Why new tax credits for clean hydrogen sparked a fiery debate

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

The guidelines elicited strong responses from clean energy advocates and today’s industry, some cheering, others outraged. Some experts said new guardrails are needed to ensure the Biden administration’s push to develop a domestic hydrogen supply chain 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.

When hydrogen is burned, water vapor is released, instead of carbon dioxide emissions that warm the planet. The problem is that today, most hydrogen is made using fossil fuels – usually through a process called steam-methane reforming, which produces carbon dioxide emissions. Methane is an even more potent greenhouse gas than CO2 and routinely escapes along the supply chain from production to end use.

US Energy Secretary Jennifer Granholm called hydrogen “a Swiss army knife”

Fortunately, there is a more sustainable way to produce hydrogen. An electrolyzer can split water into oxygen and hydrogen molecules. Furthermore, it can run on electricity generated by renewable energy sources or carbon-free nuclear energy. This tactic is simply considerably more expensive, which makes the tax credits crucial. Hydrogen made with renewable energy sources can cost up to $12 per kilogram to make, while hydrogen made with methane costs less than $3 per kilogram.

The Clean Hydrogen Production Credit was created through the Inflation Reduction Act, the largest investment the US has made to date to address climate change. The bipartisan infrastructure bill also set aside $8 billion to create hydrogen production hubs in the US. It’s clear that the Biden administration sees hydrogen as an important part of America’s clean energy future. In an interview with The edge Earlier this year, U.S. Energy Secretary Jennifer Granholm called hydrogen “a Swiss army knife” that could serve solar and wind energy that naturally fluctuate and are more difficult to use for some industrial applications.

That said, many grassroots groups are still deeply concerned about the potential impact of a growing hydrogen industry on local communities and the environment. They don’t want air pollution from facilities that use methane to make hydrogen, and don’t rely on the emerging carbon capture technologies that have been proposed as a way to prevent CO2 emissions (but not other pollutants) from entering the environment. Even using renewable energy, there is the prospect of hydrogen production taking up limited wind and solar energy resources for 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. Furthermore, when an electrolyzer is plugged into the power grid, you don’t really know if it’s running on clean or dirty energy.

The provisions enshrined in today’s new tax credit should prevent some of these risks. “Rigorous guardrails are needed to ensure that the hydrogen tax credit stimulates hydrogen scale-up right hydrogen, not just any hydrogen. At stake is no less than whether hydrogen actually serves as a tool for climate progress,” 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, could save companies up to $3 per kilogram of production if they can meet the tough new standards being proposed. They will have to buy clean electricity new generators that did not come online until three years after the hydrogen production facility came into operation. This is intended to ensure that hydrogen production adds new sources of clean energy to the grid, rather than draining that resource. There are also rules for where and when they can purchase that energy. It will have to come from the same region where they are active. And by 2028, electricity should be generated within the same hour used to power the electrolyzer.

“At stake is no less than the question of whether hydrogen actually serves as a tool for climate progress.”

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 corporate goals for sourcing local renewable electricity and tailoring their purchases on an hourly basis in a similar effort to fuel clean energy growth.

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

Industry groups aren’t so happy. They say the proposed restrictions could clean up hydrogen production before it has a chance to get off the ground. “Unfortunately, the Biden-Harris administration miscalculated an effective path for implementing the hydrogen production incentives, completely missing the IRA’s intent. And with this miscalculation, we see that the success of the recently awarded hydrogen hubs is also at risk,” said Roxana Bekemohammadi, founder and executive director of the United States Hydrogen Alliance, in an email.

The Biden administration should find other ways to encourage more clean energy to come online, rather than focusing specifically on hydrogen production, she added. “If the government encourages, let’s say battery electric vehicles, a consumer of electricity, there is no need for new power generation to be built to support that vehicle,” Bekemohammadi said.

The strict guidelines could also crush the dreams of aging nuclear power plants who thought they would have new customers in the hydrogen production sector. The largest operator of nuclear power plants in the US, Constellation, is likely to file a lawsuit to prevent the strict rules from taking 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 power doesn’t come from a nuclear source new power plant or recently added capacity at an existing power plant. Building new nuclear reactors is an extremely difficult task, to say the least. The US’s first newly built reactor in decades finally came into service this year – seven years late and more than $16 billion over budget.

One major industry player agrees with the proposed rules, which are similar to directives in the European Union. “We applaud the Administration’s proposed strong three-pillar hydrogen tax credit rule, which will be essential to achieving real emissions reductions, creating incentive for broader investments in the hydrogen value chain, and strengthening U.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 guidance is placed in the Federal Register, which the Treasury Department and the IRS will have to take into account before finalizing the new rules.

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