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The recently passed U.S. Inflation Reduction Act (“IRA”) includes a series of tax credits as a means of promoting the development and use of clean hydrogen. These credits are intended to encourage investment in the construction of infrastructure to support the hydrogen economy as well as in the production, storage, and consumption of hydrogen. This article discusses the three tax credits applicable to clean hydrogen projects: the clean hydrogen production tax credit, the clean hydrogen investment tax credit, and the credit for carbon dioxide sequestration.
Section 45V Clean Hydrogen Production Tax Credit
The IRA adds a new tax credit for the production of “qualified clean hydrogen” (“PTC”): i.e., hydrogen produced through a process that results in “lifecycle greenhouse gas emissions” (as defined in the U.S. Clean Air Act) through the point of production of no more than four kilograms of CO2e per kilogram of hydrogen.
The qualified clean hydrogen must be produced in the United States or in a possession of the United States, in the ordinary course of a trade or business of the taxpayer, for sale or use, as verified by an unrelated party, at a qualified clean hydrogen production facility within 10 years of the facility being placed into service. Qualified clean hydrogen production facilities must (i) be owned by the taxpayer, (ii) produce qualified clean hydrogen, and (iii) begin construction before January 1, 2033.
The amount of the base credit is equal to the amount of qualified clean hydrogen produced multiplied by $0.60 multiplied by the applicable percentage. The applicable percentage depends upon the lifecycle greenhouse gas emissions of the produced qualified clean hydrogen. The $0.60 amount is subject to inflation adjustments.
The increased credit, which is five (5) times the base credit, is available for a qualified clean hydrogen production facility if (i) it meets certain prevailing wage and apprenticeship requirements, or (ii) if construction of the facility begins within 60 days after the Secretary publishes guidance on the prevailing wage and apprenticeship requirements.
The qualified clean hydrogen production credit will not be allowed for facilities that include carbon capture equipment (to produce so called “blue hydrogen”) for which a credit is allowed under Section 45Q under the current or any prior taxable year.
Clean Hydrogen Investment Tax Credits
In addition to the PTC for qualified clean hydrogen, the IRA also introduces an investment tax credit (“ITC”) for clean hydrogen. Section 48(a)(15) allows taxpayers to treat specified clean hydrogen production facilities as energy property.
The ITC for any taxable year is equal to the energy percentage of the basis of each specified clean hydrogen production facility placed in service during such taxable year as follows:
The increased credit, which is five (5) times the base credit, is available for an energy project if (i) it has a maximum net output of less than one (1) megawatt of electrical (as measured in alternating current) or thermal energy; (ii) meets certain prevailing wage and apprenticeship requirements, or (iii) construction of the energy project begins within 60 days after the Secretary publishes guidance on the prevailing wage and apprenticeship requirements.
Such energy projects are also eligible for the 10-percent domestic content bonus credit amount and the 10-percent increase in credit rate for energy communities as set out in Section 48(a)(12)(C)(ii) and Section 48(a)(14)(B)(ii).
For purposes of the increased credit amount, Section 48(a)(9)(A)(ii) defines energy project as a “project consisting of one or more energy properties that are part of a single project.”
Section 48(a)(15)(C) defines specified clean hydrogen production facility as any “qualified clean hydrogen production facility” (as defined in Section 45(V)(c)(3)) (i) which is placed in service after 12/31/22; (ii) with respect to which (A) no credit has been allowed under Section 45V or 45Q, and (B) the taxpayer makes an irrevocable election to have the energy ITC apply, and (iii) for which an unrelated third party has verified that the lifecycle greenhouse gas emissions rate for each kg of hydrogen produced at such facility does not exceed 4kg of CO2e.
In conclusion, Section 48(a)(15)(B) provides that no credit shall be allowed under Section 45Q or Section 45V for any taxable year with respect to any specified clean hydrogen production facility (as defined above), i.e. taxpayers cannot stack the carbon capture tax credit or the qualified clean hydrogen PTC on top of the energy ITC.
Section 45Q Credit for Carbon Dioxide Sequestration.
Taxpayers who (i) own carbon capture equipment used to capture qualified carbon dioxide from an industrial facility or from the atmosphere and (ii) physically or contractually sequester or use it for certain purposes as provided by Section 45Q are entitled to a credit for each metric ton of qualified carbon dioxide captured and sequestered or used during the 12-year period starting on the date the equipment is first placed in service.
To qualify for the credit, certain threshold amounts of carbon dioxide specified in the statute must be captured in a taxable year, with those threshold amounts depended on the type of facility at which the carbon capture equipment is installed.
The amount of the credit (i) differs depending on whether the captured carbon dioxide is disposed of in secure geological storage or used for another purpose, including as a tertiary injectant in an enhanced oil recovery (“EOR”) project and (ii) is increased using linear interpolation up to a specified amount ($50 per metric ton in the case of sequestered carbon dioxide and $35 in the case of carbon dioxide used for other purposes) for years beginning before 2027. For subsequent years, this maximum amount is inflation-adjusted.
To qualify for the credit, construction of the qualified facility at which the carbon capture equipment is used generally must begin before 2026 and construction of the carbon capture equipment must also begin by such date (or must otherwise have been contemplated in the original planning and design for the qualified facility).
The IRA extends the beginning of construction deadline for carbon capture facilities to 12/31/32.
In the case of facilities placed in service after 2022, the credit amount for those calendar years beginning before 2027 will be fixed at $85 per metric ton ($17 base / $85 maximum) if the captured carbon is sequestered and at $60 per metric ton ($12 base / $60 maximum) if it is used as a tertiary injectant in an EOR project or for an otherwise permitted purpose. For subsequent years, this maximum amount is inflation-adjusted.
In the case of direct air capture facilities, the IRA increases the applicable credit amount to $180 per metric ton ($36 base / $180 maximum) of carbon dioxide captured and sequestered and to $130 per metric ton ($26 base / $130 maximum) of carbon dioxide captured and used as a tertiary injectant in an EOR project or for an otherwise permitted purpose.
The IRA significantly reduces the threshold amounts of carbon dioxide required to be captured in order to qualify for the credit. In particular, the amount of qualified carbon dioxide that must be captured at a qualifying facility is reduced from 100,000 metric tons to 1,000 metric tons annually for direct air capture facilities, from 500,000 metric tons to 18,750 metric tons annually for an electricity-generating facility, and from 100,000 metric tons to 12,500 metric tons for any other facility. See below table for purposes of comparing minimum capture requirements pre- and post-IRA.
The IRA, however, imposes a new requirement that carbon capture equipment at an electricity generating facility must have a capture design capacity of not less than 75% of the baseline carbon dioxide production for the principal electricity generating unit for which the carbon capture equipment is designed.
Our team is happy to discuss any questions that you may have.
Attorney advertising. The material contained in this Client Alert is only a general review of the subjects covered and does not constitute legal advice. No legal or business decision should be based on its contents.
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