Treasury and IRS Finalize Clean Hydrogen Production Credit Regulations

The Inflation Reduction Act of 2022 added the Section 45V production tax credit for the production of clean hydrogen (Section 45V) to the Internal Revenue Code of 1986, as amended. Section 45V provides a credit against federal income tax for each kilogram of clean hydrogen produced during the taxable year for the first 10 years after a qualified clean hydrogen production facility that began construction before 2033 is placed in service (the Section 45V Credit). The Section 45V Credit amount is equal to 60 cents per kilogram of hydrogen produced multiplied by the “applicable rate.” This base rate is increased to three dollars per kilogram if certain prevailing wage and apprenticeship requirements are satisfied. The “applicable rate” is based on the lifecycle greenhouse gas (GHG) emissions rate of the hydrogen produced at the qualified clean hydrogen production facility as follows:

• Greater than 4 kilograms of carbon dioxide equivalent (CO2e) per kilogram of hydrogen: zero percent
• Less than 4 kilograms of carbon dioxide equivalent (CO2e) per kilogram of hydrogen but not greater than 2.5 kilograms of CO2e per kilogram of hydrogen: 20 percent
• Less than 2.5 kilograms of CO2e per kilogram of hydrogen but not less than 1.5 kilograms of CO2e per kilogram of hydrogen: 25 percent
• Less than 1.5 kilograms of CO2e per kilogram of hydrogen but not less than 0.45 kilograms of CO2e per kilogram of hydrogen: 33.4 percent
• Less than 0.45 kilograms of CO2e per kilogram of hydrogen: 100 percent

On January 3, 2025, the U.S. Department of Treasury (the Treasury) and Internal Revenue Service (the IRS) released final regulations on Section 45V (the Final Regulations). The Final Regulations provide clarifications to certain definitions, eligibility criteria, lifecycle emission calculations and procedural requirements of Section 45V of the code initially outlined in proposed Section 45V regulations released on December 26, 2023, as corrected by notice of proposed regulations 117631-23 released on March 4, 2024 (the Proposed Regulations). The Proposed Regulations generated approximately 30,000 written comments, and the Treasury and IRS responded to many of these comments in the preamble to the Final Regulations. The Treasury and IRS adopted many of the positions taken in the Proposed Regulations in the Final Regulations except the following significant changes and clarifications:

1. Lifecycle Greenhouse Gas Emissions

   • The Final Regulations refine the definition and calculation of lifecycle GHG emissions by mandating the use of the 45VH2-GREET Model, a hydrogen-specific adaptation of the broader GREET Model. This shift from relying on the “most recent GREET model” provided in the Proposed Regulations is intended to ensure fixed parameters for emissions calculations that are tailored specifically to hydrogen pathways. The Final Regulations also clarify the boundaries of “well-to-gate” emissions, which include only the emissions up to the point of hydrogen production and explicitly exclude emissions associated with the manufacturing of the equipment within the hydrogen production pathway, such as power generators or production facilities.

2. Energy Attribute Certificates

   • The Final Regulations significantly modified the requirements for Energy Attribute Certificates (EACs) to address concerns raised over ambiguities in the Proposed Regulations. Unlike the Proposed Regulations, the Final Regulations establish three clear standards for EACs: (1) incrementality, requiring the clean electricity to represent new capacity and directly reduce emissions; (2) temporal matching, mandating hourly alignment between electricity generation and hydrogen production starting in 2030; and (3) geographic matching or deliverability, ensuring the electricity is sourced from a power producer physically located in the same region as the hydrogen production facility, with some exceptions. The Final Regulations also require EACs to include detailed information, such as the electricity source, generation technology and precise generation time. To prevent double counting, the Final Regulations mandate the use of qualified EAC registries that assign unique identification numbers, track ownership and ensure each EAC is claimed and retired only once.

3. Verification Standards

   • The Final Regulations include more detailed verification and recordkeeping requirements to ensure transparency and consistency in claiming the clean hydrogen production credit. All hydrogen production must be independently verified by an unrelated third party, and lifecycle GHG emissions rates must align with the 45VH2-GREET Model for validation. Additionally, the Final Regulations require facilities to irrevocably elect one credit, such as the Section 45V Credit, the Section 45Q carbon capture credit or the Section 48 energy investment credit, and disallows overlapping claims for the same hydrogen production activity.

4. Renewable Natural Gas and Fugitive Methane

   • The Final Regulations provide that GHG emissions values related to renewable natural gas and fugitive methane are expected to be included in a soon-to-be updated 45VH2-GREET Model. Treasury also seemed to open to a potential “book-and-claim” system for these types of natural gas sources.

5. Definition of “Facility”

   • The Proposed Regulations defined “facility” broadly, allowing taxpayers to include auxiliary equipment, multifunctional components and separate production lines even when they shared infrastructure. The Final Regulations narrow this definition, specifying that a facility includes only components that interdependently produce hydrogen, such as electrolyzers and carbon capture equipment, while excluding unrelated auxiliary systems, upstream feedstock equipment and downstream hydrogen transportation or storage systems. The Final Regulations also refine the treatment of individual production lines, allowing them to qualify as separate facilities only if they operate independently.

The Final Regulations provide some welcome clarity and flexibility with many of the Section 45V concepts that were first introduced under the Proposed Regulations with the expectation that the U.S. green hydrogen market will continue to expand now that there is more certainty with qualifying for and claiming the Section 45V credit.