Forthcoming guidance from the Treasury Department that could have major implications for climate change is sparking fierce debate in Washington. 

The guidance will set the rules for the hydrogen energy industry — which has the potential to cut emissions from hard-to-abate sectors like the steel, cement and chemicals industries — as it looks to take advantage of a lucrative tax credit provided by the Inflation Reduction Act.

Climate activists, however, say that if the policy gives the industry too much leeway on where it gets its power to produce the hydrogen, it could be a disaster for the warming planet. 

Lena Moffitt, executive director of climate advocacy group Evergreen, called the forthcoming guidance “the key determinant of whether or not we get truly clean hydrogen in this country — with massive emissions ramifications.”

The Democrats’ climate, tax and health care bill provides a tax credit for low-carbon hydrogen energy. This type of energy is produced by using low-carbon energy to power an electrolyzer that sends an electric current through water to separate it into hydrogen and oxygen.

Among other applications, hydrogen is seen as a way to cut emissions from sectors that are difficult to decarbonize, including the iron, steel, chemicals industries, as well as long-haul transportation. 

But, the extent of hydrogen’s climate benefits could be determined by the Treasury guidance, which is due by the middle of August, and could set the rules for what a hydrogen producer needs to do in order to qualify. 

Environmental advocates have pointed to research that found putting strict rules on how the industry sources its low carbon power will have significant emissions benefits. They have raised concerns that looser rules could allow hydrogen to compete with other electricity users on the grid for clean power — driving up electricity demand and indirectly spurring more fossil fuel use. 

One analysis from consulting firm Evolved Energy Research, for instance, found that if the Treasury Department puts strict requirements in place, between 250 and 640 million metric tons of carbon dioxide would be avoided through 2032 — the equivalent of one year of emissions from between 67 and 171 coal-fired power plants.

On the other hand, some industry players say the policies favored by the climate movement could stifle the nascent hydrogen industry. 

Shannon Angielski, president of the Clean Hydrogen Future Coalition, which advocates for spurring hydrogen energy development, says the immediate goal of the guidance should be to “get this clean hydrogen industry launched with very pragmatic rules of the road so that way it can scale.”

That group’s members include oil companies and utilities as well as producers of gas, hydrogen, renewable energy and nuclear energy. 

Advocates on this side of the ledger have pointed to an analysis finding that if the Treasury Department takes a stricter position on a key provision in its guidance, it would be “ultimately hindering the economic competitiveness and adoption” of green hydrogen. That same analysis from research and consulting firm Wood Mackenzie found that if the department adopts a looser position it would result in a “marginal” emissions increase. 

The tax credit included in the Inflation Reduction Act is itself considered a major boost for both hydrogen energy in general and hydrogen produced from low-carbon sources in particular, with BloombergNEF hydrogen analyst Adithya Bhashyam calling it a “game-changer.”

“For the domestic market, hydrogen would need some sort of policy support to compete with existing fossil fuels in most use cases” without the credit, Bhashyam said, adding that it puts the U.S. in a position to possibly become a hydrogen exporter. 

But, the contours of what hydrogen producers will have to do to qualify are still forthcoming. One major point of dispute is whether hydrogen counts as “clean” if it uses energy that is already on the grid — or if there should be a requirement for the power to come from new energy sources.

Climate advocates warn that if hydrogen production uses up low-carbon electrons that are already on the grid, it raises electricity demand across the board — and could result in the utilization of more fossil fuels.

The hydrogen industry, meanwhile, has raised concerns about how long it takes to get new carbon-free power up and running. 

Other questions in the debate include where the clean energy to power the hydrogen production should come from and how often they have to match their energy usage to clean power sources. 

Climate advocates say electrolyzers should essentially run constantly on clean power, having to match their electricity use to a clean energy source every hour, and that the power should come from the same area as the hydrogen plant.

Industry, on the other hand, favors a system in which a hydrogen producer can use whatever power is available on the grid as long as it makes a yearly purchase of the equivalent amount of clean power. 

Frank Wolak, president and CEO of the Fuel Cell and Hydrogen Energy Association, said that hourly matching has practical barriers, including that it’s not universally available.

“Today there are measurements and market indications that time matching can be available, but … until that is available universally where there’s clear market signals and pricing and you can go to brokers to actually get an hourly matched renewable energy credit or a series of brokers to get competitive pricing the application of hourly matching is sort of scenario and theoretical,” he said. 

Environmental groups have said that collectively, all three of the policies they’re pushing for are critical to ensuring the future of hydrogen is climate-friendly. 

“They are the best system of guardrails that we have to make sure that these … very power hungry assets that are electrolyzers do not increase emissions on the grid,” said Rachel Fakhry, policy director for emerging technologies at the Natural Resources Defense Council. 

“If you strip one out … what we are seeing from analyses that examine the impact on the power sector, on the economy is that the system would be significantly compromised,” Fakhry added. “They all have to work together.”

Meanwhile, there may be at least some congressional support for the Treasury Department to take a more lenient approach in its forthcoming guidance. The Senate Appropriations Committee recently approved an amendment to a funding bill submitted by Sen. Joe Manchin (D-W.Va.) that expressed concern “that the Department of the Treasury is considering imposing additional limitations or restrictions … in order to qualify for the clean hydrogen production tax credit.”

A Treasury spokesperson declined to comment on the guidance ahead of its release. 

Others have staked out what they describe as middle ground positions in the debate. For instance, the American Clean Power Association, which represents renewable energy companies, says that there should be a window in which “first-mover” projects get the more relaxed requirement to match their use of electricity with equivalent purchases each year but those that break ground starting in 2029 have to do stricter hourly matching.

JC Sandberg, the group’s chief advocacy officer, said the organization was trying to strike a balance between “too much regulation in the beginning which would not allow the industry to reach its full potential” and “too little regulation” that prevents it from cutting emissions. 

Hydrogen energy may also play a significant role in the future of power generation that currently occurs at natural gas plants thanks to the Environmental Protection Agency (EPA).

A new EPA rule would require some gas plants to cut their emissions using methods including potentially co-firing hydrogen with gas to reduce the amount of fossil fuel that is burned, potentially giving the emissions associated with hydrogen production even greater implications. 

Moffitt, from Evergreen, said that as a result of that EPA rule, if “the hydrogen that we get flowing into the market subsidized by … public climate money is dirty, that could dramatically undercut the impact of the carbon standards for power plants.”