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.
