The Biden administration unveiled its final rules on Friday for a tax incentive designed to channel substantial funds to producers of cleaner hydrogen, a move expected to significantly influence the energy landscape.
Environmental organizations responded cautiously to the new regulations, acknowledging their potential to diminish emissions linked to climate change. However, they raised concerns about certain loopholes that could unintentionally benefit producers of less clean hydrogen.
The administration aims to boost hydrogen production as a means of replacing fossil fuels in areas of the economy that are major contributors to greenhouse gas emissions, yet challenging to electrify, such as long-range transportation and industrial sectors like steel production.
Currently, the majority of hydrogen is produced from natural gas, which has a considerable impact on climate change. Alternatively, hydrogen can also be generated by electrolysis, whereby water is split using renewable energy sources such as solar, wind, nuclear, or geothermal, resulting in minimal greenhouse gas emissions.
A year prior, the Treasury Department suggested a tiered framework in which companies producing hydrogen through water splitting could receive the maximum credit of $3 per kilogram.
Under the newly established rules, companies using natural gas to produce hydrogen could also qualify for the full tax credit—provided they employ technology to capture and sequester emissions. This eligibility may extend to firms utilizing natural gas alternatives derived from wastewater, animal waste, or landfill gas, while hydrogen produced from coal mine methane might receive lower tiers of credit.
Administration officials clarified that the tax credit is determined based on the total lifecycle emissions associated with the hydrogen production process, rather than the specific methods used for production. This credit is part of the Democrats’ Inflation Reduction Act enacted in 2022, garnering some bipartisan support within Congress.
Wally Adeyemo, Deputy Secretary of the Treasury, emphasized that the combined efforts of the Inflation Reduction Act and the Bipartisan Infrastructure Law represent some of the most ambitious initiatives globally aimed at invigorating the clean hydrogen sector.
Earthjustice, an environmental advocacy group, voiced support for the rules, noting that they largely promote clean hydrogen projects without exacerbating climate and pollution issues. Nonetheless, the organization expressed worries that a segment of less sustainable hydrogen producers might also benefit from this pivotal climate program.
Conrad Schneider, a senior director at the Clean Air Task Force, stated that the final regulations are indeed favorable for the environment. Receiving a tax credit indicates that the hydrogen is produced with lower emissions compared to the fossil fuels it is designed to replace. He pointed out the urgent need to decarbonize sectors like aviation, marine shipping, and steel production, which rely heavily on fossil fuels at present. A tax incentive for clean hydrogen production could facilitate a shift toward more sustainable fuel sources, benefiting the climate overall.
However, Schneider cautioned that accurately tracking the emissions from hydrogen produced with natural gas might become increasingly challenging if regulations governing methane emissions and reporting requirements were rolled back by the previous administration.
The Fuel Cell & Hydrogen Energy Association, representing over 100 entities involved in hydrogen, including manufacturers, industrial gas firms, renewable energy developers, and nuclear plant operators, expressed relief over the finalization of these rules. Frank Wolak, the association’s president, raised concerns about whether the new tax credit would indeed propel progress in the industry and stimulate investment or if its provisions would only be advantageous for specific companies.
