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Optimal Subsidies for Green Hydrogen Production

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  • Harrison Fell
  • Stephen P. Holland
  • Andrew J. Yates

Abstract

The Inflation Reduction Act (IRA) provides tax credits to encourage green hydrogen production. We analyze a model in which hydrogen produced using electricity replaces natural gas. The electricity is procured from dedicated renewables or from the grid with and without procuring clean electricity credits (offsetting). Optimal hydrogen subsidies are positive if the unpriced externality from natural gas is larger than the unpriced externality from electricity. With optimally differentiated subsidies, offsetting increases welfare. With undifferentiated subsidies, offsetting can decrease welfare, unless restricted to regions with higher unpriced electricity externalities. Short-run parameterization shows that the IRA’s subsidy of $3/kg-H2 is rationalized (i) by hydrogen production from dedicated renewables if the social cost of carbon (SCC) is $500 or (ii) by hydrogen production from the (relatively clean and carbon-priced) grid in California with renewables offsetting electricity in the (relatively dirty and non-carbon-priced) grid in parts of the East if the SCC is $185.

Suggested Citation

  • Harrison Fell & Stephen P. Holland & Andrew J. Yates, 2025. "Optimal Subsidies for Green Hydrogen Production," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 12(1), pages 33-63.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/730592
    DOI: 10.1086/730592
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