Clean hydrogen tax credits are out: Here’s how they could slash emissions

This morning, the United States’ Treasury Department released long-awaited guidance for claiming clean hydrogen production tax credits. 

The 45V guidelines — which are in the proposal stage and are still subject to change — reflect a rigorous definition of what constitutes “clean” hydrogen and aim “to make production of clean hydrogen with minimal climate pollution more economically competitive and accelerate development of the U.S. clean hydrogen industry,” according to the department. 

The proposed rules limit the $3-per-kilogram credit to hydrogen produced with deliverable, time-matched renewables projects constructed within three years of a hydrogen facility’s powering up. Today’s announcement does include the potential for exceptions, requesting input on how “existing clean power generators” could meet the requirements in certain cases.

As drafted, the rules could be a boon for the clean energy industry, and a blow to fossil fuels; indeed, natural gas champion Sen. Joe Manchin (D-W.Va.) described them as “horrible” in the weeks before their release. 

The following is Dan Esposito, senior policy analyst at Energy Innovation, with his take on their potential impact. 

The proposed clean hydrogen production tax credit rules look to be a monumental win for climate, consumers, and the country’s budding clean hydrogen industry. But Treasury will need to close potential loopholes that threaten to poison the well, such as arbitrary carve-outs for existing clean energy resources.

Treasury’s central challenge in constructing these rules was accounting for upstream greenhouse gas emissions from electrolyzers, which split hydrogen from water using electricity. While this process has no on-site pollution, electrolyzers’ interaction with the power system has enormous implications for the true emissions intensity of their hydrogen production. Whether the hydrogen can be considered “clean” or “dirty” comes down to this interaction.

Fortunately, Treasury successfully navigated these turbulent waters. The proposed rules require electrolyzers to draw power from new, deliverable, hourly-matched clean energy resources to earn the top tax credit value. 

And if the department holds firm on its framework through the comment period, it will both ensure U.S. hydrogen production is truly emissions-free and protect consumers from price spikes and air pollution. Furthermore, it will set the industry up for long-term growth, while positioning it to eventually stand on its own without subsidies.

The right way to build

In creating the Inflation Reduction Act, Congress tasked Treasury with writing rules for earning the lucrative “45V” tax credit and tied its value to a hydrogen producer’s upstream and production emissions.

Nearly all hydrogen today is made through a highly polluting process involving natural gas, then used to refine oil or make fertilizer. Congress designed 45V to support lower-emissions hydrogen technology development that scales clean hydrogen production to the massive volumes required to clean up the last frontiers of our carbon-based economy, like steel, aviation, and international marine shipping.

While today’s emissions-intensive hydrogen costs $1 to $2 per kilogram, 45V offers $3 per kilogram in tax credits for the cleanest hydrogen production. This allows pricier hydrogen produced using renewables to immediately be more cost-competitive while bringing electrolyzer technology costs down over time. 

Hydrogen producers have been kept in limbo awaiting Treasury's rules, debating potential designs and waiting to see if their business models would qualify for the rich subsidy.

Treasury could have taken the easy way out by throwing its hands up at the complexities of accurate emissions accounting, allowing hydrogen producers to cannibalize existing clean energy or match power consumption with clean electricity generation on an annual basis. This would have made the subsidy very easy to access and potentially given the industry a faster start — but at the expense of both public welfare and its own future.

Specifically, such rules would have produced hydrogen that appears clean but actually causes a dramatic rise in expensive fossil fuel power generation, driving an enormous amount of accompanying emissions and harming consumers. It also would have built an industry forever dependent on subsidies, never able to stand on its own.

Instead, the Biden administration stayed true to its goals through a lengthy, tumultuous process, proposing guardrails that will ensure 45V subsidizes truly clean hydrogen.

Climate

Treasury’s proposed rules would ensure the nascent electrolytic hydrogen industry is low-emissions from the start. This provides high confidence for consumers of U.S. “green” hydrogen that they are actually reducing emissions, rather than simply greenwashing.

