Treasury Snarls Tax Credit Process for Clean Hydrogen Production

The Treasury Department on Dec. 22 complicated a relatively simple statute in the Inflation Reduction Act with proposed regulations on hydrogen production tax credits.

The guidance complicates Section 45V of the tax code, which offers a tax credit for property producing hydrogen for sale or use that generates “lifecycle greenhouse gas emissions” at specified rates of efficiency. It emphasizes two requirements spurring cottage markets: sellers and brokers of energy attribute certificates, and unrelated verifiers of production and sale or use of hydrogen.

The Treasury’s one guidepost for defining greenhouse gas emissions in the statute was to “only include emissions through the point of production (well-to-gate)” as determined under the most recent model or successor model for greenhouse gases, regulated emissions, and energy use in transportation.

Four days before the Treasury released the proposed regulations, the Department of Energy issued a white paper that influenced the guidance. The paper emphasizes that because an increase in hydrogen production would increase electricity load, higher greenhouse emitting “dispatchable generators” (coal and natural gas fired plants) would supply the electricity to make up the marginal demand.

The deference to the Department of Energy has creates an administrative morass for taxpayers and potential legal challenges for the Treasury, which should expect many comments on these proposed regulations, with a Feb. 26 deadline for comments and a March 25 public hearing.

Energy Attribute Certificates

Steam methane reforming technology generates the lion’s share of hydrogen; using electricity to separate hydrogen atoms from water is a growing other method. Greenhouse gas emissions in this latter process depend greatly on assumed emissions from power plants creating the electricity.

Carbon capture can help mitigate rates, but the proposed regulations treat the capture equipment as part of the hydrogen facility. That will disappoint those who hoped a carbon capture credit could be allowed to a capturer and, if a different taxpayer, a clean hydrogen credit to the producer.

Treasury took the white paper’s proposal to assume a generic regional mix of energy sources, unless a taxpayer obtains an energy attribute certificate from a more efficient, regionally sourced power project that is newer—meaning not older than 36 months before the hydrogen facilities placed in service date—or has undergone an uptake of capacity that is newer.

The effect is a limit of availability of the tax credit to hydrogen producers that are sited nearer to such power generating facilities or that use carbon capture—a limit that’s absent in the statute.

The proposed regulations require energy attribute certificates to coincide with the calendar year of the hydrogen production, and after 2027, with the hour—yes, hour—of hydrogen production.

Ultimately, if the energy attribute certificate system remains, newer nuclear power, solar, and wind producers would benefit greatly due to an increase in value of their certificates. Nuclear power and offshore wind producers stand to benefit the most if the hourly requirement takes effect in 2028, as they would be able to substantiate the most power in the many hours when the sun doesn’t shine.

Notably, while transfers of tax credits can only occur once, no such restriction exists for energy attribute certificates, opening the possibility of a fluid market for energy attribute and offering opportunities for intermediaries of the certificates.

Unrelated Verifiers

The statute requires an unrelated party to verify production and sale or use of hydrogen. It only requires the verification of production and sale or use of any hydrogen, not of qualified clean hydrogen or of lifecycle greenhouse gas emissions.

The proposed regulations insert qualified clean hydrogen as a touchstone of the production verification. They take the unrelated-party limitation of the verifier to a sophisticated level, requiring not only that the verifier be unrelated to the taxpayer or an employee of a taxpayer, in the Section 267(b) or Section 707(b)(1) sense, but also that the verifier not:

• Receive a contingency fee
• Be a buyer of hydrogen or seller of a hydrogen feedstock
• Be a spouse of a related person, or
• Act as a partner in a partnership that is or has an employee that is related under these broader concepts

For transferred credits, the verifier’s independence must meet this criterion for both the transferee and transferor. This restriction could result in stakeholders with great understanding of the viability of a particular hydrogen credit to be precluded from acquiring it.

Finally, only verifiers who are members of the American National Standards Institute National Accreditation Board or California Resources Board Low Carbon Fuel Standard Program need apply. In this sense, Treasury has created a generally accepted accounting principles auditor-like independence standard to verify production and use of hydrogen, which would cause service fees in this sector to increase.

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

James Chenoweth is managing director for tax insurance at Alliant Insurance Services and was tax partner at Gibson Dunn and Baker Botts.

Write for Us: Author Guidelines