Hydrogen Tax Credit Rules Will Be Done by the End of the Year

The Treasury Department will finalize the long-awaited rules governing the new clean hydrogen tax credit before the end of the year, Deputy Secretary Wally Adeyemo told Heatmap in an exclusive interview Monday.

It will also publish the final guidance for the advanced manufacturing and technology-neutral clean power tax credits by that time, he said.

That means that the Treasury Department will have finished the rules governing most — but not all — of the 18 tax credits created or remade by the Inflation Reduction Act, President Joe Biden’s signature climate package, by the end of his term. More than two years after that law’s passage, many of the potential beneficiaries — including electric utilities, battery manufacturers, and more — are still waiting to find out exactly how to collect its incentives.

The Treasury hasn’t just been sitting on its hands. Adeyemo told us the department has completed 75 guidance “projects” related to the IRA, a category that includes proposed and final rules as well as some non-binding FAQs and other documents. Citing an analysis from the Rhodium Group, an energy research firm, and MIT, he said that the Inflation Reduction Act has already spurred some $380 billion of private investment in 1,600 clean energy projects nationwide, potentially creating 270,000 jobs.

“This is far out-performing what I think the initial expectations for the law were at this stage,” Adeyemo said. “But as you also know, lots of people want us to finish additional rulemaking.”

The uncertainty has been especially paralyzing for the nascent clean hydrogen industry, as the final guidance for the hydrogen tax credit, section 45V of the tax code, could determine which multimillion dollar projects ultimately get developed. Chief among the Treasury Department’s concerns: It must decide how hydrogen producers who use electrolysis — sending electricity through water to split its molecules — should deal with the indirect carbon emissions associated with drawing power from the grid.

Under the scheme favored by climate advocates, would-be hydrogen makers will have to build enough new renewable capacity to satisfy their energy needs in close to real time. Under a proposal more favored by the industry, producers could buy power from existing nuclear or hydroelectric power plants that currently serve other customers, or simply offset their emissions with solar energy certificates even if they continue to operate when the sun goes down. Draft rules published in December took a strict approach to emissions — and faced fierce pushback not just from industry, but also from Democratic members of Congress and the Department of Energy. Leaders of regional clean hydrogen hubs — which have been awarded grants by a separate $7 billion federal program — argued that strict rules would be fatal to their cause.

There is a lot of money at stake — up to $3 per kilogram of hydrogen produced, equaling many billions over the lifetime of the program — to build a new industry from near-scratch. Some energy modelers fear that if the program is designed poorly, that windfall could subsidize a lot of carbon emissions. Projects that are supposed to help the U.S. cut emissions could end up creating them instead, these groups have predicted, setting the country back two to three percentage points on its greenhouse gas targets.

There are many other open questions about the hydrogen credit, including requirements for producers that make hydrogen from natural gas, instead of from water and electricity. Although hydrogen companies made a flurry of new project announcements right after the Inflation Reduction Act first passed, many have since put those plans on hold as the industry awaits the final rules.

The Treasury received more than 30,000 comments on the initial draft of the hydrogen rules. Though Adeyemo did not comment on the final rules’ substance, he called those comments “quite helpful” and asserted multiple times during our interview that the Treasury has found middle ground.

“Congress has provided a strong enough incentive here that allows us to do two things at once, which is one, make sure that we’re watching for significant indirect emissions, but at the same time creating pathways to do exactly what industry is talking about, which is accelerating the development of the industry here,” he said.

Looming over these decisions is the upcoming election, when a change in control of the White House or Congress could open up the rules to review. Adeyemo acknowledged that the final rules were unlikely to please everyone. But he said that he was “less concerned” about pushback from Congress. He argued that the tax credit was lucrative enough that companies could afford to abide by the requirements Treasury ultimately sets, and that what the industry really wants is “clarity, certainty, and flexibility.”

Companies and environmental groups on both sides of the hydrogen fight — including the energy company Constellation, which operates more than a dozen nuclear plants, and the Natural Resources Defense Council — have already threatened lawsuits if the rules do not align with their priorities. Recent Supreme Court decisions have weakened federal agencies’ ability to defend their own rules in court. But Adeyemo said the department was working hard to design the rules “in a way that is in keeping with congressional intent,” to protect them from such attacks. “We’re now going through the process of making sure that we show our work and how we’ve done that.”

The other tax credit rules the Treasury plans to finalize, while still consequential, have not left such foundational questions up in the air. Companies have already begun building battery factories, for example, under the expectation that they will be able to claim the advanced manufacturing tax credit. The technology-neutral clean power credits don’t even go into effect until next year, and the biggest uncertainty is whether facilities that burn biomass or methane captured from landfills for energy will qualify.

The news also leaves a few industries in the dark. Adeyemo said he couldn’t commit to a timeline for finalizing a tax credit for low-carbon aviation fuel, for example. Final rules for a tax credit for electric vehicle charging equipment are also on the to-do list.

“The challenge, of course, is there’s only so many people here at the Treasury Department who are doing all this work,” Adeyemo said, “so getting through all the 30,000 comments on clean hydrogen and focusing on that means that there’s going to be clear trade-offs.”