Hydrogen fuel holds immense importance in the pursuit of carbon neutrality and environmental sustainability. Most notably, hydrogen can act as a sustainable fuel source for transportation sectors that are hard to decarbonize, such as semi-trucks, freight trains, aviation, and maritime transport. Recognizing this potential, the Inflation Reduction Act (IRA) offers a significant tax incentive to support the development and availability of clean hydrogen. Seeing that these investments are implemented in an effective and timely manner will ensure the hydrogen fuel economy has the opportunity for rapid expansion.
45V Hydrogen Production Tax Credit Overview
The IRA contains the section 45V Hydrogen Production Tax Credit, awarding up to $3 in tax incentives per kilogram of hydrogen produced. Projects that begin construction before January 1, 2033, will be eligible for the credit for ten years. This tax incentive aims to incentivize clean hydrogen production by making it economically competitive compared to diesel or other hydrogen production methods. The credit is determined by multiplying the kilograms of hydrogen produced by the applicable amount, which varies depending on the lifecycle greenhouse gas emissions rate associated with the production process. The tax credit encourages cleaner hydrogen production by offering higher incentives for hydrogen that produces fewer emissions.
In addition to the IRA’s tax incentive, the Bipartisan Infrastructure Law (BIL) included $1.5 billion to support hydrogen electrolysis development and $8 billion to fund regional clean hydrogen hubs. However, despite these investments, many industry leaders are holding the development of hydrogen projects in anticipation of the tax incentive guidelines from the Department of the Treasury and the IRS. Notably, these agencies are being pressured by some to include requirements of ‘additionality’ to qualify for the 45V production tax credit. Additionality would require hydrogen producers to power their production facilities with new sources of renewable energy to qualify for the tax credit.
Flexibility is Needed for Hydrogen Production
Including an additionality requirement for hydrogen producers to qualify for the 45V tax credit could substantially hinder the growth of the hydrogen industry. By imposing an additionality requirement, existing avenues for scaling clean hydrogen would be ineligible for the tax credit. This limitation artificially restricts the growth of clean hydrogen markets and overlooks the benefits of established clean energy sources. The current language in the IRA does not include additionality as a requirement to qualify for this tax incentive. Maintaining flexibility in the source of clean energy used for hydrogen production will allow new hydrogen production facilities can leverage existing clean energy infrastructure, resulting in a faster, more efficient deployment of clean hydrogen.
Hydrogen is a versatile fuel source with a variety of uses. The development of hydrogen fuel production will support the rapid decarbonization of many transportation sectors. In the near term, allowing for the use of the 45V hydrogen production tax credit without the requirement of additionality is an essential step in ensuring the large-scale growth of the clean hydrogen industry.
Additionally, we encourage the State of Michigan to explore complementary programs and legislation to allow clean hydrogen to reach its full potential.
