Biden’s New Hydrogen Rules Are Here. They’re Way Bigger Than Hydrogen.

The most generous, lucrative, and all-around lavish subsidy in President Joe Biden’s climate law, the Inflation Reduction Act, is the new tax credit for clean hydrogen production. Under the policy, a company can get a bounty of up to $3 for each kilogram of hydrogen made with clean electricity that it produces and sells. There are few legal limits to what a company can earn.

So it figures, then, that this subsidy has been the subject of maybe the most acrimonious, dramatic, hair-tearing fight over the law so far, one that saw snoozy lobbyists and power plant operators take out Spotify spots and full-page New York Times ads in order to make their point.

On Friday, the first phase of that battle ended — and the side supported by most environmental groups claimed a provisional victory. The Biden administration proposed strict rules governing the tax credit, designed to ensure that only zero-carbon electricity meeting rigorous standards can be used to make subsidized hydrogen. The rules, which some industry groups allege could stunt the field in its infancy, will have far-reaching consequences not only for hydrogen itself, but for how America’s power grid prepares for an age of abundant, zero-carbon electricity. It will create a system for organizing clean electricity that could soon determine how companies, consumers, and the federal government buy and sell that electricity — even when it has nothing to do with hydrogen.

But all of that is in the future. Now, to get the highest value of the tax credit, companies must — like other subsidies in the law — demonstrate that they paid a prevailing wage and took advantage of local apprenticeship programs.

They also must demonstrate that they used clean, zero-carbon electricity to power their electrolyzers, the energy-hungry machines that pull hydrogen out of water or other molecules. And defining clean electricity has proven to be an enormous challenge. However the Biden administration chose to define it, someone was going to be left out — or let in.

Consider just one hypothetical. Pretend you own a fancy new electrolyzer. If you buy power for it from a wind farm that’s already hooked up to the grid, then another power plant will have to replace the electrons that you’re now using. That marginal electricity will probably have to come from a coal or natural gas power plant, meaning that it will need to burn extra fuel, meaning it will release extra carbon pollution. Does that mean that the electricity that you bought is actually clean? And if not, do you still get the tax credit?

Earlier this year, climate groups proposed that any clean electricity used to make hydrogen had to meet three requirements: It had to come from a truly new source of power on the grid; it had to generate power at the same time that it was used; and it had to be produced on essentially the same grid where it was used. The Biden administration largely adopted those requirements in Friday’s proposal. On a briefing call with reporters ahead of the rule's release, Deputy Secretary of the Treasury Wally Adeyemo was effusive about the new rule’s benefits. “We’ve developed a structure that will drive innovation and create good-paying jobs in this emerging industry while strengthening our energy security and reducing emissions in hard-to-transition sectors of the economy,” he said.

Not everyone feels that way. Senator Joe Manchin, who provided a key vote for the IRA, told Bloomberg that the draft is “horrible” and promised that “we are fighting it.”

“It doesn’t do anything the bill does. They basically made it 10 times more stringent for hydrogen,” he said. The trade group for the nuclear industry has also expressed its “disappointment,” arguing, more or less correctly, that the proposal “effectively eliminates all existing clean energy from qualifying” for the credit.

But debate about the proposal has not quite run on green vs. industry lines. Air Products, the world’s largest hydrogen producer, has backed the administration’s approach, as have half a dozen other hydrogen companies. So has Synergetic, a hydrogen developer that recently left the trade group the American Clean Power Association to protest its laxer stance. “Consumer groups are behind these rules, and environmental justice has also come out to express support,” Rachel Fakhry, a policy director at the Natural Resource Defense Council, told me.

The excessive focus on the hydrogen tax credit has been, in one sense, surprising. If you care most about cutting carbon pollution in the near-term, the hydrogen tax credit is unlikely to be the most important part of the IRA. Other policies — such as the clean electricity tax credit, which could add vast amounts of new wind and solar to the grid, or new subsidies for electric vehicles — will likely reduce greenhouse gas pollution by far more in the next decade.

But a clean hydrogen industry could soon be crucial to the climate fight. Hydrogen could eventually be used to fuel medium- and heavy-duty trucks, which are responsible for roughly a quarter of the country’s transportation emissions.

It could also decarbonize the production of steel, chemicals, and fertilizer, all of which require fossil fuels today. These are a looming climate problem: By the middle of this decade, heavy industry will pollute the climate more than any other sector of the American economy, according to the Rhodium Group, an independent research firm.

Yet this does not explain why the hydrogen tax credit attracted so much attention. It became a big fight, in short, because it stood the biggest chance of backfiring. Because the tax credit is so generous, incentivizing hydrogen companies to use more and more power, it risked gobbling up too much electricity and distorting the country’s power markets. In the disaster-movie scenario, the tax credit could wind up like the federal government’s ethanol subsidies, which have cost billions while doing nothing to help the climate.

The hydrogen tax credit “has been the most challenging piece of policy that we’ve had to contend with,” John Podesta, the White House adviser in charge of implementing the IRA, told me on the sidelines of COP28 in Dubai earlier this month.

He described the administration as balancing between two extremes. On the one hand, overly strict rules could cause companies to invest more in so-called “blue hydrogen,” which is produced by separating natural gas and capturing the resulting carbon. Yet overly loose rules could cause emissions to balloon and power prices to soar.

