Tax Incentives May Change the Game for Green Hydrogen Investment

Green hydrogen is beginning to catch the attention of policymakers, who are stepping in to drive change as watch groups warn that we’re running out of time to meet global sustainability goals. Green hydrogen could play an essential part in accelerating the transition to a low-carbon economy, so it’s no surprise that legislators are looking at incentives to encourage investment. What will likely be the game-changing carrot to push this change forward? Tax.

As an energy source, green hydrogen has huge potential to help reduce emissions from sectors of the economy that face significant challenges around decarbonization, because they require either high energy density fuel or intense heat. These sectors include aviation, shipping, long-distance trucking, and concrete and steel manufacturing.

While hydrogen can be produced from a variety of resources, green hydrogen is produced using biogas or renewable power like solar and wind, with the only by-product being oxygen, and can be converted into electricity or fuel.

The imperative to invest in green hydrogen is clear, but there’s one considerable obstacle to investment. Green hydrogen is far more expensive to produce than natural gas, blue hydrogen (hydrogen produced from natural gas and supported by carbon capture and storage), and gray hydrogen (hydrogen produced from natural gas, without capturing the greenhouse gases produced during the process).

Where Does Tax Come In?

Policymakers in both the US and Europe recognize that unlocking investment in green hydrogen will be crucial to meeting urgent net-zero goals. For that reason, tax credits and incentives that are specifically intended to promote investment in green hydrogen are a fundamental feature in President Biden’s Inflation Reduction Act, which offers $369 billion in subsidies to clean energy industries. Of this, more than $30 billion is earmarked for programs that include hydrogen.

By offering tax incentives, the new US law is consistent with its historical approach to drive changes. Contrast this with the European Union, which has relied heavily on regulation, penalties, and carbon pricing versus offering incentives to achieve its environmental objectives. In February, however, the EU changed tack, with the European Commission presenting its proposal for a “Green Deal Industrial Plan for the Net-Zero Age,” which promises to feature investment aid and funding, some delivered though the tax code. The plan is designed to help meet Europe’s climate neutrality goals while maintaining EU competitiveness, especially considering what the US has enacted with the new law.

The US Approach

Developers of green hydrogen and other forms of clean hydrogen are set to benefit from generous subsidies and tax reliefs under the US law. In particular, they will be able to claim a clean hydrogen production tax credit for any facilities they begin building by the end of 2032.

The PTC will help support producers to receive up to $3 per kilogram for clean hydrogen production, with green hydrogen producers benefiting more from the credit than blue hydrogen producers. Because of this, the Green Hydrogen Organization has predicted that some US locations may become the cheapest destinations in the world for producing green hydrogen.

As an alternative, a producer may select the investment tax credit of up to 30%, with respect to clean hydrogen production facilities. In total, the producer could receive an ITC of up to 30% depending on the carbon intensity of the production process.

Alongside the PTC and the ITC, green hydrogen developers can benefit from an additional ITC on standalone energy storage technology. The new energy storage ITC is available on both battery and hydrogen storage. Credits can be used for both standalone projects and those co-sited with renewable energy.

The EU Approach

Under the Green Deal Industrial Plan, the European Commission aims to simplify state aid rules that apply to renewable energy deployments (including renewable hydrogen) and the decarbonization of industrial processes (including through hydrogen use). EU member states would be able to offer tax benefits to support new investments in production facilities in defined strategic net-zero sectors. Member states also would be able to match the aid offered by a third country for individual initial investments in targeted sectors.

Furthermore, the European Commission is encouraging member states to include financial support for businesses that invest in green net-zero technologies in their National Recovery and Resilience Plans (which support recovery from the Covid-19 pandemic). This support would take the form of “either a tax credit, an accelerated depreciation or a subsidy linked to the acquisition or improvement of green investment assets.”

The European Commission is expected to launch the first auction—or competitive bid—for supporting the production of renewable hydrogen as part of the EU Innovation Fund. The winners will receive a fixed premium for each kilogram of renewable hydrogen they produce over a period of 10 years. The belief is that this auction will “have a similar impact as the production tax credit in the US IRA.”

Where Next?

Both the US and the EU are trying to achieve the same goal: reducing the cost of producing clean hydrogen to help facilitate the transition to a lower-carbon economy. While their policies appear to be good news for the planet, they’re not entirely without controversy.

Some environmentalists, scientists, and clean-tech companies have expressed concerns that oil and gas multinationals will use the US law’s lucrative tax credits to produce hydrogen with higher emissions processes. Some environmentalists also have talked about more oversight to ensure that green hydrogen that is connected to the grid is produced by zero-emission electricity.

Some proponents of the US law’s approach counter that it is only by encouraging innovation on the largest possible scale, and attracting investment to drive this innovation, that we’ll arrive at the cleanest production techniques.

We know from the positive impact that incentives have had on wind and solar energy that they can help drive investment in new technologies, which in turn drives down costs over the long term. Tax incentives therefore are critical to unlocking green hydrogen investment since they will make green hydrogen a more cost-effective investment.

Green hydrogen could be a game-changer for our world. Thanks to tax policy, we may finally see its full potential unleashed.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Cathy Koch is EY’s global sustainability tax leader and leader of Americas and global tax policy network. The views reflected in this article are the views of the author and do not necessarily reflect the views of EY.