Hydrogen has the potential to become a transformational decarbonization solution for many parts of the U.S. economy. It can be used as clean burning fuel, an energy storage medium or a feedstock for manufacturing processes. However, hydrogen’s promise to help reduce emissions depends on whether it’s “clean” — which means it’s produced with zero to little emissions, reducing emissions overall instead of adding to them.
To incentivize the production of clean hydrogen, the U.S. Department of the Treasury released its proposed guidance on the 45V Hydrogen Production Tax Credit on December 22, 2023, that outlines what counts as clean hydrogen. This credit, established by the Inflation Reduction Act (IRA) of 2022, provides tiers of tax credits to clean hydrogen producers based on the amount of emissions produced. Fewer emissions per kilogram of hydrogen produced will yield larger credits, up to a maximum of $3 per kg of hydrogen. This could spur enormous investments as the tax credit could accelerate making clean hydrogen competitive with, and eventually significantly cheaper than, today’s conventional hydrogen. Current conventional hydrogen costs between $1.00-$2.00 per kilogram and clean hydrogen is projected to drop from $4.00-$5.00 down to nearly $2.00 by 2030 and potentially less than $1.00 by 2050.
Under heavy debate and lobbying about the stringency of this guidance, the Treasury’s final rules will greatly influence investment, production and use of clean hydrogen. WRI issued a statement of support for the guidance and submitted a formal response to Treasury elaborating upon that statement, which we summarize throughout this article.
What Are the Key Proposals in the 45V Hydrogen Production Tax Credit Guidance?
The Treasury requested comments on many questions in the guidance, most of which concerned how hydrogen production emissions data can be collected and verified. One of the main questions focused on how to evaluate emissions from electricity used to split water into hydrogen through electrolysis or “electrolytic hydrogen.” This was the focus of WRI’s response. There are other clean hydrogen production pathways with their own considerations, such as sourcing biomass for waste biomass gasification with CCS, that the guidance seeks to address, but they are not the focus of this article.
Fundamentally, using electrolysis to produce hydrogen avoids greenhouse gas (GHG) emissions, if it is directly powered by a clean energy source, such as renewable or nuclear energy. However, a key complication arises when electrolysis uses power from the electricity grid, causing substantially more emissions than conventional hydrogen production if the grid is powered by fossil fuels or if the additional electricity demand increases fossil fuel-based electricity generation.
Concerns around sourcing clean electricity have manifested into a debate on whether or how that electricity should be sourced from new clean power sources, produced at the same time as the hydrogen plant is operating and located near the plant — also known as the “Three Pillars” of clean hydrogen production.
The guidance proposes a strict adoption of the Three Pillars, requiring electrolytic hydrogen be produced with additional clean energy within the same region during the hour it is produced.
Specifically, hydrogen producers would have to follow these detailed rules describing the Three Pillars:
- Additionality (or incrementality): Electrolytic hydrogen production must be accompanied by new, matching clean power generation that has begun operation within three years of the electrolysis plant commencing operations. This reduces the likelihood of diverting existing clean electricity (such as from old nuclear plants) from current uses with fossil electricity to make up the demand gap. Certain flexibility will be allowed for existing power generation to qualify as additional, including for retrofits, deferring retirement and a 5% existing generation allowance.
- Time-matching (or temporal matching): Hydrogen production must occur in the same hour as the clean electricity powering it is generated starting in 2028. This would ensure that hydrogen production is not subsidized during hours when clean electricity is not being produced. Until 2028, a more flexible annual matching will be allowed to implement necessary technology changes for tracking systems.
- Regionality (or deliverability): Electrolytic hydrogen must be produced within the same defined regions from which the clean electricity is generated. This would avoid congesting and burdening the grid, which can prevent clean electricity from reaching the hydrogen plant.
What Are Supporters of the 45V Hydrogen Production Tax Credit Guidance Saying?
