Calibrating US Tax Credits for Grid-Connected Hydrogen Production: A Recommendation, a Flexibility, and a Red Line.

“Acceleration is key to meeting our climate goals. However, this must be done in a strategic and holistic way” – US National Clean Hydrogen Strategy and Roadmap, June 2023.

The United States recognizes the importance of accelerating the development of clean hydrogen. It is a necessary (and sometimes, the only) solution to decarbonize much of the 30% of global emissions associated with industrial and heavy-duty transport processes. The United States understands the need to strategically plan for hydrogen’s development to ensure investments maximize benefits to the climate, local communities, and the US economy. Strategically balancing the need for clean hydrogen’s acceleration in the near term with holistic, long-term considerations of the technology’s role and climate impact is at the forefront of decisions the country is currently facing to define and regulate clean hydrogen production.

The market for clean hydrogen is relatively nascent today and must quickly overcome several early technology and market scaling constraints. In efforts to bolster the deployment of clean hydrogen, the Inflation Reduction Act (IRA) established a production tax credit (PTC) to act as a financial catalyst for projects that would otherwise not be developed at current costs. The PTC, also known as 45V, is structured to provide the most benefit to the projects that produce the lowest emissions hydrogen and can be a powerful carrot to help accelerate a fully decarbonized grid and support lasting industrial decarbonization projects.

In the case of “green” hydrogen — projects that produce hydrogen using an electrolyzer powered by electricity — hydrogen producers would need to consume between 90 to 97.5 percent zero-carbon power to qualify for the largest tax credit. When such a project is powered by a dedicated renewable energy array, also known as “behind-the-meter” renewables, the emissions accounting is straightforward. But when a project uses power from the grid, it produces hydrogen with the emissions intensity of that grid — and the US grid is currently dominated by fossil fuel-intensive generators.

Given the potential emissions impact of grid-connected hydrogen production, the US Department of the Treasury is establishing regulations to clarify what grid-connected projects will need to do to meet the statutory emissions standards and receive the credit. Depending on how Treasury decides to write rules for this credit, developers will respond with projects of varying electrolyzer operation, costs, and infrastructure needs, which could fundamentally shape the size and shape of the US hydrogen markets. The rules decided by Treasury will ultimately determine the trajectory of emissions resulting from domestic hydrogen production and impact the realization of the national clean industrial strategy.

Striking the correct balance between achieving the emissions reductions intended by this policy and accelerating a clean hydrogen industry in a strategic and holistic manner is possible.

RMI recommends hydrogen PTC rules provide some flexibility for first movers, which will help reduce costs and complexity for early projects and give electrolytic hydrogen the boost it needs to achieve cost competitiveness. On January 1, 2028, these flexible rules should phase out and the tax credit should only be granted to projects that meet emissions-accurate, forward-looking standards. The early flexibility will help bring the nascent industry to scale and compete with current fossil-based pathways, while the phaseout and requirement of more granular emissions accounting rules will ensure that the hydrogen economy grows in a strategic, holistic, and climate-aligned manner.