MIT scientists don’t usually have a hand in drafting U.S. tax code. But an Internal Revenue Service (IRS) regulation announced in January establishing qualifying requirements for tax credits to support production of clean hydrogen bears the clear imprint of a team of researchers from the MIT Energy Initiative (MITEI).
“Most of the time MITEI’s analyses get published and just move conversations along,” says William H. Green, MITEI director and Hoyt C. Hottel Professor of Chemical Engineering. “In this case, our work translated directly into public policy and became law of the land within two years.”
Modeling studies led by former MITEI scientist Dharik Mallapragada directly shaped guidance for these tax credits, which are intended to expand low-carbon hydrogen production pathways, such as water electrolysis powered by clean electricity. The IRS regulations, known as Section 45V, are part of the 2022 Inflation Reduction Act (IRA), whose sprawling legislation aims to address the climate crisis and advance a clean energy economy. Given the change in presidential administrations, at this time it is unknown if there will be additional changes to the IRS regulations.
“The value of this credit is to close the gap between the cost of clean hydrogen today and what it needs to be to make it economical for adoption in different parts of the economy as part of broader decarbonization efforts,” says Mallapragada, now an assistant professor of chemical and biomolecular engineering at New York University’s Tandon School of Engineering.
Central to the energy transition
Hydrogen already plays an important role in the economy today that might expand further as a result of decarbonization. It is primarily used in fertilizer manufacturing, chemical production and oil refining, and in coming decades, may serve to decarbonize steelmaking as well as be used either directly or indirectly as a zero-carbon fuel source for vehicles, airplanes, shipping, and power generation.
“Unfortunately, while we’re producing this lovely, carbon-free molecule today to use as a fuel or a chemical feedstock, we’re emitting a lot of CO2,” says Robert Stoner, president of technology developer The Kendall Square Project, and former deputy director for science and technology and interim director of MITEI. “That’s because we mostly make it using natural gas in a process that releases 10 tons of CO2 for every ton of hydrogen it produces.”
Emissions-free alternatives exist, such as electrolysis, which harnesses electricity from renewable sources like wind and solar to split water molecules into oxygen and hydrogen. But while electrolyzers and renewable electricity are getting cheaper quickly, Stoner notes, “hydrogen from natural gas costs far less today—roughly a quarter as much.”
This is where Section 45V comes in. The IRA production tax credit (PTC) intends to even the playing field by subsidizing the production of clean hydrogen and its renewable energy chain, enabling manufacturers to offer the carbon-free product at prices comparable to those charged by producers using fossil fuels.
But tailoring the tax code to accomplish this goal proved anything but straightforward.
“The IRA legislation contained a lot of nebulous language and there was much debate and analysis in the academic/policy world about the best way to implement the tax credits to reduce emissions,” recounts Mallapragada.
In its preliminary rulemaking for Section 45V, the IRS proposed that in order to receive the full value of the PTC, clean hydrogen producers would need to match their consumption of electricity with clean electricity generation on an hourly basis and that the electricity generation facility must be newly installed. These so-called hourly matching and additionality requirements suggested that production of clean hydrogen must be accompanied by investment in a dedicated solar farm or wind mill that was either co-located or accessed via the electric grid, and by a means of verification for each unit of green electricity consumed.
“Environmental organizations thought 45V had to be written this way in order to discourage dirty natural gas generation from coming onto the grid to meet the new demand from electrolysis, which would be self-defeating,” says Stoner. “But when electric utilities and many hydrogen producers saw these initial requirements, they had deep concerns.” This preliminary guidance might set up a “chicken and egg” scenario in which hydrogen investors would be discouraged from investing in electrolyzers because they could not count on a robust supply of renewable electricity, while electricity generators would be reluctant to invest in renewables without confidence in new demand from electrolyzers.
Was there a way to loosen these requirements while also achieving ambitious reductions in carbon emissions? MITEI unleashed Dharik Mallapragada to investigate the question.
Relaxing requirements
The Treasury Department was pressing to release a final version of the 45V tax code before the turnover in presidential administrations. So Mallapragada and his team—MITEI research scientist Tim Schittekatte, along with graduate students Anna N. Cubulsky and Michael A. Giovanniello—quickly got into gear.
Using DOLPHYN, an open-source energy system optimization code developed by Mallapragada’s research group and other MITEI researchers, they modeled different scenarios of qualifying requirements for electricity supply for clean hydrogen production and its impact on costs and system-wide emissions. They also examined the impact of these requirements under different policy contexts for the grid, including the presence or absence of grid-wide renewable portfolio standards (RPS) that legally require procurement of a certain amount of clean electricity.
Their analysis revealed that imposing hourly matching requirements for clean electricity supply would increase the cost of electricity-driven hydrogen production, thereby working against the intent of the tax credits to scale up this technology in the near-term. Instead, the team argued for a phased approach balancing the need to kick-start a nascent industry against the long-term risk of emissions from the looser standards of annual matching.
Their findings suggested that the faster the propagation of clean hydrogen, through annual matching, the swifter and greater the scale of decarbonization. Annual matching could in fact enable the kind of strict qualifying requirements environmental groups desired.
“All this new clean electricity generation, being added today as result of other drivers like corporate procurements and existing incentives, would lead to an excess of green electrons, at which point it would make sense to insist that the clean hydrogen producers begin more stringently tracking their consumption,” says Stoner. “Give them some time to scale up the technology and tracking mechanisms, and they could begin hourly matching by 2030.”
Mallapragada’s team also found that the emissions impacts of qualifying requirements depended on the regional policy context—specifically, they concluded that stricter additionality and hourly matching requirements may be redundant in case a regional grid has stringent RPS requirements or other similar decarbonization goals, like California.
The researchers posted a draft of their findings online in May 2023, which was subsequently submitted for peer-reviewed and published in the January 2024 issue of Nature Energy.
“Going from conception to writing to developing a draft this fast is a personal record for me,” Mallapragada remarks. “I don’t think I’ll ever beat that.”
MITEI made sure that this research found its way into the right offices at the White House and elsewhere in Washington, D.C. Some of their recommendations, regarding the phased approach and carveouts for regions with stringent grid decarbonization goals, were incorporated into 45V and published January 10, 2025, in the Federal Register. Their findings have also been cited in the ongoing revision of the Greenhouse Gas Protocol, a voluntary emissions accounting standard used by many organizations across the world for emissions reporting.
Although it is unclear how the incoming administration regards clean hydrogen tax credits, Green hopes MIT’s “just the facts” approach will pay off. “We’ve given very good advice to many different leaders in Congress, which they accept because we have a reputation for telling it straight and not being influenced much by the political winds,” he says.