The IRA includes many provisions aimed at increasing the production and use of clean hydrogen. One such provision is a new tax credit for clean hydrogen production – generally considered a promising low carbon fuel particularly for trucks and ships. The credit is based on a percentage ranging from 20 percent to 100 percent depending on the lifecycle greenhouse gas reductions achieved in producing the clean hydrogen. Importantly, the IRA authorizes new regulations to determine lifecycle greenhouse gas emissions and verification processes for production and sale of clean hydrogen, the issuance of which will undoubtedly have ripple effects across multiple sectors. The applicable percentage for the new tax credit is multiplied by a base rate of $0.60 times the volume of clean hydrogen produced. A bonus rate of $3.00 is available for taxpayers who meet prevailing wage requirements during construction of the clean hydrogen project and for each year of the 10-year credit period, as well as satisfy apprenticeship requirements during construction. Qualified clean hydrogen is produced through a process that results in a lifecycle greenhouse gas emissions rate of not greater than 4 kg of CO2e per kg of hydrogen. Hydrogen must be produced in the U.S. to qualify for the new credit.
Hydrogen incentives also are provided under the IRA’s clean vehicle credit programs, which include hydrogen fuel cell vehicles as eligible vehicles. There are three different types of clean vehicle credits available under the IRA, the availability of which pose complicated decisions for both manufacturers and consumers alike (The IRA’s electric vehicle and battery credits: More complexity and more benefit for US manufacturing). First, a maximum credit of $7,500 is available for new clean vehicles, including hydrogen fuel cell vehicles. However, the vehicles must be assembled in North America. and vehicle price limits and purchaser income limits apply. Second, a credit is also available for used clean vehicles, including hydrogen fuel cell vehicles. The used clean vehicle credit is $4,000 or 30% of the sales price, whichever is less. In order to qualify for the credit, the vehicle must be at least 2 years old with a maximum price of $25,000, and purchaser income limits apply. Lastly, a credit is available for new commercial clean vehicles, including hydrogen fuel cell vehicles. The credit is 30% of the purchase price, or the incremental cost of the vehicle over a comparable internal combustion engine vehicle, whichever is less. The credit is limited to $7,500 for vehicles under 14,000 pounds, and $40,000 for vehicles 14,000 pounds and over.
In addition, the IRA extends the alternative fuel refueling property tax credit to encourage greater deployment of clean fuel refueling infrastructure, hydrogen refueling facilities. The IRA expands the credit for alternative fuel refueling infrastructure, including any fuel that is at least 85% hydrogen by volume. A base credit of 6% and a bonus credit of 30% apply for expenses up to $100,000 for each refueling pump installed. The bonus credit is available if prevailing wage and apprenticeship requirements are satisfied during construction of the property. Refueling properties must be placed in low income or rural areas to obtain the credit.
Finally, the IRA includes $2 billion in funding for grants for domestic production of clean vehicles, including hydrogen fuel cell vehicles.
Extension of Biodiesel and Biofuel Incentives
The IRA amends many sections of the Internal Revenue Code to extend existing incentives for biodiesel and other alternative fuels used in the transportation sector, including commercial trucking. Specifically, the IRA extends existing biodiesel, alternative fuel, and second generation biofuel tax credits through December 31, 2024.
Sustainable Aviation Fuel Credits
In an effort to reduce greenhouse gases from another significant transportation sector, the IRA establishes a new “sustainable aviation fuel” credit. The fuel credit is determined by multiplying the number of gallons of sustainable aviation fuel by the sum of $1.25 plus an applicable supplementary amount. The applicable supplementary amount is the amount equal to $0.01 for each percentage point by which the lifecycle greenhouse gas emission reduction percentage with respect to such fuel exceeds 50 percent. However, the applicable supplementary amount cannot exceed $0.50.
The credits apply only to mixtures of sustainable aviation fuel and kerosene that are produced in the U.S. and that are transferred to a fuel tank of an aircraft in the U.S. Sustainable aviation fuel means a fuel which meets certain ASTM International Standard requirements and is not derived from coprocessing with a feedstock, palm fatty acid distillates, or petroleum. Sustainable aviation fuels also must be certified as having a lifecycle greenhouse gas emissions reduction percentage of at least 50 percent. The lifecycle greenhouse gas emission reduction percentage means the percentage reduction in lifecycle greenhouse gas emission achieved by the fuel as compared with petroleum based jet fuel.
In order to receive sustainable aviation fuel credits, a producer or importer must be registered with the Secretary of the Treasury and provide certification from an unrelated party demonstrating compliance with applicable requirements. The aviation fuel credit is incorporated into the general business credit, 26 U.S.C. § 38, and the alcohol fuel, biodiesel, and alternative fuel mixtures credit, 26 U.S.C. § 6426. Specifically, as revised, 26 U.S.C. § 6426 specifies that the sustainable aviation fuel credit for the year is equal to the product of the number of gallons of fuel multiplied by the sum of $1.25 plus the applicable supplementary amount.
Clean Fuel Production Credit
For clean fuels produced in the US and sold after December 31, 2024 and before January 1, 2028, the IRA establishes a new technology neutral ‘clean fuel production credit.’ Clean fuels with less than 50 kilograms of carbon dioxide equivalents per million British thermal units (mmBTU) qualify as clean fuels eligible for credits. Credit levels for each gallon or gallon equivalent of clean fuel production depend on the lifecycle carbon emissions associated with such fuel.
The credit is equal to the product of the applicable amount per gallon of fuel produced by the taxpayer at a qualified facility and then sold, multiplied by the emission factor for the fuel. The applicable amount for fuels produced at a qualified facility is 20 cents. A bonus rate of $1.00 is available for taxpayers who meet prevailing wage requirements and satisfy apprenticeship requirements. The clean fuel production credit also creates a special rate for sustainable aviation fuel. The standard applicable amount for aviation fuels produced at a qualified facility is 35 cents. A bonus rate of $1.75 is available for taxpayers who meet prevailing wage requirements and satisfy apprenticeship requirements.
The emission factor used in the credit calculation is the quotient of 50 kilograms of CO2e per mmBTU minus the emission rate for the fuel, then divided by 50 kilograms of CO2e per mmBTU. The Secretary of the Treasury is required to annually publish a table with the emissions rate for categories of transportation fuels based on the amount of lifecycle greenhouse gas emissions.
The IRA offers taxpaying entities the opportunity to obtain credits for various alternative fuel types to address the needs of multiple transportation modes, with the overarching goal to make these alternative fuels more prevalent in the market. However, because of the limitations attached to the credits, it will be important to carefully review the terms of each credit program.
Authored by Joanne Rotondi, Jamie Wickett, Mary Anne Sullivan, Susan McAuliffe, and Christina Bassick.