Hydrogen can play a role in decarbonization, but Treasury needs to get 45V right

Ever the social butterfly, the hydrogen molecule is rarely found alone on earth. Instead, hydrogen atoms often bond with carbon (forming hydrocarbons like methane) and oxygen (forming water). However, hydrogen itself may be critical to our ability to reach net-zero because of its potential to decarbonize hard-to-abate sectors and its role as a feedstock for industrial and agricultural processes that are integral to our modern economy. But to achieve any of these decarbonization goals with hydrogen, the molecule must be produced cleanly – i.e., through a process resulting in low greenhouse gas (GHG) emissions. Today, most hydrogen is produced through steam methane reforming without carbon capture, a carbon intensive process that results in lifecycle GHG emissions between 10–11 kilograms (kg) of carbon dioxide-equivalent (CO₂e) per kg of hydrogen (H₂). 

Producing hydrogen through cleaner methods costs more, in part due to the additional processes required to capture, transport, and sequester carbon; the cost of clean electricity; and the relative nascence of large-scale electrolyzers. Recognizing this, Congress passed the Section 45V Clean Hydrogen Production Tax Credit as part of the Inflation Reduction Act (IRA) to advance clean hydrogen technologies along the cost curve and promote the growth of a truly clean hydrogen market in the U.S. Section 45V appropriately assigns tax credit amounts based on the GHG intensity of hydrogen, starting at $0.60/kg H₂ produced at or below a GHG intensity of 4 kg CO₂e/kg H₂ and increasing up to $3.00/kg H₂ produced below 0.45kg CO₂e/kg H₂. 

But before it can be fully implemented, the passage of IRA in 2022 kicked off a process that takes place at the U.S. Department of the Treasury (Treasury). At the end of 2023, the agency published proposed guidance for implementing the 45V credit along with a request for comment from the public. While the release of the proposal included many important guardrails that CATF has advocated for to ensure the tax credit bolsters a truly clean hydrogen market, adjustments are necessary for the credit to be successful at supporting a path towards economy-wide decarbonization.  

CATF submitted comments to Treasury with recommendations to both strengthen guardrails around hydrogen lifecycle analyses to avoid increased emissions from hydrogen – which would negate the purpose of the credit – while also emphasizing flexibility and the need to create certainty for hydrogen producers. Both principles are critical to getting this lucrative credit right and ultimately promoting a clean hydrogen market to protect our climate. Key highlights from those comments are below.  

1. Hydrogen producers who use natural gas feedstocks must be required to use verifiable, project-specific upstream emissions data to incentivize natural gas producers to clean up production

Under the current version of 45VH2-GREET – the tool used to calculate lifecycle GHG emissions for the 45V credit – the upstream methane leak rate for the natural gas supply chain is fixed at a nationwide average of 0.9%, and the upstream CO₂ emissions from procuring, extracting, and transporting the natural gas are similarly fixed. Treasury’s proposed fixed methane leak rate and upstream CO₂ emissions are both over- and under-inclusive of the reality on the ground. They prevent operators with cleaner supply chains from proving so and achieving a higher 45V credit, a situation that can harm the economic viability of low-emissions projects. And this also allows operators with dirtier supply chains to claim an artificially lower GHG intensity without incentive to improve their lifecycle emissions.  

To make sure that cleaner projects are properly rewarded for that characteristic, CATF has advocated that Treasury should require hydrogen producers to provide verifiable, project-specific data to establish their methane leak rates using the data that natural gas producers submit as part of Subpart W of the EPA-administered Greenhouse Gas Reporting Program (GHGRP). CATF also urged Treasury to finalize similar requirements for upstream CO₂ emissions using GHGRP Subparts C and W. This data is already submitted by most natural gas operators, is familiar to the EPA, and is verified by built-in submission processes. 

2. Negative emissions values should not be allowed as inputs for 45V lifecycle analyses

In our comments, CATF also urged Treasury to adopt strict guardrails around hydrogen production methods that use biomethane (methane from landfills and digesters) and fugitive methane (methane that would have otherwise been leaked or flared). Without these guardrails, hydrogen producers could offset direct hydrogen facility emissions using…