Loose 45V guidance would backfire on taxpayers, clean hydrogen, and climate

In late December, the U.S. Treasury Department released draft guidance for the Inflation Reduction Act’s 45V Clean Hydrogen Production Tax Credit, set to distribute hundreds of billions in taxpayer dollars for early-stage development. The rules clarify how electrolyzers—which split hydrogen from water using electricity—must operate to earn the lucrative subsidy, rewarding genuinely clean hydrogen production as required by statute rather than using fossil power.

Splitting hydrogen from water takes lots of energy, and if that comes from fossil fueled power, then the climate impact would be far worse than how we make today’s dirty hydrogen. Congress specified it wants to incentivize truly clean hydrogen production, and it tasked Treasury with writing regulations that do just that.

But some industry stakeholders are now crying wolf, making baseless claims that these restrictions would suffocate clean hydrogen before it can grow. Unfortunately, these voices are often the loudest in the room, pushing a false narrative that industry stands united against environmentalists.

The truth is completely opposite: Strong guardrails are the only way to grow a truly clean and self-sufficient industry. Loose guidance would use taxpayer dollars to fund a planet-warming boondoggle. If Treasury relents, it risks propping up a frail industry that belches climate pollution—like building a house that collapses once the scaffolding is removed.

Despite having the spotlight wrested from them by a few loud voices, many hydrogen developers agree on strong rules. They did their research and concluded that this structure is critical to grow a clean, enduring industry—essential for cutting emissions from sectors like steel and aviation.

So what’s happening here—is one side of the hydrogen industry advocating to shoot itself in the foot, or is something simpler at play?

When Congress passes a steep subsidy, everyone wants their share. In this case, many companies quickly announced large investments in dirty hydrogen projects masquerading as clean, threatening to cancel if regulators dared set reasonable rules. 45V has a clear mandate to support truly clean hydrogen, but groups ill-equipped to meet this standard—or looking for juicier profit margins—extrapolated their challenges to the whole industry to drum up a crisis, hoping to scare regulators into submission.

By securing weak rules, they’d enrich themselves for a decade or two at minimum, then hold Congress hostage over an extension: “Look at all the jobs we created, never mind the pollution—you wouldn’t want to kill them, would you?” Meanwhile, the flood of cheap, dirty hydrogen pushes out clean projects, worsening climate pollution under the guise of mitigating it.

Compare this to developers fighting for strong standards, confident they can do things right from day one and sounding alarms that weak rules would “irreparably compromise the credibility and longevity” of the hydrogen industry. By themselves, one might wonder whether they’re merely leveraging a competitive advantage. But a large coalition of NGOs, academics, research firms, environmental justice leaders, consumer advocates, and legislators are in their corner.

Restricting subsidies to make an industry succeed may seem bizarre. But while the details are complex, the core concept is simple: Guardrails train the budding industry for long-term success.

A free-for-all approach would flood the market with the cheapest, rudimentary electrolyzers. Subsidies would pay down the cost of expensive dirty electricity and stuff corporate pockets—but should they ever expire, these businesses would collapse, unable to adapt to the new paradigm.

Guardrails would force investment in truly clean hydrogen production from the start, with developers using subsidies to pay for pricier, innovative equipment. These flexible technologies—together with the midstream infrastructure and businesses they stimulate—will be capable of flying on their own when pushed out of the nest, ready to continue making clean hydrogen without taxpayer support.

Yes, strong rules will foreclose some announced hydrogen projects. However, this would prevent wasting taxpayer dollars on schemes that should never have been proposed. Far from “letting the perfect be the enemy of the good,” Treasury’s draft rules represent a middle ground building something beneficial and durable rather than harmful and counterproductive to long-term viability.

Other clean energy technologies like wind, solar, and electric vehicles face fewer subsidy restrictions, but they unambiguously slash emissions. Hydrogen incentives affect many different technologies that can operate in a clean or dirty manner, so they must apply more precision.

Carving through the chaos of an emerging industry empowers Treasury to concentrate funding on investments driving sustainable success. We know the capabilities and appetite are there. Just one group of developers is planning U.S. investments exceeding 50 gigawatts of electrolyzers—about half of the U.S. Department of Energy’s optimistic 2030 target. In Europe, electrolyzer investments increased after similarly strong rules were finalized, quieting prior doomsday cries.

Taxpayers deserve federal funds to be well spent. By standing firm, Treasury can ensure funds promote innovation and cultivate a robust industry vital to combatting the climate crisis—not exacerbate pollution and fatten corporate wallets.

Dan Esposito is senior policy analyst at Energy Innovation.