After extensive lobbying, a leaked draft, and a long wait, Treasury and IRS have finally issued the highly anticipated proposed regulations (the "Proposed Regulations") for the new section 45V clean hydrogen production tax credit that Congress enacted in the Inflation Reduction Act (IRA). Among other things, those Proposed Regulations impose additional requirements on hydrogen producers to source and track clean energy in order to take the tax credit. Lauded by the some in the environmental community and criticized by some potential hydrogen producers, it is unclear whether the Proposed Regulations are sufficiently grounded in the statute, result from valid rulemaking processes, or pass muster under other administrative law principles.

Summary

Section 45V expressly ties the amount of the hydrogen production tax credit to the amount of lifecycle greenhouse gas (GHG) emissions from the point of hydrogen production (the "well-to-gate" hydrogen production)—the lower the GHG emissions, the higher the credit. The statute requires measuring the GHG emissions from electrically produced hydrogen via the Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) model. Therefore, the GREET model is itself one crucial determinant of whether a hydrogen producer is eligible for the credit and the size of the credit the producer may claim. It is thus legally significant that concurrent with the Proposed Regulations, the Department of Energy (DOE) released guidelines detailing the assessment of lifecycle GHG associated with electricity used for clean hydrogen production and an updated version of the GREET model (with a newly interposed user interface and accompanying Guidelines).

The Proposed Regulations and revamped user interface for the GREET model are difficult to reconcile with the purpose of section 45V. Congress intended the section 45V credit to kick start domestic hydrogen production. That credit is worth up to $3.00 per kilogram of clean hydrogen for producers who emit the least GHG and meet other statutory criteria. But the Proposed Regulations add three new requirements, commonly known as the " three pillars," that hydrogen producers who use electricity to produce hydrogen must meet: (1) incrementality/ additionality requirements, (2) deliverability requirements, and (3) time-matching requirements. The Proposed Regulations layer those new requirements on top of the low-emission requirements that are already in the statute (which keys the value of the credit to the producer's GHG emissions as measured under the GREET model). Moreover, the new user interface integrates the three pillars as a threshold for hydrogen producers to use the GREET model in measuring GHG emissions.

The Proposed Regulations already have their detractors. Several energy industry organizations, along with Senator Joe Manchin (D-WV), have sharply criticized the Proposed Regulations and predicted that they will impede the growth of the US clean hydrogen industry and overall decarbonization. Given the vocal opposition, it seems likely that if Treasury and the IRS were to finalize the Proposed Regulations in their current form, there will be legal challenges to the validity of those regulations. One potential challenge would be that Treasury and the IRS have exceeded their statutory authority in implementing these three pillars because there is no mention of the three pillars in the statutory language. Indeed, the statute already accounts for the carbon intensity of hydrogen production in determining the amount of the credit. Another potential challenge is that DOE's Guidelines and its interposition of the new user interface on the GREET model constitute agency rulemaking but fail to comply with the notice-and-comment requirements for rulemaking under the Administrative Procedure Act (APA).

The Proposed Regulations would, if finalized, apply to tax years beginning after December 26, 2023. The publication of the Proposed Regulations in the Federal Register began a 60-day public comment period. Comments are due on February 26, 2024. A public hearing on the Proposed Regulations is slated for March 25, 2024.

Section 45V Background

Section 45V provides a ten-year production tax credit for qualified clean hydrogen that is produced at a qualified clean hydrogen production facility. To qualify, the clean hydrogen must be produced through a process that results in a well-to-gate lifecycle GHG emission rate of not greater than 4 kilograms of carbon dioxide equivalent (CO2e) per kilogram.

Depending on the lifecycle GHG emissions rate as determined under the GREET model, the amount of the tax credit can vary from $0.12/kg (for hydrogen with a lifecycle GHG emissions rate between 2.5 and 4 kg of CO2e per kg of hydrogen) up to $0.60/kg (for hydrogen with a lifecycle GHG emissions rate of less than 0.45 kg of CO2e per kg of hydrogen). If the facility meets prevailing wage and apprenticeship requirements, the full value of the credit increases fivefold. At the highest credit level, this means a jump from $0.60/kg up to $3.00/kg.

