45V Clean Hydrogen Tax Credit Rules: Good For Consumers, Industry, Climate

U.S. Treasury threaded the needle to protect consumers, unlock investment, and cut emissions

When the U.S. Treasury issued final rules for the Inflation Reduction Act’s Section 45V Clean Hydrogen Production Tax Credit – the core policy to fuel growth of a new domestic clean hydrogen industry – it ended two and a half years of fiery debate. Treasury received 30,000 public comments intended to shape which projects qualify as “low-emissions” hydrogen and can earn up to a $3 tax credit per kilogram of hydrogen produced; for context, Treasury received about 2,000 rulemaking comments for the clean electricity tax credit and just 89 for the electric vehicle tax credit.

The stakes for this tax credit were very high. Loose rules would have qualified hydrogen production that is much dirtier than how it’s made today under the guise of “clean” and could have set back U.S. efforts to cut climate pollution by 2 to 3 percentage points – equivalent to putting 48 million cars on the road – while raising wholesale electricity prices 10 percent and costing the government around $30 billion per year.

Fortunately, Treasury threaded the needle by maintaining most guardrails necessary to ensure 45V supports truly clean hydrogen production and builds a robust, financially viable industry. And remarkably, Treasury tailored the rules with carve-outs and concessions that offered all stakeholders a piece of the pie without blowing up the crucial “three pillars” protections. Initial statements from companies, trade groups, and NGOs suggest that while no one is thrilled, the final rules are a compromise everyone can work with.

In a Latitude Media byline, I argue this compromise is a precious opportunity to spark investment in truly clean hydrogen across America. If the industry lines up behind these rules, it can finally begin deploying projects that have been waiting for years with bated breath. Buyers will also be more likely to sign contracts, now having reasonable confidence the hydrogen they are procuring will be truly clean.

All sides must resist the urge to relitigate old battles or seek self-serving tweaks to 45V with the new administration and Congress. Any actions that upset the fragile equilibrium would bring all parties back to the table, delaying the business certainty these rules provide by several more years – long enough to send investors packing for other jurisdictions and ceding U.S. leadership on this budding industry.

In a new Energy Innovation blog, I took a longer look at the final 45V rules for electrolytic hydrogen, highlighting key differences from the December 2023 draft and what they mean for climate and the industry’s long-term viability.

In brief, the final rules largely lock in the “three pillars,” requiring electrolyzers to buy clean electricity that is new, local, and generated at the same time as electrolyzers’ hydrogen production.

However, the final rules also include targeted exemptions that will likely subsidize some dirty electrolytic hydrogen, along with concessions that trade emissions integrity for operational risk reduction. These include carve-outs for nuclear power plants (due to perceived retirement risk) and facilities within California and Washington (due to state policies), as well as an hour-by-hour crediting approach that allows higher overall emissions but removes the risk of a few bad hours voiding a year’s worth of credits.

Treasury’s final 45V rules bend but do not break its proposed rules’ guardrails, resulting in a system that remains a net win for climate and industry growth while bringing more stakeholders on board. While the journey was long, Treasury got it right: 45V can stand up a hydrogen industry that is broadly clean, protects consumers, and responsibly uses public funding on projects that will remain viable after the tax credit expires.

Whether this future comes to pass depends on stakeholders upholding this compromise, rather than dragging everyone back into the mud.