WRI and other proponents of stringent 45V rules stand by the intention of the IRA and 45V to reduce emissions. There is overwhelming evidence through research and modeling that enforcing the Three Pillars is effectively the only way to ensure 45V is not increasing emissions for grid-connected electrolysis. These models also find that strict rules would not inhibit clean hydrogen supply to an extent that would prevent the Biden Administration from reaching its clean hydrogen production goals of 10 million metric tons by 2030.
Research on 45V assesses a wide breadth of impacts that include the carbon intensity of hydrogen, total increased emissions, production costs, power consumption and offtakers (i.e. purchasers) of clean hydrogen. Princeton Net-Zero Lab, one of the early proponents of the Three Pillars, found that grid-connected electrolysis could produce emissions two to four times (20 to 40 kilograms of carbon dioxide per kilogram of hydrogen or kgCO2/kgH2) more polluting than average hydrogen production today (9 to 11 kgCO2/kgH2). The figure below illustrates why grid-connected electrolysis can be more carbon intensive than steam methane reforming, which is today’s primary hydrogen production method in the U.S.
Evolved Energy found that, cumulatively, the Three Pillars avoid 192 million to 416 million metric tonnes of CO2 (MtCO2) through 2030, and even more in the years beyond. Some studies also examine impacts of the proposed flexibility, with Rhodium Group, for example, estimating that a poorly administered 5% allowance that uses fossil fuels rather than clean energy could emit up to 1.5 billion MtCO2 through 2035, when the credit is slated to expire.
On production, the Electric Power Research Institute (EPRI) found that the Three Pillars would prompt production of more than 10 million tons of hydrogen annually by 2030, in line with the Biden Administration’s hydrogen production goal of 10 million metric tons annually by 2030. Energy Innovation contends that loose guidance would fund competitive energy markets to produce hydrogen for uncompetitive offtakers because it would support weak project economics. This is an underappreciated consequence of subsidizing low-quality hydrogen production, as many sectors could use hydrogen even when there are less expensive, readily available options to pursue. But hydrogen is the only viable abatement option for use in a handful of sectors and stringent rules will produce pricing that will drive its use toward those sectors.
Finally, a recent Princeton supplement also found that a flexibility option proposed by some companies that would exempt additionality in states with a binding carbon-limit policy would increase emissions in next-door states because it would reduce the clean energy being exported.
And support from the private sector is building, with several companies committing to the guidance as it currently stands. For example, Air Products, Hy Stor Energy, Synergetic and EDP Renewables are planning for 50 gigawatts of combined electricity use in compliance with the guidance which could lead to 6 million metric tonnes of clean hydrogen production or 60% of the goal for 2030.
What Are Critics of 45V Hydrogen Production Tax Credit Guidance Saying?
Criticisms of the Three Pillars are not uniform nor are those critiquing them. Some contest the Three Pillars entirely, others might support one or two pillars, or suggest that they need more flexibility or time before tighter restrictions are put in place. Critics of strong 45V rules justify their rationale from two main perspectives: legal and economic.
The legal argument claimed by critics is that the IRA does not permit the Treasury the authority to impose strict rules on hydrogen production and that any criteria not explicitly granted by the legislation should be out of bounds. For example, one argument is that 45V as approved by Congress does not give the Treasury authority to indirectly regulate the power system at large, as it would be implicitly doing by adhering to the Three Pillars.
Yet the law does allow the Treasury to consider indirect emissions, such as those caused by additional fossil-fuel generation resulting from existing clean energy moving to hydrogen production. The Environmental Protection Agency (EPA) even wrote a letter supporting this position, arguing that such an interpretation is in line with historical interpretations of indirect emissions.
The economic criticism of the guidance and opposition to the Three Pillars entirely is based on the potential tension between aiming to produce somewhat less hydrogen of the cleanest quality or producing large quantities of cleanish to inadvertently dirty hydrogen — a debate of quality versus quantity. Critics argue that strict guardrails will increase the barriers to entry and compliance costs, stifling the industry’s launch and delaying technological maturity and related cost declines.