Taxpayers can also claim the section 45V credit as a direct payment for up to five years or elect to transfer the credit to another taxpayer in exchange for cash. For more information on these direct pay and transferability options, please see our previous Steptoe Client Alert, "Treasury and IRS Release Long-Awaited Guidance on Direct Pay and Transferability Elections."

Proposed Regulations

Nothing in the statute's language or history portends the most prominent limitations in the Proposed Regulations—the "three pillars."

Three Pillars

To identify and verify the GHG emissions associated with the electricity used for the hydrogen production process, the Proposed Regulations require hydrogen producers to purchase and retire qualifying energy attribute certificates (EACs). For facilities that produce hydrogen using electricity, the Proposed Regulations impose three pillars that the hydrogen production must meet to obtain EACs and claim the credit:

  • Incrementality/Additionality: The producer must derive the electricity from power facilities that began operation no more than three years before the hydrogen facility is placed in service;
  • Deliverability: The producer must source electricity from a power producer in the same region as the hydrogen facility; and
  • Time-Matching: The producer must match the electricity used to produce hydrogen with the clean power generation on an annual basis. That annual matching requirement applies until January 1, 2028; after that, producers must match production with clean power generation on an hourly

The Proposed Regulations impose other compliance requirements, including a reporting requirement that hydrogen producers must include a verification report attesting to the lifecycle emissions data with their annual tax return. A verified consultant must draft and sign the verification report under penalties of perjury.

Updated 45VH2-GREET 2023 Model

Section 45V requires potential credit claimants to measure the lifecycle GHG emissions "well-to-gate" using the GREET model or a "successor" model. With the Proposed Regulations, DOE issued a new 45VH2-GREET 2023 model. The 45VH2-GREET 2023 model makes no computational changes to the Hydrogen GREET pathways model but it overlays (presumably at DOE's behest) a user interface that dictates whether and the extent to which hydrogen producers can use the model. Moreover, the current iteration of the user interface and the model limits the 45V model so that it can test hydrogen using only eight pathways (although the Proposed Regulations state that future versions of the 45VH2-GREET model may include additional hydrogen production pathways). The Proposed Regulations would allow taxpayers who are unable to use the 45VH2-GREET 2023 model (usually because they have feedstock or other hydrogen production technology incompatible with the GREET model) to petition DOE and Treasury for a provisional emissions rate they can use to claim the credit.

Carbon Dioxide Utilization and Co-Products

45VH2 GREET models only the permanent sequestration of carbon dioxide, as in Class II or Class VI injection wells. It does not model other forms of carbon dioxide utilization (e.g., production of synthetic fuels).1This means that the 45VH2 GREET model (as limited by the user interface) does not accommodate the use of carbon monoxide in the production of methanol from natural gas. This is hard to fathom because methanol is one of the primary hydrogen carrier products essential to DOE's US National Clean Hydrogen Strategy and Roadmap.2

The 45VH2-GREET 2023 model does, however, allow taxpayers that generate commercially useful co-products during the hydrogen production process to allocate a portion of the process's emissions to the co-product. But the constraints imposed by the user interface mean that the 45VH2-GREET 2023 model cannot simulate some co-products. Although DOE commented in the Guidelines that it might add other co-products to future versions of the GREET model, the current model (as constrained by the new user interface) simulates only steam, oxygen, and nitrogen. DOE therefore omitted other common co-products, such as the carbon monoxide co-product in syngas (which is a mixture of hydrogen and carbon monoxide).

Because of the input requirements in its new user interface, the 45VH2-GREET 2023 model effectively assumes all carbon monoxide in syngas is combusted at the point of production and does not treat carbon monoxide valorized outside the well-to-gate system to produce methanol as a co-product to which the producer may allocate some emissions in the new model. In effect, by overlaying its new user interface on the GREET model, DOE disqualifies hydrogen produced in syngas that is used to synthesize methanol (derived from a natural gas feedstock) from eligibility for the 45V credit. Accordingly, the Proposed Regulations should clarify whether a taxpayer can petition for a provisional emissions rate in the case where the hydrogen production technology is covered but the application of that technology (for instance to utilize co-products such as carbon monoxide to produce methanol) is not.

