US Unveils Tiered Hydrogen Tax Credit Favoring Cleaner Production

The Biden Administration has announced proposed rules for a tax incentive promoting clean hydrogen production, with hydrogen derived using fossil fuels still qualifying but for lower credits.

As part of the proposed regulations for the Clean Hydrogen Production Credit established by the Inflation Reduction Act, companies that produce cleaner hydrogen and meet prevailing wage and apprenticeship requirements qualify for a credit of $3 per kilogram of hydrogen. Hydrogen whose production process entails higher lifecycle emissions gets less.

The four-tier, 10-year incentive scheme is based on carbon intensity, which must not exceed four kilograms of carbon dioxide equivalent per kilogram of hydrogen produced.

The incentive scheme, which emanates from Section 45V of the U.S. Code, plans to use the Energy Department’s Greenhouse Gases, Regulated Emissions and Energy Use in Transportation (GREET) model in classifying hydrogen based on carbon intensity. The department expects to release an updated GREET model March 2024.

The official text of the proposed rules for the hydrogen tax credit notes, “As of the publication date of these proposed regulations, 45VH2-GREET includes the following hydrogen production pathways—steam methane reforming (SMR) of natural gas, with potential carbon capture and sequestration (CCS); autothermal reforming (ATR) of natural gas, with potential CCS; SMR of landfill gas with potential CCS; ATR of landfill gas with potential CCS; coal gasification with potential CCS; biomass gasification with corn stover and logging residue with no significant market value with potential CCS; low-temperature water electrolysis using electricity; and high-temperature water electrolysis using electricity and potential heat from nuclear power plants”.

Hydrogen produced using so-called renewable natural gas (RNG) and fugitive sources of methane are being considered for inclusion for the credit. “In the context of this guidance, the term RNG refers to biogas that has been upgraded to be equivalent in nature to fossil natural gas”, the official text states.

“Fugitive methane refers to the release of methane through, for example, equipment leaks, or venting during the extraction, processing, transformation, and delivery of fossil fuels to the point of final use, such as coal mine methane or coal bed methane”.

The US Chamber of Commerce deemed the requirements restrictive. “The proposed regulations released today by the Treasury Department on the clean hydrogen production credit will stunt the growth of a critical industry before it has even begun”, the group’s president, Marty Durbin, said in a statement.

“In issuing these regulations, the White House failed to listen to its own experts at the Department of Energy who advocated for the type of flexible and balanced approach necessary to attract investment and stimulate demand for clean hydrogen”, Durbin said in the statement on the group’s website.

The chamber said it would use the public comment process to push for flexibility in the final regulations.

“Unfortunately, the restrictions in the proposed regulations—which didn’t come from Congress—threaten to steer investment elsewhere, harming efforts to reduce emissions in hard-to-decarbonize industrial sectors”, Durbin said.

Advocacy group the Natural Resources Defense Council (NRDC) expressed support for the proposed regulations. “The rules contain strong measures to ensure that electrolytic hydrogen production does not add overwhelming new demand on the power grid and bring extra fossil fuels online at the expense of the climate and U.S. electricity customers”, it said in a statement.

NRDC policy director for emerging technologies Rachel Fakhry said, “Anything less than the climate and consumer protections proposed today would be a giveaway to legacy energy companies eager to hijack hydrogen at the direct expense of the climate and consumers”.

“Treasury must hold firm and finalize this strong guidance”, Fakhry added.

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