Finalized tax credit for cleaner hydrogen gets a cautious OK from some environmental groups

The Biden administration released long-awaited final rules Friday for a tax credit that will send billions of dollars to producers of cleaner hydrogen.

The new rules drew cautious praise from environmental groups, who said they would likely reduce planet-warming emissions but included loopholes that could still reward producers of dirty hydrogen.

The administration is trying to ramp up hydrogen production to displace fossil fuels as an energy source for sectors of the economy that emit massive greenhouse gases, yet are difficult to electrify, such as long-haul transportation and industrial manufacturing, including steel-making.

Most hydrogen today is made from natural gas, contributing to climate change. But hydrogen can also be made by splitting water with solar, wind, nuclear or geothermal electricity, yielding little if any planet-warming greenhouse gases.

A year ago, the Treasury Department proposed a tiered system where firms that produce hydrogen by splitting water could qualify for the full credit of $3 per kilogram.

Now, the final rule could also extend the full credit to firms that use natural gas to make hydrogen if they use technology to capture and sequester the emissions, and to firms that make hydrogen from natural gas alternatives sourced from wastewater, animal manure and landfill gas. Hydrogen produced from coal mine methane would likely qualify for lower tiers of the credit.

Administration officials said the credit is based only on the lifecycle emissions of the hydrogen production process, rather than on how the hydrogen is produced. The credit is part of the Democrats' Inflation Reduction Act passed in 2022, but it has support from some Republican members of Congress.

Treasury Deputy Secretary Wally Adeyemo said the act, along with the Bipartisan Infrastructure Law, are the world’s most ambitious policies to support the clean hydrogen industry.

The environmental group Earthjustice said the rules support clean hydrogen projects that by and large do not worsen climate and health-harming pollution. But the group said they're also concerned that dirty hydrogen producers will enjoy the benefits of this important climate program, too.

Conrad Schneider, senior director at the Clean Air Task Force, an advocacy group, said the final rules do benefit the climate. If the hydrogen qualifies for a credit, that means it's being made with lower carbon emissions than the fossil fuels it's displacing, he said.

“We have a number of industry sectors that are hard to decarbonize, aviation, marine shipping, steel production, that are currently using fossil fuels,” he said. “Having a tax incentive like this for the production of clean hydrogen will create a fuel that replaces those unabated fossil fuels and helps the climate.”

But Schneider said accurately tracking the emissions of hydrogen produced with natural gas could be impossible if the Trump administration weakens regulations on methane and emissions reporting requirements.

The Fuel Cell & Hydrogen Energy Association includes more than 100 members involved in hydrogen production, distribution and use, including vehicle manufacturers, industrial gas companies, renewable developers and nuclear plant operators. Frank Wolak, the association’s president, said they are relieved the rules are finally in place. The big question now, he said, is whether the tax credit will move the industry forward and give firms the confidence to make investments, or whether the provisions work for some and not for others.

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