Renewable Natural Gas (RNG)

The Proposed Regulations include limited guidance for determining the emissions rate for hydrogen produced from renewable natural gas. For RNG to be treated as having a lower carbon emissions rate than fossil natural gas, the Proposed Regulations "anticipate requiring" that the RNG must originate from the first productive use of the methane and either be subject to direct use or be able to attain attribution certificates. RNG producers need significant lead time to aggregate RNG from dairy farms and other sources to meet the market demands from hydrogen producers. Treasury and the IRS requested further comments related to measurement methods and systems in a series of questions posed in the preamble to the Proposed Regulations.

There is concern that the Proposed Regulations will create a hardship for RNG producers to finance investment in new gathering and collection systems that will direct RNG to hydrogen producers because new projects will not be able to market the gas for hydrogen for any other purpose, creating a significant time mismatch in the market. Notably, the first-productive-use requirement for RNG is more stringent than the three-year look back that the Guidance affords electrolytic hydrogen. The Proposed Regulations thus currently treat hydrogen feedstocks differently but offer no rationale for doing so. Treasury and the IRS requested RNG comments in the preamble. But that request solicited comments only about measuring and verifying the RNG's first productive use; they did not invite comments about whether they should impose this first-productive-use requirement in the first instance.

Additionality and Nuclear Power Generation

Because the Proposed Regulations would require the electricity used to produce hydrogen to come from a new facility (i.e., one that began commercial operations no more than three years from the date the taxpayer elects to claim the section 45V credit), this arguably eliminates the credit for hydrogen producers using electricity from current nuclear facilities. The Proposed Regulations request comments on whether Treasury should allow minimal-emitting generators at risk of retirement (such as nuclear plants) to issue EACs where the facility can delay potential retirement by selling electricity for hydrogen production.

Origin of and Reactions to the Three Pillars

Immediately after Congress enacted the section 45V hydrogen credit in August 2022, the criteria for credit eligibility and determining credit amounts became the subject of comment, lobbying, and discussion in Congress, the White House, DOE, and Treasury. There was a general expectation that producers would be able to use grid electricity to power electrolyzers and use Book-and-Claim methods to verify the emission reduction benefits of hydrogen in computing emissions rates based on GREET when they filed their annual tax returns.

But in December 2022, a group of Princeton University professors published a research paper proposing the "three pillars" as requirements that would minimize emissions from grid-based hydrogen production.3This research paper became the focus of debate over whether the regulations should impose requirements concerning the source of and accounting for the electricity used to produce hydrogen.

Several environmental advocacy organizations voiced their support for the strict approach reflected by the three pillars in the Proposed Regulations. They maintain that a strict approach is necessary to ensure that the hydrogen-production credit incentivizes only clean energy production. These organizations support the notion that hydrogen producers should have to show that the low-carbon electricity they use to produce hydrogen is not drawn from low-carbon electricity sources that would have otherwise served other electric loads. The time-matching requirement is thus meant to ensure that hydrogen production occurs only when additional low-carbon electricity is available.

Producers and financers raised concerns about the possible "additionality" requirements imposed in the three pillars.4In May 2023, several industry organizations—led by the Fuel Cell and Hydrogen Energy Association—sent a letter to Treasury and the IRS, urging them to implement section 45V without additionality requirements because it would limit credit eligibility for hydrogen produced with electricity to only those projects that use new (rather than existing) clean energy sources for that electricity. Indeed, hydrogen producers have almost unanimously opposed the three pillars in the Proposed Regulations, arguing that they undermine Congressional intent to encourage hydrogen production and will make it nearly impossible to finance new hydrogen production facilities.5

Last fall, two groups of Democratic Senators sent dueling letters to the Biden Administration about Treasury's implementation of the section 45V credit. On one side, a group of eight Senators, led by Senator Sheldon Whitehouse (D-RI) and Senator Jeff Merkley (D-OR) urged Treasury to issue guidance that included safeguards to prevent the tax credit from being claimed by projects that directly or indirectly increase GHG emissions. On the other side, a group of ten Senators, led by Senator Maria Cantwell (D-WA), raised concerns that imposing stringent requirements could deter investment in hydrogen production and the associated infrastructure.

Potential Challenges to the Proposed Regulations

Given the vocal opposition by the hydrogen industry, it seems likely that if Treasury and the IRS were to finalize the Proposed Regulations in their current form, there will be legal challenges to the validity of those regulations. It is therefore worth considering what some of those challenges might look like.

