Whitehouse, Merkley, Raskin, Beyer & 62 Lawmakers Urge Biden Administration to Finalize Strict Clean Hydrogen Tax Credit Rules

Washington, DC - U.S. Senators Sheldon Whitehouse (D-RI) and Jeff Merkley (D-OR) and Representatives Jamie Raskin (D-MD) and Don Beyer (D-VA) led a letter from 66 members of Congress calling on the Biden Administration to finalize strict rules for the Section 45V Tax Credit for Production of Clean Hydrogen that was passed as part of Democrats' historic Inflation Reduction Act.

In a letter sent yesterday to Treasury Secretary Janet Yellen, Energy Secretary Jennifer Granholm, EPA Administrator Michael Regan, OMB Director Shalanda Young, National Climate Advisor Ali Zaidi, and John Podesta, Senior Advisor to the President for Clean Energy Innovation and Implementation, the lawmakers urged the administration to quickly finalize the strong proposed rules for 45V that aligned with Congressional intent and would reduce carbon emissions, while ensuring the tax credit supported robust growth in the nascent clean hydrogen industry.

"When Congress drafted the climate provisions of the Inflation Reduction Act, including the Section 45V Tax Credit for Production of Clean Hydrogen, our primary intent was to develop a suite of incentives that would result in substantial emissions reductions. The 45V tax credit is a key part of the IRA, which will help decarbonize hard-to-abate industrial sections. Treasury's proposed rules for 45V remain critical to ensuring that 45V does not increase net carbon pollution, and we urge Treasury to finalize rules consistent with its proposal," wrote the lawmakers.

"The U.S. has the chance and is well-suited to stake out a leading position on clean manufacturing; we must not squander this opportunity for short-sighted gain," added the members. "Treasury's strong proposed rules demonstrated a commitment to evidence-based policy, and we urge Treasury to maintain this rigor as it finalizes the regulations. Just as we agree that it is important to get clean hydrogen right, we agree that no tax credit is worth compromising our commitment to tackling the climate crisis by pursuing scientific emissions reduction targets."

The Inflation Reduction Act included a suite of clean energy tax credits and other provisions to boost decarbonization technologies in the United States, including the Section 45V Clean Hydrogen Production Tax Credit. Clean hydrogen has the potential to reduce emissions in aviation, shipping, steelmaking, and heavy-duty vehicles, but is still at an early stage of development. The 45V tax credit, as designed by Congress, aimed to jump start innovation in the hydrogen industry to give clean hydrogen an opportunity to compete with conventional "grey" hydrogen.

Senators Whitehouse and Merkley asked Treasury in an October 2023 letter to adhere closely to Congressional intent and implement strict rules for the 45V tax credit. The senators urged Treasury to design the standards around three principles - additionality, deliverability, and time-matching - to ensure the environmental integrity of the program. The senators also pointed to the rules governing the European Union's clean hydrogen economy as a good starting point for Treasury's standards.

"A three-pillar framework with strong protections against fossil fuel greenwashing ensures the hydrogen tax credit is part of a solution to this problem by stimulating demand for new sources of clean electricity generation while fulfilling its primary goal of reducing carbon pollution. These rules ensure that we do not subsidize a greenwashed industry that burdens environmental justice communities with toxic pollution," added the 66 members of Congress.

Senators Ed Markey (D-MA), Bernie Sanders (I-VT), Chris Van Hollen (D-MD), Elizabeth Warren (D-MA), Peter Welch (D-VT), and Cory Booker (D-NJ) joined Whitehouse and Merkley on the letter. Representatives Raskin and Beyer led a group of 58 members of the House of Representatives in signing the letter. Climate Action Campaign, Natural Resources Defense Council, Earthjustice, League of Conservation Voters, Environmental Defense Fund, Union of Concerned Scientists, Sierra Club, and Evergreen Action endorsed the lawmakers' letter.

The text of the letter is below and a PDF is available here.

Dear Secretaries Yellen and Granholm, Administrator Regan, Director Young, Mr. Podesta, and Mr. Zaidi,

When Congress drafted the climate provisions of the Inflation Reduction Act (IRA), including the Section 45V Tax Credit for Production of Clean Hydrogen (45V), our primary intent was to develop a suite of incentives that would result in substantial emissions reductions. The 45V tax credit is a key part of the IRA, which will help decarbonize hard-to-abate industrial sections. Treasury's proposed rules for 45V remain critical to ensuring that 45V does not increase net carbon pollution, and we urge Treasury to finalize rules consistent with its proposal.

