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March 1, 2024
The Clean Hydrogen Production Credit: How the Incentives are
Structured
The Inflation Reduction Act of 2022 (IRA; P.L. 117-169)
clean hydrogen (QCH), and have begun construction prior
enacted a new tax credit for the production of “clean”
to 2033. QCH cannot have a lifecycle greenhouse gas
hydrogen. Widespread adoption of hydrogen fuel may
emissions rate greater than 4 kilograms of CO2e per
reduce economywide greenhouse gas (GHG) emissions,
kilogram of hydrogen through the point of production. If a
especially in sectors that have traditionally proven difficult
facility placed in service before 2023 did not initially
to decarbonize, such as trucking, steel manufacturing, and
produce QCH, but is modified to produce QCH before
cement production. This In Focus provides background
2033, and if those modifications are charged to the
information on hydrogen fuel and the clean hydrogen
taxpayer’s capital account, then the facility qualifies for the
production credit, also known as “the 45V credit” based on
credit. Without additional modifications, changing the fuel
its Internal Revenue Code (IRC) section.
source would not be considered a capital expense and
therefore would not make a facility eligible for the credit.
The Basics of Hydrogen Fuel
Tax-exempt entities including nonprofits, local
Hydrogen currently fulfills important uses in chemical
governments, and rural electric cooperatives may receive
plants and oil refineries, but does not deliver energy
direct cash payments in place of traditional income tax
services to firms and consumers other than in
credits. Taxable entities may also elect to receive direct
demonstration-scale quantities. However, a future economy
cash payments for five years, starting with the year a
using hydrogen as a fuel could offer an alternative that
facility is placed in service. Taxable entities cannot make
provides the numerous modern energy services associated
this election after 2032. Finally, the CHPC is transferable,
with fossil fuels. In addition to providing a fuel for
meaning that credits may be sold from one business to
transportation, hydrogen could support industrial processes
another for cash. Businesses of all types, including
or building operations, or become part of the energy
businesses not in the energy sector, may buy credits. Once
infrastructure by storing energy. The hydrogen energy value
bought, credits cannot be resold to a third entity.
chain spans resource extraction, production, storage,
transportation, and final conversion and end use.
CHPC Credit Values and “Cliffs”
Demonstrations of hydrogen technology and the value
For taxpayers meeting prevailing wage and apprenticeship
propositions based on hydrogen continue to emerge,
requirements as described under 26 U.S.C. §45V, the
ranging from one-off funded projects to public-private
maximum credit is $3 per kilogram of QCH, adjusted
partnerships in the United States and abroad.
annually for inflation. Taxpayers producing QCH with
Using money provided by the Infrastructure Investment and
lifecycle GHG emissions below 0.45 kilograms of CO2e
Jobs Act (IIJA; P.L. 117-169), the Department of Energy
(through the point of production) are eligible for the full $3
(DOE) announced seven finalists for the initial $7 billion of
credit. Taxpayers may receive partial credits of
Regional Clean Hydrogen Hubs funding on October 13,
• $1 per kilogram of QCH if the CO
2023. CRS Report R47289, Hydrogen Hubs and
2e emissions rate is
from 0.45 kilograms to less than 1.5 kilograms;
Demonstrating the Hydrogen Energy Value Chain, by
Martin C. Offutt, provides more information on hydrogen
• $0.75 per kilogram of QCH if the CO2e emissions rate is
hubs and their role in the hydrogen value chain.
from 1.5 kilograms to less than 2.5 kilograms;
Credit Eligibility Requirements
• $0.60 per kilogram of QCH if the CO2e emissions rate is
Taxpayers producing clean hydrogen at qualifying facilities
between 2.5 and 4.0 kilograms.
may receive the clean hydrogen production credit (CHPC)
Figure 1 shows how the CO2e emissions rate affects the
based on the amount of clean hydrogen produced, the
value of the CHPC. The CHPC includes four “credit
lifecycle carbon dioxide equivalent (CO2e) emissions rate
cliffs”—points at which the value of the credit rises or falls
of the hydrogen through the point of production, and the
based on small changes in CO2e emissions. Policy cliffs can
taxpayer’s compliance with prevailing wage and
provide inconsistent incentives for behavioral changes,
apprenticeship requirements. For GHGs other than CO2,
depending on the proximity to the given cliff. In the case of
the carbon dioxide equivalent is the quantity of CO2 that
the CHPC, such cliffs are combined with flat or unchanging
would produce the same amount of global warming over a
credit values over much wider ranges of CO2e emissions.
