The US Can Lead in the Hydrogen Economy — If the Treasury Encourages Lifecycle Thinking and Diverse Investments

In recent days, record-breaking extreme heat has provided a preview of what’s in store as global temperatures continue to rise, to the alarm of many scientists. In response, governments around the globe are taking unprecedented actions to reduce greenhouse gas emissions and limit temperature rise to 1.5 degrees C.

In the United States, the Biden administration is mobilizing for a global competition that will see new technologies and industries enter the fray to progress toward economy-wide net- zero goals. The passage of the Inflation Reduction Act (IRA), which included robust clean energy tax credits, served as the federal government’s pronouncement that the U.S. will be a leading force in the fight against a changing climate.

One of the solutions the federal government is targeting to rapidly deploy is clean hydrogen. The IRA included the clean hydrogen production tax credit, commonly referred to as 45V, which will provide up to $3 per kilogram of “qualified clean hydrogen” if producers meet thresholds for carbon intensity. To qualify for 45V, a producer needs to cut emissions by over half compared to the current unabated hydrogen production in use today.

While the plain language of section 45V in the IRA offers a simple incentive for aspiring clean hydrogen producers, a vocal group of longstanding hydrogen critics is attempting to have the Department of Treasury place more complex requirements on the tax credit.

Hydrogen Production Pathways are Many

The use of hydrogen as an energy source has been explored for years, but commercial hurdles for other than niche uses have largely been insurmountable, and the costs vary depending on how hydrogen is produced. Using natural gas as a feedstock and capturing and storing CO₂ emissions (“blue hydrogen”) is one way to produce hydrogen. Hydrogen can also be produced via methane pyrolysis, a process that eliminates CO₂ entirely and directly converts the methane in natural gas to hydrogen and solid carbon, the latter of which can serve as a future substitute for difficult to decarbonize materials, e.g., steel and concrete (“turquoise hydrogen”). Another hydrogen production pathway, known as electrolysis, uses electricity made from solar, wind, or nuclear to split water into hydrogen and oxygen (“green hydrogen”).

Regardless of the technology deployed, the end result is a hydrogen commodity (and a potential carbon-to-value proposition for pyrolysis) that can be used in a multitude of applications. Thus, the choice of technology is reduced to finding the least energy- and resource-intensive pathways across life cycles that provide sufficient value for long-term commercial viability, while keeping environmental performance and social externalities in check. This is precisely the foundation of sustainability.

A True Lifecycle Approach Offers the Best Understanding of Sustainability

Since clean hydrogen can be produced in a variety of ways, basing the credit on lifecycle carbon intensity (as opposed to production method) and coupling it with other relevant verifiable lifecycle insights (e.g., water use and waste management) discourages predetermining presumed “clean” hydrogen “winners” based on a narrow subset of metrics. For instance, the availability of water (which is used as a feedstock for electrolyzers), along with water quality, water treatment, desalinization in some locales, and understanding the administrative regimes that govern water use, rights, jurisdiction, etc. could all be factors that impede the success and sustainability of green hydrogen over time. This is especially true in areas of water scarcity where competition over resources for food production would be exacerbated.

Downstream waste management supply chain activities — such as recycling, landfilling, and incineration — are often overlooked but critical to a realistic and more complete accounting of sustainability impacts. Presently, wind turbine blades, solar panels, and electrolyzers for green hydrogen lack scaled recycling options, rendering end-of-life avenues to landfill, incineration, or export to developing economies, thus shifting the balance in sustainability.

Aligning with the principles of sustainability, a true lifecycle approach from an emissions perspective should capture upstream and downstream supply chain activities, including the mining, processing, and transportation of minerals used in solar panels, wind energy, and electrolyzers. It should also take into account the supply chains of natural gas and coal for other hydrogen production methods, including transportation-related emissions and any capture and storage of emissions of hydrogen production. Unless solar and wind are generated onsite and fully provide power, then the actual electrons used are derived from a mix of the electricity system regardless of the "contract" for renewables far upstream.

'Life Cycle' has Many Meanings, Blurred Boundaries, and a Dearth of Data

The term “lifecycle emissions” has multiple meanings and can refer to the attribution of emissions from production of a fuel (electricity) to the production of a product (hydrogen) that uses fuel. The Treasury Department will need to consider the definition as well as the boundaries of lifecycle emissions when deliberating the rules for what qualifies as tax credits under the 45V program. Currently, lifecycle greenhouse gas emissions include emissions through the point of production (well-to-gate), as determined by the Department of Energy’s Greenhouse Gases, Regulated Emissions, and Energy Use in Technologies (GREET) model, and consistent with the Clean Air Act (42 U.S.C. 7545 (o)(1)). For 45V, this translates to on-site emissions and emissions from generating the electricity used to run the hydrogen facility — a partial life cycle of overall emissions.

Calculating actual lifecycle emissions across supply chains is complicated and requires an unprecedented understanding of data needs, data availability, and data quality. Existing emissions-based lifecycle assessments that capture supply chain activities have enormous data gaps, and an expanded set of lifecycle metrics beyond emissions has even more data deficiencies. Also required in any lifecycle-based framework are systems for measurement and standardization; verification mechanisms; reporting frameworks; and the ability to audit. This will help markets evolve, achieve higher efficiency, and inch society closer to understanding risk-shifting, unintended consequences, and rebound effects. Arranging for this level of accountability takes time, so it could impede the award of credits and delay cleaner hydrogen production.

