Research that Informs Business and Public Policy
The IRA promises to get the clean hydrogen industry off the ground, but there are critical policy risks. Hydrogen Production Plant
Among the many provisions of the Inflation Reduction Act (IRA) is 45V, which specifies subsidies for the production of low-carbon hydrogen. So-called “green hydrogen” can lower emissions by displacing conventional hydrogen production, which is associated with nearly 3% of global greenhouse gas emissions, but it has even greater potential as a low carbon alternative to fossil fuels in transportation and industry.
Generous subsidies in the IRA top off at $3 per kilogram, which is roughly double the current market price for conventional hydrogen made from natural gas, and is plausibly large enough to drive net costs below zero given projected (though highly uncertain) learning rates. If the industry can hit the Department of Energy’s own production targets, the subsidy would translate to $30 billion in subsidies per year by 2030, which exceeds pre-IRA subsidies for wind, solar, and electric vehicles combined.
The trouble is that hydrogen production might increase emissions in the near term if it turns out to rely on electricity made from fossil fuels. This is possible because measuring the carbon footprint of hydrogen turns out to be quite a challenge. If the Treasury, which is tasked with determining eligibility, makes rules that are too lax, many worry that taxpayers will end up spending billions to pay for the production of H2 that turns out to be a lot of hot air.
It’s not hard to imagine 45V ultimately killing public support for hydrogen by becoming the Solyndra of the IRA—an inflated cudgel for critics of the climate agenda—and simultaneously turning off enough climate hawks to get hydrogen filed alongside nuclear power as a decarbonization pathway that splits environmental groups.
Unfortunately, getting the tax guidance right is not only critical, but also exceptionally difficult. To see why, we need to start by understanding what green hydrogen is and how the law is written.
Conventional (gray) hydrogen is produced from natural gas via steam methane reforming (SMR). Green hydrogen comes when hydrogen is pulled out of water via electrolysis powered by clean electricity. (In this post, I am going to focus on electrolysis, but there is another important debate about the use of biogas that warrants its own post.)
The trouble with figuring out if your hydrogen is green is that, while it is straightforward to see whether hydrogen is generated by electrolysis, it is difficult to assign emissions to the power that created it.
The IRA spells out subsidy tiers that are based on carbon emissions per kg of hydrogen produced, rather than specifying a production process. To get the full $3 per kg production subsidy, emissions need to cause less than 0.45 kg of carbon emissions per kg of hydrogen. This represents a 95% reduction relative to SMR, which accounts for nearly all hydrogen production today. (There are substantial, but less generous, subsidy tiers ending with a $0.6/kg subsidy for production with less than 4 kg of carbon per kg of hydrogen, with a couple of other intermediate values.)
Electrolysis is energy-intensive, so even a little bit of emissions per kWh can make electrolysis carbon intensive. This chart, from a study by Energy Innovation, shows the emissions rates for hydrogen made by electrolysis powered by fossil fuels, as they compare to the policy benchmarks and SMR. Electrolysis powered by best-in-class efficient natural gas electricity plants would create emissions roughly 30 times larger than the $3/kg credit target, and coal-powered electrolysis is easily 100 times the standard. Across the board, switching from SMR to electrolysis powered by fossil fuels increases emissions substantially.
The key implication is that if even a small fraction of the power going to a hydrogen plant is associated with fossil generation, then it should push the emissions rates out of the $3/kg tier, and modest use of fossil generation can make H2 from electrolysis dirtier than conventional SMR. This makes it paramount to get the accounting right.
So how do we decide if hydrogen is clean?
Any hydrogen facility that draws power from the grid is going to have to use some accounting method to demonstrate that it is running on clean power. The lax version of this is to require facilities to hold renewable energy certificates (RECs) or power purchase agreements (PPAs) that true up on an annual basis to cover their consumption. The problem with this is that RECs and PPAs will often just reshuffle attribution; they do not actually guarantee that new renewable generation was brought online because of the demand from hydrogen. An annual matching criteria can easily lead to a form of “carbon laundering”, where instead of using natural gas directly to make hydrogen through SMR (which is more efficient), natural gas makes electricity that feeds an electrolyzer while the operator buys non-additional paper contracts to certify that the electricity, and thus the hydrogen, is green. Emissions go up and producers collect a check from taxpayers.
The IRA will get hydrogen off the ground, but details from Treasury are needed to safeguard against bad outcomes. Source.
Advocates of stricter criteria focus on what has come to be called “three pillars” of new construction (often erroneously called “additionality”), deliverability, and hourly matching. In essence, these rules require that projects be able to contract for renewable power that is new, situated in the same part of the grid, and based on time-specific certificates that cover consumption every hour of the year.
