Unlocking Clean Hydrogen Investments in U.S. Climate Policy

Hydrogen is widely considered to be a cornerstone for decarbonization, with the potential to slash emissions from energy-intensive sectors such as heavy industry and commercial transport. Increasing production of “clean hydrogen” (hydrogen made with low or no carbon emissions) and deploying it at scale can help meet the United States’ goal of reaching net-zero emissions by 2050 and contribute to the global goal of keeping temperature rise to 1.5 degrees C (2.7 degrees F).

Two recent laws in the U.S. — the Inflation Reduction Act (IRA) and Bipartisan Infrastructure Law (BIL) — provide historic levels of investment in climate action and low-carbon technologies, including for the development and deployment of clean hydrogen. With over $9.5 billion in funding from the BIL and enhanced tax credits in the IRA, the stage is set for a rapid increase in hydrogen production and use over the next 5-10 years. Now, it’s up to stakeholders to fully leverage these investments in sectors that need hydrogen the most.

To help support and guide the implementation of new hydrogen projects, Carbon Solutions and the Industrial Innovation Initiative (co-convened by the Great Plains Institute and WRI) have launched a new report, The Landscape of Clean Hydrogen: An Outlook for Industrial Hubs in the United States. It provides detailed information and data regarding hydrogen production and usage, as well as considerations for locating hydrogen hubs and decarbonization potential. The report maps key demand sectors for hydrogen, regional advantages for producing and consuming it, emission impacts, and other potential outcomes related to hydrogen deployment in the U.S.

Below are a few key insights from the report, which can be read in full here.

How Clean Hydrogen Can Support Decarbonization in the U.S.

Today, hydrogen is used primarily to refine fossil fuels and create ammonia for fertilizer. However, when produced using low- or no-carbon methods, hydrogen can serve as a cleaner fuel source and feedstock to reduce emissions from industrial sectors and processes.

These activities are difficult to decarbonize because they are energy and heat intensive, emit from diverse sources and often comprise large supply chains. Traditional solutions like energy efficiency and renewable power — which can be used in other sectors to reduce economywide emissions by about 85% — are important but not necessarily sufficient to meet the requirements of heavy industry and commercial transport. Clean hydrogen can help fill the gap.

The Landscape of Clean Hydrogen identifies strategic uses and volumes of clean hydrogen by sector, particularly industry and transportation. Key applications explored in the report include:

• Heat: Hydrogen is a clean burning fuel that can replace fossil fuels in high-heat processes in industry and energy.
• Chemicals and fuel: Hydrogen can be used as a feedstock to be processed into clean chemicals or synthetic fuels.
• Iron and steel: Hydrogen can serve as a reducing agent for iron and steel production as well as a fuel source.
• Trucking, aviation and shipping: Hydrogen can be used as a fuel, in a fuel cell, or converted to ammonia or methanol.
• Energy storage: Hydrogen from excess renewable energy can be converted back to electricity when renewable generation is low and energy demand is high.

Taken together, these applications can significantly reduce the United States’ greenhouse gas emissions. Meeting the Department of Energy’s clean hydrogen goals could avoid 245-366 million metric tons of emissions from conventional hydrogen and fossil fuels annually by 2050 — equivalent to removing 65-98 coal-fired power plants.

U.S. hydrogen production, targets and potential demand

Clean Hydrogen Investments in the Bipartisan Infrastructure Law and Inflation Reduction Act

Investments from the Bipartisan Infrastructure Law and Inflation Reduction Act provide unprecedented levels of funding for clean hydrogen that can help transform the industry and increase the probability of meeting climate goals. Because almost all hydrogen today is carbon intensive, BIL and IRA incentives are specifically designed to deploy hydrogen that is produced with few or zero emissions.

Bipartisan Infrastructure Law provisions

The Bipartisan Infrastructure Law, enacted in November 2021, included over $9.5 billion of direct investments in clean hydrogen initiatives. This funding will help catalyze clean hydrogen production and supply chains and deploy it for novel uses. BIL investments over five years (FY22-FY26) include:

Inflation Reduction Act provisions

The Inflation Reduction Act, signed into law in August 2022, included the new 45V Hydrogen Production Tax Credit (PTC). This funds hydrogen produced through any method as long as it emits less than 4 kilograms of CO2 equivalent (kgCO2e) per kilogram of hydrogen. The credit is tiered, so cleaner hydrogen earns a higher credit, up to a maximum of $3 per kilogram of hydrogen produced with 0-0.45 kilograms of CO2. The BIL also enhanced existing tax credits for hydrogen fuel cell technology.

To be eligible for the IRA’s hydrogen tax credit, projects must begin construction by 2033 and can include retrofitted facilities. The tax credit is transferrable and eligible for direct pay, enabling taxpayers to convert the credit to cash.

Hydrogen Production Tax Credit (PTC) tiers

*Carbon intensity must be calculated using the GREET Model

Other IRA tax credits supporting clean hydrogen

The 45V PTC most directly benefits clean hydrogen production, but the IRA contains several other tax credits that incentivize hydrogen production and use.

• Advanced Energy Project Credit (48C ITC): Extends the 30% investment tax credit (ITC) and makes hydrogen manufacturing projects such as fuel cells, electrolyzers and infrastructure eligible for the funding.
• Carbon Capture and Sequestration Tax Credit (45Q PTC): Increases the tax credit for storing carbon dioxide captured from point sources, such as hydrogen steam methane reforming plants, up to $60 and $85 for utilization and storage, respectively. Cannot be stacked with the 45V Tax Credit.
• Energy Storage Credit (48 ITC): Makes hydrogen storage eligible for a 30% ITC under the energy investment tax credit.