As members deeply involved in the crafting and passage of the IRA, our goal was always to enact a package of incentives that would put the United States on track to meet its Nationally Determined Contribution (NDC) of 50 to 52 percent emissions reductions by 2030 compared to a 2005 baseline, a target scientists state is necessary to avoid exceeding 1.5 degrees Celsius of warming. To ensure the IRA lived up to this goal, hundreds of hours of work went into the emissions analysis of various competing policies.

New analysis from Energy Innovation shows that if proper guardrails are not in place, 45V could actually increase emissions by 2 to 3 percentage points. This is significant: since 2005, U.S. emissions have only declined by 18 percent. In other words, getting the 45V rule wrong could erase one sixth of our progress to date.

We agree on the need for a robust, clean hydrogen industry. The environmental impact and energy efficiency of hydrogen depends on how it is produced. Currently, most hydrogen is produced by natural gas reforming or gasification, and marginally by electrolysis and other methods. Electrolytic hydrogen has the potential to cut emissions in the hardest-to-abate sectors, particularly where direct electrification is unfeasible. However, because of the energy intensity of the electrolysis process, when powered by gas or coal, electrolyzers produce hydrogen with 1.5-5 times the emissions of conventional hydrogen made through steam methane reforming (SMR). As a result, estimates indicate that, without safeguards, 45V would actually increase the emissions intensity of U.S. hydrogen production. Taxpayer dollars must not blindly support all kinds of electrolytic hydrogen or we risk eroding climate progress and further subsidizing the fossil fuel industry at the expense of environmental justice and American consumers.

45V should also not blindly support the production of hydrogen from fossil fuels. In addition to being major sources of greenhouse gas emissions, SMR hydrogen production poses severe pollution risks to frontline communities. Accounting loopholes that allow conventional fossil hydrogen to qualify for 45V must be prohibited; it is unconscionable to let federal funds prop up a greenwashed industry that pollutes historically marginalized communities.

Reserving the tax credit for truly clean hydrogen that reduces emissions is directly in line with the statutory text of the IRA, which plainly states congressional intent. 45V's subsidy is reserved for qualified clean hydrogen "produced through a process that results in a lifecycle greenhouse gas emissions rate of not greater than 4 kilograms of CO2e per kilogram of hydrogen." This reflects Congress's recognition that taxpayer dollars must be carefully directed towards hydrogen production that moves us closer to, not further from, our decarbonization targets.

The statute adopts a definition for "lifecycle greenhouse gas emissions" from section 211(o)(1)(H) of the Clean Air Act, which makes clear that this greenhouse gas emissions rate must account for "significant indirect emissions such as significant emissions from land use changes". By acknowledging that electrolytic hydrogen production which drives significant increases in grid emissions fails to meet the statute's threshold lifecycle greenhouse gas emissions rate, Treasury's proposed rules give effect to the IRA's text and purpose of reducing emissions. Consideration of lifecycle greenhouse gas emissions under section 211(o), the Renewable Fuel Standard (RFS), requires a broad consideration of indirect emissions, beyond the scope of just a single farm or facility. The Environmental Protection Agency (EPA) characterizes this as a need to consider "market interactions induced by expanded biofuel production and use." Since the emissions profile of electrolytic hydrogen depends wholly on the resources powering it, accounting for indirect emissions under 45V requires similar scrutiny of grid market dynamics. EPA confirms that this is consistent with their interpretation and application of section 211(o)(1)(H). Just as it is insufficient to look only at a single plot of land under the RFS, an accounting of only facility-level emissions or a simple tallying of renewable energy certificates (RECs) is inadequate for 45V.

A robust body of modeling and analysis supports this conclusion. In addition to the new analysis from Energy Innovation, Evolved Energy Research (EER) estimates that if 45V were implemented without rules accounting for indirect emissions, annual greenhouse gas emissions could increase by nearly 200 million metric tons (MMT) of CO2e per year by 2032, even after accounting for the displacement of conventional hydrogen and fossil fuels in vehicles and the power sector. Cumulatively, this could lead to a net 1,233-MMT CO2e increase in U.S. emissions by 2032, when compared to a scenario without the 45V tax credit. By comparison, roughly 10 MMT of hydrogen is produced annually in the U.S. from fossil fuels, emitting approximately 100 MMT CO2e of greenhouse gases. Without reasonable safeguards in place, 45V actually increases the emissions intensity of U.S. hydrogen production. Displacing conventional hydrogen with a lower-carbon alternative is a worthwhile endeavor, but subsidizing the production of hydrogen that is more carbon-intensive than the legacy industry would be a glaring policy failure.

