US Hydrogen Policy at a crossroads (Updated)

The 45V tax credits are essential to getting US green hydrogen projects off the ground. While the deadline to commence project construction is now five years sooner than the original Inflation Reduction Act deadline, it still gives producers an essential two and half year lifeline until the end of 2027 to get financing, offtakers, renewable power and equipment orders in place to put shovels in the ground. The giveaways to fossil fuels and the massive cuts to renewable energy incentives in Trump's Big Beautiful Bill means the US will fall further behind on clean energy and cede climate leadership to other parts of the world such as China. 
 

Jonas Moberg, CEO GH2

President Donald Trump is soon expected to sign the “One Big Beautiful Bill Act” which sharply reduces incentives for renewable electricity and includes an early termination of the clean hydrogen production tax credit of up to $3/kg. 

The 2022 Inflation Reduction Act introduced production tax credits (PTCs) of up to $3/kg for green and blue projects, with the highest credits for projects that can achieve the lowest emissions. It took the US Treasury several years to clarify the eligibility requirements, which created uncertainty and frustrated developers. While the rules are now clear, the OBBB will bring forward the deadline for projects to qualify for the credits, requiring construction to begin by 31 December 2027 compared with the previous deadline of 1 January 2033. A previous version of the bill was even stricter.  

The response from industry has been cautiously optimistic: “Extending the commencement of construction date to January 2028 for the hydrogen production credit gives the industry an opportunity to advance a significant round of projects that will jump start the U.S. hydrogen market, including the crucial Regional Hydrogen Hubs” said Frank Wolak, CEO of the Washington DC-based Fuel Cell and Hydrogen Energy Association (FCHEA).   
 
Meanwhile, the OBBB loosens the 45Q tax credits for carbon sequestration that offer an alternative form of support for blue hydrogen projects. The 45Q credits offer $60 to $180/tonne of sequestered carbon, subject to some wage and apprenticeship requirements. The 45Q tax credit previously differentiated between uses of the captured carbon, with companies using it for enhanced oil recovery receiving less money. The final version of the bill does away with this distinction, making all carbon capture projects eligible for the same incentives.   
 
Combined, this is a disastrous outcome, especially when the emission reduction credentials of some of the largest blue hydrogen projects are highly dubious at best (see IEEFA’s Blue Hydrogen’s carbon capture boondoggle). As IEEFA note: “the 45Q credit can best be described as a carbon dioxide production credit, encouraging companies to produce and then capture/store CO2”.   
 
So much for a level playing field! As the 45V measure expires, green hydrogen projects will be pushed out of the market by highly subsidized blue hydrogen.   
 
As many commentators have pointed out, if the US Government wanted to significantly reduce spending, an obvious candidate would to be remove the massive subsidies made available to (highly profitable) fossil fuel producers. The oil and gas industry enjoys nearly a dozen tax breaks, including incentives for domestic production and write-offs for foreign production. Yet more subsidies were added to this bill, including new subsidies for metallurgical coal.  

The total cost of the existing subsidies are disputed. The Fossil Fuel Subsidy Tracker estimates direct subsidies of $14 billion per annum (in 2022). The IMF take a wider perspective, estimating fossil fuel subsidies of $757 billion in 2022. This includes $3 billion in explicit subsidies and $754 billion in implicit subsidies (including so-called “negative externalities” like health impacts and environmental degradation borne by society at large rather than producers). According to the U.S. Energy Information Administration, in fiscal year 2016 (FY 2016), the federal government’s tax revenues from natural gas and petroleum exceeded its subsidies by $1.1 billion. By FY 2022, subsidies exceeded tax revenue by $2.1 billion—a net loss for the government.   
 
As Michael Ross has commented: “Everybody agrees fossil fuel subsidies are wasteful, stupid and moving things in the wrong direction”. Regrettably, the latest changes to US hydrogen policy look set to make a bad situation even worse.