How These Laws Can Drive Cleaner, More Sustainable Hydrogen Production

Almost all hydrogen production today is done by feeding methane into a steam methane reformer (SMR). This is a carbon-intensive process which emits between 9-12 kilograms of CO2 per kilogram of hydrogen — similar to the emissions from producing and burning a gallon of gasoline, which contains an equivalent amount of energy.

Low-carbon or “clean” hydrogen technologies are led by three pathways:

• Steam methane reformer with carbon capture and storage (CCS): Hydrogen is conventionally produced by feeding methane into an SMR. CCS can be added to capture and sequester the resulting carbon dioxide. This strategy is most amenable to current hydrogen infrastructure.
• Electrolysis: Electricity is channeled into an electrolyzer submerged in water, which splits the H2O molecules into hydrogen and oxygen. No carbon is produced at all using this method if the electricity input is carbon free.
• Biomass gasification: Biomass, such as plants and even municipal waste, is turned into a mixture of hydrogen, carbon monoxide and carbon dioxide when heated without combustion. CCS can take the CO2, which originated from plants, and sequester it underground, which can lead to “negative emissions” (i.e. carbon removal). However, the source of the biomass must be sustainable (such as using waste materials) to avoid deforestation and conversion of land for biomass production.

These methods are currently more expensive than conventionally produced, fossil-based hydrogen due to the high costs of CCS and electrolyzers. However, investments in the BIL and IRA are intended to drive costs down, making clean hydrogen the more affordable option.

The Hydrogen Hubs Program created under the BIL will demonstrate commercial ecosystems of clean hydrogen markets by enabling low-cost production with nearby consumers. Accompanying infrastructure — including dedicated renewable energy as well as hydrogen and CO2 storage and pipelines — can catalyze further build outs of this ecosystem. Moreover, the IRA’s hydrogen tax credit will enable virtually all clean hydrogen to be less expensive than conventional production, creating one of the most powerful incentives to decarbonize. Because there is no funding cap to the 45V tax credit, it could potentially drive the entire clean hydrogen market.

These investments will be crucial to transition this historically high-emitting energy carrier into a flexible, low-cost and clean climate solution with a diverse array of applications. But they must be implemented properly to avoid unintended consequences, such as high emissions from electrolysis powered by a fossil fuel-based electric grid and leakage of methane and/or hydrogen.

Guiding Strategic Implementation of Hydrogen Hubs

To meet DOE’s clean hydrogen production goals, the U.S. must replace the 10 million metric tons of hydrogen produced today with clean hydrogen and scale up to at least 50 million metric tons by 2050. This will require fully leveraging BIL and IRA investments and strategically siting and building hubs to support industries and applications where hydrogen can be most effectively deployed.

The Landscape of Clean Hydrogen examines high-impact opportunities for co-locating hydrogen production and use to identify priority regions for hydrogen investment in the U.S. It considers the location of existing hydrogen production, use and infrastructure; potential applications; and access to clean energy, among other factors, to identify areas with high potential for emissions reductions.

For example, clean hydrogen could reduce emissions from the Gulf’s many refineries, chemical producers and other industrial facilities. The upper Midwest could develop clean hydrogen-based ammonia for use in fertilizer. And places with high rates of renewable energy could use clean hydrogen for grid balancing and energy storage.

Iron and steelmaking could also be decarbonized using clean hydrogen. The iron range of the upper Midwest could participate in a developing market for direct reduced iron (DRI) made using clean hydrogen. Active supply chains and distribution infrastructure could support new hydrogen and DRI-based steel production in the Gulf and Great Lakes.

Strategic opportunities for clean hydrogen production and use by region

Next Steps for Scaling Clean Hydrogen in the U.S.

Implementing clean hydrogen investments from the Bipartisan Infrastructure Law and Inflation Reduction Act can bring substantial climate, economic and social benefits. In addition to reducing greenhouse gas emissions, replacing unabated fossil fuels with clean hydrogen can reduce air pollution by displacing fossil fuel use in industry and transportation. This would especially benefit disadvantaged communities co-located with polluting facilities and high-traffic areas.

DOE and companies should continue cooperating to take full advantage of these historic investments. As DOE reviews hydrogen hub applications, other stakeholders such as companies, NGOs and academia can maximize the value of investments in the following ways:

• Use regional and sectoral takeaways from the Landscape of Clean Hydrogen report to launch early clean hydrogen offtakers and prepare the ground for important future uses.
• Assess the economic impacts of clean hydrogen development, such as employment gains and tax revenue, and convey them to high-potential regions and communities.
• Review regulatory standards for air quality, air toxics and pipeline safety to make sure they are robust enough to protect communities from additional pollution from retrofitted and new facilities.
• Improve, standardize and otherwise normalize rigorous community engagement with residents in proximity to clean hydrogen infrastructure. Although every community is different, companies can share best practices that go beyond “checking a box” and enable meaningful, early and continuous engagement with local stakeholders.
• Develop new policies or improve existing ones based on successes and failures in developing clean hydrogen. These can include directing investments where emissions reductions are largest; identifying challenges in project development, emissions mitigation and safety; and supporting continued H2 research through programs and priority-setting.
• DOE, nonprofit organizations and industries can conduct further research on economic impacts, safe transportation options and direct benefits to communities. This will be important for understanding the landscape and potential impacts of hydrogen hub implementation.

For more information and next steps, see the full report: The Landscape of Clean Hydrogen: An Outlook for Industrial Hubs in the United States.