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NRDC Blog: How Clean Is Pennsylvania’s New Hydrogen Subsidy? It’s Up To The Feds

By Mark Szybist, Natural Resources Defense Council

The following article first appeared on the Natural Resources Defense Council Blog on November 22, 2022--

Pennsylvania's newly enacted Act 108 of 2022 (formerly House Bill 1059) creates a $1 billion tax credit ($50 million annually over 20 years) for using either hydrogen or shale gas to manufacture at facilities that are part of a U.S. Department of Energy-funded "Regional Clean Hydrogen Hub."

It also more than doubles (to $1.4 billion over 25 years) an existing tax credit for using shale gas to produce petrochemicals. This blog discusses the hydrogen (H2) hub subsidy; a subsequent blog will discuss the petrochemical subsidy.

Governor Tom Wolf highlighted his support for the H2 hub tax credits when he signed Act 108 on November 3, noting that hydrogen has an important role to play in decarbonizing heavy industry and that the credits will make Pennsylvania projects more likely to win funding awards from the Department of Energy's (DOE) H2 hub program.

Act 108 likely will make Pennsylvania projects more competitive: every dollar the Commonwealth spends to support a H2 hub will make DOE money go further.

And the targeted use of low-carbon (and ideally green) H2 is an important strategy for decarbonizing the few energy end-uses that can't easily be electrified, like steelmaking, cement and marine shipping.

But Act 108's H2 hub subsidy suffers from two major flaws. First, it includes an overly-broad and costly tax credit for using fracked gas at a H2 hub project.

Second, the "clean H2" tax credit has no state statutory standards or conditions to ensure that the H2 it subsidizes is truly clean, or that it's produced with strong and equitable community protections.

Instead, the law merely conditions credit eligibility on whether a facility is part of a DOE-funded H2 Hub, betting that DOE hub awards will include conditions that keep emissions low and communities safe—and that the DOE will enforce them.
The next General Assembly and Governor-elect Shapiro can improve the law by (1) strengthening the definition of "clean H2," (2) conditioning credit eligibility on a timely transition to clean H2, and (3) establishing state community protection and benefit standards.

Clean Hydrogen's Role in a Clean Energy Economy

Truly low-emissions hydrogen has an important but limited role to play in an equitable clean energy future.

For most energy uses there are cheaper, cleaner, and more energy-efficient alternatives, namely electrification or direct renewable energy use.

Electric heat pumps, for example, are a cleaner and cheaper way to heat buildings than gas appliances powered with hydrogen, and electric cars are more cost-effective than cars powered by H2 fuel cells.

H2 makes sense only for end-uses that can't be affordably decarbonized through electrification or the direct use of renewable energy, such as marine shipping, steelmaking, cement production, and (potentially) segments of long-distance freight trucking.

This testimony from NRDC's Rachel Fakhry discusses these issues in detail. (For a shorter read, see Rachel's blog summarizing the U.N. Climate Champions' guiding principles for hydrogen, which NRDC helped shape).

The bottom line is that with targeted use, H2 has the potential to play a pivotal role in mitigating climate change, but with an overeager rush to deployment it could become a climate problem - and policy is needed to make sure H2 goes in the right direction.

Federa; Bipartisan Infrastructure Law's Regional Clean Hydrogen Hub Program

The 2021 Infrastructure Investment and Jobs Act, a.k.a. the Bipartisan Infrastructure Law (BIL) establishes a "Regional Clean Hydrogen Hub" program to invest $8 billion in at least 4 clean hydrogen "hubs," or networks of H2 producers, potential consumers, and transporters.

The goal of the program is to "accelerate commercialization of, and demonstrate the production, processing, delivery, storage, and end-use of, clean hydrogen."

Today, almost all commercial H2 in the U.S. is made from gas, a process that emits significant air pollution.

To that end, hubs must (1) "demonstrably aid achievement" of a clean H2 production standard, (2) demonstrate the "production, processing, delivery, storage, and end-use of clean hydrogen," and (3) offer opportunities to be scaled "into a national clean hydrogen network to facilitate a clean hydrogen economy."

The DOE must allocate its H2 hub awards among a range of production technologies (renewables, fossil fuels, and nuclear) and end-uses (industrial, electric power, transportation, and residential/commercial heating). And "to the maximum extent practicable" two hubs must be located in regions "with the greatest natural gas resources."

Less than a year after the BIL was enacted, the Inflation Reduction Act (IRA) reconfigured the economics of H2 production in the U.S.

With tiered H2 production tax credits that become more generous the lower associated emissions are, the IRA has made H2 produced from renewables ("green H2") cost-competitive with gas-based H2 almost overnight in parts of the country.

But the BIL still requires the DOE to fund at least one H2 hub that demonstrates the production of clean H2 from fossil fuel (though no hub need use fossil fuel exclusively) and two hubs in gas-rich regions. This is where Act 108's H2 hub tax credits come in.

