The Final Regulations offer taxpayers greater flexibility in claiming the credit, reducing risk and creating more certainty for investments in the domestic hydrogen industry.
Because of these changes, the risk of legal challenges to the Final Regulations appear diminished but not removed.
Summary
After more than one year and 30,000 comments, the Department of Treasury and the IRS finalized regulations to implement the section 45V clean hydrogen production tax credit (the "Final Regulations") that Congress enacted under the Inflation Reduction Act (IRA) in 2022.
The Final Regulations maintain the controversial "three pillars" included in the proposed regulations issued in December 2023 (the Proposed Regulations) but relax the standards, providing hydrogen producers with additional flexibility to qualify for the credit. This includes the addition of new qualification pathways for electricity generated from nuclear power facilities as well as facilities that utilize carbon capture technology, and for hydrogen produced using renewable natural gas feedstocks. Notably, the Final Regulations also delay the hourly matching requirement by two years to 2030.
In releasing the Final Regulations, which were developed in collaboration with the Department of Energy (DOE), and the Environmental Protection Agency (EPA), Treasury characterized the changes from the proposed rule as "address[ing] several key issues to help grow the industry and move projects forward, while adhering to the law's emissions requirements for qualifying clean hydrogen."1
Section 45V of the Internal Revenue Code ties the amount of the hydrogen tax credit to the amount of lifecycle greenhouse gas (GHG) emissions that is measured using the Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) model. As a result, 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. DOE previously released guidelines detailing the assessment of lifecycle GHG associated with electricity used for clean hydrogen production and a new 45VH2-GREET Model. However, Treasury stated in its release of the Final Regulations that, in the coming weeks, DOE will release an updated version of the 45VH2-GREET model.2
For additional information on the Proposed Regulations, the 45VH-2 GREET Model, and additional background information, please see our previous Steptoe Client Alert.
Because these regulations were issued in the closing days of the Biden Administration, the Final Regulations may be subject to the Congressional Review Act (CRA) which could allow Congress to overturn the regulations in whole and prohibit the Treasury and IRS from issuing any similar guidance. However, Congress has never used the CRA to overturn tax regulations, and Republicans have expressed support for the section 45V tax credit relative to other IRA energy tax provisions.
The Final Regulations' additional flexibility and modifications from the Proposed Regulations, combined with the narrow Republican margins in the House of Representatives, reduce the likelihood of Congress successfully using the CRA to overturn the Final Regulations.
Since the release of the Final Regulations, hydrogen producers, financiers, and stakeholders in the energy industry have issued statements generally supportive of the changes that were incorporated into the Final Regulations as compared to the Proposed Regulations. Although litigation risks appear to have been diminished by the changes, the Final Regulations may still be subject to legal challenges under the Administrative Procedure Act in light of the Supreme Court's repeal of the Chevron Doctrine.
As an alternative, a new rulemaking process by the Treasury Department under the Trump Administration to improve the Final Regulations to provide additional flexibility for hydrogen producers may be more advantageous and less risky to the hydrogen industry than using litigation to rescind the Final Regulations.
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, 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, and assuming that prevailing wage and apprenticeship requirements are met, the amount of the tax credit can vary from $0.60/kg (for hydrogen with a lifecycle GHG emissions rate between 2.5 and 4 kg of CO2e per kg of hydrogen) up to $3.00/kg (for hydrogen with a lifecycle GHG emissions rate of less than 0.45 kg of CO2e per kg of hydrogen).
Final Regulations
The Final Regulations Maintain but Somewhat Expand the Three Pillars
To identify and verify the GHG emissions associated with the electricity used for the hydrogen production process, the Final Regulations require hydrogen producers to purchase and retire qualifying energy attribute certificates (EACs). The Final Regulations modify and adopt the Proposed Regulations' three pillars that the hydrogen production must meet to obtain EACs and claim the section 45V credit:
- Pillar 1: Incrementality/Additionality:
- Proposed Regulations: The hydrogen producer was required to derive the electricity to produce hydrogen from power facilities that began operation no more than three years before the hydrogen facility was placed in service.
- Final Regulations: The Final Regulations retain the Proposed Regulations incrementality/additionality requirements, but add additional pathways to satisfy the incrementality/additionality requirement:
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- Carbon Capture Technology: The hydrogen producer derives the electricity from generating facilities that utilize carbon capture and sequestration or utilization technology. The facility's carbon capture operations began no more than three years before the hydrogen facility is in service.
- Nuclear Avoided Retirements: The hydrogen producer derives the electricity from a generating facility that is a nuclear reactor and successfully demonstrates that the reactor is at risk for retirement and dependent on hydrogen production to remain in operation.
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- The Final Regulation caps what may be considered incremental (and may be sold to be used for hydrogen production) at 200 MW.