Several analyses (discussed here) conclude that, because the $3/kg subsidy is so generous, hydrogen that meets these criteria is cost-competitive with gray hydrogen today. As a result, many environmental groups are urging the Treasury to apply a strict definition of eligibility, arguing that it will avoid perverse outcomes without stifling the industry. This may well be the right course, but unfortunately even the three pillars cannot fully solve the carbon accounting conundrum.
To an economist, all of this highlights risks that come with using carrots (subsidies) as the primary policy lever, instead of sticks (emissions pricing). It is impossible to definitively prove the additionality of renewable generation associated with a hydrogen project, which means it is impossible to prove that a given project did not cause emissions to go up somewhere. That’s because additionality requires observing a counterfactual. A counterfactual is, by definition, something that did not happen, which makes it hard to observe. To know if a project did or did not cause an increase in emissions across the entire complex electricity grid, one needs to measure and compare emissions with the project (observable) and grid emissions without the project (not observable—must be based on a model or assumptions).
To see how truly hard this problem is, consider a best-case scenario, like this proposed plant in Texas. It plans to build a hydrogen facility capable of producing 73,000 tons of H2 per year, paired with 1.4 GW of wind and solar capacity to support the facility, which will both power the plant and sell clean power to the grid during hours of excess generation. This one plant stands to earn billions in subsidies from both 45V and renewable energy credits, which it can also claim.
Most view this as a slam dunk—clearly that plant is not creating any new emissions (beyond the life-cycle emissions of the building materials). But this doesn’t have to be true. If this was a good site for wind or solar generation, then those renewables might have come online without the hydrogen facility with the power sold into other uses that clean up the grid. In that case the hydrogen plant is crowding out some other application of clean power and implicitly pushing up demand for fossil generation. And, given interconnection queues and transmission bottlenecks, adding renewables to the grid to support the plant might well prevent or delay other wind or solar resources from coming online.
Energy system modelers have attempted to take account of the existing generation mix plus entry and exit in order to estimate the counterfactuals. But, these models have significant uncertainty, and Treasury cannot run them for every plant; instead they will issue more general rules. In contrast to all of this, to create the right incentives for industry when pricing emissions, one only needs to observe what actually happened. It isn’t necessary to model the counterfactual. This is a big advantage of pricing emissions compared to using subsidies.
Another problem with subsidies is that they do nothing on their own to direct the hydrogen towards uses that reduce pollution the most. Right now, demand for clean hydrogen in steel, cement, shipping, and trucking is due to scattershot interest for voluntary carbon mitigation and a geographically fragmented set of policies. If we want to make sure hydrogen is directed into the right application, we need another round of policy out of Washington, which is fraught to say the least given electoral politics. Moreover, if we continue to rely on a raft of subsidies and separate regulations, it will be difficult to harmonize abatement costs across sectors. In contrast, a comprehensive price on carbon emissions would tilt producers towards green (or blue) hydrogen instead of gray, as well as ensuring that demand for hydrogen across industrial and transportation applications is strongest where the alternative abatement costs are most expensive.
Figure shows where hydrogen is used today. Clean hydrogen could displace conventional hydrogen and lower emissions in these sectors, or be used in new industrial and transportation applications. Image Source: Breakthrough Energy
Lessons for today and for the future
What should we conclude about today’s question around 45V? Some argue that tight Treasury rules unfairly single out hydrogen. After all, other green subsidies also run the risk of perversely increasing emissions—electric vehicles (aka “external combustion engines”) can increase emissions if they draw from a sufficiently dirty grid, and heat pumps can increase emissions if enough refrigerant leaks. The key difference here seems to be that perverse outcomes are more likely for green hydrogen.
Moreover, the $3/kg subsidy cannot be justified on direct carbon mitigation grounds alone, even if we use a $200 social cost of carbon. The subsidy might be rationalized based on knowledge spillovers, whereby quick adoption now can push industry down a learning curve (though even then the IRA policy window might well be too long). Part of what we want hydrogen producers to learn is how to design plants to run intermittently in harmony with renewable supplies and how to prove as reliably as possible that they are green. If tighter eligibility rules move us closer to that goal, they are likely a good idea for the long run.
What broader lessons does this challenge hold? There is a healthy debate about the best way to design policies for decarbonization among academics. Economists tend to favor policies that put a price on pollution, while many political scientists and other analysts favor subsidies or industrial policy on political economy grounds. Some view the Inflation Reduction Act, which is basically a giant flotilla of subsidies, as settling the debate: after years of floundering to pass policies that price pollution, a full embrace of the subsidy and industrial policy approach led to a historical bill.
This may well be the case, and it may be that generous subsidies are the best way to quickly ramp the green hydrogen industry. But, reliance on subsidies creates a set of challenges that policymakers and analysts need to understand and to face with eyes wide open.
