The Treasury Department’s pending tax rules for low-carbon hydrogen production could soon spark court battles.
Treasury’s initial guidance in December for the tax credit known as 45V met pushback from hydrogen producers and congressional Democrats after its release. They argue the Biden administration’s plan would slow industry growth, while supporters say the standards are necessary to ensure that hydrogen fuel is made cleanly.
Opponents of the 45V guidance may be emboldened to take tax rules to court if the Supreme Court upends the Chevron doctrine, according to experts such as Barbara De Marigny, a partner at the Baker Botts law firm. The court appears ready to limit that 40-year-old legal tool, which has helped federal agencies defend regulations in court.
The hydrogen credit rules could still change after a public comment period ends Monday. But if the regulations become final this year, disappointed hydrogen producers are poised to turn to a different remedy — lawsuits.
“It’s reasonable to expect that some or many of those opponents will be considering a challenge to the validity of final regulation,” said Steve Dixon, a partner at Steptoe specializing in tax controversies.
Since Treasury released draft rules, Sen. Joe Manchin (D-W.Va.), one of the authors of the Inflation Reduction Act that created 45V in 2022, has called Treasury’s plan illegal. He has said the department’s view of its power under the Inflation Reduction Act is too broad.
At one time, Treasury could have used Chevron to defend against that argument. The doctrine says courts should defer to agencies’ reasonable interpretations of ambiguous federal laws.
Manchin has also vowed to join lawsuits if final rules limit eligibility for projects that use nuclear energy to make hydrogen.
Some hydrogen producers have sought legal advice on potential 45V litigation, said De Marigny. Publicly, industry groups have long maintained that there are legal holes in proposed 45V guidance without committing to legal fights.
Dixon said challenges would likely question whether Treasury can adopt its proposed method to account for emissions caused by hydrogen production’s use of the grid.
Opponents of Treasury’s proposal say the Inflation Reduction Act gave the department clear direction to assess emissions, but that it is instead using a system allegedly outside of the law’s scope.
Supporters say Treasury’s proposal to account for grid emissions is backed by the letter of the law.
‘Three pillars’
Under Treasury’s tax rules, the department adopted “three pillars” to ensure that hydrogen production tapping into the grid results in minimal planet-warming emissions.
The pillars say hydrogen production facilities must use clean energy sources added to the grid such as solar farms (additionality) that are located near them (regionality). Starting in 2028, hydrogen producers will need to prove they are using clean grid energy in the same hour they are making hydrogen (hourly time matching).
Treasury appears keen to maintain the pillars with some relaxed provisions in the final regulations.
In December, Treasury published a legal letter from EPA stating that it “would be reasonable” for the department to adopt the three pillars.
Treasury used the letter to explain that the Inflation Reduction Act says the department must account for hydrogen’s life-cycle emissions using a definition from the Clean Air Act. That definition says any emissions counting system must account for “significant indirect emissions.”
“Any regime that does not properly account for significant indirect emissions would violate the law,” said Mike Kaercher, senior attorney adviser and director of the Climate Tax Project at the New York University School of Law, in an email to E&E News.
EPA said in its letter that Treasury must consider grid emissions associated with hydrogen production under the law. That finding was strengthened by a DOE technical paper, which recommended Treasury use the three pillars to account for grid emissions.
“What I don’t see is the other agencies saying to the Treasury Department [that] you could have gone much looser and gotten to another legally defensible result,” Kaercher said in an interview.
However, Jon Rund, deputy general counsel for the Nuclear Energy Institute, said in an email that he sees problems with tying the additionality pillar to language in the Clean Air Act.
Rund wrote that EPA has not previously considered emissions induced by using the grid. He added that “there is no relationship between a hydrogen producer and induced grid emissions.”
In EPA’s letter to Treasury, the agency said past tools were not advanced enough to consider grid emissions. EPA also said grid emissions are “related to hydrogen production.”
Model discussion
Opponents of the hydrogen guidance would likely argue that Treasury’s tax rules overstep the department’s legal authority, said Dixon of Steptoe.
The Inflation Reduction Act does not explicitly include the three pillars.
Instead, the law says Treasury must use Argonne National Laboratory’s GREET model to determine the hydrogen production’s emissions.
The model has previously included default grid emission values for different regions of the U.S.
“In this sense, by invoking the GREET model in the statute, Congress has already accounted for the carbon intensity of any given hydrogen producer,” Dixon and Steptoe colleague Hunter Johnston said in an email to E&E News.
In a notice to clients, they said attorneys could argue there was no opportunity for Treasury to adopt the three pillars.
Others have said the three pillars not only deviate from the Inflation Reduction Act but also run counter to the law’s original purpose of creating a clean hydrogen economy.
Companies that use nuclear power to make hydrogen have argued the additionality pillar effectively makes them ineligible for 45V. They say that Congress intended for them to qualify for 45V because the Inflation Reduction Act says nuclear power plants are eligible for both 45V and a separate tax credit for low-carbon nuclear power known as 45U.
Dixon said Administrative Procedure Act arguments could also be raised in court.
“One possible set of challenges has to do with the extent … the new, revised GREET model looks like rulemaking,” he said in an interview.
Under Treasury’s proposal, hydrogen producers will use a new GREET model known as 45VH2 GREET.
Dixon said 45VH2 GREET made several user interface changes that could be seen as rulemaking that would need to be subject to a notice-and-comment period under the APA.
Julie McNamara, deputy policy director for the Union of Concerned Scientists’ climate and energy program, pushed back on the argument. She said the Inflation Reduction Act states that Treasury could use GREET or a successor model like 45VH2 GREET.
Dixon added that legal challenges could allege additionality and regionality pillars constitute “arbitrary, capricious” agency actions that the Administrative Procedure Act says courts must strike down.
Chevron doctrine
While legal experts expect a weakened Chevron doctrine to encourage disgruntled hydrogen producers to file lawsuits, it may not mean much in the courtroom.
“I think taking Chevron away means [legal challenges are] more court-dependent than under Chevron,” Dixon said.
Without the doctrine, a court could find a regulation like the three pillars reasonable but not “reasonable enough” and strike it down, he added.
McNamara said that even if the Supreme Court ends Chevron, the legal case for the three pillars is clear — the Inflation Reduction Act requires Treasury to account for “significant indirect emissions.”
Even if Treasury can use the Chevron doctrine after this summer, Rund said he believes the requirement that hydrogen must be made from new clean energy sources would be hard for Treasury to defend.
He added that a federal court may weigh whether the three pillars violate the “major questions” doctrine before even looking at a Chevron doctrine defense.
The new version of the “major questions” doctrine articulated in 2022’s West Virginia v. EPA Supreme Court decision says Congress must explicitly authorize agencies to take an action of political or economic importance. Otherwise, that action could be struck down.
The “major questions” doctrine has been used to target federal regulations, including President Joe Biden’s student loan debt relief plan last year.
Correction: An earlier version of this story misstated a quotation about indirect emissions and the Inflation Reduction Act.