- State Policies: The electricity represented by the EAC is derived from an electric generating facility located in a qualified state, and the hydrogen production facility acquiring and retiring such EAC is also located in a qualifying State.
- Currently, only Washington and California have been identified as qualifying states. To qualify a state must have GHG emissions policies paired with clean energy standards or renewable portfolio standards that meet certain criteria.
- Pillar 2: Deliverability:
- Proposed Rule: The hydrogen producer was required to source electricity from a power producer in the same region as the hydrogen facility.
- Final Rule: The Final Regulations maintain the deliverability requirement that the producer must source electricity from a power producer in the same region as the hydrogen facility but provides clarifications regarding the requirements. For example, the Final Regulations explain how to qualify electricity sales between regions.
- Pillar 3: Time-Matching:
- Proposed Regulations: The producer was required to match the electricity used to produce hydrogen with the clean power generation on an annual basis (until January 1, 2028). After January 1, 2028, the Proposed Regulations required that producers match production with clean power generation on an hourly basis. The Proposed Regulations imposed 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 was required to draft and sign the verification report under penalties of perjury.
- Final Regulations: The Final Regulations provide the following modifications:
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- Postpones the transition from annual to hourly matching until 2030, a two-year extension from the 2028 date under the Proposed Regulations.
- Notably, there is no grandfather provision that will allow projects in service before 2030 to continue annual matching and these projects will have to switch to hourly matching starting in 2030.
- Under the hourly matching requirements, commenters expressed concern that if part of the hydrogen production did not meet the GHG emissions requirements, a hydrogen producer would be unable to claim the section 45V credit for the entire annual production. The Final Regulations clarify that, when hourly matching is required on or after January 1, 2030, a taxpayer can elect to determine emissions on an hourly basis if the facility's annual lifecycle emissions are under the 4 kg CO2e per kg standard. The Final Regulations encourage the use of EACs but provide a guardrail that if a taxpayer is unable to acquire and retire an EAC for every single hour to match the facility's production for that hour, the electricity emissions for that hour where an EAC was not obtained will be determined using the default emissions of the regional electricity grid, provided that facility's emissions do not exceed the 4 kg CO2e per kg standard on an annualized basis.
The Final Regulations Account for Carbon Capture Sequestration and Utilization When Determining Emissions Rates
As noted above, the Final Regulations maintain the requirement for hydrogen producers to purchase and retire qualifying EACs that are subject to the incrementality/additionality standard. The Final Regulations modify the Proposed Regulations to provide that electricity generated from a facility that has added carbon capture technology in the 36 months before the hydrogen facility is placed in service is an eligible EAC.
For purposes of determining the lifecycle GHG emissions rate under section 45V, the Final Regulations add new provisions under Treas. Reg. § 1.45V-4(e). These new provisions allow hydrogen facilities employing carbon capture equipment to account for captured carbon that is sequestered (as provided under section 45Q(f)(2) and the accompanying regulations) or utilized (as provided under section 45Q(f)(5) and the accompanying regulations), when determining the emissions rate under the 45VH2-GREET Model or in a petition to the Secretary of Energy to establish a provisional emissions rate if the taxpayer's pathway is not yet represented in the 45VH2-GREET Model.
The inclusion of carbon utilization into the Final Regulations under Treas. Reg. § 1.45V-4(e) is very significant. The Proposed Regulations and 45VH2-GREET Model expressly assumed that all carbon utilized to produce another product was instead emitted at the point of production of hydrogen. The Final Regulations recognize, similar to carbon sequestration, that carbon utilized to produce other products is valorized and is not emitted at the point of production of hydrogen, opening the door to valorization of carbon oxides from syngas to produce methanol and other chemicals.
Only carbon capture that occurs in the production of qualified hydrogen or that occurs in the production of electricity, fuel, or feedstock that is used by such facility to produce hydrogen is eligible to be considered. Any carbon captured that does not meet the section 45Q requirements for sequestration or utilization will be considered under the GREET model as emissions attributed to the facility during the production of hydrogen.
The Final Regulations Clarify that a Taxpayer Cannot Stack 45Q and 45V Tax Credits in the Same Year, but Can Claim the Section 45Q Credit After the Section 45V Credit Period Expires
Section 45V prohibits stacking of its tax credit with the section 45Q tax credit for carbon capture and sequestration. Section 45V(d)(2) provides that no section 45V credit is allowed for any qualified clean hydrogen produced at a facility that includes carbon capture equipment for which a section 45Q credit is allowed to any taxpayer for the taxable year or any prior taxable year.
The preamble to the Final Regulations notes the statute "is sufficiently clear" that section 45V does not prohibit the taxpayer from claiming a section 45Q credit in a subsequent tax year.