Several other independent analyses agree on the importance of guardrails-specifically the guardrails proposed by Treasury. These include modeling from the Electric Power Research Institute (EPRI), analysis from Rhodium, prior analysis from Energy Innovation, and modeling from Princeton ZERO Lab. The models that differ, such as the one conducted by Energy & Environmental Economics (E3) and funded by the American Council on Renewable Energy (ACORE), fail to account for power sector load growth dynamics and produce flawed conclusions as a result.

Data centers, investments in manufacturing, and broader electrification of the economy are driving load growth in the U.S. for the first time in two decades, causing many utilities to turn to increasing fossil generation. 45V adds electrolyzers to this equation, which require tremendous amounts of power and represent a sizeable new demand, capable of drawing power at all hours of the day. To meet the Department of Energy's (DOE) goal of 10 MMT of annual clean hydrogen production by 2030, electrolyzers consuming several dozen gigawatts of electricity will need to come online. Without strong standards, new sources of clean electricity will not necessarily be deployed to meet this demand, especially not at all hours of the day. As such, the 45V tax credit risks creating a shell game, where existing clean generation gets nominally claimed by hydrogen electrolyzers, but the resulting gap in grid capacity is backfilled by fossil fuel generation.

The three pillars do not-as some have claimed-lead to the cannibalization of future clean energy. Instead, they help ensure that when electrolyzers are added to the grid, that demand is balanced with additional clean energy, rather than requiring new fossil generation, keeping existing fossil generators running, or consuming existing renewables that are needed to decarbonize other aspects of our economy. If the three-pillar requirements are weakened, households will bear the negative effects of fossil-fuel-powered electrolyzers, in the form of both increased pollution as well as increased energy bills. A study of electricity markets in California and Colorado found that weak 45V rules could lead to as much as a 10-percent increase in power prices for consumers as a result of the additional demand on the electric grid.

Treasury's proposed rules ensure that 45V will live up to its emissions-reducing potential and prevent the tax incentive from becoming yet another fossil fuel subsidy. The "three pillars" of incrementality, temporal matching, and deliverability ensure that taxpayer dollars do not go to electrolyzers that generate significant indirect greenhouse gas emissions from the grid. The rules work together to create a market signal for the development of new zero-carbon power and the deployment of electrolyzers that can flexibly ramp down when clean power is limited. 45V's ability to be stacked with the 45Y Clean Electricity Production Credit or the 48E Clean Electricity Investment Credit enhances this signal.

Furthermore, modeling, analysis, and current market realities overwhelmingly show that strong guardrails will not prevent the clean hydrogen industry from developing. EER and EPRI find that while the three pillars are necessary for preventing an emissions spike, they have limited consequences for total electrolytic hydrogen production or deployment of electrolyzers. Nor are these concerns borne out in evidence on the ground. A contingent of hydrogen suppliers and developers currently planning and developing more than 50 GW of three-pillar-compliant projects in the U.S. have come out in strong support of Treasury's rules. And in the European Union, where the three pillars are already law, the clean hydrogen market has boomed.

The economic incentives for the development of the hydrogen industry are further bolstered by the $7 billion DOE has allocated to the Hydrogen Hubs. While many of the Hubs also plan to produce SMR hydrogen with carbon capture, some have raised concerns that Treasury's proposed rules could threaten the economic viability of the Hubs. However, analysis from the Rocky Mountain Institute (RMI) shows that the three pillars are not necessarily a barrier for the Hubs' access to qualified clean electricity. All the Hubs are projected to have access to enough pillar-compliant clean energy to achieve their early electrolytic hydrogen production goals with capacity factors north of 70 percent.

