Treasury proposes strict climate rules for lucrative hydrogen energy tax credit

Producers of hydrogen energy would have to comply with strict climate rules to qualify for a lucrative tax credit under new proposed guidelines from the Treasury Department. 

The Biden administration and climate advocates say these guidelines would ensure the nascent power source develops in a sustainable way rather than becoming a significant contributor to global warming.

But many industry players say the rules would stifle hydrogen’s growth — with negative implications for companies and the planet in the long run.

The stakes are high. Hydrogen power is seen as a key tool to transition industries, such as aviation, steel and cement — whose emissions are particularly difficult to eliminate — to a cleaner power source. 

The tax credits are key for making hydrogen from low- or no-emitting sources economically viable.

Frank Wolak, president and CEO of the Fuel Cell and Hydrogen Energy Association, said without access to the credit, hydrogen produced from renewable sources is “not market feasible.”

Hydrogen energy can be made by either using electricity to separate the hydrogen out of water molecules in an electrolyzer or through a reaction between methane and steam. 

Later use of the hydrogen itself does not create any emissions, but the process of making it with steam or generating the electricity to power the electrolyzer can produce climate-warming emissions.

The Inflation Reduction Act (IRA), the Democrats’ 2022 climate, tax and health care bill, provided significant tax credits for hydrogen energy whose production meets certain emissions thresholds.

The proposed guidance released Friday sets out rules for what hydrogen can qualify for a clean hydrogen tax credit provided by that law. 

The proposal says that to get the tax credit, an electrolyzer would need to be fueled by new power sources as opposed to existing electricity that’s already on the grid.

It would also be required to get power that’s generated in the same geographic region where the electrolyzer exists.

For the first few years of the guidance, it would allow the new renewable energy sources to generate power during the same year that it is used by the electrolyzer. Starting in 2028, however, the electricity would have to be produced within the same hour as it is used by the electrolyzer.

Administration officials told reporters that without strict stipulations, renewable-based hydrogen energy’s total emissions footprint may be greater than that of fossil-based hydrogen that’s already in use. 

That’s because without strict rules, electrolyzers would be able to take renewable power from the electric grid that is ultimately replaced with fossil fuels to meet the rest of the power needs.

“Clean hydrogen holds the potential to reduce emissions in some of the most difficult to decarbonize sectors of our economy. But producing it today typically entails significant climate pollution,” Deputy Treasury Secretary Wally Adeyemo told reporters. 

“That’s why the … credit is aimed at building a clean hydrogen industry in the U.S., and the proposed rules we are releasing today are aimed at achieving that goal.”

Environmental advocates have been pushing for strict guidelines — saying they are necessary to make sure hydrogen actually delivers climate benefits. They largely cheered the Biden administration’s proposal. 

“These are flexible rules, they’re pragmatic, they’re straightforward to implement,” said Rachel Fakhry, policy director for emerging technologies at the Natural Resources Defense Council. 

She added the White House is “absolutely right” in its assessment that the strict rules are necessary to meet emissions limits set forward in the Democrats’ bill. 

However, many major industry players have balked at the idea of stringent rules, arguing more flexibility is needed to get the hydrogen industry off the ground. 

“It really represents a setback for the growth of hydrogen in the United States,” said Wolak, with the Fuel Cell and Hydrogen Energy Association. “It ultimately puts constraints on the intent of the IRA to broadly accelerate hydrogen.”

Marty Durbin, senior vice president for policy at the Chamber of Commerce, said it also takes away an opportunity from the U.S. to be a leader on hydrogen after the European Union put similar rules in place to those proposed by the Biden administration.

“We lose … the U.S.’s ability to be the global leaders in this technology,” he said. 

Durbin, whose group represents business interests broadly, said most of its members are unified on the issue. 

But a coalition of other industry players has called for strict rules, arguing that weaker rules could hamper a buildout of hydrogen. 

“Weaker rules would result in highly subsidized hydrogen projects that drive large greenhouse gas emissions increases and electricity price spikes that would engender public backlash and stymie our industry’s growth,” they wrote this week.