While industries and governments work to create a wider set of lifecycle sustainability standards that will help close data gaps and eventually provide a completer and more realistic picture of impacts, policies should be designed to be inclusive of all hydrogen production pathways at the beginning of the rollout of tax credits. Criteria for credits can be modified as a more comprehensive picture of lifecycle impacts are revealed and additional information about the efficiency, emissions, and costs of the various ways to produce hydrogen are based on actual performance rather than conjectures.

Regional comparative advantages, economics, and federal, state, and local policy frameworks will ultimately determine optimal hydrogen production pathways since not all parts of the country have access to low-cost and abundant resources, whether natural gas, wind, or solar. Remaining resource agnostic allows for efficiency gains in power generation and encourages a lifecycle approach to the diverse hydrogen production pathways so that every region of the country has an opportunity to contribute to growing cleaner domestic hydrogen capacity that best suits their economics and resource configuration.

Additionality Predetermines Hydrogen 'Winners' Without Scientific Basis

With this lucrative and inclusive incentive in place, the Department of Energy is counting on a huge increase in clean hydrogen supply, with a goal to reach 10 million metric tons (MMT) produced annually by 2030 and 50 MMT by 2050. Much of the early use of clean hydrogen would be to replace the almost 14 MMT of industrial use of hydrogen as a feedstock without carbon capture storage today. Hydrogen’s versatility in how it is used provides the immense potential to reduce emissions in power generation, transportation, and industrial uses like fertilizer, chemical, steel, and cement production.

The U.S. is now well-poised to compete for the growing pipeline of new clean hydrogen projects globally, leaving other countries scrambling to attract the budding hydrogen industry. Experts and advocates in Europe point to the simplicity of the 45V credit compared to the complex framework the European Union has put in place as the driving factor that could see the U.S. leapfrog the EU in the race to develop a domestic clean hydrogen value chain.

Among the demands being perpetuated by hydrogen critics is additionality, which would require producers to procure clean electricity used for hydrogen production only from new clean power sources, such as solar and wind, eliminating contracting for solar and wind already in service, for example. If included in the Treasury’s final guidance, the additionality requirement would defy congressional intent, make the U.S. less competitive on the global stage, and defeat the ultimate goal of achieving net zero by 2050. Additionality could also restrict competition and innovation and prevent market development.

Additionality would follow the same complex path the EU embraced and would essentially equate to the U.S. competing with its hands tied behind its back when China and other non-EU nations would not face the same obstacles. The consequences of strict requirements on a nascent industry are crystal clear. Hydrogen projects will be delayed by years while producers wait for new power generation resources to be planned, permitted, constructed, and interconnected to the grid — with concomitant economic, environmental, and social analysis that must be considered. The demand in minerals and associated geopolitical, social, and environmental impacts would further complicate overall sustainability goals and shift risks beyond our borders. Cost reductions for electrolyzers and job creation will not be fully realized in the years ahead due to ongoing supply chain bottlenecks and significant project delays.

Given that nearly 40% of U.S. electricity production is already derived from carbon-free resources such as nuclear and hydro, additionality would devalue these assets, restrict their contribution to clean hydrogen production, and make them ineligible to benefit from 45V. The intent of the IRA is to grow the hydrogen industry and leverage its potential for large-scale decarbonization. This will remain unfulfilled should additionality requirements be implemented. The potential of hydrogen rests in its diversity.

For Greater Sustainability Awareness, the U.S. Government Should Expand Lifecycle Insights Beyond Emissions

A focus on emissions alone will never provide a realistic picture of a technology’s overall sustainability profile since it neglects a range of other significant non-emission factors across complete life cycles under the sustainability umbrella, aspects that are not included in the narrow GREET emissions-based lifecycle model. In the case of 45V and hydrogen planning, policies should remain technology-neutral and focus on desired outcomes. If the end goal is, in fact, sustainability, then there should be a strategic and phased approach to the development of a broader set of lifecycle, sustainability-related factors rather than preselecting “clean” and presumably sustainable technologies based solely on emissions.  

“Clean” hydrogen is a misnomer because all processes today that produce hydrogen generate greenhouse gas emissions across life cycles and associated supply chains and all have additional non-emissions-related environmental and social impacts. “Clean” erroneously creates the illusion of a lack of impact when, from an actual lifecycle perspective, this is far from reality. A more suitable term would be “cleaner” hydrogen.

Cleaner hydrogen production will grow slowly at first and then begin to ramp up as companies gain direct experience with various technologies, make adjustments, and innovate. It is premature to exclude technologies at the onset when the hydrogen economy has not even had a chance to take off and scale. Additionally, the data needed to make qualified and science-based decisions either is not being considered or does not yet exist. As data becomes more readily available in the future and strategies begin to incorporate this data to help guide decision-making, policies can then be strengthened and refined, and definitions of “clean” can be narrowed as more investments are made. 

The Treasury must provide a policy framework that allows clean hydrogen to provide complementary benefits to other clean energy solutions in order for the U.S. to compete on the global stage. To lead, U.S. policymakers must continue to chart their own path to realize the environmental, economic, and societal benefits that a growing clean hydrogen industry could provide. While calculating emissions can lead to an improved understanding of performance, the Treasury must be clear on how “life cycle” is defined and transparent about the boundaries. While an emissions profile is important, it does not by itself translate to sustainability unless a broader set of metrics are captured, assessed, and verified. Fashioning the guidance to be strategic and progressive, yet practical and flexible, by following the legislative text in the IRA will unleash the nation’s innovative prowess without restricting the benefits a diverse hydrogen economy can offer.

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.