Biden’s clean hydrogen tax credits are officially decided — for now

After two years of debate and tens of thousands of public comments, the Biden administration has finalized the rules for what might be the Inflation Reduction Act’s most contentious climate policy — the 45V clean hydrogen production tax credit.

Now, the parties that have been battling over the shape of the world’s most generous government incentive for clean hydrogen production are preparing for the policy’s implementation, which will happen under the incoming Trump administration. It’s unclear whether Trump will aim to replace the newly finalized rules — a laborious and risky process — or make targeted tweaks, but analysts and industry participants expect that some further changes are on the way.

Last week’s final rules from the Treasury Department aim to jump-start a massive new clean hydrogen industry that could help decarbonize sectors including steelmaking, chemical production, shipping, and aviation.

The rules have become a policy battleground. Fossil-fuel and energy industry groups have argued for a more flexible approach to measuring the emissions that determine eligibility for the incentive. On the other side, environmental advocates and energy analysts — and a subset of industry participants — have warned that lax rules could allow hundreds of billions of taxpayer dollars to flow to hydrogen production projects that harm rather than help the fight against climate change.

For now, the latter group appears to have carried the day. The 379 pages of final rules retain many of the climate safeguards laid out in proposed rules issued late last year, which set tight emissions limits for hydrogen producers seeking to earn the program’s maximum tax-credit value of $3 per kilogram. That’s enough of a subsidy to make very-low-carbon hydrogen cost-competitive with the fossil-fuel-derived ​“gray” hydrogen that makes up the vast majority of the world’s supply.

In particular, the final rules retained the so-called three pillars for ​“green hydrogen” produced by splitting water using low- or zero-carbon electricity. The pillars, which were at the center of the fight over the tax credit’s rules, dictate that the clean power used to make hydrogen must come from new sources and be delivered and tracked hourly, rather than from existing power plants anywhere in the country and averaged out annually.

“The three pillars survived in a big way, against so much pressure to not just weaken but to eliminate them,” said Dan Esposito, hydrogen policy lead at think tank Energy Innovation. He credits that to ​“the evidence being just overwhelming” that those requirements are key to ensuring that the tax credit avoids incentivizing hydrogen projects that would actually increase power grid carbon emissions.

The final rules also set guidelines for making low- or zero-carbon hydrogen using fossil gas and capturing and sequestering the resulting carbon — a method known as ​“blue hydrogen.”

These guidelines should reduce the risk that methane-derived hydrogen projects will lead to increased greenhouse gas emissions, said Julie McNamara, senior analyst for the Union of Concerned Scientists — although she warned that federal agencies’ interpretation of those rules could undermine their effectiveness.

“We know it takes rigorous requirements to ensure the hydrogen we call clean is really clean,” she said. ​“I think the administration did a good job making sure that the rules matched that intent.”

Who’s against strict hydrogen tax-credit rules? 

That’s not how some industry groups backed by fossil-fuel and energy companies see things, however. For the past two years, these groups have argued that safeguards demanded by environmental groups will stifle the billions of dollars of investment needed to get the nascent clean hydrogen sector off the ground.

Last week’s final rules drew rebukes from these groups — along with some statements indicating that they’ll be seeking relief from the Trump administration.

“The overly rigid regulations are at odds with the innovation needed in this nascent sector and will prevent the U.S. from realizing global leadership in clean hydrogen production, as Congress intended,” Jason Grumet, CEO of the American Clean Power Association, said in a Friday statement. ACP’s members include NextEra Energy, a clean energy developer and utility company that’s pushed for less strict annual clean energy accounting.

Other groups offered a mix of praise and demands for changes. Marty Durbin, president of the U.S. Chamber of Commerce’s Global Energy Institute, said in a prepared statement that the final rule does offer some ​“additional flexibility” compared with the proposed rules, ​“especially in recognizing the importance of natural gas as a cornerstone of a hydrogen economy.”

At the same time, ​“we believe that it still will leave billions of dollars of announced projects in limbo,” he said. ​“The incoming Administration will have an opportunity to improve the 45V rules to ensure the industry will attract the investments necessary to scale the hydrogen economy.”

So, what could the Trump administration and Republicans in Congress do to change how the 45V hydrogen tax credit works? The options range from rejecting the Biden administration’s rules and starting over to more in-the-weeds changes for evaluating emissions from hydrogen projects.

