The U.S. Could Leapfrog The World In Producing Clean Hydrogen—But Only If Treasury Encourages Diverse Investments
By Rachel Meidl
In recent days, record-breaking extreme heat has provided a preview of what’s in store as global temperatures continue to rise, prompting an unprecedented increase in clean energy investments as governments around the world race to reduce their carbon dioxide (CO2) emissions and secure a competitive edge in the burgeoning net-zero economy.
In the United States, the Biden Administration is investing billions—and, by some estimates, trillions—to unseat China as the world’s largest clean energy producer and achieve net-zero carbon emissions by 2050. Almost a year ago to the day, Congress significantly bolstered these efforts with the passage of the largest climate-related investment in U.S. history, the Inflation Reduction Act (IRA), which provides numerous clean energy tax credits for both individuals and business, including the world’s biggest-ever clean hydrogen production tax credit.
Commonly referred to as 45V, this tax credit offers a simple and clear incentive for current and aspiring U.S. hydrogen producers: up to $3 for every kilogram (kg) of clean hydrogen that is produced while emitting no more than 0.45 kg of greenhouse gases.
Increasing electrolyzed clean hydrogen production is key to the clean energy transition, long recognized for its potential to replace fossil fuels to decarbonize heavy industries, power vehicles and airplanes, generate electricity, and more. Producing it entails running an electric current through water to separate its constituent elements, hydrogen and oxygen, via a process called electrolysis, which takes place in an electrolyzer. If the electricity for the electrolyzer comes from zero-carbon resources like nuclear, hydropower, wind, solar, or fossil fuels with carbon emissions captured, the result is clean hydrogen, regardless of the technology deployed.
The challenge is, with the technologies available today, electrolyzed clean hydrogen is extremely expensive, costing about $4-8/kg to produce compared to about $1/kg for hydrogen produced from natural gas via steam methane reforming, which currently accounts for 95% of U.S. hydrogen production.
The 45V tax credit is poised to close this cost gap with lucrative incentives to jumpstart clean hydrogen production, which the U.S. Department of Energy (DOE) aims to increase 400% in less than 30 years to reach 10 million metric tons (MMT) annually by 2030 and 50 MMT by 2050.
But first, the Department of Treasury must issue implementation guidance that will determine how hydrogen producers account for their emissions to qualify for the credit. This guidance must be issued no later than Aug. 16 and, as the deadline approaches, there is mounting concern that Treasury will yield to a vocal group of hydrogen critics who want to impose a new and strict additionality requirement that would limit 45V eligibility to only those producers who use who use electricity sourced from newly built clean power—primarily, solar and wind. That means all other existing clean energy resources—including solar and wind projects currently in service—would be ineligible.
Roughly 40% of U.S. electricity production is already derived from carbon-free resources such as nuclear and hydropower. By excluding them from 45V’s benefits, additionality would devalue these resources and restrict overall U.S. clean hydrogen production.
Additionality would also complicate an otherwise simple and straightforward tax credit that is currently the envy of U.S. competitors, particularly in Europe, where experts acknowledge that—if implemented in the way Congress intended—45V would see the U.S. leapfrog ahead in the global race to develop a profitable clean hydrogen value chain.
Instead, hydrogen critics lobbying for additionality want Treasury to follow the same complex path the E.U. embraced, which would effectively force the U.S. to compete with its hands tied behind its back against China, Saudi Arabia, the United Arab Emirates, and other non-E.U. nations that have not imposed the same restrictions.
Moreover, it would also defy Congressional intent. Congress was explicit in stipulating that 45V eligibility be tied to the lifecycle carbon intensity of hydrogen produced—not to the resource or technology used to produce it.
The consequences of such a restrictive requirement on a nascent industry cannot be overstated. Hydrogen projects would be delayed while producers wait for new wind and solar power plants to be planned, approved, permitted, built, and interconnected to the grid. This would take years beyond the 10 for which the 45V tax credit is authorized. Just getting approval to start building a new solar or wind plant in the U.S. currently takes, on average, four years, with fewer than one-fifth of approved projects actually making it through the so-called grid interconnection queue.
Concomitant economic, environmental, and social implications must also be considered. Take, for instance, the availability of water, which is used as a feedstock for electrolyzers. Water quality, water treatment, localized desalinization programs, and community-specific regulations that govern water use, rights, and jurisdiction need to be worked through to ensure success and sustainability of clean hydrogen over time.
The intent of the IRA is to grow the hydrogen industry and leverage its potential for large-scale decarbonization. This will remain unfulfilled should additionality requirements be implemented.
Cleaner hydrogen production will further achieve economies of scale as companies gain direct experience with the various technologies, make adjustments, and innovate. As actual lifecycle data become more readily available in the future to help guide decision-making (data beyond emissions that represent activities from mining/extraction to end-of-life), policies can then be strengthened and refined and definitions of “clean” can be narrowed as more investments are made. While an emissions profile is important, it does not by itself translate to sustainability unless a broader set of metrics are captured, assessed, and verified.
At present, only a portion of lifecycle activities are captured, and from a sustainability perspective there are enormous data gaps. Given the data paucity and nascency of this industry, it is premature to exclude technologies at the onset when the hydrogen economy has not even had a chance to scale.
Treasury must provide a policy framework that allows clean hydrogen to provide complementary benefits to other clean energy solutions for the U.S. to compete on the global stage. Fashioning the guidance to be strategic and progressive yet practical and flexible by following the legislative text in the IRA will unleash the nation’s innovative prowess without restricting the benefits a diverse hydrogen economy can offer.
By Rachel Meidl, LP.D., CHMM, energy and environment fellow at Rice University’s Baker Institute
