Congress created a landmark suite of incentives in the past two years for companies that make hydrogen from natural gas — as long as they also deploy carbon capture to cut down on the resulting emissions.
“Blue” hydrogen, as it is known, is rarely made in the U.S. at present. But its future is expected to become clearer by the end of the year, as the Department of Energy awards the first billion-dollar subsidies for demonstration projects and the Treasury Department issues guidance for companies that want to claim new tax credits for low-carbon hydrogen production established in the Inflation Reduction Act.
The administration’s actions are expected to shape the industry for years by helping define how blue hydrogen is made, how clean its production process is and how lucrative it will be for companies.
Looming federal decisions also may create ruptures between Democrats and their allies, as some groups and lawmakers traditionally aligned with the administration have criticized blue hydrogen.
“There’s a huge amount at stake here,” said Zane McDonald, executive director of the Open Hydrogen Initiative at GTI Energy, in reference to coming actions from Treasury and DOE.
Blue hydrogen is one of several concepts for low-emissions hydrogen that is backed by federal policymakers in the U.S. and abroad. Other types include “green” or “pink” hydrogen, which is extracted from water using renewable- or nuclear-generated electricity.
Some environmentalists call blue hydrogen a false solution that would contribute to climate change and should never be supported by policymakers, because it relies on fossil fuel feedstocks.
The oil and gas industry and today’s producers of conventional, high-emissions hydrogen are among the groups that say blue hydrogen is useful for decarbonizing.
Many companies say the fuel could be cheaper than other low-carbon types of hydrogen and slash emissions in a wide range of sectors, including homes and buildings.
The Biden administration falls in between the two poles. The Department of Energy has been less enthusiastic about hydrogen’s use for building heat — an idea often promoted by gas utilities — saying in one recent road map that it should happen only when there are “limited alternatives.” It has also said its selections for billion-dollar blue hydrogen demonstrations won’t involve building brand-new production plants, instead limiting them to deploying carbon capture at existing facilities.
But other DOE road maps cite independent projections that blue hydrogen could make up anywhere from half to 80 percent of the hydrogen produced in the U.S. in 2050, and could be especially useful for cutting emissions in the industrial sector.
By 2031, the Biden administration wants the price of low-carbon hydrogen to rival the cost of natural gas. Energy Secretary Jennifer Granholm has called that a “big, hairy, audacious” goal that could create jobs and cut emissions.
Currently, one U.S. plant is actively making and selling blue hydrogen — an Air Products and Chemicals Inc facility in Port Arthur, Texas, that won DOE loans to demonstrate carbon capture in 2009 and 2010. There are more than 30 additional blue projects involving hydrogen and carbon capture systems that are in the planning phase in the U.S., according to a Sept. 26 report by the International Energy Agency.
The two departments are likely to present their next actions in tandem by the end of October, according to comments from Granholm during a recent congressional hearing, although a government shutdown could thwart the timing.
Here are five things to watch on blue hydrogen as Treasury and DOE ready plans for the fuel:
Can blue hydrogen qualify as ‘clean’?
Along with the Inflation Reduction Act, pending federal actions were set in motion by the 2021 bipartisan infrastructure law.
In that law, Congress set aside $8 billion for hydrogen hubs — or the first major demonstrations of low-carbon hydrogen production, storage, transport and consumption within a specific region. DOE has said it will fund anywhere from six to 10 hubs, and under the law’s text, at least two must include blue hydrogen.
Once the DOE-backed hubs are making hydrogen, they could conceivably earn tax credits from the Inflation Reduction Act, if their fuel is clean enough.
To qualify for the Inflation Reduction Act’s clean hydrogen credit, producers can emit no more than 4 kilograms of CO2 equivalent for every kilogram of hydrogen made — less than half of today’s norm for conventional production methods.
The tax credit becomes much more lucrative when companies slash emissions further. At 4 kg of CO2 pollution, the credit is 60 cents per kilogram of hydrogen. But when the carbon intensity dips below 0.45 kg, the credit swells to $3 per hydrogen kilogram.
But its unclear whether blue hydrogen producers will qualify — and if so, at what level.
That will be determined largely by the Treasury Department guidance on tax credits, which is expected to lay out rules for counting blue hydrogen’s emissions.
The task is profoundly complex, in part because the law requires Treasury to consider “well-to-gate” emissions, referring to pollution created by procuring the energy sources used in hydrogen production.
In the case of blue hydrogen, that will involve issuing rules for measuring and reporting the upstream emissions that stem from drilling and transporting natural gas, for instance.
Treasury is likely to define which sites with potential emissions will need to be tracked and reported by companies, as well as the types of offsets that can be used to lower emissions.
Given the climate law’s requirements, there is still a lot of “gray space and variability” in the way hydrogen’s emissions could be counted, said McDonald of GTI.
