Hydrogen is often hailed as a clean energy solution, but the reality is more complicated. While hydrogen can play a role in reducing emissions, there are serious concerns about its costs and scalability, as well as its ability to provide meaningful emissions reduction.

Hydrogen is often marketed as a clean fuel because it only emits water when used in fuel cells. However, it can be produced from a variety of sources—natural gas, coal, biomass, and renewable energy—all of which have different environmental footprints. Approximately 95% of hydrogen in the U.S. is produced through steam methane reforming, where methane from natural gas is combined with steam at high temperatures to produce hydrogen gas. While this method is cost-effective and widely used, it results in significant carbon dioxide emissions.

Recent investments to encourage hydrogen production have been pushed by industry, Congress, and the Administration as a way to speed up the shift to cleaner energy. However, there’s a growing worry that these subsidies could flow to fossil fuel facilities like natural gas power plants that produce “gray” hydrogen, which emits carbon dioxide during the production process. With these subsidies potentially exceeding tens of billions of dollars, taxpayers could end up funding projects that do more harm than good.

Adding to the complexity, the tax credit system, particularly the 45V tax credit, is fraught with opportunities for polluting industries to claim ‘clean’ tax credits for hydrogen production. Section 45V of the Internal Revenue Code, a new 10-year production tax credit for hydrogen, offers up to $3 per kilogram, depending on how carbon-intensive the production process is. The credit is intended to promote clean hydrogen production, but the criteria for qualification are contentious. And the impact on emissions can vary widely.

TCS has voiced our concerns to the Department of the Treasury and the IRS that Section 45V must be implemented in a way that ensures these credits lead to genuine reductions in greenhouse gas emissions and don’t end up as yet another subsidy for dirty energy sources. The climate impact of 45V hinges upon the method the IRS chooses to verify if electricity used in hydrogen production truly comes from zero-emission sources. Strict verification, transparency, and public engagement are the only ways to ensure these credits serve their intended purpose.

The Administration is pushing for responsible rules that will help ensure that only genuinely clean hydrogen projects receive these tax credits. The goal is to incentivize the production of hydrogen with low greenhouse gas emissions that are derived from new clean electricity sources. The oil and gas industry, specifically LNG (liquified natural gas) companies, however, are lobbying for more lenient regulations, arguing that strict rules could make many projects economically unviable. They want to see so-called “blue hydrogen,” produced from natural gas with carbon capture and storage, qualify for these credits.

We have similarly criticized the 45Q carbon capture and storage tax credit as a flawed clean energy solution—one that has led to significant waste and fraud. The 45Q credits have disproportionately benefited a small number of companies—just 10 companies claimed 99% of all 45Q credits, worth over $1 billion, from 2010 to 2019. And the majority of captured carbon companies are getting credits for end up being used for enhanced oil recovery, which produces more oil and gas. Like many other subsidies—whether labeled as ‘clean’ or otherwise—flowing to the fossil fuel industry, these layers of subsidies may ultimately contribute to increased carbon emissions rather than reducing them.

This makes them double losers for taxpayers, as the federal government also pays much of the escalating costs of recovering from destructive hurricanes, floods, droughts, and wildfires, all of which are increasing in frequency and severity due to climate change.

The outcome of federal guidance and ongoing rulemakings over hydrogen and its future as a clean fuel is crucial. It will determine whether taxpayer dollars are effectively used to promote true climate solutions or end up subsidizing fossil fuel companies—something we have been doing for more than a century!

In the end, aggressively pursuing hydrogen as part of the clean energy transition is fraught with risks. Without strong taxpayer safeguards and clear oversight, there’s a real danger that more, maybe much more, taxpayer dollars will be wasted on projects that don’t deliver clean energy.