Hydrogen tax credits
Hydrogen tax credits are starting to take shape in Congress.
The tax credits would reward production of “clean hydrogen,” meaning hydrogen made with a process that emits at least 50% less carbon dioxide than use of steam-methane reforming to separate hydrogen from natural gas.
The lower the emissions compared to steam-methane reforming, the larger the tax credit. Emissions reductions would have to be determined by looking at emissions over the full lifecycle to produce the hydrogen.
The Senate Finance Committee approved the tax credits the last week in May as part of its markup of a Wyden energy tax credit bill. (For more information about the bill, see “Wyden bill and tax credits” at www.projectfinance.law.)
The markup was an effort by the committee chairman, Ron Wyden (D-Oregon), to lay down a marker as Congress considers possible action to promote clean energy this year as part of a massive infrastructure bill. Any infrastructure bill is expected to start in the House.
The bill that cleared the Senate Finance Committee would give hydrogen producers a choice of two tax credits: production tax credits as high as $3 per kilogram of hydrogen produced in the first 10 years after the electrolyzer or other production equipment is first put in service or an investment tax credit for as much as 30% of the equipment cost. The investment tax credit would be claimed entirely in the year the equipment is first put in service. The production tax credit amount would be adjusted annually for inflation.
The carbon emissions would have to be at least 95% lower than for hydrogen produced from natural gas using a steam-methane reforming process to claim the full tax credit. A clean hydrogen producer who does not reach at least 95% would qualify for tax credits at only 20% to 34% of the full rate.
Hydrogen producers would have the option to be paid the cash value of the credits under an IRS refund process with a one-year time lag.
The tax credits are retroactive. They would cover hydrogen produced or electrolyzers put in service since the start of this year.
However, they could not be claimed unless contractors and subcontractors working on the project pay at least prevailing wages as determined by the US Department of Labor and use qualified apprentices for at least 15% of total labor hours, both during construction and when making any repairs or improvements during the full period tax credits are claimed or, where an investment tax credit is claimed, during the five-year period the ITC is subject to recapture.
Meanwhile, the US Treasury released details of a low-carbon hydrogen tax credit that the Biden administration favors. The details are in a “green book” that the Treasury released at the end of May.
The Biden tax credit would be simpler to administer, but could be less generous.
Production tax credits could be claimed for making hydrogen from renewable or nuclear electricity and water during the first six years after the electrolyzer is first put in service. The credit would be $3 a kilogram “between 2022 and 2024” and $2 a kilogram “between 2025 and 2027.” The credit amounts would be adjusted for inflation.
Credits could also be claimed on hydrogen made from natural gas, but only if all of the carbon emitted during production is captured and sequestered.
Construction of the hydrogen production facility would have to start by the end of 2026 to qualify for any tax credits. The production equipment would have to be put in service after this year.
The Treasury said the administration would work with Congress to impose “strong labor standards.”