We acknowledge that the three pillars could affect the viability of some hydrogen project designs. However, we must remember that the bedrock goal of the IRA was to cut greenhouse gas emissions, and the 45V credit was crafted to support a truly clean hydrogen industry. Removing these guardrails in the final 45V rules will thoroughly undercut those goals. Without strong rules, 45V will subsidize the production of more carbon-intensive hydrogen and could cost taxpayers an additional $252 billion through 2040, while harming the same frontline communities that have acutely borne the costs of our reliance on fossil fuels.

Transmission limitations and delays in interconnection challenge the achievement of our larger climate goals. The Federal government should address these problems directly rather than by watering down the rules governing the production of 45V-eligible hydrogen.

For these reasons, forward-thinking companies along the hydrogen value chain, environmental organizations, environmental justice groups, consumer advocates, and fiscal responsibility watchdogs have voiced staunch and unified support for Treasury's strong proposed rules. On the other hand, it is telling that the fossil fuel industry is well-represented among those calling for weakening the rules.

As Treasury works to finalize its guidance, we encourage it to maintain strong climate standards in its final rule. While certain allowances can be made to facilitate compliance with the rules, we must not compromise the emissions integrity of 45V. Unfortunately, many of the exemptions and modifications that have been proposed would severely weaken the tax credit:

• 5-10 Percent Curtailment or Retirement Allowance for Existing Clean Energy: Flexible electrolyzers are an ideal use case for otherwise curtailed clean energy. Curtailments should be credited when and where they occur, but blanket allowances are a poor proxy for this. Curtailments of renewables, by their nature, are typically not consistent enough to serve as the sole power source for an electrolyzer, and allowances that fail to match the sporadic nature of these curtailments can easily push the emissions intensity of electrolyzers above statutory thresholds. Applying a blanket 5-10% allowance to more "firm" resources like existing nuclear or hydroelectric generation, under the guise of preventing retirements, could severely harm the integrity of 45V. Exempting 5% of all existing clean energy from the incrementality requirement could allow 1.5 MMT of hydrogen to qualify annually, which in the short-term could drive up to 60 MMT CO2e of additional annual greenhouse gas emissions; cumulatively, this could drive up to 1,479 MMT CO2e of additional greenhouse gas emissions through 2035. A 10-percent allowance could potentially double those amounts.

• Incrementality Exemption for Relicensed Hydroelectric and Nuclear: Unless assets can demonstrate a credible risk of retirement that cannot be prevented with the IRA's 45U Zero-Emission Nuclear Power Production Credit or state incentives, there is no reason to exempt them from incrementality. If all hydroelectric and nuclear assets that were set to be relicensed between 2024 and 2035 were granted this exemption and then used exclusively to support hydrogen electrolysis, it could result in up to a 525 MMT CO2e cumulative increase in greenhouse gas emissions through 2035.

• Incrementality Exemption for State Clean Energy Mandates: At first blush, an exemption that recognizes the progress states have made on climate seems reasonable, but such an exemption for incrementality should only be granted if the states can credibly demonstrate that their policies can constrain indirect emissions from electrolyzers without leaking emissions to neighboring states. No U.S. state is in a position to credibly demonstrate that they can accomplish that, absent additional measures. A legally binding target is insufficient without policies to constrain emissions. Even if in-state emissions are constrained, an exemption would allow any clean power supplied to other states to be redirected to electrolyzers within their borders, which would lead to the same indirect emissions. And while a clean electricity standard drives toward zero power emissions, an electrolyzer would still be able to induce emissions above the statutory cap until the target reaches zero. Current cap and trade programs have price ceilings that can be effectively short-circuited by the value of 45V.

• Annual or Monthly Matching: Allowing electrolyzer projects that commence construction prior to 2028 to qualify through annual matching in perpetuity would increase cumulative emissions by nearly 700 MMT of CO2e through the duration of the tax credit. Monthly matching is similarly a poor substitute for hourly matching. Even weekly matching fails to safeguard against indirect emissions remotely as well as hourly matching, as the key consideration is electrolyzers' ability to capture intraday variations in renewable output, like the sun setting each night and rising each morning. Hourly matching is critical to minimize emissions from electrolytic hydrogen and to incentivize the deployment of flexible electrolyzers. Low-tech alkaline electrolyzers are unable to ramp up or down to match the availability of clean electricity-a trait that will be essential to electrolyzers' ability to continue producing competitively-priced hydrogen after subsidies expire. While these electolyzers are cheap, they are ill-suited to producing truly clean hydrogen and are largely imported from China. Conversely, the U.S. leads the way in high-tech electrolyzers, such as proton exchange membrane and more flexible alkaline electrolyzers. These technologies are better able to respond to the variability of renewables and produce truly clean hydrogen, but they require hourly matching to be economic over Chinese alkaline electrolyzers.

