Blue Hydrogen and the 45V Tax Credit: How to Maintain American Energy Excellence

Written by Max Lies, KBH Energy Center Graduate Fellow

American energy leadership has long rested on the ability to combine scale, innovation, and reliability: producing abundant energy at home while shaping global markets abroad. As global energy demand continues to rise, the next phase of this leadership will be defined not only by volumes produced, but by which countries set the terms for emerging energy commodities. Hydrogen is poised to become one such commodity, with applications across refining, chemicals, manufacturing, and international trade. Among hydrogen pathways, blue hydrogen, produced from natural gas with carbon capture and sequestration (CCS), aligns closely with U.S. strengths: an existing natural gas base, world‑class industrial operators, and deep experience in large-scale project execution. Recognizing this opportunity, Congress included the 45V Clean Hydrogen Production Tax Credit in the 2022 Inflation Reduction Act (IRA) to catalyze early investment and overcome market failures.[1] Recent legislative changes under the One Big Beautiful Bill (OBBB), however, substantially weaken this incentive by imposing an early sunset. As a result, U.S. firms risk forfeiting a narrow but critical window to establish international leadership in blue hydrogen, ceding economic and strategic ground in a market primed to expand over the coming decades.

The International Energy Agency’s (IEA) 2025 Global Hydrogen Review shows that global hydrogen demand reached more than 100 million metric tons (Mt) in 2024, a roughly 10% year‑over‑year increase.[2] This demand remains concentrated in established industrial sectors such as refining, ammonia production, and chemicals rather than new clean‑energy applications. China alone consumes nearly 30 Mt of hydrogen annually, compared with approximately 16 Mt across all of North America. Absent strong policy support, the IEA notes that hydrogen demand growth will remain limited to these incumbent uses, as high costs and coordination challenges inhibit broader adoption.

The IRA’s 45V Clean Hydrogen Production Tax Credit was designed to address this reality. By offering up to $3.00 per kilogram of qualifying clean hydrogen for ten years, the credit aimed to move projects across critical investment thresholds rather than permanently subsidize production. For capital‑intensive blue hydrogen projects, the availability and durability of 45V materially altered project economics, enabling firms to justify final investment decisions (FIDs) and initiate construction at scale.

The importance of 45V can be illustrated with a simple exemplar calculation: ExxonMobil’s proposed Baytown blue hydrogen project was expected to produce approximately 2.5 million kilograms of hydrogen per year.[3] At the full $3.00/kg credit level, this output would generate roughly $7.5 million annually, or $75 million over the ten‑year credit life (ignoring discounting). While modest relative to multi‑billion‑dollar capital expenditures, this support becomes decisive at the margin. Blue hydrogen production costs are commonly estimated at $1.50–$2.50 per kilogram before subsidies, with CCS accounting for a significant share of operating expenses.[4] The 45V credit therefore improves early‑year cash flows, raises expected internal rates of return, and reduces downside risk during the period of greatest uncertainty. Truncating or eliminating the credit can push otherwise viable projects below investment hurdle rates, delaying or preventing FIDs altogether.

Blue hydrogen faces a classic coordination problem. Industrial consumers are reluctant to sign long‑term offtake agreements without reliable, large‑scale supply, while producers are unwilling to invest billions of dollars without credible demand signals. Government intervention in this instance can serve as a catalyst in such markets by lowering early‑stage risk and improving project bankability. An intent of 45V was to break this causal loop through allowing supply to come online, costs to decline through scale and learning effects, and demand to gradually expand.

Prior to the passage of OBBB, major U.S. energy firms responded accordingly. ExxonMobil announced plans to integrate blue hydrogen production into its Baytown refinery complex, and Chevron unveiled Project Labrador, a proposed $5 billion blue hydrogen facility in Port Arthur, Texas.[5] These projects were led by firms with deep operational expertise, existing hydrogen demand, and access to CCS infrastructure, suggesting that policy support was enabling credible, execution‑ready investments rather than speculative ventures.

The United States occupies a uniquely strong position in blue hydrogen development. The IEA reports that the U.S. accounts for nearly half of announced hydrogen production projects incorporating carbon capture by 2030. In contrast, several non‑U.S. energy majors have recently retreated from blue hydrogen investments. Shell placed its Aukra blue hydrogen export project in Norway on hold in 2024, citing weak demand and poor economics, while Equinor has similarly slowed its hydrogen ambitions.[6] These developments underscore that blue hydrogen markets are unlikely to emerge organically in the near term; they will only develop where policy frameworks credibly support early investment.

OBBB’s changes, therefore, carry outsized implications. Under the enacted legislation, the 45V credit terminates for projects that begin construction after December 31, 2027. Large hydrogen typically require five to seven years from concept to groundbreaking due to permitting, engineering, and financing constraints. As a result, the sunset functions less as a gradual phase‑out than as a policy cliff, reintroducing the uncertainty that 45V was designed to mitigate.

Allowing the 45V credit to expire as currently enacted risks stalling the formation of a domestic blue hydrogen market just as global demand begins to materialize. This outcome would forfeit first‑mover advantages in project development, CCS integration, workforce expertise, and potential export positioning. It also increases the likelihood that other global actors, particularly China, will fill emerging supply gaps and shape standards and supply chains to their advantage.

Maintaining the 45V credit in its original form would support billions of dollars in private investment, reinforce industrial communities (especially along the U.S. Gulf Coast) and demonstrate that American energy firms can expand supply while managing emissions responsibly. In this sense, 45V functions less as a climate subsidy than as a strategic industrial policy tool aligning energy security, economic competitiveness, and environmental stewardship. Prematurely curtailing it risks undermining all three.

[1] Inflation Reduction Act, U.S. Congress (2022).

[2] International Energy Agency, Global Hydrogen Review (2025).

[3] ExxonMobil, “Advancing Low-Carbon Solutions at Baytown (ND).

[4] Eliseo Curcio, “Techno-economic analysis of hydrogen production: Costs, policies, and scalability in transition to net-zero”, International Journal of Hydrogen Energy (May 2025).

[5] Engineering News-Record, “Chevron Plans $5B Blue Hydrogen and Ammonia Project in Port Arthur” (July 2025).

[6] Reuters, “Shell shelves Norway project due to lack of demand” (September 2024).