{"id":23059,"date":"2024-02-08T15:36:56","date_gmt":"2024-02-08T20:36:56","guid":{"rendered":"https:\/\/blogs.edf.org\/energyexchange\/?p=23059"},"modified":"2024-02-08T15:36:56","modified_gmt":"2024-02-08T20:36:56","slug":"why-a-strong-3-pillar-framework-makes-sense-for-pivotal-hydrogen-tax-credit","status":"publish","type":"post","link":"https:\/\/blogs.edf.org\/energyexchange\/2024\/02\/08\/why-a-strong-3-pillar-framework-makes-sense-for-pivotal-hydrogen-tax-credit\/","title":{"rendered":"Why a strong \u20183 pillar\u2019 framework makes sense for pivotal hydrogen tax credit"},"content":{"rendered":"

\"Hydrogen<\/a><\/span><\/p>\n

What does it mean for hydrogen to be clean? And will the emerging hydrogen economy be able to deliver the meaningful climate benefits it promises? The U.S Treasury is about to make a series of decisions that will determine the answer to these questions for the U.S region, and potentially others around the world who choose to follow by example. <\/span>\u00a0<\/span><\/p>\n

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This includes the details of a massive set of tax incentives \u2014 the 45V Hydrogen Production Tax Credit, under the Inflation Reduction Act\u00a0 \u2014 that will have a major impact on how hydrogen is deployed, scaled, managed and traded for decades to come. A thought out and well implemented set of rules would set a global precedent for how governments can incentivize truly clean hydrogen, while the contrary would create an artificially subsidized market that undercuts the U.S\u2019s climate goals and international competitiveness.<\/span>\u00a0<\/span><\/p>\nWhy a strong \u20183 pillar\u2019 framework makes sense for pivotal hydrogen tax credit <\/a><\/span>Share on X<\/a><\/span>\n

By law, hydrogen producers can earn the production tax credit per kilogram of hydrogen produced over the first ten years of a facility\u2019s hydrogen production, where the size of the credit is based on a sliding scale depending on how clean the hydrogen is estimated to be. As a result, the definition of what constitutes clean and how emissions are estimated is a cornerstone for which hydrogen production pathways will receive a leg-up in the market. Treasury\u2019s final set of guidance will determine the rules. <\/span>\u00a0<\/span><\/p>\n

As with anything in the tax code, there\u2019s a lot of money riding on the fine print, and this has been the source of intense debate.<\/span> This topic gets technical quickly, but a new report<\/a> from the world\u2019s largest pureplay sustainability consultancy Environmental Resources Management\u00a0 breaks down the details and offers key insights into how officials can structure this guidance to prevent unintended increases in pollution, while spurring long-term growth in a genuinely clean hydrogen economy.<\/span>\u00a0<\/span><\/p>\n

A focus on green hydrogen and the details that matter\u00a0<\/strong><\/p>\n

The hydrogen production pathway that will earn the highest credits will be electrolytic hydrogen made by splitting water molecules using electricity \u2014 commonly called green hydrogen. So that\u2019s what we are focusing on here. (At the same time, we\u2019re calling for crucial protections for fossil-based hydrogen, which you can read more about <\/span>here<\/span><\/a>.)\u00a0\u00a0<\/span>\u00a0<\/span><\/p>\n

Electrolytic hydrogen, made from clean electricity, has the potential to have the greatest positive impact on the climate and public health, especially when compared to fossil-based hydrogen alternatives. But there is an important caveat. Making hydrogen is an energy-intensive process that requires a lot of electricity \u2014 up to <\/span>3-7 times<\/span><\/a> as much as using the electricity directly. It matters if the electricity is clean or dirty, and whether it is being used in a way that stimulates greater investment in clean electricity supply or exhausts what is available to use directly for buildings, transportation, and other applications.\u00a0<\/span>\u00a0<\/span><\/p>\n

Getting this right depends on how we tally the GHG emissions of hydrogen\u2019s electricity supply. To qualify for 45V, most electrolyzers can\u2019t simply pull power from the grid, as the average carbon intensity would be far too dirty. Instead, producers will need to purchase dedicated, truly clean electricity (e.g., through a direct connection, power-purchase agreement or certificates). But the cleanliness of electricity varies by resource, time of day, and other factors like the congestion on neighboring transmission lines and extreme weather events. If these factors aren\u2019t accounted for, an electrolyzer could actually be diverting clean power from other needs and causing the grid to deploy more fossil fuels to meet demand. To be achieved sustainably, hydrogen development needs to not only use clean power, but <\/span>drive investment<\/span><\/i> in new clean power.\u00a0<\/span>\u00a0<\/span><\/p>\n

Doing the math\u00a0\u00a0<\/strong><\/p>\n

Bringing new clean power on the grid is less like filling a bucket, and more like conducting an orchestra \u2014 lots of coordination and fine-tuning has to happen to make it work. And while the details can get complex, the rules needed to ensure hydrogen drives clean power development can be summarized by three simple principles, also known as accounting pillars:<\/span><\/p>\n

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The Biden administration has included these three pillars in its proposed 45V rule<\/a>, but they nonetheless continue to be a lightning rod for debate. Critics claim the three pillars are difficult to implement and likely to flatten the emerging hydrogen market in its infancy. Yet various analyses from EDF, ERM and others across academia, policy think tanks and industry clearly show that a strong 3-pillar framework is the only way to ensure hydrogen is actually clean \u2014 which is the main purpose of the tax credit. For example, studies from Princeton University<\/a>, Energy Innovation <\/a>and Evolved Energy Research<\/a> find that without the 3 pillars, 45V could add hundreds of millions of tons of pollution per year. Industry members representing more than 50 GW of electrolyzer capacity have endorsed<\/a> the Three Pillars approach as financially viable and implementable.<\/p>\n

ERM\u2019s Assessment of Grid-Connected Hydrogen Production Impacts and Implementation Considerations<\/strong><\/p>\n

As Treasury moves into its final rulemaking, EDF wanted to help clarify some of the questions and concerns around the 3-pillar system, and so we asked ERM to dig deeper. We wanted to understand: What does the literature on both sides say about the 3 pillars\u2019 potential effects? How could a 3-pillar system address implementation challenges and ensure the highest-incentivized hydrogen is truly clean? And is the 3-pillar approach actually feasible?<\/p>\n

Part one of the report (the literature review) summarizes key findings from about 30 studies, explaining how interpretations can differ based on assumptions and methodologies. Part two assesses the 3 pillars within a regional context, exploring implementation considerations including design options that could address certain stakeholder concerns while maintaining the overall integrity of a strong 3-pillar framework.<\/p>\n

The 3 Pillars quite simply add up\u00a0<\/strong><\/p>\n

The report highlights several findings:<\/p>\n