Understanding Hydrogen Production and Hydrogen Tax Credits

What is hydrogen?

Hydrogen is an energy carrier that can be produced from several different energy sources. However, because hydrogen production and use inherently results in energy loss - and often higher emissions - compared to using the input energy directly, it is crucial to understand the different types of hydrogen production and its impact on communities and the climate.

What are the different methods of hydrogen production?

Hydrogen is often referred to by a color that indicates what energy was used to produce it, each with distinct environmental and policy implications. In the US, hydrogen production is overwhelming "gray" hydrogen, created via steam methane reforming (SMR) of fossil gas. This fossil hydrogen has historically been used in industrial applications like fertilizer and fossil fuel refining. The production process emits significant greenhouse gases.

Recently fossil hydrogen producers have attempted to rebrand themselves as "blue" hydrogen. This so-called "blue" hydrogen is produced from fossil fuels and uses the same process as gray hydrogen, with the addition of carbon capture and sequestration (CCS). However, due to the emissions of fossil gas and the high energy demands of CCS, fossil hydrogen with CCS remains highly polluting. Big Oil is aggressively pushing "blue" hydrogen as a tactic to co-opt climate subsidies, greenwash a new generation of fossil infrastructure, and supply subsidized carbon to their enhanced oil recovery operations (EOR drilling). But despite the latest research demonstrating that accurately accounting for fossil gas emissions and the power demands of CCS makes blue hydrogen even worse for the climate than coal, per unit of heat energy, this blue hydrogen is poised to benefit from substantial government subsidies.

Hydrogen can also be produced through electrolysis, a process that uses electricity to split water into hydrogen and oxygen. If this input energy is produced by toxic nuclear power plants, it is called "pink" hydrogen and if the electricity is produced by renewable power, it is called "green" hydrogen. Many people assume electrolysis is automatically "green" hydrogen, but there are no regulatory requirements or standards preventing producers from falsely claiming their hydrogen is "green." Often these so-called "green" hydrogen projects use existing grid electricity rather than powering the sustainable energy requirements of hydrogen production with new renewable capacity. The spike in energy demand caused by hydrogen production without any new renewable capacity on the grid will typically be met by fossil fuel power plants, which can rapidly make so called "green" hydrogen's emissions worse than other production methods and undermining any supposed environmental benefits.

How much does hydrogen production cost?

Hydrogen production costs vary considerably depending on the method and energy source used. Fossil fuel hydrogen produced via steam methane reforming is currently the cheapest option, which explains its market dominance, though it carries a heavy emissions burden. Producing truly green hydrogen is more expensive due to the high electricity requirements and the capital costs of building new renewable infrastructure. But if hydrogen is to play any role in our climate response, it must be produced in a green and sustainable way. Anything less will only accelerate the climate crisis.

What are energy tax credits for hydrogen?

Energy tax credits are government incentives designed to encourage investment in energy sources with lower greenhouse gas emissions than traditional fossil fuels. These credits reduce tax liabilities for companies or projects that develop or use renewable energy such as solar or wind or supposedly lower-emission energy technologies, such as hydrogen production. In theory, these projects should be held to strict environmental criteria, but that is often not the case.

A prominent example is the hydrogen production tax credit (PTC) under Section 45V of the Inflation Reduction Act (IRA), which provides tiers of value up to $3 per kilogram of hydrogen produced that meets lifecycle emissions thresholds. Hydrogen producers can qualify for different tiers of value depending on the carbon intensity of their production. Lower emissions lead to higher tax credit payments.

What are lifecycle emissions?

Lifecycle emissions represent the total greenhouse gas emissions generated throughout every stage of a product or process. For hydrogen production, this means counting not only emissions from the direct production of hydrogen but also those caused by the energy and materials used.

Who are the largest hydrogen producers?

The largest producers of hydrogen are predominantly major fossil fuel and chemical corporations. These companies rely heavily on fossil gas reforming to supply hydrogen primarily for industrial purposes. Large utility and nuclear energy companies are also increasingly exploring investment in hydrogen production. These corporations collectively dominate the U.S. hydrogen market and can wield significant influence over its regulatory framework.

How do hydrogen producers greenwash dirty hydrogen?

Hydrogen producers engage in greenwashing by presenting high-emissions hydrogen as clean to co-opt generous federal subsidies like the 45V tax credit. These producers are lobbying for weakened lifecycle emissions standards that avoid requirements for producing hydrogen using new renewable energy, undercounting upstream emissions, and allowing for bogus emissions offsets.

Safeguards requiring the grid impact of hydrogen production to be included in the lifecycle analysis are crucial. Hydrogen production is incredibly energy intensive, and if this new energy demand is not met by new renewable capacity, it will likely be met by fossil power. Subsidizing hydrogen that is produced by fossil power on the energy grid would dramatically increase our overall emissions at a time where we need to rapidly ramp them down.

What are hydrogen offsets?

Hydrogen offsets or "book and claim accounting" is a greenwashing mechanism that allows hydrogen producers to claim emissions reductions without making real changes to their production processes. Instead of directly using new renewable energy or reducing emissions onsite, companies buy credits from external projects - such as methane capture from factory farms or landfills - and apply these credits toward their hydrogen's emissions profile. Often these offsets are based on dubious claims, and the supposed emissions reductions are being sold off to be double or triple counted by polluters hoping to qualify for various state and federal programs.

This system benefits both Big Oil and Big Agriculture by providing a lucrative revenue stream for concentrating and commodifying Big Ags methane production rather than reducing its pollution. This perverse incentive disproportionately harms low-income or BIPOC communities, which are often closest to the pollution from factory farms and landfills.

Conclusion

The hydrogen production tax credit was not intended to enrich polluting industries. But fossil fuel companies and industrial agriculture are working hard to undermine any semblance of rigorous standards for this subsidy. Through offsets, weak emissions accounting, and pressure to subsidize fossil-based hydrogen, these industries are trying to secure billions in public funding while continuing to pollute. To prevent this, we need strict rules that ensure hydrogen projects reduce real emissions and don't rely on harmful practices like offsets. Without strong guardrails, hydrogen policy will become another polluter giveaway.