Some Senate Democrats are pushing the Biden administration to impose stricter limits on hydrogen tax credits, which they say will justify the fuel’s climate-fighting potential. Hydrogen advocates warn that it could instead stifle the nascent industry.
The campaign targets the US Treasury Department, which is writing rules to claim a tax credit of $3 for every kilogram of hydrogen produced over ten years. The Biden administration hopes to fuel decarbonization of power plants, clean up heavy industry and meet climate goals. The stimulus created in last year’s landmark climate law is necessary to spend tens of billions of dollars on hydrogen production and electrolysers to remove the gas from water.
Investments without “strict guardrails” could contribute to a net increase in US greenhouse gas emissions, Sen. Jeff Merkley warns the Internal Revenue Service in a letter Bloomberg News has seen signed by several other Democrats. “The IRS must ensure that the billions of dollars at stake are used to support truly low- and zero-carbon hydrogen production and infrastructure.”
Lawmakers — along with a coalition of environmental groups — want the full credit available only to hydrogen plants that are offset by new, clean electricity supplies located in the same region and operating during the same hours. Otherwise, they argue, energy-intensive hydrogen production could lead to more fossil-fuel-based electricity generation to fill the gap — increasing carbon dioxide emissions by the equivalent of 26 new coal plants each year.
Proponents have outlined options for some existing energy resources to qualify as new, clean sources — for example, nuclear plants that run at night or recently built renewables.
Hydrogen advocates say the restrictions would destroy the potential value of the industry — and halt some planned projects.
“You’re stopping the intent of the IRA in a way that will definitely stifle industry growth and the benefits of decarbonization,” said Frank Wolak, president of the Fuel Cell and Hydrogen Energy Association, whose members include Amazon.com Inc. ., Southern Co., Toyota Motor Corp. and Plug Power Inc.
Potential limits are a particular threat to nuclear and hydropower projects. While some companies are eyeing new nuclear-powered hydrogen production operations, none are considering building a nuclear plant. With demand for new generation, increased capacity or off-peak capacity, nuclear advocates say many plants will not be viable.
“I don’t see a world where we have the level of hydrogen production from nuclear that we would be,” said Benton Arnett, director of markets and policy at the Nuclear Energy Institute. A strict mandate for new, clean electricity would “pretty much take nuclear off the table.”
Congress left a higher tax credit for the cleanest produced hydrogen and gave the Treasury Department discretion in how to assess emissions. Proponents of hydrogen argue that similar restrictions have not been imposed on tax breaks for electric cars and other technologies that could also increase demand for coal and gas.
The department plans to lay out its approach by mid-August.
Analysts say the rapid scale-up of hydrogen is critical to reducing emissions in the coming decades as the U.S. power grid becomes cleaner. According to the Rhodium Group study, “when assessing policy implementation trade-offs, it is important to understand the balance of significant long-term benefits of reducing emissions against short-term impacts.” While increased power generation from fuel-burning electrolyzers could increase greenhouse gas emissions by about 34 million to 58 million tons in 2030, Rhodium pointed out, the Energy Department estimates the potential reduction in clean hydrogen could be about 20 times that in 2050.
Rachel Fakhri, director of policy at the Natural Resources Defense Council, says the government’s decision dictates hydrogen’s potential as a climate savior — or villain. The goal should be to “prevent emissions growth and increase fossil fuel production in the grid,” he said. Otherwise, it’s “completely contrary to the trajectory we should be on.”