Between the disparity in tax credits and the U.S. Department of Energy's selection of multiple hydrogen hubs focused on “blue” fossil fuel-derived hydrogen hubs, U.S. companies have little financial incentive to produce low-carbon hydrogen, according to speakers on a panel held Thursday by the Clean Energy Group.
The 45Q tax credit for carbon capture would result in greater tax savings, and requires fewer reductions in emissions, than the 45V tax credit for low-carbon hydrogen production, said Anika Juhn, data visualization analyst at the Institute for Energy Economics and Financial Analysis, known as IEEFA.
Hydrogen is also subject to fewer regulations regarding safety and transparency than natural gas, said Amanda McKay, policy manager for the Pipeline Safety Trust.
Federal incentives for hydrogen could gift hundreds of millions in tax savings to hydrogen producers without resulting in any real reduction in carbon emissions, Juhn said during a panel on the potential environmental impacts of federal hydrogen incentives.
The hydrogen production tax credit, Juhn said, offers tiered incentives based on the carbon emission intensity of the hydrogen produced — but it does not apply to intensities above 4 kilograms of carbon per kilogram of hydrogen. The 45Q credit for carbon capture, on the other hand, is tiered according to how much carbon is captured and sequestered.
To qualify for even the smallest hydrogen production tax credit would require carbon capture rates in excess of 94%, Juhn estimated. But most of today's projects capture just 70% to 85% of the carbon they emit — which means most if not all companies that plan to use carbon capture to make low-carbon hydrogen from fossil fuels would not meet the 45V criteria.
But they could qualify for 45Q credits all the way down to 45% carbon capture, Juhn said. And at 96.2% carbon capture, a hypothetical hydrogen project would earn more in 45Q tax credits than they would qualify for under 45V. This gives hydrogen produces essentially no incentive to attempt to meet the 4 kilograms of carbon standard, Juhn said.
Juhn pointed to a planned hydrogen project in Louisiana, which she said could earn $425 million per year in 45Q tax credits for its use of carbon capture technology. But with an expected carbon intensity of 4.8 kg of carbon per kg of hydrogen, the project would not qualify for 45V hydrogen production tax credits and would emit roughly the same amount of carbon as a natural gas-fired power plant.
The carbon capture tax credit “is a real cash gift,” said David Schlissel, director of resource planning analysis for IEEFA. “It's not a Christmas stocking. It's a Christmas 8-wheel truck backing up into oil and gas companies' homes.”
McKay also noted that despite a growing push to build hydrogen pipelines in order to decrease the cost of storing and transporting hydrogen, regulators have little experience with the fuel and there are few hydrogen-specific regulations to ensure the safety of these pipelines. Hydrogen is a much smaller molecule than natural gas, McKay said, and therefore more likely to leak from pipes or storage tanks. It also explodes more readily than natural gas, she said.
“If we're talking about blending into a natural gas system that already has a lot of known leaks, a hydrogen molecule will find and leak through most known leaks, in addition to smaller leaks where methane leaks haven't happened yet,” McKay said.
McKay called on regulators to create reporting requirements for pipeline operators who plan to blend hydrogen with natural gas in order to enable the collection of data on incidents that may be associated with hydrogen.