The Big Hydrogen Cash Grab

May 9, 2024 | 7:30 am
Smokestack air pollutionDocumerica/Unsplash
Julie McNamara
Senior Energy Analyst

As the Biden administration works to finalize implementation guidance for the new clean hydrogen production tax credit, 45V, the fossil fuel industry and a select set of other industry actors are aggressively lobbying to loosen the rules—while everyone else is scrambling to stop them. Here’s why.

First, the tax credit is generous. Extremely generous. Borderline obscenely generous.

And there’s no funding cap. Meaning through 2042, as long as produced hydrogen is deemed eligible, there’s no limit to how deep into the public coffers eligible hands can reach.

Second, because of the tax credit’s design, exactly what counts as “eligible” clean hydrogen is still to-be-defined.

Queue the lobbying blitz as industries once-, twice-, and even three-times removed from anything to do with hydrogen production scramble to stretch the definition of “clean” to stamp their own winning ticket to the pot.

And third, the difference in outcomes between an implementation path that rewards “clean” hydrogen versus actually clean hydrogen is staggering.

The difference is not, as long-shot beneficiaries have tried to spin it, a minor pollution blip necessary in the name of broader hydrogen industry scale-up.

Far from it.

Instead, a tax credit with loosely defined “clean hydrogen” would enable companies to claim hundreds of billions of taxpayer dollars more, while the general public would get this:

  • climate- and health-harming pollution ratcheted up;
  • coal plant retirements delayed;
  • reliance on gas plants increased;
  • electricity bills spiked as ratepayers are forced to cover hydrogen producers’ offloaded costs; and, most offensively,
  • the subsidized buildout of “clean energy infrastructure” completely incapable of meeting the real needs of the clean energy transition.

Each of these should be sufficient on their own to warn off any weakening of requirements; together, they make clear how utterly indefensible a loosening of the rules would be.

Meanwhile, defining “clean hydrogen” to reward hydrogen that is actually clean results in the scale-up of a hydrogen sector readily and robustly climate-aligned, with the right technologies built in the right places at the right times and the right pace. This would be a hydrogen production apparatus equipped to clean up, really clean up, the difficult pollution holdouts that a successful clean energy transition needs to reach.

The right approach to 45V implementation, the necessary approach to implementation, couldn’t be clearer: strong standards, no loopholes. And yet, the dazzling prospect of easy money threatens to blind.

Defining “clean hydrogen” based on facts, not feelings

The biggest farce of the entire raging 45V implementation debate is that there’s any debate at all.

In the underlying statutory text, the threshold for “clean hydrogen” is clearly defined: 0.45 kg CO2e per kilogram of hydrogen produced, with carbon emissions assessed on a lifecycle basis as already defined in a long-standing section of the Clean Air Act.

Moreover, the Treasury Department and the Internal Revenue Service, supported by other agencies including the Department of Energy and the Environmental Protection Agency, released draft regulations and supporting materials this past December that made clear the depth of research undertaken to arrive at their conclusions on the correct implementation approach. Including, most critically, adoption of the three-pillars framework to meet the underlying statute’s requirement to account for significant indirect emissions alongside direct emissions.

Tellingly, objections to the December proposal do not argue that the approach fails on the merits—the only argument that is legally relevant in the development of implementation guidance.

Instead, objections are all about the implications of strong standards on pace of industry scale-up. Especially this one: too stringent of standards will stifle the sector, sacrificing the ability to achieve large-scale decarbonization of the economy as a whole, in the naïve pursuit of perfectly clean hydrogen.

This argument sounds compelling, and even more so, it feels compelling.

And it’s meant to: This framing pulls straight from the time-worn industry disinformation playbook, designed to lend an air of legitimacy to what’s in reality a bald-faced cash grab.

The argument is also flat-out wrong.

Loosening the standards for what counts as “clean” will increase the amount of 45V tax credit money that goes out the door—by multiple orders of magnitude—and will disincentivize the production of truly clean hydrogen and undermine hydrogen’s ability to serve as a real decarbonization solution, all while causing an overall increase in the nation’s use of fossil fuels.

With trade-offs like that, policymakers have to reject arguments that are engineered to feel right and finalize rules that are right.

Strong support for strong standards

To get clean hydrogen right, rigorous rules are required across the board. If key rules are loosened, the consequences stack up—fast.

When it comes to emissions accounting for electrolytically-produced hydrogen, everybody agrees that for the produced hydrogen to be clean, the electrolyzer has to run on clean electricity. Easy enough.

Where things diverge is in the sourcing of that clean electricity.

In Treasury’s December proposal, adoption of the three-pillars framework included a requirement that procured clean electricity be incremental, i.e., new or additional, to the system.

This stipulation has been shown to be an essential protection against subsidized pollution shifting via a wide range of academic studies; has been adopted as a requirement by other clean hydrogen standards, such as that set by the European Union; and has been strongly supported by an extensive set of stakeholders, including environmental groups, consumer advocates, and members of industry focused on the long-term viability of the hydrogen sector—including, notably, the world’s largest hydrogen supplier.