The downsides of getting rid of the new rules

It’s unlikely that industry groups will want to start from scratch, however.

Getting the sector off the ground requires the certainty that these final rules provide. In their absence, investors have been unwilling to move ahead with hydrogen projects, as evidenced by delays or cancellations of a number of high-profile projects over the past two years. Starting a new rulemaking would require the Trump administration to launch another lengthy notice and comment process, which could take years to complete.

“I think what folks on the industry side need to be asking themselves right now is, ​‘Are these rules we can live with, even though we didn’t get everything we asked for?’” said Aaron Lang, energy and environmental attorney at the law firm Foley Hoag.

The same question applies to the prospect of Congress using its power under the Congressional Review Act to undo the Biden administration’s regulation, Lang said. ​“That assumes you have majorities in both houses interested in completely invalidating the rule,” he said. ​“There has been a lot of hydrogen investment proposed in states that run the political gamut.”

Beth Deane, chief legal officer at Electric Hydrogen, a well-funded startup that’s building electrolyzers for several U.S. green hydrogen projects, doesn’t want to see another years-long delay — and she doubts that other companies in the space want that either.

“A lot of stakeholders who care about the rules have been speaking positively about it,” she said. ​“That gives us a sense that there are folks across the spectrum that want to see rules that are effective and durable. We’re cautiously optimistic that this will hold and get the industry going, and that any other changes will happen in a very targeted way.”

Looming questions about hydrogen made from methane 

But there are easier ways for the Trump administration to weaken the tax credit’s emissions rules.

One key lever of action lies not in the Treasury Department, which oversees tax regulations, but in the Department of Energy, which manages the model that determines the emissions intensity of hydrogen production.

The Inflation Reduction Act instructs the Treasury Department to use the Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) model developed by DOE’s Argonne National Laboratory to determine the emissions intensity of fuels and other products. Last year, DOE launched the 45VH2-GREET model to deal with the hydrogen tax credit’s specific requirements.

DOE is required by law to update that model annually, but Lang noted that ​“it’s not yet clear what process will go into those updates” or whether that work will be open to review by outside parties.

The 45VH2-GREET model uses a set of assumptions to calculate the emissions intensity of hydrogen. For blue hydrogen, those include key assumptions about the amount of methane that leaks from gas wells and pipelines on the way to hydrogen production plants, which is counted as part of the product’s total emissions.

“That upstream methane leakage rate can sink a project from qualifying,” said McNamara of the Union of Concerned Scientists. Methane is a far more potent global warming gas than carbon dioxide, and it tends to seep out when transported through pipelines.

At present, the GREET model assumes an upstream methane leak rate of 0.9 percent — well below the rates cataloged by more recent studies of gas networks by independent researchers and environmental groups.

The new rules call for using forthcoming data from the Environmental Protection Agency’s new methane rules to update those rates on a project-by-project basis. But if the Trump administration weakens or does away with those EPA rules, that data might not be available, leaving the federal government using the default leakage rates.

Under the new rules, projects can lock in an emissions rate based on the 45V GREET model in place at the time they start construction for the next 10 years. That could allow blue-hydrogen projects to secure credits over the long term for emissions rates that don’t bear up under future scrutiny.

“We’re disappointed they didn’t complete the work on blue hydrogen and create project-specific values,” said Conrad Schneider, U.S. senior director at the nonprofit Clean Air Task Force. ​“But they created a pathway toward that. That’s conditioned on the maintenance of the EPA reporting requirements and methane regulations. That’s a really important guardrail going forward.”

Watching for biomethane loopholes

The DOE under the Trump administration could also alter the 45VH2-GREET model in ways that could allow blue-hydrogen producers to lower their emissions intensity by tapping into alternative sources of methane, McNamara said.

The Biden administration’s final rules allow projects to use methane leaking from coal mines, as well as from biological sources including wastewater treatment plants, landfills, and livestock manure. Because capturing and converting these methane sources into hydrogen can be more climate-friendly than allowing them to escape into the atmosphere, the GREET model assigns them a lower emissions intensity than fossil gas. But that value depends on what the GREET model assumes would have otherwise happened to that captured methane.

Methane from animal manure has long been treated as ​“carbon negative,” meaning that capturing and burning it is counted as equivalent to removing greenhouse gases from the atmosphere. That’s because livestock operations, unlike landfills and wastewater treatment plants, aren’t already required to capture and flare leaking methane, McNamara said — a policy choice that has created an opportunity for polluting industries to source that biomethane as a carbon offset.

