The $433bn Inflation Reduction Act of 2022 creates a tax credit that would pay clean hydrogen producers up to $3 per kilogram (adjusted for inflation).

The size of the tax credits available to US clean hydrogen producers depends on the lifecycle greenhouse gas (GHG) emissions of each project — and more importantly, on how much staff are paid.

So the basic tax credit rate for “qualified clean hydrogen” is set at $0.60/kg, with a sliding scale depending on lifecycle emissions — measured in carbon dioxide-equivalent (CO2e) — of the H2 produced.

Hydrogen manufactured with less than 0.45kg of lifecycle CO2e emissions per kg of H2 would receive 100% of the credit, followed by 33.4% for 0.45-1.5kgCO2e/kgH2, 25% for 1.5-2.5kg and 20% for 2.5-4kg.

The lifecycle emissions would have to be verified “by an unrelated third party”, and only projects that start construction before 2033 would qualify.

However, the wage requirement in the new bill seems to be the most important part of the deal — multiplying the size of the tax credit by a factor of five.

Producers would be eligible for this boost if they ensure “that any laborers and mechanics employed by contractors and subcontractors in the construction of such facility… shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such facility is located as most recently determined by the Secretary of Labor”.

Importantly, these lifecycle emissions are calculated from “well to gate” — in other words, they would include upstream methane emissions in the production of blue hydrogen (which is made from natural gas with incomplete carbon capture and storage).

Also, the IRA states that blue hydrogen projects would be ineligible for H2 tax credits if they already receive federal tax credits for carbon capture and storage — but green hydrogen projects would also be allowed to receive renewable energy tax credits valued at $30/MWh in addition to the hydrogen ones.

ANALYSIS | Would US blue hydrogen projects be clean enough to qualify for climate bill's new H2 tax credits?