A major question looming over an anticipated Treasury Department rule meant to boost the production of clean hydrogen energy is whether fossil fuel companies will qualify for federal subsidies ⏤ a possibility that environmentalists oppose on the grounds that it could undermine climate benefits of the policy.
The tax credit at issue, known as 45V, is one of many incentives in the 2022 Democratic Inflation Reduction Act to bolster clean hydrogen production. Hydrogen can be produced by electrolysis through the use of renewable energy, often referred to as “green hydrogen.” Relatively clean hydrogen can also be produced by steam methane reforming, using natural gas combined with carbon capture and storage technology — otherwise known as “blue hydrogen.”
Proposed guidance for the hydrogen tax credit laid out stringent but clear rules for green hydrogen producers, but the provisions for blue hydrogen are less black-and-white.
The tax credit is based on the carbon intensity of the production process — the dollar amount increases as emissions decrease. The tax credit goes up to $3 per kilogram of hydrogen that’s produced with less than 0.45 kilograms of carbon dioxide or its equivalent — but can go as low as 60 cents per kilogram of hydrogen that has emitted between 2.5 and 4 kilograms of CO2.
However, it is unclear whether blue hydrogen will qualify for the tax credit, as steam methane reforming, one of the main methods of extracting hydrogen from natural gas, can release more carbon emissions than renewable sources. According to the Department of Energy, steam methane reforming emits around 10 kilograms of CO2 equivalents per kilogram of hydrogen, well above the threshold of eligibility.
Figuring out this conundrum will not only be essential to aiding the nascent hydrogen industry but could determine the success of some of the Biden administration‘s own projects. The White House has poured $7 billion into creating seven regional clean hydrogen hubs that will produce the fuel from a diverse set of sources, including natural gas with carbon capture and biomass. However, if the finalized rules are too strict, it’s possible that even the projects approved by the administration won’t be able to qualify for the 45V tax credit — restricting funds meant to bolster the industry.
“I think that is absolutely a risk,” said Xan Fishman, the director of energy policy and carbon management at the Bipartisan Policy Center. “If the guidance for 45V is finalized and is too strict, I think it’s very possible that not all seven of the hydrogen hubs will be able to launch.”
Fishman explained that the initial funding for the hubs, allocated through the 2021 bipartisan infrastructure bill, paid for the upfront costs of building the necessary facilities to produce hydrogen. But the projects will still need support during the production process ⏤ which is where the tax credits come in.
Given the barriers to qualification for blue hydrogen, experts are expecting producers to try instead to qualify for the 45Q tax credit, which is meant to incentivize investment into carbon capture and sequestration. Producers are only allowed to take part in one tax credit.
“Clearly, 45Q is straightforward,” said Frank Wolak, President and CEO of the Fuel Cell and Hydrogen Energy Association. “And in some ways, it may be more available than trying to work the mechanics of the steps and all the modeling that needs to go in to get to the 45V tiers.”
Still, there are some loopholes that could allow for blue hydrogen producers to qualify for the 45V tax credit, depending on how the guidance is finalized. Carbon-intensive hydrogen production facilities could be considered “clean” depending on the emissions accounting process that the Treasury adopts. More specifically, the Treasury Department could adopt a similar system to California‘s Low Carbon Fuel Standard ⏤ which would allow for producers to cancel out their emissions by purchasing “credits” from facilities that capture methane from their operations. This would theoretically get their emissions rate under the threshold for qualifying for the tax credit. That is an option opposed by environmentalists, who argue that it would undermine efforts to lower emissions.
“We really don’t want taxpayer dollars propping up the fossil fuel industry,” said Abbe Ramanan, a project director at Clean Energy Group. “That is just gonna be undermining decarbonization efforts, and that’s a lot of lost time that we don’t really have right now, with the climate crisis where it is.”
The Treasury Department is currently accepting feedback on its guidance for 45V, with more than 17,000 comments posted from industry players. The comment period is expected to close toward the end of the month, on Feb. 26.
Environmentalists and industry groups will be looking for how the Treasury plans to finalize rules for biomethane — otherwise known as “renewable natural gas” in the proposal — and how they’re accounted for in the framework. Companies using natural gas to power their hydrogen production can sign agreements with agriculture and livestock operations to capture biogas and convert it into biomethane, an almost pure source of methane that removes carbon and other contaminants present in the gas. Biomethane can be used as a natural gas substitute, powering cars or heating homes.
But even though the gas may emit carbon emissions, California’s accounting system argues methane is a far more potent natural gas than carbon dioxide; therefore, capturing the methane before it hits the atmosphere is considered a “carbon-negative.” Agricultural operations that capture the methane can sell these “carbon-negative” credits to hydrogen producers and other fossil fuel companies, where they can tout their energy as being “carbon-free.” How biomethane is ultimately defined and accounted for in 45V could create a national system similar to California’s.
In the proposed rule, Treasury stated that it intends to issue conditions for biomethane and fugitive methane ⏤ unintended methane emissions ⏤ as “logically consistent, but not identical” with the three principles that govern how green hydrogen producers may qualify for the tax credit, but acknowledges there needs to be different approaches for accounting for the carbon emissions of each hydrogen method. These include incrementality, which requires the clean energy powering the hydrogen production process to go online less than 36 months before a facility begins producing hydrogen; deliverability, which stipulates the electricity must come from the same region as the hydrogen production facility; and matching, which requires production to be matched with clean power generation annually until 2027 and hourly starting in 2028.
More specifically, it’s unclear how the Treasury will require producers to account for methane leaks in the “life-cycle emissions” calculations of the fossil fuel gas they use. Under the current proposal, hydrogen producers are required to account for “upstream” leakage, or methane leaks that occur before the gas reaches hydrogen production facilities and any gas that escapes at the facilities.
During the open comment period, the Treasury Department is seeking feedback on how to account for both the direct and indirect emissions associated with the fuels. Specifically, the agency is seeking guidance on the use of counterfactual scenarios – an approach to assess hypothetical scenarios and its impact based on assumptions — to evaluate both types of emissions.
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Much of the controversy of the debate stems around how strict the carbon emission requirements are for green hydrogen – and some experts are predicting that if the green hydrogen portions are too strict, it might disincentivize the industry from investing further into the fuel as demand ramps up, and instead turn towards its blue counterpart, even if it’s not supported by the tax credit. According to an analysis by BloombergNEF, green hydrogen is already more expensive than its blue or grey counterpart ⏤ but only a small percentage of hydrogen is created through electrolysis.
“You wind up having potentially a lot more blue hydrogen filling the voids because there’s a limitation on the amount of competitiveness in the electrolytic space as a result of the narrow guidance on the $3 credit,” Wolak said.
