Hydrogen
Production Credit for clean hydrogen produced at a facility that includes carbon capture equipment for which the taxpayer also claims the carbon capture and sequestration credit under section 45Q of the Code (Coordination Rule). Section 1.45V-1(a)(7)(i) of the Proposed Regulations would define the term “facility” for purposes of section 45V to exclude equipment used to condition or transport hydrogen beyond the point of production, or electricity production equipment used to power the hydrogen production process. Accordingly, carbon capture equipment associated with conditioning, transportation, and electricity production can qualify for the section 45Q credit without impacting the section 45V credit for a clean hydrogen production facility.
Also in connection with the Coordination Rule, Proposed Regulation section 1.45V-2(a) would clarify that, if the 80/20 rule set forth in Treasury Regulation section 1.45Q-2(g)(5) is satisfied with respect to carbon capture equipment, and no new carbon capture and sequestration credit has been allowed for such equipment, then the unit of carbon capture equipment for which the 80/20 rule is satisfied will not trigger the Coordination Rule.
III. Anti-Abuse Rule:
In the preamble to the Proposed Regulations, Treasury and the IRS articulate a concern that if the cost of producing qualified clean hydrogen is less than the value of the Clean Hydrogen Production Credit, taxpayers may have an incentive to produce such hydrogen solely to exploit the credit, rather than for a productive use. To mitigate this concern, Proposed Regulation section 1.45V-2(b)(1) would make the Clean Hydrogen Production Credit unavailable if, under all of the facts and circumstances, the primary purpose of the production and sale or use of such hydrogen is to obtain the benefit of the credit in a manner that is wasteful.
Proposed Regulation section 1.45V-2(b)(2) would provide an example illustrating such wasteful production. In this example, the taxpayer produces qualified clean hydrogen at a cost that is less than the value of the Clean Hydrogen Production Credit, and intends to sell the hydrogen for a below-market price to a customer who the taxpayer knows or reasonably expects will vent or flare such hydrogen. Under these circumstances, Treasury and the IRS conclude that the primary purpose of the taxpayer’s production and sale of qualified clean hydrogen is to obtain the Clean Hydrogen Production Credit in a manner that is wasteful, and the credit should be disallowed.
IV. Emissions Rate Procedures & Provisional Emissions Rate:
The Proposed Regulations reiterate that the lifecycle greenhouse gas emissions rate for
purposes of the Clean Hydrogen Production Credit is determined using the “most recent GREET model,” as discussed above. Under Proposed Regulation section 1.45V-4(b), this determination must be made separately for each production facility, is to be made following the close of each taxable year, and must include all hydrogen production during the taxable year.
If the hydrogen produced by the taxpayer is produced at a facility that uses a production pathway not included in the most recent GREET model, the taxpayer may petition the Secretary of the Treasury for a provisional emissions rate (PER). Proposed Regulation section 1.45V-4(c) sets forth further guidance on this topic, including how to apply for a PER and the effect of obtaining a PER.
V. Use of EACs to Document Impact of Electricity Usage:
The Proposed Regulations would permit taxpayers to rely upon EACs with certain
specified attributes to determine and substantiate the impact of electricity used in the hydrogen production process on the taxpayer’s lifecycle greenhouse gas emissions rate.
Under section 45V of the Code, the lifecycle greenhouse gas emissions associated with electricity the taxpayer uses in the hydrogen production process impacts the taxpayer’s Clean Hydrogen Production Credit.1 If a clean hydrogen producer is connected to an electricity grid or to a specific source of generation that previously supplied other consumers, assessment of the taxpayer’s grid-related lifecycle greenhouse gas emissions can be difficult. EACs represent an exclusive claim to the attributes of a unit of energy, and verify that a certain unit of electricity was generated by a specific entity and has specific attributes. Purchasers of EACs can retire EACs to claim in a regulatory context that their electricity use was generated with the attributes associated with the EACs.
In determining its lifecycle greenhouse gas emissions rate, the taxpayer would be permitted under the Proposed Regulations to use certain EACs from low-greenhouse-gas electricity generators to account for the impact of the taxpayer’s electricity use under the most recent GREET model or in a PER. Notably, this would permit the taxpayer to identify the applicable facility’s use of electricity as being from a specified electric generating facility rather than from the regional electricity grid (which, in many cases, might increase the facility’s emissions beyond the 4-Kilogram-CO2e –per-Kilogram-of-hydrogen ceiling permitted under section 45V of the Code).
Taxpayers could only use EACs with certain specified attributes for this purpose under the Proposed Regulations. Such EACs would be required meet incrementality, temporal matching, and deliverability requirements set forth under Proposed Regulation section 1.45V-4(d)(3) to qualify. Renewable energy certificates meeting these requirements would qualify under the Proposed Regulations.
VI. Verification Regime:
Proposed Regulation 1.45V-5 would implement a verification regime to claim the Clean Hydrogen Production Credit. Among other requirements, the taxpayer would need to attach a verification report to its From 7210 (or successor form(s)) and include such report with its return for each qualified clean hydrogen production facility for each year in which it claims the Clean Hydrogen Production Credit. The verification report must be prepared by a “qualified verifier” under penalties of perjury. A qualified verifier must, among other things, generally be unrelated to the taxpayer and meet the active accreditation requirements under the Proposed Regulations.
VII. Modifications to Existing Facilities:
Generally, a qualified clean hydrogen production facility may generate Clean Hydrogen Production Credits during the 10-year period beginning on the date that the facility was originally placed in service. Section 45V(d)(4) of the Code enables taxpayers to modify facilities that are already placed in service to produce qualified clean hydrogen, and further permits such modified facilities to qualify for a new placed in service date under certain circumstances. Proposed Regulation section 1.45V-6 would, among other things, clarify that (i) the purpose of such modifications must be to enable the facility to produce qualified clean hydrogen, and (ii) a modification is made for such purpose if the facility could not, but for the modification, produce hydrogen with a lifecycle greenhouse gas emissions rate less than or equal to 4 kilograms of CO2e per kilogram of hydrogen.
Further, Proposed Regulation section 1.45V-6(b) would provide that an existing facility may establish a new placed in service date for purposes of section 45V of the Code if it is retrofitted to produce qualified clean hydrogen. To qualify, the fair market value of used property comprising the retrofitted facility must not be more than 20 percent of such facility’s total value (45V 80/20 Rule). The 45V 80/20 rule would apply to any existing facility, regardless of whether the facility previously produced qualified clean hydrogen, and regardless of when the facility was originally placed in service.
Next Steps
The Proposed Regulations would apply to taxable years beginning after December 26, 2023. Taxpayers may rely on the Proposed Regulations for taxable years beginning after December 31, 2022 and before the date final regulations are published in the Federal Register. Comments to the Proposed Regulations must be received by February 26, 2024.
1. As noted in the preamble to the Proposed Regulations, the U.S. Department of Energy has published a technical paper, Assessing Lifecycle Greenhouse Gas Emissions Associated with Electricity Use for the Section 45V Clean Hydrogen Production Tax Credit, which was reviewed by Treasury and the IRS and informed development of the Proposed Regulations. This technical paper is available at Assessing Lifecycle Greenhouse Gas Emissions Associated with Electricity Use for the Section 45V Clean Hydrogen Production Tax Credit 508_EDITED (energy.gov).
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