President Joe Biden’s climate change agenda aims to shift America towards net-zero emissions by 2050, with infrastructure investments, regulatory mandates and tax incentives. However, the involvement of multiple federal departments and agencies in managing these initiatives brings risks of conflicting policies, leading to inefficient and expensive carbon reduction, while creating a potential ‘disconnect’ in the US’s overall climate strategy.
The Treasury Department and the IRS are currently working on regulation concerning Section 45V of the tax code, which relates to issuing tax credits for clean hydrogen production. Currently, the majority of hydrogen produced derives from natural gas, contributing to greenhouse gas emissions. Through credits incentivizing hydrogen production methods that capture or avoid carbon emissions, the hope is to encourage cleaner hydrogen production.
The regulatory process has encountered resistance, however. The drafting process resulted in over 30,000 comments from stakeholders across industry and environmental groups, as well as initial controversy focused on stringent IRS requirements that favored newly established sources of carbon-free electricity.
The current draft version of the regulation asks hydrogen producers to use an assumed methane leakage rate from natural gas production as a baseline for applying for their tax credits. This move has been criticized, with some arguing that it rewards producers who produce natural gas with more methane leakage, while penalising those with lower methane emissions.
Despite this, there is still room for the IRS to adjust its approach to use measurement-based data, a move that would be in-line with other initiatives intended to monitor and reduce greenhouse gas emissions. The use of measurement-based data has support from business, labor and even some environmental groups. Maintaining an approach that assumes a fixed methane leakage rate could lead to unnecessary problems and undermine the larger goals of Biden’s climate initiative.
The overarching lesson from this situation is that for the federal government’s attempt to lower carbon emissions to be successful, it needs to maintain coherence across its various departments and agencies. Lack of clarity and coherence in policy-making across different levels of government is a recipe for failure.
This article does not necessarily reflect the opinion of this publication.
By: Morgan D. Bazilian, Gregory Clough, and Simon Lomax of The Payne Institute