So who stands opposed?

The few who would only profit if the incrementality requirements were loosened—plus the policymakers they’ve loudly threatened to hold responsible if the play for profit-friendly rules fails.

This includes a subset of would-be hydrogen companies solely strategizing around how to turn this clean energy incentive into a massive windfall. It also includes existing carbon-free electricity generators—led loudly by the nuclear industry—who could make more money if allowed to suddenly pivot to selling to hydrogen producers; never mind the fact that existing carbon-free resources have been frequently subsidized by the very electricity consumers whom their pivot would now leave in the lurch.

The high costs of loose rules

A closer look at this subset of actors’ favored exemption makes these self-interested motivations clear, and in the process it lays bare the outrageous claim that they’re only working to secure what’s best for the nation’s clean energy transition.

In particular, these actors are calling for an exemption that would enable up to 10% of existing clean energy resources to count as eligible for powering electrolyzers.

Here’s the striking reality of how this moderate-sounding exemption would actually play out: Because of just how incredibly generous the 45V credit is for each unit of eligible clean hydrogen produced—with an implied value for clean electricity exceeding that which would be received in the electricity market—hydrogen producers will race to erect electrolyzers as fast as possible to plug straight into the grid and hoover up as much existing carbon-free resources as eligibility requirements will allow. And that means nearly overnight, 10% of today’s carbon-free resources would be poof! disappeared from the electricity mix, left to be back-filled by an equivalent increase in generation from coal- and gas-fired power plants.

What a staggering set-back that would be for our nation’s clean energy transition, and what a slap in the face for the public.

Beyond the fact that this would trigger a delay in coal plant retirements and worsen the electricity sector’s current overreliance on gas, it would also set electricity prices surging by potentially double digit-percentage increases given the fact that existing carbon-free resources are typically the cheapest resource on the dispatch curve—so if hydrogen producers snatch that cheap power up, the general public will be forced to bear the costs of sourcing much more expensive electricity supply.

In addition, this exemption would also dramatically increase the amount of grid infrastructure costs electricity consumers will have to pay for, as it effectively would enable hydrogen producers to offload the implications of their massive amounts of electricity use back onto captured ratepayers who would be forced to cover the gap.

That means electrolytic hydrogen producers receiving 45V would be subsidized three times over: First by the lucrative tax credit, second by the use of existing ratepayer-subsidized clean resources, and third by ratepayers covering the costs of necessary electricity system upgrades.

And for all this, what does the nation get in return?

In exchange for funding hundreds of billions of dollars of direct subsidies, plus all the uncounted subsidies laid out above, people will get this: A dramatic reversal in the power sector’s clean energy transition; the buildout of electrolyzers mismatched with the types, amounts, phasing, and locations of those actually best-equipped to produce truly clean hydrogen; and a whole new supply of hydrogen that can’t actually move the clean energy transition forward.

Policymakers may think they can duck blame for the first two, but that last one should set them on high alert.

Those lobbying for loose standards are trying to convince policymakers they’ll be able to cheer the stepped-up outflow of tax credit dollars as a climate success given the amount of economywide decarbonization all that new “clean” hydrogen will support. But in reality, that’s exactly where the bill for the emissions difference between “clean” hydrogen and actually clean hydrogen will come due.

Because remember, hydrogen is not the end goal—the end goal is developing hydrogen as a tool for advancing the clean energy transition overall.

And for any entity looking to rely on clean hydrogen as a tool for actual decarbonization—be it for cleaning up ammonia, steel, fuels, or otherwise—all that “clean” hydrogen will entirely fail to deliver because all its uncounted emissions will still be there, even if, for the purposes of 45V, policymakers pretend they’re not. Meaning when the real math is done, all those hundreds of billions of dollars in “clean” investments will come crashing back down to Earth.

And that’s just for electrolytically produced hydrogen.

Fossil fuel interests are also actively lobbying to secure their own favorable polluter loopholes that would enable them to hide the true tally of carbon emissions associated with their hydrogen production projects, again to capture enormous 45V payouts without actually cleaning up their approach.

Strong 45V rules get industry incentives right

With such a lucrative tax credit in play, it’s unsurprising that private interests are lobbying for 45V regulations that would grant them a massive taxpayer-funded windfall.

What is surprising—and deeply alarming—is that policymakers are at risk of falling for it.

Actors calling for loose rules claim strong 45V implementation requirements would stifle the hydrogen industry; in reality, strong rules would stifle their self-interested cash-grab while actively supporting the build-out of a durable, climate-aligned hydrogen sector.

Policymakers have to reject profit-motivated definitions of success and hold the line for what our nation’s clean energy transition truly needs.

Rigorous implementation rules are necessary to get this industry right, now and for the future.