The Inflation Reduction Act (IRA) includes provisions for subsidies aimed at promoting the production of low-carbon hydrogen, also known as “green hydrogen.” Green hydrogen has the potential to significantly reduce emissions and serve as an alternative to fossil fuels in transportation and industry. The IRA subsidies, which reach up to $3 per kilogram, could drive production costs below zero given projected learning rates and would amount to $30 billion in subsidies per year by 2030. However, there are critical policy risks associated with hydrogen production and its impact on emissions.
One of the challenges lies in the carbon footprint measurement of hydrogen production. If hydrogen production relies on electricity generated from fossil fuels, it could potentially increase emissions in the near term. Determining the eligibility for subsidies becomes complex as it is difficult to assign emissions to the power used in hydrogen production. The Treasury, responsible for eligibility determination, must establish rules that are stringent enough to prevent taxpayers from funding the production of carbon-intensive hydrogen.
There is a risk that if the tax guidance is not handled properly, hydrogen production could become a contentious issue, similar to the Solyndra controversy, and lose public support. The delicate nature of defining green hydrogen lies in understanding the differences between conventional (gray) hydrogen produced from natural gas and green hydrogen produced through water electrolysis powered by clean electricity. The IRA’s subsidy tiers are based on carbon emissions per kilogram of hydrogen rather than production processes. However, even small amounts of emissions per kilowatt-hour in the electrolysis process can make hydrogen production carbon-intensive.
To ensure the production of clean hydrogen, stringent accounting methods are required. Holding renewable energy certificates (RECs) or power purchase agreements (PPAs) can be used to demonstrate that hydrogen facilities operate on clean power. However, there is a concern that these methods may not guarantee new renewable generation brought online directly because of hydrogen demand. Without careful accounting, the system may result in increased emissions and taxpayers paying for carbon-intensive hydrogen production.
Environmental groups are advocating for stricter criteria, including three pillars of new construction, deliverability, and hourly matching, to ensure clean hydrogen production. However, even with these criteria, the carbon accounting conundrum is not entirely solved.
Subsidies, while beneficial, pose risks compared to emissions pricing as a policy lever. Care must be taken to strike the right balance in incentivizing green hydrogen production without compromising carbon neutrality goals.
Sources: Energy Innovation