An intense battle is underway, pitting environmental groups, academics, and energy companies against each other, over the tax credit for clean hydrogen production in the United States. With billions of dollars at stake, the Treasury Department faces the daunting task of setting a precedent that will shape the nation’s future in the fight against climate change.
Hydrogen has emerged as a crucial element in the Biden administration’s climate strategy, offering the potential to replace fossil fuels in critical industries like steelmaking, shipping, aviation, and fertilizer production. However, most hydrogen is currently produced from natural gas using a carbon-intensive process. To enable the shift towards cleaner hydrogen production, the Treasury Department introduced a generous tax credit aimed at boosting the competitiveness of cleaner production methods, such as electrolysis.
Electrolysis involves splitting hydrogen off of water molecules using electricity, resulting in emissions-free hydrogen production when powered by carbon-free electricity sources. The tax credit allows companies to earn up to $3 for each kilogram of hydrogen produced through this method. However, determining what qualifies as clean electricity becomes a critical question, particularly for projects connected to the electric grid.
For grid-connected hydrogen plants, tracing the origin of clean electricity used in the production process is complex. A Princeton study recommends three guidelines to ensure a low carbon footprint: locally generated clean energy, from recently-built power plants, matched to the hydrogen facility’s operations hourly. Without these measures, carbon emissions could rise, negating the intended environmental benefits.
Hydrogen companies advocate for a more lenient approach, arguing that the tax credit aims to foster a burgeoning industry, and strict rules might hamper its growth. However, environmental groups emphasize the need for robust guidelines to guarantee meaningful emissions reductions and prevent wasteful use of taxpayer dollars.
The Treasury’s decision on clean hydrogen rules will extend beyond hydrogen production. Other industries, such as automotive, paper and pulp, and food and beverage, face similar challenges in their transition to cleaner alternatives. A harmonized global market for clean hydrogen could be pivotal for international trade and the success of U.S. “Buy Clean” initiatives.
Hydrogen’s role in power generation introduces complexities. The EPA’s proposed regulations for power plants offer the option to burn a blend of natural gas and hydrogen. However, if hydrogen production involves significant natural gas consumption, the benefits might be offset.
The Treasury’s decision will establish a precedent for the energy transition, shaping industries and policies for years to come. The stakes are high, and the implications are far-reaching. Striking the right balance between fostering innovation and ensuring effective emissions reduction will be key.
The hydrogen tax credit debate is emblematic of the broader challenge of advancing clean energy solutions while safeguarding the environment. The decision will significantly influence the trajectory of the U.S. economy, global markets, and climate action. Getting the hydrogen tax credit right is an opportunity to lead the charge towards a more sustainable and prosperous future.