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1 [1] (January 31, 2025)

handle is hein.crs/goveshz0001 and id is 1 raw text is: Congressional Research Service Informing the IegisI9tive debate since 1914 Updated January 31, 2025 The Clean Hydrogen Production Credit: How the Incentives are Structured P.L. 117-169, commonly referred to as the Inflation Reduction Act of 2022 (IRA), enacted a new tax credit for the production of clean hydrogen. Widespread adoption of hydrogen fuel may reduce economy-wide greenhouse gas (GHG) emissions, especially in sectors that have traditionally proven difficult to decarbonize, such as trucking, steel manufacturing, and cement production. The credit aims to incentivize hydrogen fuel production, but it reduces government revenue, and the IRS implementing regulation generated significant public comment. Given this debate, the 119th Congress may elect to amend the credit. This In Focus provides background information on hydrogen fuel and the clean hydrogen production credit (CHPC), also known as the 45V credit, based on its Internal Revenue Code (IRC) section. The Internal Revenue Service (IRS) modified and finalized its CHPC regulations on January 10, 2025. The IRS set rules based, in part, on over 30,000 comments received on a December 2023 proposed rule. The final regulations are discussed below in the section Recent Developments. The Basics of Hydrogen Fuel Hydrogen currently fulfills important uses in chemical plants and oil refineries, but does not deliver energy services other than in demonstration-scale quantities. However, a future economy using hydrogen as a fuel could offer an alternative that provides the numerous modern energy services currently associated with fossil fuels. In addition to providing a fuel for transportation, hydrogen could support industrial processes or building operations, or become part of the energy infrastructure by storing energy. Demonstrations of hydrogen technology and the value propositions based on hydrogen continue to emerge, ranging from one-off funded projects to public-private partnerships in the United States and abroad. Credit E ity Requirements Taxpayers producing clean hydrogen at qualifying facilities may receive the CHPC based on the amount of clean hydrogen produced, the lifecycle carbon dioxide equivalent (CO2e) emissions rate of the hydrogen through the point of production, and the taxpayer's compliance with prevailing wage and apprenticeship requirements. The carbon dioxide equivalent is a measurement unit that allows disparate gases and their effect on global warming to be expressed in a common unit. Credits are available for 10 years after a facility is placed in service. A qualified facility must be owned by the taxpayer, produce qualified clean hydrogen (QCH), and have begun construction prior to 2033. QCH cannot have a lifecycle GHG emissions rate greater than 4 kilograms of CO2e per kilogram of hydrogen through the point of production. If a facility placed in service before 2023 did not initially produce QCH, but is modified to produce QCH before 2033, and if those modifications are charged to the taxpayer's capital account, then the facility qualifies for the credit. Without additional modifications, changing the fuel source would not be a capital expense and therefore would not make a facility eligible for the credit. Tax-exempt entities including nonprofits, local governments, and rural electric cooperatives may receive direct cash payments in place of traditional income tax credits. Taxable entities may also elect to receive direct cash payments for five years, starting with the year a facility is placed in service. Taxable entities cannot make this election after 2032. The CHPC is transferable, meaning that credits may be sold from one business to another for cash. Businesses of all types, including businesses not in the energy sector, may buy credits. Once bought, credits cannot be resold to a third entity. CHPC Credit Values and C ffs For taxpayers meeting prevailing wage and apprenticeship requirements as described under 26 U.S.C. §45V, the maximum credit in 2024 was $3.11 per kilogram of QCH; amounts are adjusted annually for inflation. Taxpayers producing QCH with lifecycle GHG emissions below 0.45 kilograms of CO2e (through the point of production) are eligible for the full $3.11 credit. In 2024, taxpayers were eligible for partial credits of * $1.04 per kilogram of QCH if the CO2e emissions rate was from 0.45 kilograms to less than 1.5 kilograms; * $0.78 per kilogram of QCH if the CO2e emissions rate was from 1.5 kilograms to less than 2.5 kilograms; and * $0.62 per kilogram of QCH if the CO2e emissions rate was between 2.5 and 4.0 kilograms. Figure 1 shows how the CO2e emissions rate affects the value of the CHPC. The CHPC includes four credit cliffs-points at which the value of the credit rises or falls based on small changes in CO2e emissions. Policy cliffs can provide inconsistent incentives for behavioral changes, depending on the proximity to the given cliff. In the case of the CHPC, such cliffs are combined with flat or unchanging credit values over much wider ranges of CO2e emissions. For example, the CHPC increases significantly when taxpayers reduce their CO2e emissions from 0.46 to 0.44 kilograms (per kilogram of hydrogen); on the other hand, producers have no CHPC-related incentive to reduce their emissions from 0.44 to 0.00 kilograms.

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