How do you prove your electricity is clean? This deceptively simple question is at the heart of an all-out war raging among environmental groups, academics, and energy companies over a new tax credit for the production of clean hydrogen.
At stake, most immediately, is billions of dollars in subsidies and the success and integrity of a nascent climate solution. But the question is so foundational to the energy transition that the answer could also reverberate through the U.S. economy for decades to come. And by a fluke — or by the limitations of the current political system — Janet Yellen’s Treasury Department has been tasked with setting the precedent.
“This is not just a hydrogen debate, at its very core,” Nathan Iyer, a senior associate at the clean energy research nonprofit RMI, told me. “This is the first round of a much larger, era-defining question.”
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To see why, it’s crucial to understand what all the hydrogen hubbub is about in the first place.
Hydrogen is a key plank in the Biden administration’s climate strategy, as it has the potential to replace fossil fuels in a number of industries, including steelmaking, shipping, aviation, and fertilizer production. But today, most hydrogen is made from natural gas in a carbon-intensive process, so first it has to become cheaper to make it in cleaner ways.
The Treasury Department got involved because the Inflation Reduction Act, which Biden signed last summer, created a generous tax credit to make these other, cleaner ways of producing hydrogen more competitive. One method, called electrolysis, involves splitting hydrogen off of water molecules using electricity. The process is emissions-free, as long as the electricity comes from a carbon-free source. Companies will be able to earn up to $3 for every kilogram of hydrogen produced this way. But before anyone can claim the credit, the Treasury has to write rules for what counts as clean electricity.
This is a more fraught question than it might sound. If a hydrogen plant wants to use power from the electric grid rather than build its own, dedicated supply, there’s no easy way to trace where the electrons it’s using originated. And the grid is still largely fed by fossil fuels.
The solution is to allow grid-connected projects to “book” clean energy by signing contracts with wind or solar or geothermal plants that serve the grid, and then “claim” the use of that energy to the Treasury. Many industries voluntarily use these sort of “book and claim” deals in order to advertise to customers that they are “powered by clean energy.”
But one influential Princeton study found that hydrogen production from electrolysis is so energy-intensive that in order to be sure that it has a low carbon footprint, these deals should follow three guidelines: The “booked” clean energy should be generated locally, from a recently-built power plant, and matched to the hydrogen facility’s operations on an hourly basis. Otherwise, you might have a hydrogen plant in New Mexico “buying” energy from a wind farm in Texas that’s already been operating for half a decade. Or you might have that same plant buy lots of local solar power, but then keep operating at night. In either case, a natural gas plant will likely have to ramp up to meet the real-time energy demand.
Without these guardrails, the authors warn, the Treasury could end up directing billions of taxpayer dollars to facilities that emit twice as much carbon as those making hydrogen from natural gas today.
Many hydrogen companies want the Treasury to instead adopt more of an “A for effort” kind of approach. They argue that the point of the tax credit is to launch a new industry, and that onerous rules could kill it before it has a chance to get off the ground.
In fact, there’s so much money on the line that the Fuel Cell and Hydrogen Industry Association has been flooding the public with ads in newspapers and on streaming and podcast services delivering a cryptic warning that “additionality” — the requirement to buy energy from new power plants — was threatening to “set America back.” Others, like the energy company NextEra, are lobbying against the hourly requirement.
While companies tussle with environmental groups and others over what’s at stake for hydrogen, the Treasury’s decision will have implications far beyond any one project, company, or even industry. That’s because the emissions risks described in the Princeton paper are not unique to clean hydrogen.
Automotive, paper and pulp, and food and beverage are just a few examples of other industries with large energy needs that use heat from natural gas boilers but could eventually switch to industrial electric heat pumps or thermal batteries. There are also emerging technologies that hardly exist yet, like machines that remove carbon from the atmosphere, that could be essential to curbing climate change, but will consume lots of electricity.
If we don’t decarbonize the grid in tandem, these solutions could do more harm than good. But whether or not it should be the responsibility of individual companies to do that is a question that will keep coming up. Unlike Europe, the U.S. has no national renewable energy standard or other policy working in the background, forcing the grid to get greener over time no matter how much electricity demand grows.
Legacy industries are unlikely to switch to electricity voluntarily, let alone build clean power sources while they do it. These shifts will require subsidies that make them profitable or regulations that obligate them. And designing those subsidies and regulations will require making the same call that the Treasury is being asked to make right now.
“In that broader sense, these clean hydrogen rules are a real opportunity,” said Gernot Wagner, a climate economist at Columbia Business School. “It's important to get this right.”
The decision could also have international trade implications. Europe has already finalized its own rules for what constitutes clean hydrogen, and they essentially mirror the three guidelines recommended by the Princeton paper, but phase them in to give companies time to figure out how to comply. A weaker set of rules in the U.S. could tarnish the reputation of U.S. hydrogen in global markets.
“We are going to want to have a single global market,” said Jason Grumet, the CEO of the trade group American Clean Power during a panel on Monday about the tax credit debate. His organization wants the Treasury to adopt similar rules to Europe, but phase them in much more slowly. He argued that some companies would still choose to follow Europe’s timeline in order to have access to that market.
The market in question is not just a market for clean hydrogen, per se. The stuff isn’t an end in itself but a building block for decarbonizing a wide range of other products: clean steel, carbon-free fertilizer, replacements for jet fuel, to name a few.
That won’t just matter for exports to Europe, but business opportunities at home. The Biden administration’s “Buy Clean” initiative requires the government to prioritize buying “low-carbon, made in America construction materials.” But if the foundation of these “clean” products is built on faulty carbon accounting it could undermine the whole program.
“Over time, there will be increasing incentives to use low-carbon materials and products because of policies like Buy Clean,” said Rebecca Dell, senior director of the industry program at the Climateworks Foundation. “But the further down the supply chain you go, the harder it is to enforce regulations on the inputs and processes at the top. So it’s worth getting [the hydrogen tax credit] right on its own merits.”
The tax credit rules could also set off a negative feedback loop within the power sector itself. The Environmental Protection Agency recently proposed new regulations to reduce emissions from power plants, including the option to let them burn a blend of natural gas and hydrogen. But if making hydrogen requires burning a lot of natural gas in the first place, the benefits could cancel out.
A senior spokesperson for the Treasury did not respond to a question about whether the department was considering any of these broader implications in devising the rules, instead replying that it was “engaging with a range of stakeholders, the Department of Energy, and other federal partners” and “focused on providing clarity to businesses as soon as possible and ensuring this incentive advances the goals of increasing energy security and combating climate change.”
Wagner, of Columbia, compared the situation to the federal renewable fuel standard, a subsidy for ethanol that Congress created ostensibly to reduce emissions from transportation. But recent analyses have found the policy has done more harm than good for the climate. Nonetheless, the EPA recently re-upped the policy for three more years. Once a policy is in place, it’s pretty hard to tighten it later, Wagner told me.
“What we are trying to do by getting the rules for clean hydrogen right from the beginning is to avoid a reckoning later.”
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