These rules — which include a 10-year subsidy available to projects beginning construction before 2033 — could also ensure the coming electrolyzer boom will clean up the grid while improving reliability. Developers would bring new clean energy resources online to support their electrolyzers' hydrogen production and access the tax credit. When the subsidy expires, project owners would flexibly operate their electrolyzers to run only when power prices are cheap enough to make competitively-priced hydrogen — that is, when clean energy is widely available.

Looser rules that allow electrolyzers to use existing clean energy sources or annually match their clean energy consumption with their operations would have supported the buildout of inflexible electrolyzers that are relatively undiscerning consumers of power. This could have stimulated new gas-fired generators or even pushed back coal power plant retirement dates.

We cannot afford to slam the brakes on cleaning up the grid when we instead need to accelerate that transition.

Consumers

Under a loose framework, electrolyzer developers could essentially use accounting tricks to claim their hydrogen production is clean while pocketing hefty subsidies. In reality, this would raise power consumption without adding sufficient new supply, increasing fossil fuel power plant operations to the detriment of consumer electricity bills and local air quality.

Consumer advocates recognized this danger and encouraged Treasury to adopt strong rules. The proposed framework ensures 45V will pay down costs associated with truly clean hydrogen production, rather than passing them to the public. It also protects the hydrogen industry against backlash about using taxpayer funding to worsen public welfare, which could derail much-needed policy support.

Industry

This guidance would benefit the hydrogen industry, both today and years into the future.

The rules provide plenty of support to make well-designed projects financially viable today. Evidence is all around us: billions worth of U.S. project announcements, the European Union’s electrolytic hydrogen pipeline increasing since it adopted similarly strong rules, and a consensus of academic and industry-led studies. By aligning with the EU, Treasury’s rules help create a trusted international clean hydrogen market and provide much-needed business certainty globally.

These proposed guidelines also set a strong foundation for growth, ensuring funding only flows to hydrogen projects best positioned to survive after public funding expires. This will set up the flexible infrastructure network we desperately need to achieve a robust hydrogen supply chain in the 2030s and 2040s, when it will be essential to clean up steel, chemicals, aviation, and marine shipping. 

Looser rules would have indiscriminately fertilized a field of weeds, which offer no value while choking the crops we were intending to cultivate all along.

Major hydrogen industry voices support Treasury’s proposed framework for this very reason: Renewable developers and hydrogen companies alike all know they can build projects today under Treasury’s framework and recognize the industry will be better off having done things right from the jump.

Loopholes risk wrecking the program

Crucially, Treasury’s proposal is not yet airtight, as the Department is still considering exceptions that could sabotage 45V’s success if not carefully addressed.

For example, Treasury asks about allowing a carve-out for 5% of existing U.S. clean energy to qualify outside of its framework. This seemingly innocuous allowance could subsidize roughly 1.5-2 million metric tons of dirty electrolysis, emitting tens of millions of metric tons of climate pollution. 

Smaller carve-outs might also allow electrolyzers to “top off” purchases of truly clean electricity with effectively dirty electricity, killing the incentive to build flexible electrolyzers and endangering the industry’s long-term viability.

Separately, Treasury will need to take great care in its treatment of renewable natural gas, as permissive rules could allow today’s highly-emitting hydrogen producers to earn the top 45V credit value by switching fuel sources rather than investing in new technologies. This could damage 45V’s ability to grow a truly clean hydrogen industry by making it much more difficult for newer technologies, like flexible electrolyzers, to compete with subsidized natural gas-derived hydrogen.

The Biden administration faced a steep challenge in crafting these complex rules, but if it ties up destructive loose ends, it’ll notch a landmark win for consumers and the hydrogen industry — and bring us closer to reaching a climate-safe future.

Dan Esposito is a senior policy analyst at Energy Innovation. The opinions represented in this contributed article are solely those of the author, and do not reflect the views of Latitude Media or any of its staff.