The smallest molecule is generating big interest as a potential clean energy source that could help the U.S. transition to a low-carbon economy.  

The Biden Administration earmarked $7 billion for investment in hydrogen production and distribution networks in the Bipartisan Infrastructure Law passed in November 2021. So far, only two of seven hydrogen “hubs” approved by the administration use only renewable energy, with a majority (four) using natural gas, and one using both nuclear and solar or wind.

Simply writing checks doesn’t ensure that climate targets will be met, of course. The way hydrogen is produced – with fossil fuels, solar power, or other energy sources -- determines whether it fuels or cools global warming.  

When burned, hydrogen releases only water vapor. That gives hydrogen fuel the potential to reduce greenhouse gas emissions from steel, cement, aviation, shipping and other energy-intensive industries. But if the production of hydrogen fuel is powered by fossil fuels and made from natural gas, the process releases carbon dioxide that undermines its alleged climate benefits.

In an effort to nudge the growing hydrogen industry in a climate-friendly direction, the U.S. Treasury Department recently released proposed rules for clean hydrogen subsidies included in the Inflation Reduction Act. The guidelines, which cover the distribution of tens of billions of dollars of tax credits, surprised many with their strong commitment to hydrogen produced with clean energy, not fossil fuels.  

However, others wonder if the new guidelines will have much impact on global warming because other federal tax break programs still subsidize hydrogen produced with natural gas.    

Rachel Fakhry, policy director for emerging technologies at Natural Resources Defense Council, is optimistic about the proposed new rules. She said the U.S. Treasury’s proposal will ensure that the clean hydrogen industry grows while actually reducing emissions.

Fakhry said if the proposal is implemented without changes, it “will turbocharge the U.S. hydrogen market toward long-term success, position us as the global leader of an emerging industry, protect electricity consumers, expand new clean energy jobs, and deliver on the climate promise of the Inflation Reduction Act.”

Many industry leaders, elected officials in fossil fuel-producing regions, and those in states where the incentives will be hard to qualify for see the new rules as being too strict and at risk of hampering the nascent hydrogen industry.  

Sen. Joe Manchin (D-W.Va.), said the new rules for the hydrogen production tax credit “will only make it more difficult to jumpstart the hydrogen market.”

“For an administration that wants to reduce emissions and fight climate change, it makes no sense to kneecap the hydrogen market before it can even begin,” he continued.  

Known as 45V, the tiered tax credit is worth up to $3 per kilogram of hydrogen if the greenhouse gases released by the hydrogen’s production are low enough (a lifecycle emissions rate of less than 0.45 kgs of carbon dioxide equivalent per kg of clean hydrogen), or as low as 60 cents per kilogram for hydrogen made with higher emissions. The regulations are open to public comment until late February with a public hearing scheduled for the end of March.

To qualify for the credit, hydrogen production companies must use clean electricity from wind, solar, or other non-fossil fuel sources that began operation no more than three years prior to the construction of the hydrogen facility. The hydrogen fuel manufacturers must also not divert clean energy from other users. And the electricity must be sourced from the same geographic region and tracked on an hourly basis.  

According to a Rhodium Group analysis of the Biden Administration proposal, the 45V rules for hydrogen production largely embrace “the three pillars’ concept”—regionality, incrementality, and temporal matching—for defining how to account for the life-cycle emissions of hydrogen production. The Rhodium authors assert that one of the most important issues to be ironed out is how hydrogen projects that use electricity from existing clean energy sources can qualify, if at all – given the prohibition on diverting clean energy from other users.

Timothy Fox, managing director with ClearView Energy Partners, said they regard the proposed rulemaking as prioritizing the climate ahead of economic growth.  

“The incorporation of environmental advocates’ ‘three pillars’ appears to limit clean power sources used in hydrogen production, in contrast to a conceptually more laissez faire protocol urged by industry,” Fox said.

Fakhry said her major concern was that exemptions or carveouts would be added to the proposed guidelines that might seem minor but would have significant impacts.  

“Many hydro and nuclear producers want to capitalize on the credits by diverting power that’s currently directed toward the grid toward hydrogen production,” she said. “Even shifting 5-10 percent of this capacity could result in diverting 2-4 percent of total U.S. power for hydrogen  production. This is equivalent to the approximate power consumption of Oklahoma for the lower range, and roughly Illinois for the upper range.”

In October 2023, the Biden Administration selected seven projects to receive about $1 billion dollars each as part of the Department of Energy’s Regional Clean Hydrogen Hubs program. The seven H2Hubs will be in different regions across the United States.  

So far, only two of seven proposed hydrogen production networks – or “hubs” – selected by the Biden Administration so far would produce hydrogen using only renewable energy and water. As mentioned earlier, four of the hubs would use natural gas for some portion of their power and as a feedstock, and two would use nuclear power (one of these would use both nuclear power and natural gas).

The proposed Treasury Department rules might not make the number of hydrogen projects fueled by natural gas decline, because fossil-fuel based hydrogen projects cost less than making it with renewables and water, and they can still get billions in federal subsidies through a different federal tax break program (the IRS 45Q program) that rewards carbon capture and sequestration, including by oil and gas-related industries. Carbon capture is a technology that remains unproven on a large scale but that many of the companies planning to build hydrogen plants intend to use. The 45Q program has been criticized for subsidizing continued use of fossil fuels.

Jeff St. John at Canary Media writes that while the 45V tax credit rules reward hydrogen production in places where wind and solar thrive, regions with nuclear and hydropower will struggle to qualify because the current proposal rules out existing nuclear and hydropower options.

St. John notes that “under the three-pillars structure, certain regions of the country will win, and others will lose. That’s because cost-effective green hydrogen production will be driven to the places where new renewable power can be built at the lowest cost and produce as much power as possible.”

According to an Electric Power Research Institute analysis, tax credits could cover up to 90 percent of the production costs of hydrogen in locations with the best wind and solar resources and low construction costs, whereas in places with low-carbon power options that fail to qualify, such as nuclear and hydroelectric, the credits could cover less than half the costs.

Images: Courtesy of U.S. Treasury Department and iStockphoto.