The Final Regulations Provide Additional Flexibility for Hydrogen Produced from Renewable Natural Gas
- The Final Regulations Remove the First Productive Use Requirement
The Proposed Regulations included limited guidance for determining the emissions rate for hydrogen produced from renewable natural gas (RNG). The Proposed Regulations anticipated requiring that the RNG originate from the first productive use of the methane and either be subject to direct use or be able to attain EAC certificates. But, RNG producers raised concerns that a first productive use requirement would create additional hardships to finance investment in new gathering and collection systems. RNG producers highlighted that a first productive use requirement would prohibit new projects from marketing the gas for hydrogen for any other purpose, creating a significant time mismatch in the market.
In response to these concerns, the Final Regulations eliminated the first productive use requirement, noting that it is difficult for taxpayers to substantiate and verify independently such a requirement. Instead, the Final Regulations state that the more appropriate approach for determining the emissions rate for hydrogen produced from RNG is to consider the likelihood of alternative productive uses.
- The Final Regulations Support the Development of a Book-and-Claim System
Although not addressed in the Proposed Regulations, the Final Regulations affirm that taxpayers can use a book-and-claim system, subject to certain conditions and safeguards, to establish certain attributes of RNG used to produce hydrogen. However, to allow for the development of book-and-claim system registries, the Final Regulations do not allow taxpayers to use a book-and-claim system until 2027.
- The Final Regulations Expand the Pathways for Different Types of Biogas Feedstocks
The Final Regulations support hydrogen production from natural gas alternatives. The Proposed Regulations only considered a pathway for RNG derived from landfill gas, but the Final Regulations support providing pathways for other types of biogas, such as RNG derived from animal waste or wastewater treatment plants and coal mine methane.
- The Final Regulations Do Not Account for Blending RNG with Natural Gas to Reduce the Hydrogen's Carbon Intensity but Allow Taxpayers to Use a "Weighted Average" For Claiming the Investment Tax Credit
Several commenters recommended that the 45VH2-GREET Model allow for the blending of feedstocks, such as RNG and natural gas. This blending would allow hydrogen producers using natural gas to produce hydrogen to blend in RNG to reduce the hydrogen's carbon intensity to qualify for the section 45V credit. The Final Regulations do not account for blending and, instead, treat the use of RNG with natural gas in a calendar year as separate processes.
The Final Regulations assess hydrogen production using different hydrogen containing feedstocks as distinct process and only considers the "primary feedstock" as defined in Treas. Reg. § 1.45V-1(a)(11). The additional feedstock for blending is considered a separate feedstock and a different production process. These restrictions are likely be an area of pushback from the RNG industry, particularly for producers seeking to sell dairy gas for methanol production.
The Final Regulations allow taxpayers who elect under section 48(a)(15) to claim an investment tax credit (instead of the section 45V credit) for a clean hydrogen production facility to determine the lifecycle GHG emissions rate by using a weighted average of all the hydrogen production processes that would allow for blending.
The Final Regulations Provide Additional Guidance for Obtaining a Provisional Emissions Rate
The Final Regulations affirm that taxpayers who are unable to use the 45VH2-GREET 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 (PER) they can use to claim the section 45V credit.
The Final Regulations rejected commenters requests to allow taxpayers to choose between using the PER and 45VH2-GREET. Under the Final Regulations, taxpayers can only petition for a PER if its technology or feedstock to produce the hydrogen is not included as a pathway in 45VH2-GREET Model. Under a Special Rule for facilities that receive a PER prior to beginning construction, a taxpayer may use a PER for the full ten years of credit eligibility if the PER was obtained before construction began on the hydrogen facility. The taxpayer may additionally elect to switch to the 45VH2-GREET Model in the first year of issuance of an updated version of the model if the updated model includes the taxpayer's technology or feedstock. Once the taxpayer switches from a PER to the 45VH2-GREET Model, they must continue to use the model in subsequent tax years.
The preamble to the Final Regulations notes that the DOE has not developed an appeals process or a method for a PER applicant to unilaterally revise or supplement their PER application. The Final Regulations provide that PER applicants seeking a new emissions value after the DOE has completed its analysis may reapply only if they wish to resubmit their application with new or revised technical information or clarifications related to the information previously submitted.
The Final Regulations Allow Taxpayers to Lock In the GREET Model in Place at the Beginning of Construction and Future GREET Model Updates Will Incorporate Project-Specific Upstream Methane Leakage Rates Instead of National Averages
Section 45V provides that the lifecycle GHG emissions are to be determined using the most recent GREET Model.
The Final Regulations add a new provision to allow hydrogen producers to elect under Treas. Reg. § 1.45V-4(b)(2) to use, for the duration of the hydrogen facility's 10-year credit period, the version of the 45VH2-GREET Model that was the most recent on the date when the facility began construction. This provides producers with additional investment certainty. Further, the Final Regulations provide that the taxpayer may elect for the remaining credit years to lock in the version of the 45VH2-GREET Model in which the taxpayer's qualified clean hydrogen production facility's hydrogen production pathway is first included as the 45VH2-GREET Model.