The Biden administration’s final rules set some guardrails on that practice by barring hydrogen facilities from ​“blending” manure-derived methane into existing fossil-gas-fed feedstocks to reduce overall carbon intensity, McNamara said.

It also restricts existing fossil-gas-fed hydrogen production facilities from offsetting their real-world emissions with negative-carbon biomethane fed into gas pipelines in another part of the country via ​“book-and-claim” accounting methods.

But that restriction will lift in 2027, when new accounting rules from Treasury governing that practice are set to take effect. That could make this aspect of the rules ​“vulnerable to an administration that wants to open that up” further down the road, McNamara said.

New ​“flexibilities” for green hydrogen

The GREET model also applies to calculating the emissions intensity of hydrogen made from electricity. But short of undoing the Biden administration’s rules completely, opponents have far fewer options to weaken the three-pillars rules governing green-hydrogen production, Lang noted. ​“They would require going back to the drawing board for a modification process.”

At the same time, the Treasury Department did include exemptions that appear designed to meet demands from states and industry groups to expand the scope of clean energy resources that could meet the ​“additionality” portion of the three-pillars construct.

Nuclear power is one big winner. Constellation Energy, the country’s biggest nuclear power plant operator, as well as states that rely on nuclear power, lobbied hard to secure a pathway for those carbon-free electrons to qualify for 45V compliance. The final rule complies by allowing certain nuclear plants to sign contracts of at least 10 years to provide up to 200 megawatts of power to hydrogen producers, as long as they can pass a test showing that these contracts are ​“likely to mitigate its risk of retirement” due to adverse energy market economics.

Esposito of Energy Innovation said that the final rules’ guidance could allow about 10 percent of the country’s nuclear capacity to be diverted from serving power grids at large to powering hydrogen facilities. That creates a risk of increasing emissions on the grids that lose that carbon-free power. But given the restrictions in place, ​“it should be a relatively contained share of the pie,” he said.

The second big exception is for states with both a strong clean electricity mandate and a carbon emissions cap in place — a combination that only California and Washington have today. Under those conditions, Treasury presumes that hydrogen producers tapping existing clean power won’t cause more fossil-fueled generation to be dispatched to fill in the gaps left on the grid.

Esposito questioned this assumption, noting that increased electricity demand within a state’s borders could lead to consequences like less clean electricity being exported to other states, which would backfill the gap with fossil-fueled power.

Perhaps not coincidentally, he added, these two exceptions happen to coincide with the demands put on the Treasury Department by the country’s seven hydrogen hubs.

These public-private partnerships, which are collectively eligible for up to $7 billion in federal funds, have argued that limiting hydrogen to using only newly built clean electricity resources could stifle their efforts. One is in California and another in the Pacific Northwest, making them eligible for the state exemptions, and three more in the Midwest and mid-Atlantic plan to rely on nuclear power for a portion of their hydrogen production.

Still, all these exceptions don’t alter the underlying fact that all green-hydrogen projects will have to secure clean electricity delivered to them on an hour-to-hour basis, Esposito said. Treasury’s final rules did push the deadline for achieving this hourly matching from 2028 to 2030, which ​“isn’t great,” Esposito said. But because that deadline applies to all projects whether or not they start production before then, ​“that means that all projects will need to plan to hourly match from the beginning.”

That’s not just the most important policy in terms of preventing green-hydrogen production from driving up grid emissions, he said. It’s also in line with a growing recognition that achieving round-the-clock clean electricity on the grid at large requires both building more clean power and also investing in resources that can fill in the gaps when the sun isn’t shining and the wind isn’t blowing.

Hourly matching also keeps the U.S. in alignment with the European Union’s clean hydrogen policies, he noted. That will be important for U.S. producers seeking to sell their clean hydrogen in European markets, where demand from industries facing decarbonization mandates is expected to grow more quickly.

U.S. clean hydrogen producers should also keep in mind that the companies they’re relying on to buy their product will be setting their own standards for what counts as clean and what doesn’t, he noted.

“There’s this assumption that if the rules were weakened, people would be happy to buy a somewhat cheaper product,” he said. ​“But the only reason for this industry to exist is to provide something clean. It seems really clear to me that if you subsidize a dirty product, it won’t meet the requirements of first-mover buyers of these risky products.”