The IRS is about to decide whether green hydrogen is a pipe dream | Semafor

The U.S. Treasury Department may need to choose between climate integrity today and a high-stakes gamble that the hydrogen industry can decarbonize in the future. At its core is a debate over what “green” hydrogen really is.

The maximum value of the new tax credit, $3 per kilogram, is available only for hydrogen with the lowest possible carbon footprint. In theory, this should apply to hydrogen manufactured through “green electrolysis,” in which renewable electricity is used to separate hydrogen molecules from water. Up to now, nearly all hydrogen is instead “gray” or “blue” — derived from natural gas, a process that could negate its climate benefit: Under the IRA this would qualify for a much lower credit.

Deciding which projects qualify as green is less straightforward than it may seem. Imagine a producer plugs an electrolyzer into the grid, and buys certificates from a wind or solar farm to show that the hydrogen was made using clean power. That clean power is now unavailable to other users, which may cause the grid operator to ramp up a fossil fuel power plant to compensate. Should that count against the hydrogen’s carbon footprint?

The nascent hydrogen industry is fiercely divided on this question. Environmental groups and some entrepreneurs argue that truly “green” hydrogen should need to match its electricity use in real-time to renewable sources that were built explicitly for that purpose, or else billions of taxpayer dollars could be poured into an ostensible climate solution that actually increases net emissions.

Others, including some oil majors and utilities, argue that with looser rules, electrolysis-derived hydrogen will still be cleaner than that made from gas. They say the greatest imperative should be to use the tax credit to scale the industry and make it cost-competitive with fossil fuels. Today, electrolyzer hydrogen is roughly three times the price of natural gas in Europe and 15 times the price in the U.S., but the green tax credit is high enough to drastically change the economics.

“If the regulations are too tight, no one will qualify, and it will limit the ability of this industry to get moving,” Andy Marsh, CEO of fuel cell company Plug Power, said in an interview.