Co-written with Nik Sawe, a Policy Analyst in Energy Innovation’s Industry team.
Industry will be the United States’ largest greenhouse gas-emitting economic sector by 2030, but the sector’s clean energy transition has received less attention, lagging behind the transportation and power sectors. Clean hydrogen could be the solution to some of industry’s biggest emissions challenges, but only if judiciously produced and used. If not, it could delay or reverse progress on cleaning our economy.
An employee of Air Liquide, a company in gases, technologies and services for Industry and Health, ... [+]
Two industries – iron and steel, along with chemicals – are the sector’s leading sources of carbon emissions, accounting for around 8 percent and 5 percent of total global emissions respectively. Because they are considered technologically challenging places to reduce emissions, iron, steel, and chemicals have frequently been glossed over despite their considerable impact.
But now thanks to increased federal and state incentives, advocate attention, and policy support for clean hydrogen, reducing greenhouse gas emissions from these industries is finally becoming economically and technologically feasible.
Inflation Reduction Act 45V Tax Credit Could Fuel Clean Hydrogen
Clean hydrogen is almost non-existent today, but the Inflation Reduction Act’s 45V clean hydrogen production tax credit intends to change that by offering a robust subsidy of up to $3 per kilogram of hydrogen, depending on the emissions intensity of its production. On December 22nd, the Internal Revenue Service and Treasury Department proposed regulations that wisely follow the European Union’s “three pillars” approach to clean hydrogen production. Essentially, electrolyzers must use power from new clean energy resources that can physically deliver their electricity during the same hours when it’s being generated.
This ensures developers make truly clean hydrogen, rather than stressing the grid and causing fossil fuel power plants to ramp up to serve the added demand from hydrogen electrolyzers. This would actually worsen climate pollution relative to our current state, even after accounting for the dirty hydrogen’s downstream uses.
The attractiveness of the $3/kg subsidy, however, is already drawing attention and resources toward suboptimal uses of hydrogen, such as powering vehicles or heating buildings: applications where emissions can be slashed far more efficiently through electric alternatives. These end-uses have massive markets and the ability to pay more for hydrogen than the iron, steel, or chemicals industries.
So, while 45V may greatly reduce the cost of producing hydrogen, the sale price could be boosted by high demand from low-value applications — especially since there’s not likely to be enough truly clean hydrogen to go around anytime soon. However, in the long term without such a high subsidy, hydrogen simply cannot compete with electric alternatives in these applications, setting the hydrogen industry up for failure while delaying the deployment of better solutions such as electric vehicles and heat pumps.
Steel Mill for Metal Sheets. (Photo by Mediacolors/Construction Photography/Avalon/Getty Images)
Hydrogen Could Clean Iron, Steel, and Chemical Production
If instead hydrogen supply focuses on meeting the needs of high-value uses in iron, steel, and chemical production, we can create a long-standing and sustainable hydrogen industry with plenty of market opportunity. The key lies in ensuring that as we build clean hydrogen infrastructure to meet our growing clean energy demands, its supply flows to these uses where it can provide the greatest benefits.
In iron, steel, and chemicals manufacturing, the application of clean hydrogen helps clean up processes that are otherwise difficult or impossible to electrify. Traditionally, fossil fuels are used to purify iron ore to a quality that allows us to make steel, but hydrogen can also play this role.
Similarly, clean hydrogen can replace fossil fuels that are frequently used as chemical “feedstocks,” or material inputs in the formation of myriad mass-produced staples from plastics to fertilizers. Both applications are highly productive uses of the clean hydrogen that will emerge from the seven clean hydrogen hubs selected by the Department of Energy for $7 billion in support.
While policy support will reduce clean hydrogen production costs and incentivize industry expansion, investors may find it too risky to build clean steel and chemical production plants. These facilities have multi-decade lifespans, and clean hydrogen is still too new — and dependent on subsidies — for investors to make the leap.
Smart Policy Could Ensure Truly Clean Hydrogen Production
Policymakers could require steel and chemical producers to make cleaner products over time, though this could raise their costs. In such competitive, fungible commodity markets, even slight cost additions could make a huge difference, driving them to relocate to other states or countries — at least in the absence of further policy changes like the EU’s carbon border adjustment mechanism that places tariffs on more emissions-intensive imports. Instead, policymakers should look to programs that reduce the risk of investing in new, clean technologies.
For example, as a large consumer with lots of buying power, the U.S. government could guarantee the purchase of some amount of steel from clean steel producers via an advance market commitment. This gives first-mover investors certainty that if they produce such products, they will have a buyer, even if costs end up being higher than expected. Such policies can cut costs for the entire sector, incentivizing other buyers to step in.
H2 sign is seen on a window of hydrogen bus as Poland introduces its first hydrogen bus -Urbino 12 ... [+]
The Buy Clean California Act is one example of government actors creating a market for greener materials, setting limits on the amount of carbon emissions from the production of materials used in public works projects, including structural and concrete reinforcing steel.
At the federal level, the Biden administration launched a Buy Clean Initiative, with a task force prioritizing the use of low-carbon construction materials in federally funded projects. The DOE is also exploring several demand-side measures for clean hydrogen uptake via a $1 billion initiative, which could support advance market commitments, pay-for-difference contracts, and reverse auctions, including recently selecting a consortium to inform and guide this process. However, it’s essential that these limited funds support high-value end-uses like steel and chemicals rather than dead-ends like vehicles and industrial heat.
Clean hydrogen is a key piece of tackling the industry sector’s most difficult challenges – but securing its emissions reduction benefits requires careful application of policies and incentives to ensure that hydrogen production is truly clean and applied to uses where it will be competitive long term. Otherwise, hydrogen risks worsening climate pollution and delaying our transition to a clean economy.
