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Taxing For Takeoff: The Hydrogen Economy In The United States (Video)

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Tax dominates the discussions regarding the transition to a
hydrogen economy in the United States. Although carbon pricing
or a federal carbon tax appears to be politically unachievable and
off the table in the current environment, almost every other clean
energy tax incentive seems to be under active
discussion.  Hydrogen advocates want to be sure that the
hydrogen industry benefits from whatever new clean energy tax
incentives may be on offer and does not lose any existing tax
incentives.  As the lobbyists advise, if you are not at
the table, at least make sure you are not on the menu. 

The Biden Administration fired the starting gun for tax lobbying
season with its release on March 31, 2020 of its $2 trillion
infrastructure proposal entitled “the American Jobs
Plan”. This was followed a week later by the Treasury
Department’s release of its outline of associated tax
provisions in its “Made in America Tax
Plan.”  Neither piece contained technical details,
specifics, or proposed statutory language – those will be
forthcoming when the Treasury Department releases its “Green
Book”, which is expected in early May. 

Hydrogen is clearly part of both plans, however: the American
Jobs Plan referenced a 10-year extension of an expanded investment
tax credit (ITC) and production tax credit (PTC) for clean energy
generation and storage, a revised and expanded section 45Q tax
credit for carbon capture and sequestration, and a new PTC for
hydrogen projects located in distressed communities; and the Made
in America Tax Plan echoed these concepts, including specific
references to tax incentives for electricity storage projects and
the tax credit program for advanced energy projects (Internal
Revenue Code section 48C).

At present, the U.S. federal tax incentives with specific
application to hydrogen-related projects include:

  • An ITC equal to 30pc of the cost of investment in fuel cell
    power plants generating electricity (section 48)
  • An ITC equal to 30pc of the cost of investment in qualifying
    advanced energy projects (although, due to the exhaustion of
    allocated funds for this credit, it is as a practical matter
    currently unavailable) (section 48C)
  • A credit for individual taxpayers for the cost of residential
    fuel cells (section 25D)
  • A tax credit offered to purchasers of alternative fuel vehicles
    (section 30B)
  • An ITC equal to 30pc of the cost of alternative fuel vehicle
    refueling property (section 30C)
  • Excise tax credit for sales of liquid hydrogen fuel (section
    6426)
  • Relevant for blue hydrogen, a tax credit per ton of carbon
    oxide captured and sequestered (section 45Q).

So, what tax incentive additions impacting hydrogen are being
discussed and are potentially on the table now?

  • Increases in the amount, term or availability of the existing
    tax incentives listed above.For example, the current section 45Q
    carbon capture tax credit is limited to a term of 12 years from the
    placed-in-service date of the facility.Certain proposals would
    extend that term to 20 years or perhaps longer.Other proposals
    would expand or increase the amount of the credits and the
    taxpayers to whom such credits would be available (e.g., MLPs).Most
    striking is a proposal to turn the clean energy tax credits into
    “direct pay” credits, i.e., credits that are treated as
    payment of tax so that, to the extent they exceed the
    taxpayer’s tax liability, they would result in a cash payment
    to the taxpayer.With a direct pay credit, it is not necessary to
    have a tax liability in order to recognize the value of the
    credit.
  • A PTC for hydrogen, which could take the form of a credit for
    production of hydrogen broadly defined, a credit for production of
    hydrogen restricted to that production used in a fuel or energy
    storage capacity, or as a credit for the production of electricity
    using hydrogen (similar to the PTC currently heavily relied upon by
    the wind industry).
  • Expansion of the section 48 ITC to cover energy storage, which
    would include hydrogen storage.
  • An additional or expanded ITC with respect to costs incurred to
    retrofit natural gas pipelines and tanks to accommodate hydrogen
    transportation and storage.
  • Biden’s American Jobs Plan included a specific reference to
    a “new production tax credit” for hydrogen facilities
    located in “distressed” communities, which could be
    defined to include rural areas in need of investment.It remains to
    be seen exactly what form such a new PTC would take.Certainly, the
    use of tax provisions to incentivize investment in distressed
    communities is a well-paved road in Congress, both as to the
    definition of “distress” and the nature of the required
    investment (see, for example, the tax deferral and rate reduction
    provisions applicable to investment in “opportunity
    zones” in the United States).

Enactment of all or any of these proposals is by no means a
foregone conclusion, as partisan politics and spending limits could
dash the hydrogen industry’s hopes.  Despite that
risk, hydrogen industry participants, their representatives,
associations, councils and lobbyists are all closely following the
development of these tax provisions to do what they can to ensure
that they are at the table and not on the menu. 

Hydrogen tax incentive discussions in HE newsletters to follow
in following months will be following the follow-on and follow-up
that follows, as it follows, when it follows.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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