The EU is officially asking the US to make substantial changes to its recent “market-distorting” clean-hydrogen subsidies, calling upon the federal government to introduce caps to limit their use and for tax credits to be paid to hydrogen consumers, rather than producers, according to a new document seen by Hydrogen Insight.

Hydrogen: hype, hope and the hard truths around its role in the energy transition
Will hydrogen be the skeleton key to unlock a carbon-neutral world? Subscribe to the weekly Hydrogen Insight newsletter and get the evidence-based market insight you need for this rapidly evolving global market

In the Inflation Reduction Act (IRA), signed into law by President Joe Biden in August, some $369bn of federal funds are due to be channeled into clean energy and hydrogen — including a production tax credit of up to $3 per kilogram of H2.

These tax credits — along with $8bn of federal funding for clean hydrogen hubs in the separate Bipartisan Infrastructure Law — are widely expected to make the country the most attractive market in the world for green hydrogen producers and electrolyser makers.

But in a powerfully worded document sent to the US, the EU describes the tax credits as having “a strong market distorting character”.

“The financial value offered by [the hydrogen tax credits] is such that there are negative effects for the EU in terms of investment decisions in the hydrogen industry and a risk of adverse effects to the EU’s interests,” the bloc states in the document — an official “submission” in response to last month’s requests for comments from the US Internal Revenue Service ahead of implementation of the IRA.

“The subsidy thus has a strong market distorting character within and outside the US. The subsidy is unbound in financial value as there is no spending or production cap, which the EU requests to change in accordance to achieve shared climate policy goals while protecting a level-playing field.”

The EU is also requesting other changes to the new US law, which it says “contains a problematic domestic production requirement that puts EU-based producers at a disadvantage as they must compete on a distorted market with subsidised US-based producers”.

“The EU [therefore] requests a shift of the production to a non-discriminatory consumption subsidy.”

The tax credit for production of clean hydrogen is one of nine provisions in the Inflation Reduction Act that the EU is voicing concern about. Similar requests for spending or production caps are also made for other tax credits within the IRA, including those for renewable energy, zero-emission vehicles and sustainable aviation fuels.

“While each of these tax provisions is problematic by itself, the potential for cumulative market distortion and possible adverse effect is even greater,” the document states. “Given their size and design, the financial incentives deployed to meet the United States’ climate objectives unfairly tilt the playing field to the advantage of production and investment in the United States at the expense of the European Union and other trading partners of the United States, potentially resulting in a significant diversion of future investment and production, threatening jobs and economic growth in Europe and elsewhere.

“Having access to subsidised low-carbon technologies and sources of clean energy, key parts of the United States economy will receive a market-distorting boost, tilting the global level playing field and turning a common global objective — fighting climate change — into a zero-sum game. This will lead to an increased distortion of global markets for industries delivering green hydrogen, solar, wind, batteries and electric vehicle solutions, and less efficient outcomes for the reduction of global greenhouse gas emissions that in the medium term will also be harmful for the US.”

The document adds: “For the European Union, the green transition is not something to be achieved at the expense of others. The approach set out in the problematic provisions of the Act may encourage other economies to follow the United States’ example in deploying protectionist and discriminatory measures. This threatens the multilateral trading system at a time when its value is more important than ever for both American and European businesses.”

The comments are part of a wider dialogue between the EU and the US this autumn, with the two sides recently agreeing to set up a task force to discuss the “discriminatory” IRA, which met for the first time last week. It has not been confirmed whether hydrogen production subsidies were part of the discussions.

EU’s commissioner for competition, Margrete Vestager, first stated earlier in October that parts of the Inflation Reduction Act were “discriminatory”.