• Allowing Compliance through External Modeling: While there is consensus on the need for the three pillars among most experts and academics, some industry players have backed models with more favorable assumptions and parameters to erode the stringency of 45V at the expense of our climate and average American consumers. Given this, Treasury should not allow projects to comply with their own models and should instead require all producers to meet the same set of evidence-backed standards as they have proposed.

• Not Averaging Across the Year: Without the three pillars, grid-connected electrolyzers risk producing hydrogen with far greater emissions than conventional fossil hydrogen. Allowing producers to only qualify when it is convenient creates this same indirect emissions risk. Allowing electrolyzers to earn 45V tax credits when clean energy is widely available-while ignoring the emissions impact of other hours when clean energy is scarce and electrolyzers choose to continue operating with dirty power-could still drive significant emissions. Since the electrolyzer would not be operational without this tax credit, 45V would effectively be subsidizing both clean and dirty hydrogen production, and the emissions from the hours of dirty hydrogen production would be indirect emissions that the statute requires Treasury to consider. Therefore, projects must not be allowed to qualify for only a portion of their annual production.

• Renewable Natural Gas and Fugitive Methane Emissions: Since 45V is a tech-neutral tax credit, the rules for all production pathways must be equally stringent to avoid perverse incentives. Treasury recognized the importance of an equally rigorous approach in their proposed rules. In particular, Treasury should not allow captured methane to be considered greenhouse-gas-negative; such a rule would enable relatively small amounts of captured methane to offset the emissions of SMR hydrogen enough to qualify for the full $3/kg tax credit, making it effectively free to produce. In this same vein, book-and-claim accounting-that is, allowing methane captured in one location to be credited as an offset in another-would allow gaming of the tax credit and thus presents risks for inclusion in 45V. Treasury should also disallow co-product allocation in 45V to avoid incentivizing pollution shifting as opposed to true emissions reductions.

• Accurate Upstream Methane Emissions: Estimates of upstream methane leakage for fossil-based hydrogen must be accurate and transparent by relying on measured and verified data. While industry has proposed that hydrogen producers should be able to self-report user-specific methane figures, there is no robust verification system in place to validate these figures. Company-reported data from the Greenhouse Gas Reduction Program Subpart W already show significant under-reporting of methane emissions, when compared with observed satellite measurements. Producers should not be allowed to elect between using national methane emissions rates and their own site-specific rate, which would allow them to cherry-pick whichever of the two happens to be lower. Until site-specific rates can be sufficiently verified, Treasury should instead assign basin-specific methane emissions rates to fossil-based hydrogen to credit responsible operators without allowing them to claim emissions reductions they did not achieve.

We are at a pivotal moment in the energy transition. We have the technology to electrify the bulk of our economy and transform our hardest-to-decarbonize sectors. However, our deployment of clean electricity generation is lagging behind and we face the risk of expanding heavily polluting fossil fuel infrastructure. A three-pillar framework with strong protections against fossil fuel greenwashing ensures the hydrogen tax credit is part of a solution to this problem by stimulating demand for new sources of clean electricity generation while fulfilling its primary goal of reducing carbon pollution. These rules ensure that we do not subsidize a greenwashed industry that burdens environmental justice communities with toxic pollution.

If we want this industry to thrive into the future, we cannot afford short-sighted half-measures. The European Union has adopted rules for clean hydrogen similar to those proposed by Treasury. If our hydrogen is not truly clean, the low-carbon products that depend on that hydrogen-green steel, e-fuels, clean methanol, zero-carbon fertilizers-will not be duly credited in other markets. The U.S. has the chance and is well-suited to stake out a leading position on clean manufacturing; we must not squander this opportunity for short-sighted gain.

Treasury's strong proposed rules demonstrated a commitment to evidence-based policy, and we urge Treasury to maintain this rigor as it finalizes the regulations. Just as we agree that it is important to get clean hydrogen right, we agree that no tax credit is worth compromising our commitment to tackling the climate crisis by pursuing scientific emissions reduction targets.

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