On August 16, 2022, President Joe Biden signed the Inflation Reduction Act of 2022 (the “Act”) into law. The Act includes significant incentives pertaining to producers and end users of clean hydrogen including a new clean hydrogen production tax credit as well as an expansion of the investment tax credit for hydrogen-related energy storage. This alert provides a brief overview of the Act’s hydrogen-related tax credits and what they mean for project developers and producers of clean hydrogen. For a more detailed discussion of the credits from a tax perspective, click here.
The Act defines “clean hydrogen” as hydrogen that is produced through a process that results in a lifecycle greenhouse gas emissions rate of no greater than 4 kilograms of CO2 equivalent (“CO2e”) gas per kilogram of hydrogen. Because this definition is process-neutral, the tax credit is available whether the hydrogen is produced through electrolysis to create green hydrogen, steam methane reforming to create blue hydrogen or any other process. Lifecycle gas emissions are determined under the Greenhouse gases, Regulated Emissions, and Energy use in Transportation model (known as the “GREET model”), which considers aggregate emissions up to the point of production (i.e., “well-to-gate”).
Clean Hydrogen Tax Incentives
Section 45V of the Act creates a new tax credit for the production of qualified clean hydrogen (the “Clean Hydrogen Production Credit”). The value of this credit varies depending on the clean hydrogen’s lifecycle carbon intensity, with producers receiving up to $3.00 per kg of hydrogen for the least carbon-intensive hydrogen down to $0.60 per kg of hydrogen for the most carbon-intensive, yet still qualifying, clean hydrogen.
As an alternative to the Clean Hydrogen Production Credit, taxpayers may elect the Section 48 Investment Tax Credit (the “ITC”) with respect to clean hydrogen production facilities, receiving an ITC of up to 30% depending on the carbon intensity of the production process.
The Clean Hydrogen Production Credit is not available, however, for clean hydrogen produced at a facility that also includes carbon capture equipment for which the Section 45Q carbon capture tax credit is allowed to any taxpayer.
With respect to fuel cells, the Act extends the 30% fuel cell ITC through 2024 before transitioning to the technology-neutral clean-energy investment tax credit in 2025. There is also a new 30% ITC for energy storage, including hydrogen storage, again available through 2024 before transitioning to the technology-neutral clean-energy investment tax credit.
The Act also includes tax incentives to facilitate use of clean hydrogen. These additions include an increase to the 30% credit cap for the Alternative Fuel Refueling Property Credit from $30,000 to $100,000 and credits for fuel cell vehicles, including commercial vehicles. These incentives will increase the demand for clean hydrogen throughout the transportation sector.
The incentives included in the Act will make existing and proposed clean hydrogen projects more economic. In addition to providing significant tax credits for clean hydrogen production and hydrogen-related energy storage, the Act also provides incentives for end-use hydrogen applications in transportation. The Act sets the stage for significant investment in the production and use of clean hydrogen in the United States.
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