Statutory Authority

There are questions about whether the Proposed Regulations exceed the scope of section 45V itself. Section 45V does not expressly require that a hydrogen producer must meet the three pillars to claim the credit. As drafted by Congress, section 45V provides for a credit with a value that varies based on the hydrogen production's carbon intensity as measured by the GREET model. And because the statute already accounts for the carbon intensity of hydrogen production in determining whether hydrogen production is eligible for the credit and the resulting amount of that credit, Congress has arguably spoken on how the carbon intensity of hydrogen production affects the 45V credit. Moreover, nothing in section 45V or its legislative history discusses EACs or the three pillars. They appeared for the first time in the Proposed Regulations.

Given the provenance of the three pillars and the plain statutory language, we expect to see potential hydrogen producers or other stakeholders challenge the Proposed Regulations. These challenges may argue that regulations implementing the three pillars are invalid because they exceed the authority of Treasury and the IRS under the Chevron standard.6That argument could contend that Congress left no gap for Treasury and the IRS to fill with EACs or the three pillars because section 45V unambiguously addresses how the carbon intensity of hydrogen production affects the eligibility for and amount of the 45V credit.

Potential claimants who use RNG to produce hydrogen may mount similar challenges if Treasury and the IRS promulgate other limitations in regulations. The Proposed Regulations indicate that Treasury and IRS anticipate rules that allow producers who use RNG to claim the credit only if that natural gas originated from the first productive use of the relevant methane, notwithstanding that Congress did not impose a "productive use" requirement under section 45V.

Notice-and-Comment Requirements

DOE issued its Guidelines and overlaid the new user interface on the 45VH2-GREET 2023 model when Treasury issued the Proposed Regulations. It is possible that DOE's choices regarding that user interface are the primary determinants of the eligibility for and value of the credit for potential hydrogen producers. Those choices may therefore effectively operate like substantive rulemaking. And although the Proposed Regulations are subject to a notice-and-comment period, it is unclear whether or how Treasury and DOE will consider comments about the contemporaneously issued Guidelines and updated GREET model user interface. Those documents appear to be final and not subject to change as part of the notice-and-comment process for the Proposed Regulations.

If and to the extent the new user interface for the 45VH2-GREET 2023 model reflects agency rulemaking by DOE, it is subject to the APA. And if the APA applies, that means that DOE must follow the APA-mandated notice-and-comment rulemaking process. That process is meant to ensure that agency rulemaking at least resembles legislation by giving interested parties advance notice of the agency's plans and allowing them to comment on proposed regulations. And the APA should (at least in theory) prevent agencies from using the interface in a technical model (like the 45VH2-GREET 2023 model) as a trojan horse for imposing substantive rules while circumventing the notice-and-comment process for those rules. If DOE's contributions to the Proposed Regulations are subject to the APA, that means the APA (as well as the attendant case law)7would hold DOE accountable for adequately explaining its choices and responding to significant comments.

There are fairness arguments for subjecting each instantiation of the GREET model and any changes its user interface to notice-and-comment requirements. After all, in making initial investments in their new facilities, hydrogen producers must project their expected 45V credits. In doing so, they have only the current GREET model (and, at least theoretically, their best guess about future GREET models) on which to rely. In fact, it appears possible that a hydrogen producer could build a facility and place it into service based on financial assumptions that integrate the credit and then have its credits diminished or even taken away entirely by changes to the GREET model (like the user interface may do for many potential claimants under the new GREET model). The Proposed Regulations have no safe harbor or similar rule that protects the reliance interests of hydrogen producers. But these are precisely the kinds of reliance interests that implicate the APA generally and its notice-and-comment requirements.

It is reasonable to expect Treasury and the IRS to be attuned to these notice-and-comment considerations. In recent years, the courts have invalidated several Treasury Regulations or other IRS guidance because of APA notice-and-comment violations.8

Congressional Review Act

Beyond the legal challenges that stakeholders might bring, the Proposed Regulations, if finalized, may be vulnerable to being overturned by Congress under the Congressional Review Act (CRA). Practically speaking, this is a risk only if the outcome of the 2024 elections results in a Republican sweep. A Democratic-controlled Congress would be unlikely to overturn the regulations and President Biden is unlikely to sign a CRA that would overturn the regulations.

