Dec 22, 2023 - Energy & Environment

Biden attempts climate-friendly hydrogen tax plan

Illustration: Tiffany Herring/Axios

The Biden administration on Friday released its attempt at a climate-friendly approach to using the tax code to boost hydrogen fuel production.

Why it matters: Administration officials seek to address the irony that, without sufficient guardrails on curbing energy use in producing hydrogen, a boom in the new business could actually undermine progress on reducing carbon emissions.

  • Industries that have sought looser restrictions so they can easily get in on the hydrogen market — like nuclear energy and hydropower — may miss out on the credit.

Driving the news: The Treasury Department released proposed, and highly anticipated, guidance for the hydrogen credit created through the Inflation Reduction Act, President Biden's signature climate law.

  • The guidance says companies making hydrogen fuel can only claim the credit if they adhere to a requirement that they rely on relatively new low-emission energy — a mandate that the industry has fought.
  • Companies must also stick to geographic and time-based restraints on how their hydrogen production sucks energy from the power grid.
  • The approach is similar to European regulators' attempt at restraining hydrogen energy use.
  • White House climate czar John Podesta said Thursday these were "important environmental safeguards" engineered to avoid negative climate impacts.

Catch up quick: Hydrogen — a fuel that produces no carbon emissions when burned — is a sought-after solution for transportation modes and heavy industries that are finding it tough to quit fossil fuels, like steel and aluminum.

  • Under the IRA, companies should be able to write off up to $3 per kilogram of "clean hydrogen" they make as long as they meet these requirements, as well as certain labor standards.
  • Environmentalists urged the administration to put in place guardrails to avoid a surge in energy used from existing power sources.

Zoom in: To qualify for the credit, energy sources will have to be considered "clean" based on an analysis of carbon dioxide emitted throughout the life cycle of the hydrogen production process.

  • Industries will need to rely on either "clean" power sources initiated within the last three years or new power capacity added to existing power sources.
  • To meet the geographic limitations, this "clean" power must come from the same region as the facility producing the hydrogen.
  • The time-matching mandate will require any "clean" power consumed to be generated within the same hour it is used. By 2028, companies will have to switch from year-based matching to by the hour.

The credit is "technology-neutral," meaning there may be circumstances in which fossil-based generation can be used to power hydrogen production.

  • It'll depend on whether the energy is considered to be low-emissions based on a government model, known as GREET, which is best known for evaluating federal biofuel standards.
  • There may also be pathways for companies to qualify by powering hydrogen production with renewable natural gas and coal-bed methane.

What's next: An industry backlash against this credit.

  • Companies that can't meet these requirements along with allies in larger business groups such as the U.S. Chamber of Commerceclaim this approach will undermine a hydrogen industry that's just getting off the ground.
  • "Unfortunately, the restrictions in this guidance — which didn't come from Congress — threaten to steer investment elsewhere, harming efforts to reduce emissions in hard-to-decarbonize industrial sectors," the U.S. Chamber's Marty Durbin said in a statement issued before Treasury's announcement.
  • One aspect to watch: how companies using existing nuclear plants may respond as the "new energy source" part of the requirements would rule out their facilities, which are carbon-free (and thus climate-friendly).

Energy-state lawmakers, especially Sen. Joe Manchin, are likely to suggest these restrictions run afoul of the statute.

  • Manchin has said these sorts of requirements will make it too difficult for companies to qualify and has sought to fight it with legislation.

What they're saying: Treasury is taking comments on how to accommodate industry concerns, including a process for incorporating existing nuclear plants into the credit guidance, as well as existing hydropower, biomass facilities and fossil-based sites with carbon capture attached.

  • Treasury said it's seeking comment on whether facilities using those energy sources should qualify under circumstances where powering hydrogen production would stop them from closing down — and therefore not necessarily suck energy that is going elsewhere.
  • "We're looking for pathways that will create the environmental integrity that we're seeking, but that we believe will [also] allow the nuclear industry to participate," a senior administration official said.

Editor's note: This story has been corrected to note that by 2028 companies will be required to adhere to time-matching mandate requirements in hours, not years.

Go deeper