Clean energy tax credit safeguards could save taxpayers $1 trillion

A examine published in Environmental Analysis: Power reveals why new safeguards adopted by the U.S. Treasury Division are essential to keep away from substantial local weather impacts and wasted taxpayer sources from a beneficiant hydrogen manufacturing tax credit score.

The brand new examine illustrates how, absent safeguards, hydrogen producers might doubtlessly declare the best stage of tax credit ($3 per kilogram) for producing “gray” hydrogen from fossil pure fuel, by mixing in small quantities of biomethane or waste methane.

Permitting this mixing might help about 35 million metric tons of “gray” hydrogen manufacturing per 12 months, at a taxpayer price of round $1 trillion over 10 years and extra emissions of round three billion tons CO₂ versus situations assuming strict methane management.

On 3 January 2025, the US Treasury Division finalized regulations that align with a number of of the suggestions from the brand new examine, a draft of which was submitted to the Treasury Division as a public comment earlier within the rulemaking course of.

The ultimate rules prohibit hydrogen producers from mixing fossil and various methane feedstocks and set essential technical safeguards for hydrogen produced from various methane feedstocks.

Researchers on the College of Notre Dame, Princeton College, and the College of Pennsylvania have carried out an in depth evaluation of the Clear Hydrogen Manufacturing Tax Credit score (Part 45V) and the Clear Electrical energy Manufacturing Tax Credit score (Part 45Y), each established below the 2022 Inflation Discount Act. Their work explores how these credit could possibly be designed and the impact of those design selections on clear power industries.

The evaluation demonstrates the impacts of declaring sure feedstocks (methane, strong biomass, and waste) to be greenhouse fuel impartial or detrimental within the context of US clear power insurance policies and tax credit. A few of these tax credit outline what counts as “clean” by specific reference to life cycle strategies, however left the technical design of these strategies as much as the US Treasury Division.

Because the researchers observe, this implementation function required the Treasury Division to make vital coverage selections. “Life cycle methods offer decision-support frameworks for the implementation of complex environmental policies, but they are not objective quantitative calculators that provide the stable, predictable, and correct values that financial transactions like tax credits require.”

As a result of the 2022 Inflation Discount Act required life cycle evaluation however didn’t absolutely specify its implementation, the US Treasury Division might have adopted a variety of outcomes for the hydrogen manufacturing tax credit score below Part 45V of the tax code.

The brand new examine analyzes the local weather and monetary dangers of selecting life-cycle accounting strategies that will maximize the usage of biomethane and different waste methane feedstocks. It additionally identifies three key coverage selections that might mitigate these dangers:

1. Prohibiting mixing of feedstocks to maximise tax credit
2. Solely permitting actions that actively take away carbon from the environment to be assigned detrimental carbon depth scores.
3. Requiring baseline situations that assume deep local weather motion, resembling energetic methane administration, from fossil, municipal and agricultural sources.

The ultimate Treasury Division rules for hydrogen align with the researchers’ first and third suggestions, and set essential safeguards to restrict potential distortions associated to the second.

Particularly, the ultimate rules prohibit mixing of feedstocks (suggestion 1) and require hydrogen producers to imagine that methane produced from wastewater, landfills, and coal mines can be captured and flared, fairly than vented to the environment (suggestion 3).

For methane sourced from animal manure, the ultimate guidelines require hydrogen producers to imagine conservative ranges of prevented methane emissions, which reduces the potential distortionary impacts of permitting detrimental carbon depth scores on this occasion (opposite to suggestion 2).

The brand new examine’s evaluation and suggestions additionally prolong to the design of fresh electrical energy tax credit below Part 45Y of the US tax code. The US Treasury Division has not finalized these rules, however it’s anticipated to take action imminently.

The researchers stress that their findings do not imply life cycle evaluation must be deserted in coverage design. Relatively, policymakers must rigorously anticipate potential distortions and implement applicable safeguards.

“Our point in raising concerns about the application of life cycle analysis in complex environmental policy design is not to object to it on a categorical basis, but to show that it is a mistake to assume it is an objective framework.”

The examine additionally highlights the danger of subsidizing applied sciences which are solely “clean” based mostly on operational selections which are unlikely to proceed after the tax credit expire. The authors counsel contemplating provisions to reclaim tax credit if backed services subsequently revert to extra polluting practices.