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Suggested citation: Sallee, James, “Singing the Green Hydrogen Blues?”, Energy Institute Blog, UC Berkeley, September 18, 2023, https://energyathaas.wordpress.com/2023/09/18/singing-the-green-hydrogen-blues/
James Sallee is a Professor in the Agricultural and Resource Economics department at UC Berkeley, a Faculty Affiliate at the Energy Institute at Haas, and a Faculty Research Fellow of the National Bureau of Economic Research. Before joining UC Berkeley in 2015, Sallee was an Assistant Professor at the Harris School of Public Policy at the University of Chicago. Sallee is a public economist who studies topics related to energy, the environment and taxation. Much of his work evaluates policies aimed at mitigating greenhouse gas emissions related to the use of automobiles. Sallee completed his Ph.D. in economics at the University of Michigan in 2008. He also holds a B.A. in economics and political science from Macalester College.
Battery cars have a mineral problem — requiring “millions of tons of lithium, cobalt, bauxite and other minerals [to be] mined, processed, shipped and refined.” (WP) More immediately, battery cars also have a labor problem as they have fewer parts and need fewer workers to make them. But they are not the only way to decarbonize our world. “Hydrogen fuel cell cars, which like electric vehicles also produce zero emissions, have a far higher number of components because the working of a fuel cell engine closely resembles petrol engines. Many of the parts needed can be produced by existing suppliers to the industry. ‘Hydrogen technology means people who make internal combustion engines can still have jobs,’ said Sae Hoon Kim, Hyundai’s director of fuel cell projects. ‘We have 300 major suppliers [for the hydrogen car], and most of them are our conventional vehicle suppliers.’” (Financial Times) Nonetheless, our Department of Energy remains obsessed with battery cars and has made no plans whatsoever to build a hydrogen pipeline to connect our major cities — a threshold requirement recognized 20 years ago by General Motors. Ironically, neither have the oil companies themselves — although hydrogen fits nicely in their existing business model for the delivery of fuel — and it is thus a lifeline for oil companies when battery cars take hold.
“Hydrogen fuel cell cars, which like electric vehicles also produce zero emissions…” A common misperception.
The GREET (Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation) Model, developed by DOE’s Argonne National Laboratory as a tool to compare various emissions pathways in transportation, estimates that with emissions from the steam reforming process included, a hydrogen FCV has the well-to-wheels carbon footprint of a comparable gasoline-powered hybrid.
Twice as expensive with half the range, FCVs are useless for purposes of transportation. But that was never their purpose anyway – their purpose was to create a market for natural gas.
Kurt Vonnegut wrote, “In every big transaction, … there is a magic moment during which a man has surrendered a treasure, and during which the man who is due to receive it has not yet done so. An alert lawyer will make that moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on. If the man who is to receive the treasure is unused to wealth, has an inferiority complex and shapeless feelings of guilt, as most people do, the lawyer can often take as much as half the bundle, and still receive the recipient’s blubbering thanks.” I think this is one such moment.
https://www.thisdayinaviation.com/tag/g-faaw/
The lowest life cycle carbon intensity approach for hydrogen production is small modular nuclear reactors with electrolyzers. A review of the literature indicates the feasibility of using Small Modular Nuclear Reactors (SMRs) for energy generation. [1 Friederich, Simon, and Boudry, Maarten., 2022. Ethics of Nuclear Energy in Times of Climate Change: Escaping the Collective Problem, Philosophy & Technology (2023).30 https://doi.org/10.1007/s13347-022-00527-1. (date last accessed: 022523)], [Abduliia, A. et al. 2019. Limits to deployment of nuclear power for decarbonization: Insights from public opinion. Energy Policy 129 (2019) 1339- 1346].
A Brazilian chemical company, Unigel is developing an industrial scale green hydrogen electrolyzer.[ Marquesin, Camila,. 2022. Unigei, External Communications manager, +55 12504-6100, e-mail: camila.marquesin@unigel.com.br. https://hydrogentechworld.com/unigel-to-build-industrial-scale green. (date last accessed: 022523)] It employs thyssenkrupp nucera technology.[ Immoor, Katharina, 2022. Thyssenkrupp nucera, head of communications, +49 231 547 3505, e-mail ir4u@thyssenkrupp-nucera.com. https://thyssenkrupp-nuceera.com/2022/07/26/unigel-installs. (date last accessed: 022523]
Methane Gas, commonly called “Natural Gas”, is piped into most people’s home for hot water heating and winter furnace heating and is poisonous to humans and pets. We could replace it with Hydrogen. The utility just cut off my “natural Gas” at the street and at the meter, with no future lines planned. They will replace the poisonous gas lines for a price but why pay for poison? If they offered clean, non-poisonous Hydrogen for heating, I might consider it. Now I will just use my “Tesla Solar Roof” plus off-grid solar system and batteries and tell the utility, “No more Natural Gas.” This is exactly what the IRA program was supposed to do. If the utility, Took the infrastructure of Natural Gas and turned into natural HYDROGEN, not only could it safely be used for heating and hot water, but gas stoves and even for “Fuel Cell” power back up. systems. This is the 21st Century and we can do better.