The H2 Hub Subsidies in Act 108

Act 108 establishes tax credits for the purchase and use of both “clean H2” and gas by Pennsylvania manufacturing facilities that participate in a DOE H2 hub.

If the DOE doesn’t award a hub to the Commonwealth, the credits will never become available.

If the DOE does choose a Pennsylvania hub, manufacturing facilities included in it can receive a tax credit of $0.81 for every kilogram of "clean H2" they buy from an H2 producer in the hub, as well as a credit of $0.47 for every thousand cubic feet of gas.

Among other conditions of eligibility, applicants must have made a capital investment of at least $500 million, created at least 1,200 temporary and permanent jobs, and entered into a "commitment letter" for the purchase of "clean H2" with the state Department of Community and Economic Development.

The purpose of the H2 hub credits is to help secure a DOE H2 hub award for a Pennsylvania project – in particular, a project sponsored by Shell USA and Equinor that the Wolf administration is supporting.

A "concept paper" describing the project (the first step in the DOE application process) was recently submitted to the DOE by Team Pennsylvania, a public-private partnership that works with state government.

It's widely assumed to focus on "blue H2" (H2 made from gas with carbon capture).

Assuming that Act 108's H2 subsidies go to hard-to-decarbonize industries like steel, they are directionally exactly the kind of state policy we need to establish an appropriate, limited role for H2 in a clean energy economy.

The Inflation Reduction Act strongly incentivizes clean H2 production; states can play a key role in helping steer its consumption. However, the H2 subsidy in Act 108 has two major flaws.

Fracked Gas is Different From Clean Hydrogen

First, there's the shale gas subsidy. In his signing statement, Governor Wolf stated that the gas credit "was included as a short-term fail-safe in the event that a manufacturing facility is constructed and clean hydrogen is not initially available... It is my expectation that this period of time will not exceed a year or two."

From a business perspective, this makes sense. But the law permits for the tax credit for gas to be claimed unconditionally for 20 years, from 2024 to 2043. That policy design could slow the transition to clean H2 when we need to accelerate it.

Act 108 Doesn't Ensure That "Clean H2" Will Be Clean

Second, nothing in Act 108 ensures that H2 subsidized by "clean H2" tax credits will be truly clean, or that manufacturing operations powered by "clean H2" will benefit the communities they affect (or even be safe for them)

Rather than defining "clean H2" by reference to a production standard or pollution limits (or directing the DEP to develop a regulation that does this), Act 108 says that H2 is clean if it's "used in a project which has been determined by the [DOE] to demonstrably aid achievement of the clean hydrogen production standard" that the DOE is developing.

Effectively, that means that H2 will be "clean" for tax credit purposes as long as it's used in project that's gotten a DOE H2 hub award.

This approach is problematic because while the DOE has proposed a moderately stringent production standard to use in evaluating hub applications, a decision on the final standard has yet to be made.

(NRDC’s comments argue for a lower carbon intensity limit, as a forthcoming blog from Rachel Fakhry will discuss).

Nor do we know how close a project must get to the standard for the DOE to regard it as “aiding” the standard’ achievement.

Act 108's approach could even result in a manufacturing facility's receiving "clean H2" tax credits for using grey H2 (highly polluting H2 produced from fossil fuels without CCS) if (1) the facility is part of a DOE hub and (2) the terms and conditions of the DOE hub award don't prohibit the use of grey H2.

In this connection, it's noteworthy that grey H2 is being produced as a byproduct at Shell's newly-opened ethane cracker in Beaver County.

Act 108’s dependence on the DOE creates similar uncertainty regarding community benefit planning.

While the DOE has said it will require H2 hub applicants to submit community benefits plans that minimize negative impacts, maximize benefits, and advance job quality and equity, we don't know what conditions the DOE will ultimately insist on – or what it will do to hold Hub projects to those conditions in the long term.

After all, community benefit plans are not a statutory requirement of the BIL; the DOE is requesting them under a provision of the law that allows it to consider “other criteria” for hub awards.

Governor-Elect Shapiro and the Next General Assembly Can Fix These Problems

The point isn't that the DOE is bound to make poor decisions. It's that we don't know what they'll ultimately do.

Given that uncertainty, Act 108 should have included state conditions and standards to ensure that "clean H2" is truly clean and that its use will benefit, rather than harm, affected communities.

Since Act 108 doesn't have such conditions and standards, we don't know what its real-world impact will be.

It depends on the DOE - first, on whether the DOE makes a Pennsylvania H2 hub award at all, and second, on what conditions the DOE attaches to it.

In short, Act 108 is a $1 billion bet that the DOE will do the right things.

In 2023, the next General Assembly and Governor-elect Shapiro should revise the law to make sure it leads to the right things in Pennsylvania..

That means: (1) a definition for "clean H2" that’s at least as strong as the DOE’s clean H2 standard; 2) conditioning state support for manufacturing facilities on adherence to a timely transition from gas to clean H2, and (3) a clear requirement and strong standards for community benefit plans.

Click Here to read the entire Blog post.

Oil & Gas Compliance Dashboard:

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