Hydrogen Tax Credit Rules Must Sync With Biden’s Climate Agenda

President Joe Biden’s climate change agenda is more aggressive than anything previously in US energy and environmental policy. Tax incentives, infrastructure investments, and regulatory mandates aim to put the nation on a path to achieving net-zero emissions by 2050.

But involving many federal departments and agencies in administering these initiatives introduces risks that must be managed, such as the danger of disorganization and conflicting policies from different parts of the US government that will make reducing carbon emissions slower and more expensive.

Case in point: the Treasury Department and the IRS’s rulemaking process. One problem lies in a proposed regulation for issuing clean hydrogen tax credits under Section 45V of the tax code.

Unlike fossil fuels, hydrogen releases no carbon when it’s converted into heat or electricity. The only byproduct is water vapor. But today, most hydrogen is made from natural gas—and almost none is produced through renewable energy.

The Inflation Reduction Act, passed in 2022, created a series of tax credits to incentivize hydrogen production that avoids or captures carbon emissions. The lower the emissions per kilogram of hydrogen produced, the bigger the credit.

But before any tax credits can be issued, the IRS must complete a regulation that lays out detailed rules for the new clean hydrogen program. The draft version, released in December 2023, prompted more than 30,000 comments from industry, environmental groups, and other stakeholders.

The initial controversy focused on electrolysis, a technology that produces hydrogen by running electrical current through water, and stringent IRS requirements that favor newly built sources of carbon-free electricity. Over time, the treatment of clean hydrogen produced from another source—natural gas—also has become a major source of conflict.

In the draft version of the IRS regulation, hydrogen producers are asked to use an assumed leakage rate for methane—a more powerful greenhouse gas than carbon dioxide—when applying for their tax credits.

Natural gas is mostly made of methane, and when used as a feedstock for making hydrogen, it’s important to account for leaks that can occur at gas production facilities, pipelines, and processing plants.

But the assumed leakage rate of 0.9% being pushed by the IRS is the worst of both worlds.

Technologies to measure, monitor, report, and verify methane emissions from oil and gas operations have shown a wide variation in leakage rates across oil and gas regions and even individual operators. Some are much higher than 0.9% while others are much lower.

By using this assumed rate, instead of measurement-based data, the IRS effectively is rewarding the producers of leakier natural gas while punishing those who are getting their methane emissions under control. That’s completely backwards and contradicts a major climate initiative from the Biden administration.

“Enhancing [greenhouse gas] measurement and monitoring capabilities is foundational,” the White House said in a November 2023 interagency report. “Doing so will improve the Nation’s ability to track progress towards [greenhouse gas] emissions targets and assess the effectiveness of climate policies and actions.”

In line with this policy, the Department of Energy is working with more than a dozen nations to advance the use of measurement-based emissions data in global energy markets. And the Environmental Protection Agency’s methane regulations provide the option to use “cutting-edge methane detection technologies” such as “aerial screening, sensor networks, and satellites” for measurement-based data collection.

Thankfully, there’s still time for the IRS to make room for measurement-based data in the hydrogen tax credit program and avoid a major disconnect in the Biden administration’s approach to climate change.

Such a move would have a broad base of support from business, labor and even some environmental groups. “This simultaneously encourages operators to clean up methane leaks while also barring truly dirty operators from benefiting from the tax credit,” the Clean Air Task Force wrote in February comments to Treasury and the IRS.

On the other hand, sticking with an assumed rate is a one-size-fits-none approach, the environmental group warned.

If the federal government truly wants to accelerate the adoption of low- and zero-carbon fuels across the US economy, consistency across all its departments and agencies is key. Confusion and discord between competing power centers is simply a recipe for failure.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Morgan D. Bazilian is director of the Payne Institute for Public Policy at the Colorado School of Mines and a former lead energy specialist at the World Bank.

Gregory Clough is the Payne Institute’s deputy director.

Simon Lomax is a policy and outreach adviser to the Payne Institute.

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