45V Tax Credit’s Potential Future under Loper Bright

Participants in the hydrogen economy hold a wide spectrum of views about what should qualify for the Production Tax Credits (PTCs) authorized in the Inflation Reduction Act (IRA) under the U.S. Internal Revenue Service’s (IRS’s) 45V tax code. The IRS has proposed a structure for qualification, known as the “three pillars,” that represents its approach to ensuring that hydrogen production does not induce grid emissions. Those three pillars are incrementality, temporal matching, and deliverability.

The IRS, Environmental Protection Agency (EPA), and Department of Energy (DOE) provide justification for this approach via the wording of the IRA at 26 USC § 45V(c)(1)(A): “The term ‘lifecycle greenhouse gas emissions’ has the same meaning given such term under subparagraph (H) of section 211(o)(1) of the Clean Air Act (42 U.S.C. 7545 (o)(1)).” The referenced Clean Air Act (CAA) subparagraph requires greenhouse gas (GHG) emissions assessments to include significant indirect emissions, which the EPA Administrator is empowered to determine. In a December 2023 letter from the EPA Administrator to the Treasury, EPA made clear that induced grid emissions fall squarely in the agency’s historical interpretation of the CAA subparagraph in question:

“However, based on the EPA’s prior implementation of CAA 211(o)(1)(H), the EPA believes it would be reasonable and consistent with the agency’s precedent for Treasury to determine that induced grid emissions are an anticipated real-world result of electrolytic hydrogen production that must be considered in lifecycle greenhouse-gas analyses under IRC [Internal Revenue Code] section 45V. Such interpretation would be consistent with the EPA’s long-standing interpretation and application of CAA section 211(o)(1)(H) in the context of the RFS [Renewable Fuel Standard] program.”

All well and good. However, in the brave new world post the Supreme Court’s Loper Bright decision, the courts have new authority to make decisions about how to interpret ambiguous legislative mandates. Does this apply to the 45V PTC provisions of the IRA? That is a question for lawyers and courts to decide, of course. However, participants in the hydrogen economy can benefit from considering the possibilities, so that they may adopt strategies that would account for contingencies they might face.

In the case of the IRA, “qualified clean hydrogen” is defined by 26 USC § 48(a)(15). The critical qualifying factor is that the lifecycle GHG emissions may not exceed 4 kg CO₂e/kg H₂; there is no other criterion specified there. It seems possible that some court could consider that there is no ambiguity about the law. In particular, it might be concluded that there is no authority for the Treasury to impose additional requirements like the three pillars, because the law specifies a quantitative determination of carbon intensity and the three pillars do not involve quantification.

EPA’s letter to the Treasury contains a paragraph that appears to address such an objection (emphases ours):

“Moreover, the EPA believes it would be reasonable for Treasury to use three-pillar EACs [energy attribute certificates] that meet appropriately stringent criteria as a methodological proxy in lieu of calculating induced grid emissions as part of a lifecycle greenhouse-gas analysis. Although such use does not constitute a quantification of induced grid emissions, it would be reasonable to expect that the purchase and use of zero-emitting electricity represented by three-pillar EACs does not result in induced grid emissions.”

Two aspects of this paragraph lead us to suspect that the three-pillars approach, as set out in the draft 45V rules, may be vulnerable in light of Loper Bright:

1. The imposition of the stringent approach relies on EPA’s (expert) opinion that it is “reasonable,” rather than a hard-and-fast mandate in the IRA.
2. The approach endorsed by EPA is structured to provide zero induced grid emissions. However, the IRA criteria for 45V PTCs do not require zero emissions; they allow as much as 4 kg CO₂e/kg H₂. Thus, there could be scenarios—many, in fact—in which the lifecycle GHG emissions for renewable energy transmitted to electrolyzers would, if quantified, meet the IRA criteria for a 45V PTC.

A major problem for the IRS, EPA, and DOE is that performing such quantification of renewable energy that is delivered over a power grid is very difficult. In light of varying opinions among experts about just what the impact of hydrogen electrolyzers on the grid would be, it would require more research. In addition, the true impact of any given green hydrogen project will be highly dependent on a slew of factors, such as how many such installations there are and of what size, congestion issues, how clean the grid already is, the propensity of renewable energy developers in the region to initiate new projects to feed new hydrogen production, and much more. The situation is difficult enough to quantify that EPA noted in its letter to the Treasury that “the EPA emphasizes that it has not analyzed the lifecycle greenhouse-gas emissions associated with or conducted a lifecycle analysis for electrolytic hydrogen production. Nor has it interpreted CAA 211(o)(1)(H) in the context of hydrogen production. … The EPA has not considered the use of three-pillar EACs in conjunction with its lifecycle analyses for fuels that involve the use of grid electricity under the RFS program.”

How this will play out is anybody’s guess, but it is important to note that there is both congressional and industry pushback, including threats of lawsuits, already lined up against the Treasury’s three-pillar approach. Considering the possibilities of what might happen if such lawsuits are brought is prudent. It will be interesting to hear other interpretations of the law as well.