Under the CRA, Congress can negate a final agency rulemaking with a simple majority vote in both chambers and the President's signature. Whether Congress could use the CRA against any final hydrogen tax credit regulations will depend on timing. Congress can use the CRA against regulations only within 60 legislative days of when the agency finalizes those regulations. Historically, final regulations have fallen within the 60-day lookback period when an agency has issued them later in the second quarter or in the third quarter of the calendar year.

If Congress were to pass and the President were to sign a resolution disapproving of the final hydrogen tax credit regulations, the regulations would be deemed not to have taken effect at all and will be retroactively negated. Further, the CRA would prevent the regulations (or any regulations that are "substantially in the same form" as the disapproved regulations) from being re-issued unless Congress took some further act to authorize them.

Footnotes

1. Department of Energy, Guidelines to Determine Well-to-Gate Greenhouse Gas (GHG) Emissions of Hydrogen Production Pathways using 45VH2-GREET 2023 (Dec. 2023), https://www.energy.gov/sites/default/files/2023-12/greet-manual_2023-12-20.pdf.

2. Department of Energy, US National Clean Hydrogen Strategy and Roadmap (Jun. 2023) at 30 (stating that "[p]rocesses that use fossil fuels as a chemical feedstock or in the generation of high-temperature heat or long-duration, dispatchable power will require clean fuels, such as hydrogen, to decarbonize. For instance, ammonia and methanol manufacturing account for the majority of global GHG emissions from chemicals, and both sectors rely on natural gas as a feedstock....The primary use of methanol today is as a building block for other chemicals, such as formaldehyde, acetic acid, and plastics. Growth in the methanol market depends on the overall growth of chemicals production, rates of plastics recycling, and the development of new end-uses of methanol, such as its use as a fuel or as a hydrogen carrier."), https://www.hydrogen.energy.gov/docs/hydrogenprogramlibraries/pdfs/us-national-clean-hydrogen-strategy-roadmap.pdf.

3. See Colton Poore, Without Guidance Inflation Reduction Act tax credit may do more harm than good (Dec. 20, 2022), https://engineering.princeton.edu/news/2022/12/20/without-guidance-inflation-reduction-act-tax-credit-may-do-more-harm-good.

4. See, e.g., Press Release, Nuclear Energy Institute, NEI CEO Maria Korsnick on Biden Administration's Guidance for H2 Credit (Dec. 22, 2023), https://www.nei.org/news/2023/nei-ceo-maria-korsnick-on-guidance-for-h2-credit.

5. See, e.g., Comment Letter from Nuclear Energy Institute, Constellation Energy, Energy Harbor, Public Service Enterprise Group, and Vistra Corporation on Notice 2022-58, Request for Comments on Credits for Clean Hydrogen and Clean Fuel Production (May 24, 2023), https://www.regulations.gov/comment/IRS-2022-0029-0215; Comment Letter from Clean Hydrogen Future Coalition on Notice 2022-58, Request for Comments on Credits for Clean Hydrogen and Clean Fuel Production (Apr. 26, 2023), https://www.regulations.gov/comment/IRS-2022-0029-0216; Comment Letter from California Hydrogen Business Council on Notice 2022-58, Request for Comments on Credits for Clean Hydrogen and Clean Fuel Production (Oct 13, 2023), https://www.regulations.gov/comment/IRS-2022-0021-0291.

6. Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). Admittedly, the contours of this argument may depend on what the Supreme Court does in Loper Bright Enterprises Petitioners v. Raimondo, Case No. 21-5166. Even if the Supreme Court were to invalidate the Chevron doctrine, however, it would likely mean that courts would have more discretion to strike down agency regulations that depart from Congress's plain language or intent.

7. See, e.g., Motor Vehicle Manufacturers Ass'n of the United States v. State Farm Mutual Auto Insurance Co., 463 U.S. 29 (1983).

8. See, e.g., Liberty Global v. United States, No. 1-20-cv-03501-RBJ (D. Colo. Apr. 4, 2022); Mann Constr., Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022) rev'd 539 F. Supp. 3d 745 (E.D. Mich. 2021); and CIC Servs., LLC v. IRS, 592 F. Supp. 3d 677 (E.D. Tenn. 2022), on remand from, 141 S. Ct. 1582 (2021), rev'g, 925 F.3d 247 (6th Cir. 2019), aff'g, No. 3:17-cv-110 (E.D. Tenn. Nov. 2, 2017).

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