The Biden administration became final on Friday his long-awaited plan offer billions of dollars in tax breaks to companies that produce hydrogen, hoping to build a new industry that could help fight climate change.
When burned, hydrogen mainly emits water vapor, and it could be used instead of fossil fuels to produce steel or fertilizer, or to power large trucks or ships.
But whether hydrogen will be good for the climate depends on how it is produced. Today, most hydrogen is produced from natural gas in a process that emits a lot of planet-warming carbon dioxide. The Biden administration wants to encourage companies to produce so-called clean hydrogen using wind, solar or other low-emission electricity sources.
2022 Congress approved lucrative tax credit for companies that produce pure hydrogen. But the Treasury Department had to issue rules clarifying exactly what companies must do to claim that credit. Agency published proposed guidelines in 2023 but many businesses were waiting for the final rules before investing.
The final guidelines released Friday followed months of intense lobbying by lawmakers, industry representatives and environmental groups and roughly 30,000 public comments. They include changes that make it somewhat easier for hydrogen producers to claim tax breaks, which could amount to tens of billions of dollars over the next decade.
“Clean hydrogen can play a key role in decarbonizing multiple sectors of our economy, from industry to transportation, from energy storage to much more,” said David Turk, Deputy Secretary of Energy. “The final rules published today put us on a path to accelerate implementation.”
Initially, the Finance Ministry imposed strict conditions on hydrogen subsidies: companies could claim a tax credit if they used low-carbon electricity from newly developed sources such as wind or solar power to run a machine called electrolyzer which can split water into hydrogen and oxygen. Starting in 2028, these electrolysers would have to operate during the same hours as wind farms or solar farms.
Without those conditions, researchers warnedelectrolysers could draw huge amounts of energy from existing power grids and lead to a spike in greenhouse gas emissions if coal or gas-fired plants had to run more often to meet demand.
Yet many industrial groups and legislators in Congress lamented that the proposed rules are so strict that they could suffocate America’s nascent hydrogen industry before it even gets off the ground.
Among the concerns: The technology to match hydrogen production with the hourly fluctuations of wind and solar power is still in its infancy. Nuclear reactor owners also said they were left out.
Thus, the final rules contain several significant changes:
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Hydrogen producers will get two extra years — until 2030 — before they have to buy clean electricity by the hour to match their production. Until then, they can use the looser annual standard and still claim tax relief.
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In certain states that require utilities to use more low-carbon electricity each year, hydrogen producers will now find it easier to claim credit, on the theory that the laws will prevent a spike in emissions. Treasury said that for now only California and Washington meet this criteria, but other states may qualify in the future.
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Under certain conditions, companies that own nuclear reactors that will be decommissioned for economic reasons can now claim credit for producing hydrogen if it would help the plants stay open. Existing reactors that are profitable would not be able to claim credit.
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The final rules also set criteria under which companies could use methane gas from landfills, farms or coal mines to produce hydrogen — if, for example, the methane would otherwise be released into the atmosphere.
The guidelines “include useful feedback from companies planning investments,” said Wally Adeyemo, the deputy finance minister.
Some hydrogen producers said many, though not all, of their biggest concerns were addressed in the final guidelines, which run to nearly 400 pages.
“There is some degree of relief that the rules are, overall, an improvement over the original draft,” said Frank Wolak, executive director of the Fuel Cell and Hydrogen Energy Association trade group. “But there are many details that need to be assessed.”
The lack of clear guidance has held back investment, said Jacob Susman, CEO of Ambient Fuels, a clean hydrogen development company that plans about $3 billion in projects across the United States. “Now that we actually have something solid, we can get down to business,” he said.
Environmentalists said most of the safeguards in the original proposal to prevent rising emissions were retained.
“The additional flexibilities granted to the green hydrogen industry are not perfect from a climate perspective,” said Erik Kamrath of the Natural Resources Defense Council. “But the rule maintains key safeguards that minimize dangerous air and climate pollution from electrolytic hydrogen production.”
The Department of Energy estimates that the use of cleaner forms of hydrogen will could grow to 10 million tons per year by 2030almost nothing today.
But political uncertainty threatens. The new Congress could end the tax breaks, although hydrogen generally enjoys support from both Democrats and Republicans, and a number of oil and gas companies have invested in hydrogen technologies. The Trump administration could also overhaul the loan rules, though that could take years.
The economy is another obstacle. Production of cleaner hydrogen still costs $3 to $11 per kilogram, according to BloombergNEF data. By contrast, producing hydrogen from natural gas costs about $1 to $2 per kilogram.
The new tax credit will be up to $3 per kilogram, which could bridge the gap in some cases, but not all. The costs of the technology would have to plummet.
Even with hefty subsidies for hydrogen production, it’s not clear whether enough buyers will emerge. Worldwide, hydrogen companies canceled several large projects in the last few years due to lack of demand. Steel producers and power companies that might be interested in the fuel often object to the expensive equipment needed to use it.
“These new rules are likely to help, even if they don’t go as far as many in the industry wanted,” said Aaron Bergman, a fellow at Resources for the Future, a nonpartisan research organization in Washington. “But there’s still the challenge of finding people to consume the hydrogen you produce.”