Jim is absolutely right in noting that “It is impossible to definitively prove the additionality of renewable generation associated with a hydrogen project.” Indeed, it’s exceedingly challenging to determine additionality for carbon offsets, too, and certainly not definitively. I spent almost two years as part of the CARB’s working group on developing protocols for forestry carbon sequestration projects, particularly for offsets. In a nutshell, I came away from that experience more or less the same way I went into it: That is, in strong support of preserving forests and planting more trees, but good luck determining the carbon additionality of those efforts compared to business as usual.
Jim also asserts that “Another problem with subsidies is that they do nothing on their own to direct the hydrogen towards uses that reduce pollution the most.” This may well be true with the current subsidy structure. However, the government could set up a grant program incentive — as opposed to a tax incentive — for hydrogen projects “that reduce pollution the most.” The grant process can signficantly squeeze the leeway and laxity that tends to come with many energy/environmental tax incentives. That said, the grant process is also more administratively intensive. Given all the challenges Jim and others have presented on the challenges green hydrogen is facing, it may not be worth the effort.
Very helpful synopsis of the issues. It has made me even more concerned about these subsidies for green hydrogen than I was previously.
James, I have yet to see any evidence hydrogen – whether green, blue, gray, or black – is anything but natural gas in a fake green package.
The lightest element in the universe, hydrogen is also the element with the least chemical energy density. Either by unit of weight or volume, it offers virtually nothing of value as a liquid fuel. A gas at room temperature, it must be pressurized to 10,000 psi, or cooled to -253ºC (or both) to liquefy it, already eating up 40% of its inherent energy.
Yet in the 1990s, when oil majors recognized gasoline had a limited future, they realized they would need to rely on their second best-selling product to remain profitable. They also realized that steam-reforming natural gas was an easy and inexpensive way to manufacture hydrogen, which had always had value for industrial processes (ironically, including oil refining). With hydrogen fuel cell technology coming of age, it would be possible to market this “gray” hydrogen as a green fuel (the only byproduct from the output of a hydrogen fuel cell is water) by neglecting to mention the copious quantities of carbon dioxide and carbon monoxide emitted at the refinery during the steam reforming process.
Yes, it is possible to make green hydrogen, but there was never any reason to do it, and there never will be. The provenance of hydrogen is unverifiable – the gray variety is indistinguishable from the green. So we’re left with the prospect of trusting the oil industry to do what’s right for the environment – and “Can we?” is a question that shouldn’t need to be answered.
It is a complex issue, but proceeding with the guidance and subsidies is critical to boost the production of green hydrogen. In States with strong renewable programs and monitoring standards, such as California, some of the concerns and needs for additionality do not exist. California monitors its excess and curtailed renewable energy in the CAISO and it is very transparent. Storing the otherwise curtailed renewable energy as green hydrogen will bring more efficiency to renewable procurement and reliability to our electric grid.
We will need a LOT of green hydrogen to decarbonize existing uses of hydrogen, such as fertilizer and metallurgy. But unless technology evolves significantly, hydrogen will not be very useful as a surface transportation fuel.
Think about the thermodynamics. 1,000 kWh of electricity can be used to produce about 20 kg of hydrogen. That 20 kg of can propel a Toyota Mirai about 1,000 miles. Or, that 1,000 kWh of electricity can be used directly to propel a Nissan Leaf, Chevy Bolt, or Tesla 3 about 4,000 miles.
That’s right: about 25% of the input electricity makes it to the wheels of the car. You lose about half in the electrolysis process, and then half again in the fuel cell conversion in the vehicle.
Yes, there are challenges with battery-electric vehicles, particularly heavy trucks. But we are figuring these things out gradually. And we must figure them out. The Freightliner E-Cascadia is a terrific battery-electric heavy truck drive unit.
Companies in China, Australia, and New Zealand are moving ahead with trucks that roll into a battery-swapping facility, emerging a few minutes later with a fresh battery (allowing the depleted batteries to be charged on dynamic electric tariffs when power is cheap or even when solar and wind are surplus and being curtailed). https://www.youtube.com/watch?v=XHgw2FLBbGg
Yes, we need to proceed with green hydrogen for those end uses for which hydrogen is the right fuel. But it won’t be motor vehicles. Maybe airplanes.
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