The Treasury Department’s Internal Revenue Service is expected to release the final rules for the 45V Clean Hydrogen Production Tax Credit before the Biden administration leaves office. This program, created through the Inflation Reduction Act (IRA), has the potential to radically accelerate the energy transition towards the use of cleaner fuels. 45V could generate massive hydrogen production, as well as simultaneously incentivize lower greenhouse gas emissions as a result. The incentive structure created by Congress in the IRA awards tax credits to hydrogen producers that emit no or few greenhouse gas emissions in the production of hydrogen– hence the usage of ‘clean hydrogen’.
However, language included in the proposed rule would result in the strong likelihood that the incentives for emissions reduction will not be realized. In fact, as proposed, the 45V program would likely result in anactual increase of greenhouse gas emissions.
45V provides tax credits for hydrogen producers that use renewable energy (green hydrogen) or low upstream emission fossil fuel feedstocks in combination with carbon sequestration (blue hydrogen). There is no cap on the tax credits that will be awarded – creating an unparalleled incentive to create clean hydrogen. This comment focuses on the elements of the rulemaking pertaining to blue hydrogen production.
The proposed 45V rule released by the IRS has a central structural problem that undermines congressional intent and, if mirrored in the final rule, stands to increase upstream emissions associated with the use of natural gas as a feedstock.
A Problematic Single National Methane Average Value
The proposed rule uses a single national methane average value to determine upstream methane emissions. In other words, whether high or low, the actual life cycle emissions profile of gas being used for blue hydrogen is ignored under the proposed rule. The use of this single, default value is very problematic on a number of levels.
First, the national average value proposed for input into the emissions determination model (i.e., the GREET model) is an underestimation of actual national methane emissions. [1] This means that some operators that are actually leaking upstream methane at levels that exceed the stipulated national average value that would be eligible for the tax credit. In fact, based on their actual emissions, they should not be. In other words, poor operational practices and high emissions would be rewarded.
Second, the use of a single national average input value does not recognize the investments that some oil and gas companies have made towards methane emission leak reductions. For example, earlier this year, the California Resources Corporation (CRC) was certified under the MiQ methane performance standard to have a methane intensity of 0.05% at its operations in Los Angeles and Orange Counties. Under the proposed 45V rule, this very significant achievement – as well as the associated investment that CRC made – is unacknowledged and put on the same par as operators with significantly higher upstream methane emissions.
Fails to Acknowledge Investments in Emissions Reductions
The use of a single national input value disincentivizes operators from making any emissions reductions in order to qualify for the credit. The proposed rule treats the emissions from all operators as being, effectively, the same.
Disincentivizes Emissions Reductions
Similarly, there is no rational financial reason for an operator to lower emissions – the rule, as proposed, ignores such efforts. This is completely contrary to congressional intent of creating an incentive structure – via tiered tax credits – to lower emissions.
The Use of 45Q Will Result in Increased Upstream Emissions
Finally, it is unclear, given the particular national average value being used as an input for the GREET model, whether blue hydrogen producers will receive substantive tax credits under the 45V program. In other words, the average value may be set at a level whereby only minimal, if any, tax credits are received through 45V. As a result, there may be more of an incentive for hydrogen producers to instead seek tax credits under the IRA’s 45Q carbon sequestration tax credit program. This tax credit incentivizes the use of carbon sequestration for emissions that occur at the point of combustion. A hydrogen producer may only seek tax credits under one program – either 45V or 45Q. As a result, utilization of the 45Q sequestration program means that there will be no incentives for operators to reduce upstream methane emissions. This perverse outcome – directly stemming from the use of a single default national average value – is clearly contrary to congressional intent which was determined to drive down potent upstream greenhouse gas emissions. The 45Q tax credit will incentive the use of natural gas as a feedstock – causing more to be used – and will, therefore, result in increasing levels of potent upstream methane emissions.
Conclusion
As proposed, the 45V rule may result in more climate warming methane emissions being released into the atmosphere – the very opposite of what Congress intended! While the use of a single, national average value may be easier to implement it will result in an elimination of incentives for natural gas operators to lower their emissions.
[1] Sherwin, E., et al. (2023) “Quantifying oil and natural gas system emissions using one million aerial site measurements; Rutherford, J., et al. (2023) “The MiQ-Highwood Index: A national-scale measurement informed methane intensity for the United States” (https://miq.org/miq-highwood-index/); Alvarez, R., et al (2018), “Assessment of methane emissions from the U.S. oil and gas supply chain.” Science (https://www.science.org/doi/10.1126/science.aar7204)