The future of clean hydrogen in the US could hinge on a new tax credit

The Biden administration proposed new tax guidelines today aimed at making it cheaper to produce hydrogen as a less-polluting alternative to fossil fuels. The tax credit comes with strict stipulations around using newly constructed sources of clean energy to produce hydrogen, as opposed to more polluting sources.

The guidelines elicited strong reactions from clean energy advocates and industry today, some celebrating, others outraged. Some experts said new guardrails are needed to ensure that the Biden administration’s push to develop a domestic supply chain for hydrogen doesn’t inadvertently increase pollution. Meanwhile, clean energy trade groups argued that the tax credit is now too restrictive to allow clean hydrogen production to flourish.

Hydrogen combustion releases water vapor, rather than planet-heating carbon dioxide emissions. The problem is that today, most hydrogen is made with the help of fossil fuels — mostly through a process called steam-methane reforming that produces carbon dioxide emissions. Methane is an even more powerful greenhouse gas than CO2, and routinely escapes along the supply chain from production to final use.

Fortunately, there’s a more sustainable way of producing hydrogen. An electrolyzer can split water into oxygen and hydrogen molecules. Moreover, it can run on electricity generated by renewables or carbon-free nuclear energy. This tactic just happens to be significantly more expensive, which is what makes the tax credits crucial. Hydrogen made with renewables can cost up to $12 per kilogram to make, compared to hydrogen made using methane costing less than $3 per kilogram.

The Clean Hydrogen Production Credit was established through the Inflation Reduction Act, the biggest investment the US has made yet to tackle climate change. The Bipartisan Infrastructure Law also set aside $8 billion to create hydrogen production ‘hubs’ across the US. Clearly, the Biden administration sees hydrogen as a key piece of America’s clean energy future. In an interview with The Verge earlier this year, US Secretary of Energy Jennifer Granholm called hydrogen “a Swiss Army knife” that could fill in for solar and wind energy that naturally fluctuates and which are harder to use for some industrial applications.

That said, many grassroots groups still have major concerns about a growing hydrogen industry’s potential impact on local communities and the environment. They don’t want air pollution from facilities that use methane to make hydrogen, and don’t trust emerging carbon capture technologies that have been proposed as a way to prevent CO2 emissions (but not other pollutants) from escaping into the environment. Even when using renewable energy, there’s the prospect of hydrogen production hogging limited wind and solar resources to itself. That could lead to higher greenhouse gas emissions if grids are forced to rely more heavily on fossil fuel generators as backup power sources. Plus, if an electrolyzer plugs into the grid, you don’t really know whether it’s running on clean or dirty energy.

The stipulations laid out in the new tax credit today are supposed to preempt some of those risks. “Rigorous guardrails are necessary to ensure the hydrogen tax credit incentivizes the scale-up of the right hydrogen, not just any hydrogen. No less than whether or not hydrogen actually serves as a tool for climate progress hangs in the balance,” Julie McNamara, senior energy analyst and deputy policy director of the Climate and Energy Program at the Union of Concerned Scientists, said in a statement.

The tax credit, called 45V, can save companies up to $3 per kilogram of production, if they can meet the tough new standards proposed. They’ll have to purchase clean electricity from new generators that only started operating within three years of the hydrogen production facility coming online. This is meant to ensure that hydrogen production helps add new sources of clean energy to power grids rather than sucking that resource dry. There are also rules for where and when they can purchase that energy. It’ll have to come from the same region in which they’re operating. And by 2028, the electricity would need to be generated within the same hour it’s used to power the electrolyzer.

The three requirements reflect recommendations from a Princeton-led study published earlier this year. Some tech companies including Microsoft and Google have set their own company goals for sourcing local renewable electricity and matching their purchases on an hourly basis in a similar bid to encourage clean energy growth.

“The draft guidance avoids wasting billions of tax dollars on subsidies for dirty hydrogen production projects that would spike climate and health-harming pollution,” Jill Tauber, vice president of litigation for climate & energy at the nonprofit environmental law organization Earthjustice, said in a statement.

Industry groups aren’t so happy. They say the proposed restrictions could kneecap clean hydrogen production before it gets a chance to get off the ground. “Unfortunately, the Biden-Harris Administration has miscalculated an effective pathway to implementing the hydrogen production incentives, completely missing the intention of the IRA. And with this miscalculation, we see the success of the recently awarded hydrogen hubs also being compromised,” Roxana Bekemohammadi, founder and executive director of the United States Hydrogen Alliance, said in an email.

The Biden administration needs to find other ways to encourage more clean energy to come online rather than targeting hydrogen production in particular, she adds. “When the government incentivizes, let’s say battery electric vehicles, a consumer of electricity, it does not require that new power generation must be built to support that vehicle,” Bekemohammadi said.

The strict guidelines could also dash the dreams of aging nuclear power plants that thought they may have new customers in the hydrogen production business. The largest nuclear power plant operator in the US, Constellation, is likely to file suit to block the stringent rules from going into effect, HuffPost reports. Constellation announced plans this year to build a $900 million nuclear-powered clean hydrogen production facility in Illinois, with funding from the Biden administration’s hydrogen hub program. But it could lose the hydrogen tax credit if nuclear energy doesn’t come from a new power plant or recently added capacity at an existing plant. Building out new nuclear reactors is an extremely heavy lift, to say the least. The US’ first newly constructed reactor in decades finally came online this year — seven years late and more than $16 billion over budget.

One big industry player, at least, is on board with the proposed rules, which are similar to guidelines in the European Union. “We applaud the Administration’s strong three pillar hydrogen tax credit proposed rule, which will be essential to delivering real emissions reductions, creating the stimulus for broader investments across the hydrogen value chain, and cementing the U.S.’s global climate leadership,” Air Products president and CEO Seifi Ghasemi, said in a statement. Air products is the largest hydrogen producer in the world.

The public will have 60 days to submit comments once the new hydrogen guideline are posted to the Federal Register, which the Treasury and Department and IRS will have to take into account before finalizing new rules.