Book And Claim And The Clean Hydrogen Tax Credit

In Notice 2022-58, 2022-47 IRB 483, the IRS and Treasury requested, “Ought to oblique guide accounting components that scale back a taxpayer’s efficient greenhouse fuel emissions (also referred to as a guide and declare system), together with, however not restricted to, renewable power credit, energy buy agreements, renewable thermal credit, or biogas credit be thought-about when calculating the part 45V credit score?”

How the steering addresses that query has vital penalties, each for taxpayers who want to declare the credit score and doubtlessly for the long-term environmental influence of the incentives for clear hydrogen within the Inflation Discount Act (IRA, P.L. 117-169).

One motive for the IRS’s query is a colloquy that occurred within the Senate throughout passage of the IRA between Senate Finance Committee member Thomas R. Carper, D-Del., and Finance Committee Chair Ron Wyden, D-Ore. Carper mentioned he thought that the intent of part 45V “is that in figuring out ‘lifecycle greenhouse fuel emissions’ for this part, the Secretary shall acknowledge and incorporate oblique guide accounting components, also referred to as a guide and declare system, that scale back efficient greenhouse fuel emissions, which incorporates, however shouldn’t be restricted to, renewable power credit, renewable thermal credit, renewable identification numbers, or biogas credit.” Carper requested Wyden if that was his understanding, and he confirmed that it was.

Congress gave the IRS and Treasury categorical authority in part 45V(f) to difficulty steering “to hold out the needs of this part, together with rules or different steering for figuring out lifecycle greenhouse fuel emissions.” That steering is due inside one yr from the date of the IRA’s enactment.

A book-and-claim system is a solution to separate power produced by clear know-how from electrical energy that isn’t. The producer of the clear electrical energy “books” the quantity they’ve produced, and prospects can “declare” it by shopping for a certificates for the quantity of fresh power they need.

The construction of the credit score presents an issue for decoding it to incorporate a book-and-claim system. The credit score is on the market if a taxpayer produced certified clear hydrogen in the course of the tax yr at a certified clear hydrogen facility in the course of the 10-year interval starting on the date the power was initially positioned in service. The kilograms of certified clear hydrogen so produced are multiplied by $0.60 for the cleanest hydrogen and $3 if the prevailing wage and apprenticeship necessities are met. The life cycle greenhouse fuel emissions fee, as outlined within the Clear Air Act and decided by the Argonne Nationwide Laboratory’s Greenhouse Gases, Regulated Emissions, and Power Use in Applied sciences mannequin, is used to find out how clear the hydrogen is.

Importantly, part 45V(c)(2) defines certified clear hydrogen as “hydrogen which is produced by a course of that ends in a lifecycle greenhouse fuel emissions fee of not larger than 4 kilograms of CO₂e per kilogram of hydrogen.” The important thing phrases in that definition are “produced by a course of.”

It is likely to be that Congress wished to permit oblique accounting components to be included within the calculation of the life cycle greenhouse fuel emissions fee. However then why would the definition of certified clear hydrogen be restricted to hydrogen for which the manufacturing course of is all that’s seemed to for the life cycle greenhouse fuel emissions fee? Oblique accounting components aren’t a typical a part of the manufacturing course of, and decoding “produced by a course of” to embody a course of that additionally includes accounting mechanisms like renewable power credit and energy buy agreements looks like a stretch.

The colloquy is an fascinating knowledge level, however it’s not the tip of the dialogue. The IRS and Treasury aren’t obligated to comply with the course specified by colloquies. However this colloquy presents the steering drafters with a specific quandary as a result of there isn’t a lot in the way in which of legislative historical past on the IRA, because the invoice handed with little dialogue past the colloquies. The one factor it definitively means is that two senators wished taxpayers to have the ability to embrace oblique accounting mechanisms in calculating whether or not their hydrogen is eligible for the credit score. Each senators are on the Senate Finance Committee and had been concerned within the drafting of the clear power provisions.

There may be legislative historical past that factors away from together with the book-and-claim system. Just like the IRA, the Construct Again Higher Act (H.R. 5376) on which the IRA was primarily based didn’t embrace any point out of oblique accounting mechanisms being a part of the life cycle greenhouse fuel emissions calculation in part 45V. However the Clear H2 Manufacturing Act (S. 1807) — which Carper authored and that fashioned the idea for the Construct Again Higher Act’s erstwhile part 45X and the IRA’s part 45V — did.

Carper’s invoice directed the Treasury secretary, in session with the secretary of power and the administrator of the Environmental Safety Company, to publish steering “prescribing strategies for figuring out the credit score primarily based on lifecycle greenhouse fuel emissions.” In keeping with the Clear H2 Manufacturing Act, “such strategies shall take into account the emissions related to any feedstock or power supply which isn’t co-located on the certified clear hydrogen manufacturing facility,” below particular circumstances that embrace contracts for the clear manufacturing attributes of the feedstock or power supply. The Clear H2 Manufacturing Act did, nonetheless, use the identical “produced by a course of” phrase as part 45V(c)(2)(A).

Subsection 45V(f) appears fairly completely different from the model within the Clear H2 Manufacturing Act, which fairly strongly means that Congress meant to alter the precise grant of authority to Treasury in each the Construct Again Higher Act and the IRA. The truth that the IRA ended up with a much less particular grant, because the colloquy highlighted, is subsequently a related consideration.