On November 3, 2022, the Internal Revenue Service (IRS) issued notices requesting comments on how the Inflation Reduction Act’s (IRA) new clean hydrogen tax credit and modifications to the existing carbon capture credit should be implemented. The opportunity to submit comments offers developers and investors in these emerging clean energy sectors an opportunity to shape how these incentives are structured going forward. Comments on the notices should be submitted by December 3, 2022, although the IRS may consider comments submitted after that.
Section 45V—Clean hydrogen
Given the attractiveness of the clean hydrogen tax credit under Section 45V and the significant uncertainty that accompanies this new credit regime, it will be particularly important for the IRS to issue clear, practical guidance that hydrogen developers are comfortable with. The IRS’s notice identifies many of the ambiguities associated with 45V—although the majority of its focus is on clarifying the definition of clean hydrogen—and requests comments on, among other things, the following:
- What, if any, guidance is needed to clarify the definition of qualified clean hydrogen?
- Which specific steps and emissions should be included within the well-to-gate system boundary for clean hydrogen production from various resources?
- How should emissions be allocated to the co-products (for example, system expansion, energy-based approach, mass-based approach)?
- How is byproduct hydrogen from these processes typically handled (for example, venting, flaring, burning onsite for heat and power)?
- If a facility is producing qualified clean hydrogen during part of the taxable year, and also produces hydrogen that is not qualified clean hydrogen during other parts of the taxable year (for example, due to an emissions rate of greater than 4 kilograms of CO2-e per kilogram of hydrogen), should the facility be eligible to claim the Section 45V credit only for the qualified clean hydrogen it produces, or should it be restricted from claiming the Section 45V credit entirely for that taxable year?
- How should qualified clean hydrogen production processes be required to verify the delivery of energy inputs that would be required to meet the estimated lifecycle greenhouse gas emissions rate as determined using the Greenhouse Gases, Regulated Emissions, and Energy Use in Technologies (GREET) model or other tools if used to supplement GREET?
- How might clean hydrogen production facilities verify the production of qualified clean hydrogen using other specific energy sources?
- What granularity of time matching (that is, annual, hourly, or other) of energy inputs used in the qualified clean hydrogen production process should be required?
- What documentation or substantiation do taxpayers maintain or could they create to demonstrate the lifecycle greenhouse gas emissions rate resulting from a clean hydrogen production process?
- What procedures or standards should be required to verify the production (including lifecycle greenhouse gas emissions), sale, and/or use of clean hydrogen for the Section 45V credit, Section 45 credit, and Section 48 credit?
- Should indirect book accounting factors that reduce a taxpayer’s effective greenhouse gas emissions (also known as a book and claim system), including, but not limited to, renewable energy credits, power purchase agreements, renewable thermal credits, or biogas credits be considered when calculating the Section 45V credit?
- If indirect book accounting factors that reduce a taxpayer’s effective greenhouse gas emissions, such as zero-emission credits or power purchase agreements for clean energy, are considered in calculating the Section 45V credit, what considerations (such as time, location, and vintage) should be included in determining the greenhouse gas emissions rate of these book accounting factors?
- Are there any circumstances in which a single facility with multiple unrelated process trains could qualify for both the Section 45V credit and the Section 45Q credit notwithstanding the prohibition in Section 45V(d)(2) preventing any Section 45V credit with respect to any qualified clean hydrogen produced at a facility that includes carbon capture equipment for which a Section 45Q credit has been allowed to any taxpayer?
Section 45Q—Carbon capture credit
The areas the IRS is soliciting comments on in relation to the IRA’s modifications to 45Q relate to the definitions of direct air capture (DAC) facilities and qualified facilities, record keeping in relation to these same definitions, and the financing of carbon capture facilities with tax-exempt bonds. For example, the IRS requested comment on, among other things, the following:
- What types of existing and emerging technologies potentially meet the definition of a DAC facility?
- What clarifications are needed regarding key terms and requirements including original planning and design, capture design capacity, principal electric generating unit, designed annual carbon oxide production, average annual carbon oxide production, and actual versus potential electric output from an applicable electric generating unit?
- Which source or sources of information should the Treasury Department and the IRS consider in establishing the capacity factor and baseline carbon oxide production requirements under Section 45Q(e)(2)?
- Using technology currently available to industry, how could project developers that incorporate carbon capture equipment into electric generating units demonstrate that the carbon capture equipment meets the 75 percent baseline carbon oxide requirement under Section 45Q(d)(2)(B)(ii)?
Section 45Q(f)(8) includes a reduction for the Section 45Q credit when tax-exempt bonds are used in the financing of the facility using rules similar to the rule under Section 45(b)(3). What, if any, additional guidance would be helpful in determining how to calculate this reduction?