The Clean Hydrogen Production Credit: How the Incentives are Structured

https://crsreports.congress.gov

Updated January 31, 2025

The Clean Hydrogen Production Credit: How the Incentives are Structured

P.L. 117-169, commonly referred to as the Inflation Reduction Act of 2022 (IRA), enacted a new tax credit for the production of “clean” hydrogen. Widespread adoption of hydrogen fuel may reduce economy-wide greenhouse gas (GHG) emissions, especially in sectors that have traditionally proven difficult to decarbonize, such as trucking, steel manufacturing, and cement production. The credit aims to incentivize hydrogen fuel production, but it reduces government revenue, and the IRS implementing regulation generated significant public comment. Given this debate, the 119th Congress may elect to amend the credit. This In Focus provides background information on hydrogen fuel and the clean hydrogen production credit (CHPC), also known as “the 45V credit,” based on its Internal Revenue Code (IRC) section.

The Internal Revenue Service (IRS) modified and finalized its CHPC regulations on January 10, 2025. The IRS set rules based, in part, on over 30,000 comments received on a December 2023 proposed rule. The final regulations are discussed below in the section “Recent Developments.”

The Basics of Hydrogen Fuel

Hydrogen currently fulfills important uses in chemical plants and oil refineries, but does not deliver energy services other than in demonstration-scale quantities. However, a future economy using hydrogen as a fuel could offer an alternative that provides the numerous modern energy services currently associated with fossil fuels. In addition to providing a fuel for transportation, hydrogen could support industrial processes or building operations, or become part of the energy infrastructure by storing energy. Demonstrations of hydrogen technology and the value propositions based on hydrogen continue to emerge, ranging from one-off funded projects to public-private partnerships in the United States and abroad.

Credit Eligibility Requirements

Taxpayers producing clean hydrogen at qualifying facilities may receive the CHPC based on the amount of clean hydrogen produced, the lifecycle carbon dioxide equivalent (CO2e) emissions rate of the hydrogen through the point of production, and the taxpayer’s compliance with prevailing wage and apprenticeship requirements. The carbon dioxide equivalent is a measurement unit that allows disparate gases and their effect on global warming to be expressed in a common unit. Credits are available for 10 years after a facility is placed in service.

A qualified facility must be owned by the taxpayer, produce qualified clean hydrogen (QCH), and have begun construction prior to 2033. QCH cannot have a lifecycle

GHG emissions rate greater than 4 kilograms of CO2e per kilogram of hydrogen through the point of production. If a facility placed in service before 2023 did not initially produce QCH, but is modified to produce QCH before 2033, and if those modifications are charged to the taxpayer’s capital account, then the facility qualifies for the credit. Without additional modifications, changing the fuel source would not be a capital expense and therefore would not make a facility eligible for the credit.

Tax-exempt entities including nonprofits, local governments, and rural electric cooperatives may receive direct cash payments in place of traditional income tax credits. Taxable entities may also elect to receive direct cash payments for five years, starting with the year a facility is placed in service. Taxable entities cannot make this election after 2032. The CHPC is transferable, meaning that credits may be sold from one business to another for cash. Businesses of all types, including businesses not in the energy sector, may buy credits. Once bought, credits cannot be resold to a third entity.

CHPC Credit Values and “Cliffs”

For taxpayers meeting prevailing wage and apprenticeship requirements as described under 26 U.S.C. §45V, the maximum credit in 2024 was $3.11 per kilogram of QCH; amounts are adjusted annually for inflation. Taxpayers producing QCH with lifecycle GHG emissions below 0.45 kilograms of CO2e (through the point of production) are eligible for the full $3.11 credit. In 2024, taxpayers were eligible for partial credits of

• $1.04 per kilogram of QCH if the CO2e emissions rate

was from 0.45 kilograms to less than 1.5 kilograms;

• $0.78 per kilogram of QCH if the CO2e emissions rate

was from 1.5 kilograms to less than 2.5 kilograms; and

• $0.62 per kilogram of QCH if the CO2e emissions rate

was between 2.5 and 4.0 kilograms.