“We could kind of blow it in either direction, I think,” he said.

This hasn’t always been seen as a problem. Since the IRA passed last year, the clean hydrogen tax credit has stood out for its extreme generosity, which goes far beyond what is contemplated by other tax credits in the law.

Once the Treasury Department decides that a hydrogen project qualifies for the tax credit, for instance, then that project can receive credits for the next 10 years. For five of those years, it can even get that money as a direct payment from the government, rather than as a tax cut. What’s more, projects can qualify for the tax credit as long as they begin construction by 2033. That means the tax credit will still be used well into the 2040s, even if Congress does not extend it.

Almost no other policy in the law spends federal dollars so lavishly or directly. Manchin, who negotiated the final text of the IRA with Senate Majority Leader Chuck Schumer, has long championed the hydrogen industry and seen it as a way to use fossil-fuel assets, such as pipelines, in the energy transition.

Soon after the IRA passed, however, climate advocates realized that this generosity could pose risks to the rest of the law. In the summer of 2022, Wilson Ricks, an engineering Ph.D. student at Princeton, was interning for the Department of Energy, studying how to measure the climate impact of hydrogen produced by electrolysis.

Ricks had already concluded that the “lifecycle” of the electricity used to make hydrogen mattered: If electricity from a nuclear power plant was sent to an electrolyzer instead of the power grid, thereby forcing a natural-gas plant to turn on and send power to the grid instead, then so-called “clean hydrogen” could actually result in more climate pollution than the traditional approach of using natural gas to make hydrogen.

Then the IRA passed, and “potentially hundreds of billions of dollars hinged on that question,” he told me. In January, Ricks and his colleagues at Princeton’s ZERO Lab published a study urging the Biden administration to adopt stringent guidelines for the tax credit. Without hourly matching, they concluded, the subsidy could wreak havoc in the country’s electricity markets.

Ricks wasn’t the only expert suddenly worried about what a giant new hydrogen subsidy could do to electricity markets. Nearly a year earlier, Taylor Sloane, an energy developer for the utility and power company AES, virtually predicted the hydrogen fight in a Medium post.

“The reason it matters that we get these rules right is that we don’t want to have an environmental backlash against green hydrogen in a few years demonstrating how it actually increases emissions,” he wrote. “Getting the rules right from the start will ensure more stable long-term growth of green hydrogen.”

Ultimately, the administration decided that nearly all clean electricity used to produce hydrogen must meet three requirements — largely inherited from the climate groups’ proposals. They also mirror hydrogen regulations already adopted in the European Union.

First, the electricity must come from a relatively new source of zero-carbon power, such as a wind or nuclear plant: You can’t use electrons that once would have powered homes or cars to power an electrolyzer.

Second, the electricity must be produced at roughly the same time that it is used to make hydrogen: You can’t buy cheap solar power at noon and claim that you’re using it to make hydrogen at midnight.

Finally, the electricity must have been made on the same power grid that the electrolyzer itself is using: You can’t buy wind power in Iowa and claim that you’re using it to make hydrogen in Massachusetts.

Today, no power company in the country has a way of certifying that its electricity meets all three requirements of the new hydrogen rule — and none has any way of selling it, either. So the rules also require local power grids to set up and sell “energy attribute certificates,” or EACs, which certify that a given kilowatt-hour of electricity was produced on a certain grid, at a certain time, and using a certain source of clean energy.

Utilities and grid managers have until 2028 to launch this new system; until then, hydrogen companies can keep using the existing system of renewable energy credits, or RECs, which certify only that zero-carbon electricity was generated during a certain year.

Although this new system of EACs may sound like so much bureaucratic legerdemain, it could eventually become more important than the hydrogen tax credit itself, because it could all but reshape how the country’s electricity systems work.

Right now, even though the availability of clean energy rises and falls throughout the day — solar panels make more power at noon than at midnight, for instance — there is no way to buy or sell claims to that power. By creating a systematic way to describe and sell an hour of clean electricity, EACs could actually create a market for 24/7 clean electricity.

The existence of that system could alter corporate sustainability pledges, climate-friendly government orders, and even how companies measure their own progress toward meeting their Paris Agreement goals. Even though hundreds of American companies say that they buy their electricity from zero-carbon sources, only Google, Microsoft, and a few other companies have committed to buying 24/7 clean electricity.

“I know the administration faced absurd amounts of pressure given how lucrative this is,” Ricks told me. “But it seems like they pretty much held firm and went with the science.”

That said, the proposal kicks two issues down the road. It asks companies whether it should allow any exceptions to the general rule requiring that clean electricity come from clean sources. Some nuclear power plant operators, for instance, have argued that electricity from a nuclear plant should count toward the credit if the plant would otherwise be slated to shut down.

That decision could shape other administration priorities. Two of the government’s seven proposed “hydrogen hubs,” new industrial facilities funded by the bipartisan infrastructure law, are planning to use nuclear power to generate clean hydrogen. Under the current rules, these hubs may not qualify for the generous hydrogen tax credit, even though they could still earn billions in other subsidies.

The proposal also asks for advice about how to count so-called renewable natural gas, which is captured methane released from cows or landfills. Some environmentalists worry that the rules for this technology, if poorly drafted, could allow companies to engage in aggressive carbon accounting that does not align with reality. But so far, the Biden administration seems to have little appetite for that approach.