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

With the inclusion of these changes, the final rules provide clarity, investment certainty, and flexibility, including for participants in projects planned as part of the Department of Energy’s Regional Clean Hydrogen Hubs program.

The final rules 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. To qualify for the full credit, projects must also meet prevailing wage and apprenticeship standards.

“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 U.S. Deputy Secretary of the Treasury Wally Adeyemo. “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.”

"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.

The rules enable pathways for hydrogen produced using both electricity and methane, providing investment certainty while ensuring that clean hydrogen production meets the law’s lifecycle emissions standards. By law, the tax credit’s value is based on the lifecycle greenhouse gas (GHG) emissions of hydrogen production. To qualify as clean hydrogen under the statute, the lifecycle GHG emissions of the hydrogen production process must be no greater than 4 kilograms of carbon dioxide equivalents (CO2e) per kilogram of hydrogen produced.

Qualifying clean hydrogen falls into four credit tiers, with hydrogen produced with the lowest GHG emissions receiving the largest credit. Calculation of the lifecycle GHG analysis for the tax credit requires consideration of direct and significant indirect emissions.

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.

These safeguards help ensure that electricity consumption for hydrogen meets the statutory lifecycle GHG emissions standards, including that the lifecycle assessment take into account both direct and significant indirect emissions from hydrogen production. As the final regulations explain, without those safeguards, that additional load on the grid from hydrogen production will result in induced emissions.

However, the final rules differ from the proposed rules in several respects:

• New clean power (incrementality): As in the proposed rules, the final rules define electricity generation as incremental if the generator begins commercial operations within 36 months of the hydrogen facility being placed in service, or to the extent a plant increases its capacity within that period. The final rules provide additional pathways for demonstrating incrementality, including:
• Nuclear retirement risk. Electricity produced by nuclear plants meeting certain bright-line indications of being at risk of retirement and certain indications of co-dependence on hydrogen investment will be considered incremental, up to 200 MW per qualifying reactor. This reflects the fact that certain nuclear reactors are at greater risk of retirement based on certain economic factors, and if a nuclear retirement is averted then the additional demand from hydrogen production will not have induced emissions.
• State policies. Electricity generated in states with robust GHG emissions caps paired with clean electricity standards or renewable portfolio standards meeting the criteria set forth in the final rules will be considered incremental, given that, together, those policies can prevent significant induced emissions from hydrogen production. In consultation with expert agencies, Treasury has determined that Washington and California’s policies currently meet these criteria. Additional states could meet the criteria in the future if they adopt robust policies that meet the criteria. 
• New Carbon Capture and Sequestration (CCS). Electricity from a generator that has added CCS within a 36-month window before the hydrogen facility is placed in service will be considered incremental. 
• New, deliverable clean power generated annually, with a phase-in to hourly generation (time-matching): The final rules maintain the proposed requirement that EACs meet the temporal matching requirement if the electricity represented by the EAC is generated in the same hour as a hydrogen facility uses electricity to produce hydrogen. The final rules extend the transition allowing annual matching rule two additional years relative to the proposed rules, with hourly matching required starting in 2030 for all facilities. 
• Deliverability: The final rules confirm that electricity generated by a facility in the same grid region as the hydrogen facility meets the deliverability requirement, with certain clarifications, including providing a pathway to demonstrate electricity transfers between regions. Grid regions are based on the Department of Energy National Transmission Needs Study.
• Hourly accounting option: Once hourly matching is required, the final rules allow hydrogen producers to determine electricity-related lifecycle emissions on an hour-by-hour basis as long as the annual emissions of the hydrogen production process are under section 45V’s limit of 4 kg of CO2e per kg of hydrogen produced. This option will provide additional investment certainty because it helps producers avoid losing much of the credit value if they cannot procure EACs for a limited number of hours during the year.

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.

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.

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