Hydrogen Tax Credit Guidance: What Producers Need to Know

The Inflation Reduction Act (IRA) introduced the Section 45V credit, a production tax credit to encourage clean hydrogen production in the United States. Guidance from the U.S. Department of the Treasury and the Internal Revenue Service (IRS) provides a detailed framework for hydrogen producers, clarifying the operational and compliance standards required to benefit from the credit. The regulations establish a direct link between the environmental impact of hydrogen production and the financial benefit available, steering the industry toward methods that reduce greenhouse gas emissions.

Determining Credit Eligibility and Value

To benefit from the Section 45V credit, an entity must be the owner of the facility producing qualified clean hydrogen. The credit is available for the first 10 years of a facility’s operation for facilities that begin construction before January 1, 2033. The value of the credit is structured in four tiers, directly linked to the lifecycle greenhouse gas emissions of the production process, measured in kilograms of carbon dioxide equivalent per kilogram of hydrogen (kg CO2e/kg H2).

The base credit amount is awarded based on which tier the production process falls into.

• $0.60 per kilogram for emissions of less than 0.45 kg CO2e/kg H2.
• $0.20 per kilogram for emissions between 0.45 and 1.5 kg.
• $0.15 per kilogram for emissions between 1.5 and 2.5 kg.
• $0.12 per kilogram for emissions between 2.5 and 4 kg.

No credit is available if the emissions exceed 4 kilograms. A multiplier is available to producers who satisfy the prevailing wage and apprenticeship (PWA) requirements. By meeting these labor standards for the construction, alteration, or repair of the facility, the base credit amount is multiplied by five. This increases the maximum credit value to $3.00 per kilogram, with the other tiers also seeing a fivefold increase to $1.00, $0.75, and $0.60 per kilogram, respectively.

Core Requirements for Clean Hydrogen Production

For hydrogen produced through electrolysis, the process of using electricity to split water, Treasury guidance establishes three core principles to ensure the electricity used is clean. These pillars—incrementality, temporal matching, and geographic correlation—are designed to verify that hydrogen production does not increase overall grid emissions by diverting existing clean power. Compliance with these principles is tracked using Energy Attribute Certificates (EACs).

The principle of incrementality, or newness, mandates that hydrogen producers use electricity from new clean power sources. The clean energy generating facility must have been placed in service no more than 36 months before the hydrogen production facility it supplies. This rule is intended to spur the development of additional clean energy capacity.

Temporal matching addresses when the clean electricity is produced relative to when the hydrogen is produced. Through the end of 2027, producers can match their electricity use with clean energy generation on an annual basis. Starting in 2028, the requirement becomes more stringent, mandating hourly matching to ensure production aligns with the actual availability of clean power.

Geographic correlation, or deliverability, requires that the clean energy source be located in the same grid region as the hydrogen production facility, based on Department of Energy definitions. This ensures the clean electricity is physically deliverable to the hydrogen facility. EACs are the primary mechanism used to document that the electricity consumed meets these geographic and temporal standards.

Calculating Lifecycle Emissions

A producer’s credit amount is determined by its lifecycle greenhouse gas emissions rate. The designated tool for this calculation is the 45VH2-GREET model, developed by the Department of Energy. This model provides a standardized methodology for assessing “well-to-gate” emissions, which covers the entire production process from feedstock extraction to the final production of hydrogen.

The 45VH2-GREET model is technology-neutral and can be used to evaluate various hydrogen production pathways, including from natural gas with carbon capture. The model accounts for direct emissions from the production process and indirect emissions, such as those from generating the electricity used. The IRS requires taxpayers to use the most recent version of this model.

While the 45VH2-GREET model is the standard, regulations provide a pathway for producers to use an alternative model. A taxpayer can file a petition with the IRS if their specific process is not accurately reflected in the model. This petition must demonstrate that the proposed alternative is as accurate as the 45VH2-GREET model.

Verification and Documentation Requirements

Before a producer can claim the credit, a verification process must be completed by an independent third party. The verifier, who must be an unrelated party, is responsible for reviewing the producer’s operations and data to confirm the accuracy of the claimed emissions rate and compliance with all production requirements.

The final verification report must state the producer’s lifecycle greenhouse gas emissions rate for the hydrogen produced during the taxable year. It also needs to attest that the producer has complied with the core requirements for production, such as incrementality, temporal matching, and geographic correlation, where applicable. The verifier must also confirm the quantity of qualified clean hydrogen produced.

To support this verification, producers must maintain detailed records. This documentation includes all inputs and outputs for the 45VH2-GREET model calculation. Producers must also retain all purchased EACs to substantiate their clean energy claims and documentation proving the placed-in-service dates for both the hydrogen and clean energy facilities.

Claiming the Hydrogen Production Credit

To claim the credit, a producer files IRS Form 7210, Clean Hydrogen Production Credit, along with their annual income tax return. The completed third-party verification report, which substantiates the claims made on Form 7210, must be attached to the tax filing.

The Inflation Reduction Act provides two methods for monetizing the credit. The first option is “direct pay,” which allows certain entities to receive the credit’s value as a direct cash payment from the IRS, even if they have no tax liability. This option is available to tax-exempt organizations, and for-profit entities can elect direct pay for the first five years of the credit period.

The second monetization option is “transferability.” This allows an eligible taxpayer to sell all or a portion of the earned credit to an unrelated party for cash. This creates a market for the credits, enabling producers who may not have enough tax liability to use the full credit themselves to still realize its cash value. A producer must make a formal election to transfer the credit with the annual tax return.