U.S. Department of the Treasury Releases Final Rules for Clean Hydrogen Production Tax Credit

Final rules include significant changes and flexibilities to provide investment certainty and drive deployment of clean hydrogen

WASHINGTON – Today, the U.S. Department of the Treasury (Treasury) and Internal Revenue Service released final rules for the section 45V Clean Hydrogen Production Tax Credit established by the Inflation Reduction Act.

The final rules include significant changes and flexibilities that address several key issues to help grow the industry and move projects forward, while adhering to the law’s emissions requirements for qualifying clean hydrogen.

The final rules announced today clarify how producers of hydrogen, including those using electricity from various sources, natural gas with carbon capture, renewable natural gas (RNG), and coal mine methane can determine eligibility for the credit.

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To qualify for the full credit, projects must also meet prevailing wage and apprenticeship standards, continuing the Biden-Harris Administration’s commitment to put workers at the center of the clean energy economy and ensure clean energy jobs are good-paying jobs.

“These rules incorporate helpful feedback from companies planning investments which will drive significant deployment of clean hydrogen to power heavy industry and help create good-paying jobs,” said Wally Adeyemo, U.S. Deputy Secretary of the Treasury.

“The Inflation Reduction Act and Bipartisan Infrastructure Law represent the world’s most ambitious policy support of the clean hydrogen industry. Scaling the production of low-carbon fuels like hydrogen will be a big boost to difficult-to-transition sectors of our economy like heavy industry.”

“Clean hydrogen can play a critical role decarbonizing multiple sectors across our economy, from industry to transportation, from energy storage to much more,” said David M. Turk, U.S. Deputy Energy Secretary.

“The final rules announced today set us on a path to accelerate deployment of clean hydrogen, including at the Department of Energy’s clean Hydrogen Hubs, leading to new economic opportunities all across the country.”

"Over the past two years, our administration has listened to stakeholders across the hydrogen industry, states, advocates, and others,” said John Podesta, Senior Advisor to the President for International Climate Policy.

“The extensive revisions we've made in this final rule provide the certainty that hydrogen producers need to keep their projects moving forward and make the United States a global leader in truly green hydrogen.”

Treasury and IRS developed the final rules after consideration of roughly 30,000 public comments and many months of intensive collaboration between Treasury, IRS, and expert agencies including the Department of Energy and the Environmental Protection Agency.

In the coming weeks, the Department of Energy will release an updated version of the 45VH2-GREET model that producers will use to calculate the section 45V tax credit.

Electrolytic Hydrogen

For hydrogen production using electricity (e.g., “green” hydrogen using renewables and “pink” hydrogen using nuclear), the final rules incorporate crucial safeguards proposed in December 2023, but with additional clarity and flexibility that will help facilitate clean hydrogen investment.

Specifically, the final rules require that taxpayers seeking to use Energy Attribute Certificates (EACs) to attribute electricity use to a specific generator meet certain criteria for temporal matching, deliverability, and incrementality.

Methane-Based Hydrogen

The final regulations provide rules for determining eligibility of hydrogen produced using methane reforming technologies, including with carbon capture and sequestration (so-called “blue” hydrogen), as well as with the use of natural gas alternatives such as renewable natural gas (RNG) or coal mine methane.

The final rules aim to enhance the accuracy of upstream methane leakage rates used in determining the credit value.

Upstream methane leakage rates will be based on default national values in a forthcoming version of 45VH2-GREET. However, as described in the final regulations, future releases of 45VH2-GREET will incorporate project-specific upstream methane leakage rates, conditional on the availability of appropriate and verified data from the EPA Greenhouse Gas Reporting Program (GHGRP), including under the recently finalized updates to the EPA’s Subpart W rules and rules under Section 111 of the Clean Air Act, regarding oil and gas sector regulations.

For hydrogen production using natural gas alternatives, the final regulations provide rules on how to calculate lifecycle GHG emissions and claim the credit for alternatives sourced from a wider range of biogas and fugitive methane than the proposed rules allowed – including wastewater, animal manure, and landfill gas – and for coal mine methane.

In consideration of comments and with extensive consultation with expert agencies, the final rules provide clarity on the 45V lifecycle GHG emissions determination for those sources, including taking into account emissions in counterfactual scenarios.

The final rules take a sound and administrable approach to determining appropriate alternative fates which are used to determine lifecycle emissions according to parameters in 45VH2-GREET.

Further, as the 45V credit requires a lifecycle analysis of each process used to produce hydrogen, the emissions intensities of hydrogen produced using these feedstocks are measured separately (i.e., not blended).

The final rules do not include the “first productive use” requirement that was included in the proposed rules, in part because Treasury and IRS determined that such a rule would have administrative and compliance challenges. Rather, the likelihood that a source would otherwise be productively used is taken into account in assessing the alternative fate of that source.

The final rules aim to enhance development of “book-and-claim” systems for natural gas alternatives such as RNG or coal mine methane by detailing the information that such systems will need to provide. Because these systems will take time to develop, taxpayers will be able to begin using book-and-claim systems in 2027, upon determination of the Secretary of the Treasury that a system meets the requirements set out in these regulations.

The final rules will enable investment certainty by allowing all types of hydrogen producers the option of using the version of the 45VH2-GREET model that was the most recent when the facility began construction for the duration of the credit.

This is in consideration of comments that the prospect of potential changes to the model over time reduces investment certainty.