“If you gave that Treasury guidance to 10 Ph.D. students, you’d get 10 different answers,” he said.
Treasury’s methods for counting emissions will have “huge ramifications for the carbon intensity of the hydrogen,” he added.
Several hydrogen researchers said they weren’t sure if, or how, blue hydrogen producers would be able to qualify for the clean hydrogen credits, given the volume of upstream emissions that often stem from natural gas. Extraction of gas can release climate-warming methane.
“You would really need to reduce your methane emissions drastically. Like to a minimum, minimum” to receive the credits, said Anne-Sophie Corbeau, a global research scholar at Columbia University’s Center on Global Energy Policy.
Can fossil fuel companies just lean on offsets?
The American Petroleum Institute and the Clean Hydrogen Future Coalition — a group of oil majors, utilities and other influential energy companies — have argued that Treasury should give blue hydrogen companies a path to accessing the clean hydrogen tax credits and allow a variety of offsets.
For instance, some companies could blend “renewable natural gas” — or methane captured from sites like landfills and dairy farms — into the fossil fuels that they use to make blue hydrogen, according to API.
That captured methane should be treated as if it were “negative emissions,” meaning it would automatically lower the total emissions for blue hydrogen in comparison to if the same hydrogen was made with plain natural gas, the group argues.
“The expansion of a hydrogen economy, including all forms of low-carbon hydrogen production, is considered to be critical to meeting any meaningful emissions reduction goals,” said Rachel Fox, API’s policy adviser on low-carbon energy, in a statement. She added that the Inflation Reduction Act’s tax credits for hydrogen were “an important policy tool” for decarbonizing.
Similarly, the Clean Hydrogen Future Coalition has argued that blue hydrogen producers should be able to purchase credits generated from RNG production — rather than using the RNG directly in the creation of blue hydrogen — as a way of lowering the overall emissions count of the hydrogen.
The argument is blue hydrogen projects may help bring more RNG online, which would help decarbonize the nation’s system of natural gas overall.
Even if the RNG is not consumed directly in hydrogen production, “equal emissions are avoided throughout the gas pipeline system,” when RNG is supported, argued the coalition in an Aug. 7 letter to the IRS.
Green groups often counter that RNG is expensive and in short supply and that electric technologies should be what replaces natural gas for most forms of energy consumption.
Researchers disagree on the likely emissions intensity of blue hydrogen projects.
In 2021, a peer-reviewed study led by Cornell University professor Robert Howarth concluded that emissions from blue hydrogen production — including fugitive emissions from natural gas — could make the fuel worse for the climate than burning natural gas. “We see no way that blue hydrogen can be considered ‘green’,” the study said.
Other analyses suggest that blue hydrogen developers could be at least in the ballpark of emissions to be eligible for the clean hydrogen credit, however.
In its September report, IEA concluded if developers were to capture 93 percent of the emissions at a hydrogen production plant, the fuel’s life-cycle emissions would fall within 1.5 and 6.2 kg of CO2 equivalent per hydrogen kilogram.
The lower end of that range would allow developers to claim the clean hydrogen tax credit, although not the most lucrative one. The higher end would put blue hydrogen out of contention for the credit.
The potential variation underscores the importance of how Treasury decides to count emissions from blue hydrogen projects.
“The ability to actually prove you have low methane emissions … is not that straightforward,” said Emily Grubert, an associate professor of sustainable energy policy at the University of Notre Dame and a former deputy assistant secretary of carbon management at DOE.
“This stuff is pretty hard. A lot of us [methane researchers] are worried that the reporting standards will just be really, really weak,” she said.
How will Treasury ‘thread the needle’?
Grubert and multiple other researchers said they believe blue hydrogen companies might get around their upstream emissions by claiming a second, separate subsidy for their projects — a tax credit for carbon capture and sequestration, known as 45Q.
The carbon capture credit, which was expanded under the Inflation Reduction Act, is awarded for every ton of CO2 that companies capture and store. Unlike the clean hydrogen tax credit, it does not come with limits on emissions, researchers have noted.
Under the climate law, developers would have to choose which of the two tax credits they want to claim for a given blue hydrogen project, since they are not allowed to benefit from both.
“For most blue hydrogen facilities, 45Q [for carbon capture] will be the better option,” said Hector Arreola, a hydrogen analyst for Wood Mackenzie.
That could mean blue hydrogen developers could build federally funded projects without having to simultaneously make cuts to their upstream emissions, said Arreola and other researchers.
The situation points to the difficult balancing act facing Treasury when it delivers tax credit guidance — it is aiming to provide a way to scale out the first major production of lower-carbon hydrogen without creating ambiguity about the fuel’s environmental benefits, said McDonald.
“Threading that needle is going to be very difficult,” he added.
