Tax rules proposed by the Biden administration will prevent hydrogen, a fuel that emits only water vapor when burned in engines, from gaining a major role powering the U.S. economy and reducing greenhouse gases, hydrogen advocates say.

The rules will determine which manufacturers of “clean” hydrogen are eligible for tax credits. Congress authorized the tax breaks in the Inflation Reduction Act to make “tackling the climate crisis” appealing to investors.

Lawmakers left the details up to the Internal Revenue Service. On Christmas Day, the IRS posted draft rules for qualifying for the tax credits. For hydrogen advocates, it was like receiving Christmas stockings stuffed with coal.

“We were shocked,” said Ken Dragoon, former director of hydrogen development for Obsidian Renewables. “The rug was pulled out from under us.”

Tax lawyers and accountants likely will pore over the rules for years to come. But there are three proposals — commonly known as the “three pillars” — that are particularly concerning to hydrogen advocates.

First, to be considered “clean,” the hydrogen must be made from a renewable energy source, such as a wind or solar project, that went into operation within the past three years.

The rule shuts out existing green energy sources, such as nuclear plants and renewable natural gas from dairies.

Even Northwest hydropower is not “clean” enough. “It takes the whole hydro system off the table,” Washington Clean Energy Alliance government relations director Dave Warren said.

Second, the renewable energy will have to be used the same hour it’s generated. When the sun sets and the wind stops, the tax credit vanishes. Hydrogen plants dependent on tax credits couldn’t run nonstop.

Third, the renewable energy has to be generated regionally. The Northwest region is Washington, Oregon, Idaho and the western edge of Montana. Washington expects in the future to get power from Wyoming wind projects.

The draft tax rules are intended to subsidize projects that aren’t tainted by electricity generated by natural gas or coal. So-called “green” hydrogen is only as green as the energy that goes into making it.

Environmental groups support the three pillars. They agree with the IRS that the pillars are needed to keep the energy-intensive manufacturing of hydrogen from “inducing” greenhouse gases and worsening climate change.

Hydrogen advocates argue the rules betray a misunderstanding of how the interconnected grid works and places impossible and unprecedented demands on hydrogen producers.

True, hydrogen production will increase the demand for electricity, but so will electric vehicles, cryptocurrency, data centers, artificial intelligence and electrifying buildings. “Only with hydrogen do they say it will ‘induce’ emissions,” Warren said.

The IRS received nearly 30,000 comments on the draft tax rules. If the IRS adopts the rules it has proposed, “there won’t be a hydrogen industry in the country,” Warren said. “Europe and China will take it all.”

Hydrogen: Climate warrior?

Hydrogen lit homes in the 1800s, but in its most recent annual energy outlook, the U.S. Energy Information Administration lumped hydrogen in with other technologies “currently unknown or not well characterized.”

Several auto companies make hydrogen-powered vehicles, but they are relatively rare. Washington has no hydrogen fueling stations, according to the state Department of Ecology.

The U.S. produces about 10 million tons of hydrogen a year, according to the U.S. Energy Department. Most of it is “gray” hydrogen, made with natural gas, and most of it is used in refining petroleum or making fertilizer.

If made from renewable electricity, hydrogen is championed as the fuel that can decarbonize hard-to-decarbonize things, such as freight trucks, buses, ships, airplanes and farm tractors.

Making hydrogen, however, takes electricity and water. On average, 50 kilowatt-hours of electricity and 14 to 20 liters of water can produce enough hydrogen to store 39 kilowatt-hours of energy, according to a Washington Department of Commerce report.

Environmental groups contend that without the strict tax rules proposed by the IRS so-called “green” hydrogen will be just another taxpayer-soaking exercise in greenwashing.

Dragoon, who has retired, said governments can’t achieve their emissions-reductions goals without hydrogen, but hydrogen isn’t indispensable right now. “So it’s really easy to be critical,” he said.

The White House and Congress see a future for hydrogen. The Infrastructure Investment and Jobs Act allocated $7 billion to subsidize projects at seven “hydrogen hubs” around the U.S., including in the Pacific Northwest.

Ironically, say hydrogen advocates, the Biden administration’s proposed tax rules would undermine its initiative to create a network of hydrogen producers and consumers.

“I am mystified,” said Michelle Detwiler, the current director of the Renewable Hydrogen Alliance. “Why would they kneecap their own program?”

Is the West Coast special?

The West Coast governors sent a letter last month to Treasury Secretary Janet Yellen and White House energy adviser John Podesta asking for special treatment under the IRS rules for hydrogen production.

California, Oregon and Washington are committed to carbon-free electricity, so state policies address concerns that hydrogen production will induce greenhouse gas emissions, Govs. Gavin Newsom, Tina Kotek and Jay Inslee argued.

Environmentalists oppose the governors’ request. The states’ polices aren’t strict enough, the Sierra Club and Earthjustice said in a joint response.

They called Washington a “climate leader,” but utilities in that state won’t be required to completely phase out fossil fuels until 2045, they noted. The organizations also found fault with California and Oregon policies.

The tax rules proposed by the IRS are on the right track to ensure industry is decarbonized with clean hydrogen, Sierra Club climate policy director Patrick Drupp said.

“Clean hydrogen production, with appropriate end uses, has important potential, but without critical safeguards, hydrogen could actually increase climate emissions and air pollution and derail our clean energy progress,” he said.

Princeton University’s zero-carbon laboratory said exempting states with carbon-free laws was “correct in theory,” but maintained it was unlikely any state has policies tough enough to ensure carbon emissions won’t be induced.

Hydrogen hubs worried

The heads of the seven federally funded hydrogen hubs also sent a letter to Yellen and Podesta warning the proposed tax rules will make many projects economically impossible.

In a separate letter, the Pacific Northwest hub estimated the tax rules would add 45% to 300% to the cost of projects. The projects include a $1 billion “green” fertilizer plant in Richland, Wash.

The plant would avoid more than 1 million tons of carbon emissions a year compared to a fossil fuel plant, according to Atlas Agro North America Corp. The company said it plans to make a final investment decision by the end of the year.

With government subsidies, investors are willing to fund construction, but the proposed rules would make qualifying for the full tax credit practically impossible, according to comments the company sent to the IRS.

Douglas County PUD plans to begin making hydrogen this summer in East Wenatchee, Wash., from excess hydropower generated by Wells Dam on the Columbia River.

The PUD was having to pay people to take the excess electricity, the PUD’s manager, Gary Ivory, told lawmakers in 2019 when seeking to make and sell hydrogen.

The PUD has so far committed $40 million to expanding its hydrogen production. If implemented as proposed, the tax rules will delay and maybe cap the project’s full potential, according to comments submitted by the PUD.

The PUD’s position highlights the consequences of the IRS draft rules, Detwiler said. “That project is not eligible,” she said. “How does that make sense?”

“We were shocked. The rug was pulled out from under us.”

— Ken Dragoon, formerly of Obsidian Renewables