Figure 1 shows how the CO2e emissions rate affects the value of the CHPC. The CHPC includes four “credit cliffs”—points at which the value of the credit rises or falls based on small changes in CO2e emissions. Policy cliffs can provide inconsistent incentives for behavioral changes, depending on the proximity to the given cliff. In the case of the CHPC, such cliffs are combined with flat or unchanging credit values over much wider ranges of CO2e emissions. For example, the CHPC increases significantly when taxpayers reduce their CO2e emissions from 0.46 to 0.44 kilograms (per kilogram of hydrogen); on the other hand, producers have no CHPC-related incentive to reduce their emissions from 0.44 to 0.00 kilograms.

The Clean Hydrogen Production Credit: How the Incentives are Structured

https://crsreports.congress.gov

Figure 1. Value of the Clean Hydrogen Production Credit in 2024, 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 and IRS regulatory documents. Notes: Values displayed are before reductions for the use of tax-exempt bonds. kg = kilogram.

CHPC amounts are reduced by four-fifths for producers failing to meet prevailing wage and qualified apprenticeship requirements. To satisfy the wage requirements, laborers and mechanics constructing, altering, or repairing a facility must be paid wages at or above the “prevailing wage” (as determined by the Secretary of Labor) of workers performing similar work in the same locality. The apprenticeship requirements stipulate that registered apprentices must provide at least 10%, 12.5%, or 15% (depending on the year when construction begins) of the labor hours associated with constructing, altering, or repairing any facilities claimed under the CHPC. Under the good faith effort exception, firms meet the apprenticeship requirements if they request apprentices from a registered program and either do not receive a response within five business days or are denied for reasons other than their refusal to comply with the requirements.

The CHPC is reduced by the share of financing coming from tax-exempt bonds, up to a maximum 15% reduction.

Fiscal Costs

In December 2024, the Joint Committee on Taxation (JCT) projected that the CHPC will reduce federal revenues by $7.2 billion from FY2024 through FY2028. The JCT estimated that approximately $3.5 billion will come in the form of direct payments to hydrogen producers.

Recent Developments

The Department of the Treasury and the IRS published a final rule for the CHPC on January 3, 2025. Under the final rule, certain GHG emissions—CO2, methane, and nitrous oxide—are to be calculated through the point of production (well-to-gate) as determined by the version of the Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) model in effect when construction begins. GREET is maintained by Argonne National Laboratory. The IRA allows the use of successor models, and the final rule specifies “45VH2-GREET.”

The final rule explicitly includes a number of methods of making hydrogen, including some based on electricity and some based on chemical transformation of feedstocks such

as natural gas, coal bed methane, renewable natural gas, and others. If the rule and/or GREET does not explicitly cover a particular method, taxpayers may petition for a provisional emissions rate to calculate the tax credit. Generally, the calculation of CO2e emitted when making hydrogen with electricity and water—a process known as electrolysis— uses the CO2e emissions of the regional electricity grid. Taxpayers seeking to attribute their emissions to a specific electricity facility rather than the grid may do so provided they meet three conditions known as incrementality, deliverability, and temporal matching.

In the final rule, incrementality involves establishing that the source of electricity is no more than three years old (implying that new “increments” of electric energy were added to the grid) or, if the facility relies on carbon capture and sequestration technology, that technology cannot have started operation more than three years before the hydrogen production facility. Restarted facilities or expanded facilities may also meet the conditions for incrementality. Nuclear generation satisfies the incrementality requirement if purchasing the facility’s electricity is “likely to mitigate risk of retirement” as elaborated in a further set of criteria.

Deliverability is met if the electricity is generated in the same region (defined in the final rule) where the hydrogen is produced. The deliverability condition can also be met through use of interregional electricity if there are contractual arrangements between the generator and the hydrogen production facility and if the transmission can be demonstrated hourly.

Under the third condition, temporal matching, the electricity must be produced in the same time period as the hydrogen. Through 2029, the hydrogen must be produced in the same year as the electricity; starting in 2030, it must be produced during the same hour.

Nicholas E. Buffie, Analyst in Public Finance Martin C. Offutt, Analyst in Energy Policy

IF12602

The Clean Hydrogen Production Credit: How the Incentives are Structured

https://crsreports.congress.gov | IF12602 · VERSION 3 · UPDATED

Disclaimer

This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you wish to copy or otherwise use copyrighted material.