The Biden administration on Thursday released long-awaited rules for a tax credit intended to spur clean hydrogen production, but the proposal disappointed many industry players and divided Democrats.
The guidance implements a key piece of the landmark Inflation Reduction Act passed in August, which created a production tax credit for clean hydrogen. The rules aim to accelerate development of hydrogen made from renewable energy, nuclear power or fossil fuels with carbon capture as a climate-friendly alternative to existing hydrogen production.
Strict Emissions Standards Place Limits on Eligibility
Under the proposed guidance, hydrogen production facilities would have to meet emissions standards to qualify for the tax credits. Facilities would be assigned emissions thresholds tailored to their feedstock, covering not just the hydrogen production process itself but indirect emissions from energy used to power the facilities.
| Feedstock | Emissions Threshold (kg CO2e per kg H2) |
|---|---|
| Renewable Electricity | 0.45 |
| Fossil Fuels w/ 90%+ Carbon Capture | 0.45 |
| Fossil Fuels w/ <90% Carbon Capture | 0.22 |
| Nuclear Power | 0.45 |
Hydrogen from renewable electricity like wind and solar would be eligible only if lifecycle emissions – from the electricity generation through end use combustion – stay below 0.45 kg CO2 per kg of hydrogen produced annually at each facility. The same 0.45 threshold would apply to hydrogen from nuclear power and fossil fuels with 90% or greater carbon capture rates.
For hydrogen from fossil fuels with lower carbon capture rates, emissions would be capped at a stricter level of no more than 0.22 kg CO2 per kg hydrogen.
The proposed emissions caps are considerably tighter than some industry groups and lawmakers had anticipated. Some moderate Democrats and hydrogen trade associations warned the stringent requirements could slow development of a nascent domestic clean hydrogen economy.
Fierce Debate Over Proposed Rules Divides Stakeholders
“The hydrogen tax credit was meant to help a new, innovative industry grow,” said Sen. Joe Manchin (D-W.Va.), an original champion of the hydrogen measures in the Inflation Reduction Act. “It makes no sense to undermine this growing industry.”
But the Treasury Department defended the emissions thresholds as necessary. “We think they strike the appropriate balance between accelerating that build-out while also maintaining the environmental integrity of the credits,” a senior Treasury official told reporters.
Environmental groups largely praised the Administration’s approach as appropriately ambitious. “These proposed rules will help jumpstart the transition to clean hydrogen while ensuring robust pollution controls,” said Fred Krupp, president of the Environmental Defense Fund.
Tax Credit Value, Eligible Uses Still Unclear
The proposed regulations leave significant questions unanswered around facility eligibility, exactly how tax credits will be calculated, and what types of hydrogen uses can qualify.
Industry groups raised concerns over limited credit eligibility for hydrogen production tightly integrated with other refining operations, like oil refineries. Rules around which end uses of hydrogen can qualify facilities for credits are also still unclear.
“A lot of things weren’t addressed that we were hoping would provide more clarity,” said a hydrogen trade association official, speaking anonymously to discuss the initial proposal candidly.
The regulations will be open to public comment until late February, with the Administration aiming to finalize guidance by Summer 2023. Considerable lobbying is expected from industry groups pushing to loosen some terms seen as overly restrictive.
With the tax credit covering up to $3 per kg of hydrogen production, the program represents support for the emerging hydrogen industry potentially worth billions of dollars over the initial 4 year period. Clear eligibility terms and a smooth application process will be critical to realizing hoped-for growth.
Outlook Remains Highly Uncertain as Debate Continues
Reactions to Thursday’s proposed guidance underscored continued controversy around the Administration’s efforts to spur clean hydrogen with carbon restrictions.
Supporters see the strict emissions caps and lifecycle carbon accounting as appropriately ambitious given hydrogen’s touted role as a climate solution. But detractors warned the limitations could inhibit investment needed to scale an entirely new technology and energy supply chain domestically.
The finalized regulations expected next year will provide greater certainty around exactly how much the new tax credit can accelerate a clean hydrogen transition. In the meantime, developers face a newly complex balancing act between ambitious climate goals and pragmatic economics.
What Comes Next
With the public comment window now open, lobbying from industry groups to loosen credit restrictions will ramp up. At the same time, environmental organizations seem unlikely to accept substantial weakening of the emissions caps.
Final regulations may land somewhere in the middle – less stringent caps to broaden eligibility, but still material limits on lifecycle emissions relative to expectations last Summer. Rule clarity around facility eligibility and use cases will also draw focus going forward.
As proposed U.S. support for hydrogen sharpens into actual rules and requirements, questions loom around what incentives state governments may layer on top. Policies tailored specifically to support local project economics could help offset federal program limits in the near term for key regional hubs.
But the even bigger unknown remains whether these promised tax incentives can kickstart a new hydrogen value chain able to stand on its own within the next 4-5 years. The latest federal proposal takes a demanding approach to accelerating development while prioritizing climate protections. Striking the optimal balance as hydrogen hopes to go mainstream may prove difficult, if the immediate reactions are any indication.
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