Comment: Hydrogen a clean energy, but not with fossil loopholes

By Fred Krupp / Special to Bloomberg Opinion

The Inflation Reduction Act, the Biden administration’s signature legislative achievement, was intended to do more than bring prices down: It also contained smart provisions to protect the climate. Now, the fossil-fuel industry is lobbying to secure loopholes in rules on hydrogen-production incentives that will reward them but hurt the planet.

This multibillion-dollar fight is rooted in the fact that hydrogen can be produced in several ways. More than 90 percent of hydrogen produced today is “gray” hydrogen made from fossil fuels; it’s very dirty and bad for the climate. But the IRA provides tax credits for “green” hydrogen, made using renewable energy, and “blue” hydrogen, which is extracted from natural gas with some of its climate-damaging emissions captured and buried.

The Treasury Department published draft rules for those incentives in December, and now an intense contest is under way to influence the final form, which is expected in the coming months.

If Treasury follows the science, it will help create a robust clean-hydrogen industry that plays a meaningful part in fighting climate change. If not, billions of dollars will be wasted and the climate will suffer.

Under the Energy Department’s Clean Hydrogen Production Tax Credit, or “section 45V,” hydrogen producers that meet new low-emission standards can get up to $3 of federal money for every kilogram of hydrogen produced, bringing costs down to $2 per kilogram or less. The theory is that with upfront help, clean hydrogen will be competitive with gray hydrogen and fossil fuels within a decade; after which it will no longer need production subsidies (following the pattern of solar energy).

While the draft rules include important climate protections for hydrogen made from renewables, they contain three crucial blind spots on fossil-based hydrogen that the industry is trying to exploit.

The first loophole would enable serious undercounting of methane emissions; a potent greenhouse gas that is the main ingredient of natural gas and can leak into the atmosphere at the point of extraction and from leaky pipelines and equipment. Undercounting could occur by allowing fossil hydrogen producers to rely on either a national average leak rate or unverified estimates.

The draft rule supposes producers, on average, release less than 1 percent of the methane passing through their supply chain. But based on measurements made through an ever-growing suite of technologies, we know the leak rate in certain geographic areas is many times higher, even up to 8 percent. These numbers sound small, but they are a big deal for the climate: For the supply chain of an average blue hydrogen producer, the amount of undercounted methane could equal the long-term climate impact of up to four natural gas power plants.

Fossil-fuel hydrogen producers are pushing to cherry-pick numbers, using their own unverified leakage estimates if they’re below the national average, or alternatively using the national average if above it. This could substantially inflate the claimed credit, granting tax breaks to producers for emissions reductions they did not achieve.

A single “national average” became the standard at a time when we didn’t have drones and satellites to monitor leakage. We do now: Tech has advanced faster than government policies. Instead of relying on an outdated average figure, methane-leakage numbers should be based on measured, verified data from the basin where the natural gas is being sourced.

Taking advantage of a second loophole, producers want to use carbon-negative offsets to meet standards; for example, by purchasing credits for biomethane captured from dairy farms or “fugitive” methane from coal mines.

Using this emissions accounting scheme, producers would reduce the carbon-intensity of their product on paper only. A facility could claim to be “net zero” while in fact using old dirty technologies and releasing huge amounts of climate and air pollution. While purchasable carbon credits can be an effective tool, applying them to section 45V would undermine one of its main goals: scaling up clean-hydrogen production.

The final loophole is another accounting trick, in which fossil hydrogen producers want to allocate a portion of their emissions to byproducts, such as steam, used in unrelated processes like petrochemical production. This would push pollution accounting from where it’s actually happening — hydrogen production — to where it’s not, such as steam processes, in order to garner subsidies.

Hydrogen has great potential. But if mishandled — if the loopholes are allowed to stay in the final 45V regulations — fossil-based (“gray” or “blue”) hydrogen will receive significantly more government support than was intended, or than is required for it to be cost-competitive. This could shift billions in investment incentives away from near-zero-emissions pathways, with dire pollution consequences. For every fossil-hydrogen facility built instead of a renewable hydrogen one, greenhouse gas emissions would be expected to increase at least sevenfold.

The Inflation Reduction Act has been a historic win for our climate: It is on track to cut climate pollution by 40 percent below 2005 levels by the end of the decade, even as it creates millions of American jobs. But Treasury must block the fossil-friendly loopholes in the final 45V rule to make sure the hydrogen tax credit succeeds, too. Otherwise, we will fail to see the environmental benefits we expected; and we may even fund projects that worsen the climate.