Hydrogen producers are eligible for the tax credit if they produce hydrogen from natural gas but must account for upstream methane leaks. Initially, the 45VH-2 GREET Model relies on certain fixed assumptions, including upstream methane leakage rates that are based on fixed national averages, that cannot be changed by users of the 45VH-2 GREET Model.
However, the Final Regulations provide that future releases of 45VH2-GREET Model will incorporate project-specific upstream methane leakage rates rather than a locked-in value based on national averages. This modification in the Final Regulations aligns with the EPA's recently finalized updates to the Greenhouse Gas Reporting Program (GHGRP) rule in 40 CFR Part 98 Subpart W. As the Final Regulations note, those rules prescribe methods that facilities in the natural gas supply chain must use to account for their methane emissions for purposes of reporting under the GHGRP and ensures that the reporting of methane emissions to the GHGRP is based on empirical data and accurately reflects total methane emissions from applicable facilities. The Final Regulations do not consider other certification schemes or provide any status for certified natural gas in measurement of carbon intensity.
The Final Regulations provide that when this data from the GHGRP program is available, the DOE will update 45VH2-GREET Model to allow differentiated methane emissions rate reporting.
The Final Regulations May Be Subject to the Congressional Review Act
There may be some risk that the Final Regulations may be vulnerable to being overturned by new Republican-led Congress through the CRA.
Under the CRA, Congress can negate a final agency rulemaking with a simple majority vote in both chambers and the President's signature. Congress can use the CRA against regulations only within 60 legislative days of when the agency finalizes those regulations. The Final Regulations fall within this window and would be within the CRA's scope.
If Congress were to pass, and the President were to sign, a resolution disapproving of the Final 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.
As a result, the CRA is a blunt tool for reversing regulations and would limit Treasury and the IRS from issuing any guidance to implement the credit, including taxpayer favorable guidance or other guidance that provides investment certainty. The CRA has not been previously used to reverse a tax regulation.
The Trump Administration Could Modify the Final Regulations Through a Notice and Comment Process
The Trump Administration could modify regulations and guidance that was issued by the Biden Administration.
However, final regulations are difficult to change, as they must first undergo the notice and comment process and any new regulations must be issued using the notice and comment process and must be legally justified.
The Trump Administration will have greater discretion to modify or change subregulatory guidance, such as notices, or other guidance that may be issued to implement the section 45V credit, including future updates to the 45VH-2 GREET Model.
The Trump Administration Could Issue Some Guidance Retroactively
The Trump Administration has some flexibility to issue subregulatory guidance that applies retroactively, but its ability to apply regulations retroactively is limited. Specifically,
section 7805(b)(1) permits a regulation to be retroactive only to the date such regulation was proposed or to the date a notice substantially describing the rule was published, unless necessary to prevent abuse or it is at the election of the taxpayer.3 Congress can grant authority to Treasury to issue retroactive regulations, but this would first require additional legislation to be enacted.4 Treasury has broader authority under section 7805(b)(8) to issue retroactive administrative guidance (including notices and revenue rulings), which would allow the Trump Administration to revoke notices or other subregulatory guidance issued during the Biden Administration and subsequently issue new subregulatory guidance that could apply retroactively. However, it would be unusual for Treasury to issue retroactive guidance that modifies rules in earlier guidance, particularly if it would have adverse tax consequences for the taxpayer.
The Final Regulations May Be Subject to a "Loper" Legal Challenge
In light of the US Supreme Court's recent decision overturning the longstanding Chevron doctrine,5 stakeholders may seek to challenge the Final Regulations on the basis that Treasury and the IRS have exceeded their statutory authority. Under the Chevron doctrine, the lack of explicit statutory language permitting the implementation of the three pillars would not have prevented a court from deferring to Treasury and the IRS's interpretation of section 45V. Now however, under Loper Bright, where there is ambiguity in the agency's governing statute, "c]ourts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority."6
With the Trump Administration's goal to increase the domestic energy supply and additional flexibilities included in the Final Regulations, a new rulemaking process under the Trump Administration may be preferable to pursuing litigation to rescind the three pillars.
Footnotes
1. See Press Release, Department of Treasury, U.S. Department of the Treasury Releases Final Rules for Clean Hydrogen Production Tax Credit (Jan 3, 2025), https://home.treasury.gov/news/press-releases/jy2768.
2. Id.
3. See section 7805(b)(3), (b)(7).
4. See section 7805(b)(6).
5. See Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984).
6. Loper Bright Enterprises v. Raimondo, 144 S. Ct. U.S. 2244, 2273 (2024).
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