However, studies consistently find the benefit of lower electricity prices predicated on the availability of renewable energy during periods of clean energy generation outweighs the impact of not running the electrolyzer 24 hours a day. In fact, the Zero Lab found that total emissions increase if producers are allowed to weekly, monthly or annually match because they will operate nearly continuously while buying enough energy attribute certificates (EACs) to offset their use.
While there is truth to the argument that strict rules will create barriers for scaled expansion, sufficient analysis, such as modeling put forth by EPRI, has estimated that strict rules will not inhibit hydrogen enough to miss yearly production goals. The aim therefore must be quality over quantity. Flooding the market with less-than-ideal hydrogen will incentivize use of hydrogen in sectors in which it’s not a best use case.
What Was in WRI’s Recommendations to the 45V Guidance?
The following are the key recommendations in WRI’s comments on the guidance:
- A tax credit provisioned within the IRA to propel U.S. clean hydrogen production must prioritize maximizing emissions reduction.
- Strict rules must be adhered to within the Three Pillars to best guarantee emissions reduction based on latest research and analysis.
- Particular attention needs to be paid not just to how much clean hydrogen is produced, but who is using that clean hydrogen. More deliberate market expansion could provide time to direct clean hydrogen towards sectors with the highest abatement potential, such as heavy industries.
- Since 45V is a subsidy and not a regulation, producers must be held to the highest standards to ensure that the tax credit achieves its intent and safeguard trust in climate policy’s effectiveness.
Our response also included a comparison of two sectors that represent weak versus strong use case scenarios for hydrogen: electricity generation versus industrial use in the steel sector. We estimated that blending hydrogen with natural gas for power generation, as many announced projects seek to do, will reduce emissions by 10% in the best-case scenario and increase emissions by 70% in the worst-case scenario. In contrast, clean hydrogen used to reduce iron ore into iron and then turned into steel in electric arc furnace has an approximately 90% emissions reduction potential in primary steel production.
For more details on the recommendations and analysis read our comments here.
What Are Some Barriers for Clean Hydrogen to Overcome?
Deploying clean hydrogen still faces significant obstacles, including the insufficient availability of clean power. The U.S. is deploying clean energy only about half as fast as needed to achieve its climate commitments due to slow permitting for new energy infrastructure and upgrades, high interest rates and supply chain issues.
Because hourly matching for EACs is not as widespread as annual matching — the current convention for offsetting — many hydrogen producers and some EAC tracking systems would need to be upgraded to measure hourly electricity consumption data. The Treasury’s proposed 2028 hourly matching phase-in is designed to provide time to bring these systems online.
And while first-of-a-kind industrial plants at large or commercial scales are being constructed, it will take time for these processes to become widespread enough to drive demand for clean hydrogen. The federal government is working to accelerate the buildout of these advanced industrial facilities through federal investments in the IRA and the Bipartisan Infrastructure Law, most recently with an announced $6 billion for low-emitting industrial processes, including several that are using clean hydrogen.
A Dependable Hydrogen Ecosystem for a Decarbonized Economy
The 45V draft guidance’s adherence to the Three Pillars indicates that the Treasury is prioritizing the production of clean hydrogen to create the least amount of emissions, instead of scaled, untethered production, which carries significant risk of indirect emissions. Weakening of any of the Three Pillars could result in hydrogen production that increases GHG emissions, eliminating the intended climate benefits from clean hydrogen.
While not enforcing the pillars would catalyze more hydrogen production, that supply would not maximize emissions mitigation and risks being used in situations that are not suitable for emission reductions. Strong rules would build trust in new climate technologies and the U.S. commitment to achieving its climate goals. Conversely, a shaky foundation could set a poor precedent for future policy that similarly requires judicious implementation.