DOE hubs: Who will reap the billions?
The $8 billion in the infrastructure law for hydrogen hubs overseen by DOE comes without strict emissions limits on developers.
In June, however, DOE released informal guidelines for hub developers that encourages them to keep emissions within the range that would make them eligible for clean hydrogen tax credits — no more than 4 kg of CO2 per kilogram of hydrogen.
In its coming decision, DOE is expected to reveal where at least two blue hydrogen hubs are going to be located, how they will transport the fuel to market and who the buyers might be.
Investor-owned utilities, many of which have opposed draft EPA rules on power plant emissions, might be more willing to adopt hydrogen as a feedstock in a power plant if a regional hub is sited nearby, some analysts have said. EPA’s emissions proposal would allow power plants to burn hydrogen as a way of reducing emissions.
DOE’s picks may also give a glimpse into how the administration defines environmental justice in regards to hydrogen. The administration has established multiple initiatives on environmental justice, to ensure that historically disadvantaged communities are not overburdened with pollution and underinvestment in infrastructure.
Community engagement plans, which include measures to collaborate with environmental justice and organized labor groups, will be an important criteria for DOE’s hydrogen hub awards, the department has said. About 20 percent of a given application’s merit will be based on its community engagement details, according to department guidance.
Applications to tap the hydrogen hub funds have flooded in from nearly every state in the country, according to DOE, and Republican governors have often been among the most enthusiastic proponents of plans drawn up by local fossil fuel industries to win the funds.
Those Republican governors include West Virginia’s Jim Justice and Texas’ Greg Abbott, who have expressed support for or partnered with industrial coalitions that have submitted proposals for blue hydrogen hubs.
Democratic leaders in deep-blue states like California and New York have also backed hydrogen hub applications from local industries, although those have focused more strictly on green hydrogen.
Blue hydrogen projects may boast an economic edge over other lower-emissions varieties of the fuel, at least through the 2020s. BloombergNEF analysts estimated in August that across the world, the average cost of blue hydrogen is likely to be about two to three times cheaper than that of green hydrogen produced by renewables.
The cost advantage could give a boost to potential sales of blue hydrogen and the Biden administration’s goal of producing 10 million metric tons of clean versions of the fuel in the United States by 2030.
Already, that same amount of hydrogen is made using high-emissions methods every year. In other words, if today’s hydrogen producers were to capture or eliminate their emissions, the sector could achieve the administration’s goal.
What are the politics?
While Republican governors and members in Congress have often welcomed the opportunity to receive federal money for blue hydrogen projects in their states, few conservatives are pushing for mandates that would require the fuel’s use as a substitute for oil and gas.
Some corners of the Republican Party also remain hostile to federal support for emerging clean energy. One blueprint for a future Republican presidency known as Project 2025, released in April and compiled by the Heritage Foundation, calls for shuttering DOE’s Office of Clean Energy Demonstrations, which oversees the hydrogen hubs programs, along with other offices that lead work on low-carbon hydrogen.
Blue hydrogen is also contributing to a growing wedge among Democrats and allied groups on climate policies.
“There’s a political problem here,” said Alan Krupnick, a senior fellow and hydrogen researcher at think tank Resources for the Future.
The Biden administration and Democratic state leaders who support blue hydrogen may not want to alienate environmental justice advocates, he noted.
Last year in New Mexico, Democratic Gov. Michelle Lujan Grisham tried to push through multiple state-level incentives for blue hydrogen projects with mixed success, prompting loud resistance from local environmental groups, for example.
In April, several prominent progressive Democrats called on DOE to “deemphasize” blue hydrogen when it picks the first big demonstration projects under the hubs program. “We must not invest billions of dollars into fossil hydrogen infrastructure,” they wrote in a letter signed by lawmakers that included Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.).
Similarly, some 180 environmental justice groups and allied organizations urged DOE in an August letter to abandon its hydrogen hub program altogether.
The letter’s signatories, who hailed from 28 states, predicted that blue hydrogen would “lock in dirty fossil fuel production at a time when the U.S. urgently needs to phase out oil and gas” and described investments in green and pink hydrogen as “unnecessary at best and extremely destructive at worst.”
“We are asking DOE to choose a different path here,” said Silas Grant, a campaigner at the Center for Biological Diversity, which helped convene the letter.
Multiple environmental groups, and some researchers, have also criticized what they see as a lack of transparency from DOE about what applicants are proposing for hydrogen hubs.
DOE has responded by saying that it will release most details about the hubs when it announces selections this fall, while describing the hubs program as an essential piece of its climate agenda.
“Ensuring America is the global leader in the next generation of clean energy technologies requires all of us — government and industry — coming together to confront shared challenges, particularly lack of market certainty for clean hydrogen that too often delays progress,” said Granholm in June.