set time period as the non-CO2 GHG. Credits are available
For example, the CHPC increases significantly when
for 10 years after a facility is placed in service.
taxpayers reduce their CO2e emissions from 0.46 to 0.44
To be classified as a qualified facility, the facility in
kilograms (per kilogram of hydrogen); on the other hand,
question must be owned by the taxpayer, produce qualified
producers have no incentive to reduce their emissions from
0.44 to 0.00 kilograms.
https://crsreports.congress.gov
The Clean Hydrogen Production Credit: How the Incentives are Structured
Figure 1. Value of the Clean Hydrogen Production Credit, by Carbon Dioxide Equivalent Emissions
Credit per kilogram of hydrogen for a firm meeting applicable wage and apprenticeship requirements
Source: CRS analysis of 26 U.S.C. §45V.
Notes: Values displayed are before reductions for the use of tax-exempt bonds.
CHPC amounts are reduced by four-fifths for producers
IRS Notice 2022-58, in which the Treasury Department and
failing to meet prevailing wage and qualified apprenticeship
IRS requested comment on 59 questions related to the
requirements. These requirements, like the CO2e emissions
CHPC. The proposed IRS rule conforms to statute,
formula, create credit cliffs around fixed labor standards.
requiring that GHG emissions—including only CO2,
To satisfy the wage requirements, laborers and
methane, and nitrous oxide—be calculated through the
mechanics constructing, altering, or repairing a facility
point of production (well-to-gate) as determined under the
must be paid wages at or above the “prevailing wage” (as
most recent Greenhouse Gases, Regulated Emissions, and
determined by the Secretary of Labor) of workers
Energy Use in Transportation (GREET) model developed
performing similar work in the same locality. The
by Argonne National Laboratory or a successor model.
apprenticeship requirements stipulate that registered
Generally, the calculation of CO
apprentices must provide at least 10%, 12.5%, or 15%
2e emitted when making
hydrogen with electricity and water—a process known as
(depending on the year when construction begins) of the
electrolysis—uses the CO
labor hours associated with constructing, altering, or
2e emissions of the regional
electricity grid. Taxpayers wishing to attribute their
repairing any facilities claimed under the CHPC. Under the
“
emissions to a specific electricity generating facility rather
good faith effort exception,” firms meet the apprenticeship
than the grid may do so provided they meet three conditions
requirements if they request apprentices from a registered
and are verified by an unrelated party (26 U.S.C.
program and either do not receive a response within five
§45V(c)(2)(B)(ii)). These conditions are enumerated in the
business days or are denied for reasons other than their
proposed “Eligible Energy Attribute Certificate [EAC]
refusal to comply with the requirements.
Requirements” and include incrementality, deliverability,
The CHPC is also reduced by the share of financing coming
and temporal matching. In the NPRM, incrementality
from tax-exempt bonds, up to a maximum reduction of
generally involves establishing that the source of electricity
15%. For example, if 10% of project financing comes from
is no more than three years old (potentially implying that
tax-exempt bonds, the credit amount is reduced by 10%; if
new “increments” of energy were added to the grid).
25% of project financing comes from tax-exempt bonds, the
Deliverability is met if the electricity is generated in the
credit amount is reduced by 15%.
same region as the hydrogen is produced, with regions
defined in DOE’s National Transmission Needs Study. The
Fiscal Costs
temporal matching requirement necessitates the taxpayer
In December 2023, the Joint Committee on Taxation (JCT)
support any claim that the incremental source of electricity
projected that the CHPC would reduce federal revenues by
was actively generating and dispatching electricity in the
$4.7 billion from FY2023 through FY2027. The JCT
same hour as the hydrogen was produced. Under the
estimated that approximately $2.2 billion of this amount
proposed rulemaking, the hourly temporal requirement will
would come in the form of direct payments to hydrogen
begin after 2027; until then, an annual requirement will be
producers.
used.
Recent Developments
Nicholas E. Buffie, Analyst in Public Finance
The Treasury Department and the IRS published a notice of
Martin C. Offutt, Analyst in Energy Policy
proposed rulemaking (NPRM) and notice of public hearing
on December 26, 2023. The proposed rule was preceded by
IF12602
https://crsreports.congress.gov
The Clean Hydrogen Production Credit: How the Incentives are Structured
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https://crsreports.congress.gov | IF12602 · VERSION 1 · NEW