I recently returned from COP27 in Egypt where it was hard to miss the hubbub produced by the clean hydrogen production tax credits (PTC) in the Inflation Reduction Act (IRA).
Industry, governments, civil society, and businesses are all closely tracking developments, conscious of the sea change that the PTC is already producing in the global hydrogen market.
It is now widely accepted that the US will quickly become one the most — if not the most — lucrative market for the nascent clean hydrogen industry. And it underscores how vitally important it is for the US to implement the tax credits well, ensuring that clean hydrogen is actually “clean” and steering the market in a direction aligned with climate goals.
This is no easy feat. The tax credits are linked to the emissions intensity of the hydrogen source, but accurately determining this emissions intensity can be complicated.
For example, electrolysers connected to the grid guzzle grid electricity whose carbon intensity varies by the hour as a blend of clean energy and fossil fuels generate power. Therefore, and as we have written before, whether the tax credits will be a climate hit or miss almost entirely hinges on the guidelines that the Internal Revenue Service (IRS) and the Department of Energy (DOE) will enforce on hydrogen producers to account for their emissions.
The stakes and risks are high. A weak emissions accounting system for grid-connected electrolysers would dole out large subsidies to dirty hydrogen sources and:
- Increase emissions and jeopardise the US’s ability to achieve its 2030 and 2050 climate goals. Our colleagues at the Rocky Mountain Institute (RMI) estimate that emissions could increase by half a gigaton of carbon over the lifetime of the tax credit; this is equivalent to nearly half the emissions produced by the entire US power sector today; and
- Undermine confidence in clean hydrogen as a climate solution and taint the industry’s potentially positive climate impact, dragging it down on arrival.
The good news is that this can be done well. The IRS and DOE can adopt a system that is both rigorous and affordable. We worked with our colleagues at RMI and other partners to outline the pillars of such a system in recent comments to the US Treasury. I summarise those below.
Grid-connected electrolysers can increase emissions
The hydrogen PTC is offered to “clean” hydrogen, defined as any hydrogen resource that reduces emissions by at least about 60% relative to today’s incumbent and dirty “grey” hydrogen. The credit then follows a sliding scale, whereby the higher the greenhouse gas reductions — ie, the lower the carbon intensity of the hydrogen resource — the higher the credit.
The carbon intensity of the hydrogen resource is the fundamental factor that will determine the level of subsidy.
Determining this carbon intensity can be relatively straightforward for some hydrogen production pathways, such as an electrolyser that is not connected to the grid and primarily powered by a solar project. But it can be complicated for other pathways, such as electrolysers connected to the grid and drawing grid power to produce hydrogen.
Electrolysers use up a lot of electricity and considering that today’s US grid is still widely dominated by fossil fuels, electrolyser emissions can be high. For example, an electrolyser powered by today’s average US grid could be twice as emitting as “grey” hydrogen.
However, those electrolysers can still receive the tax credit if they offset their emissions enough to qualify.
An electrolyser can offset its emissions by spurring clean energy elsewhere on the grid, and that would displace fossil electricity equivalent to the grid electricity that the electrolyser consumes.
The electrolyser would demonstrate that it is driving this clean energy deployment by procuring clean energy attribute certificates (EACs) produced by clean energy projects, such as Renewable Energy Credits. This system is similar to how corporations like Google currently offset their electricity consumption and emissions.
Ensuring that the procured EACs offset emissions in proportion to the emissions driven by electrolysers is not straightforward and requires strict parameters, because the risks of greenwashing are high. The complexity has long bedeviled such emissions offsetting systems.
But it can be done.
Three pillars of a rigorous emissions accounting framework
Perhaps recognising the complexity, the IRA directs the IRS to publish guidance for an emissions accounting framework within a year of enactment. The IRS should work closely with the DOE to enforce a strong set of rules for grid-connected electrolysers to buttress against greenwashing.
The pillars below are fundamental to any rigorous framework. And the good news is that with such generous subsidies as the IRA tax credits, such a system would also be affordable and impose modest costs on the hydrogen industry, contrary to the alarmist claims of some in industry (see here and here).
Additionality, a non-negotiable feature
Additionality is the requirement that an electrolyser demonstrate that it helped drive the deployment of a new clean energy project that would otherwise not have been built. This is intuitive: if an electrolyser is creating new demand on a fossil-dominated grid, it should help secure new clean energy supply.
For example, electrolysers could be required to sign a power purchase agreement with a new wind or solar project that would then supply the EACs to the electrolyser.
There is a pile of evidence that a framework that excludes additionality will be dubious and should be rejected. This is because if electrolysers cannibalise existing clean energy on the grid, fossil electricity would likely ramp up to fill at least a portion of the gap.
A recent study by Princeton University finds that absent additionality, electrolysers could have an emissions intensity up to five times the minimum threshold for qualifying for the tax credits, due to the high emissions it drives on the grid.
The fundamental importance of additionality is also widely accepted globally (see here and here) and even making its way to Africa, with Egypt espousing it in its Green Hydrogen Strategy released at COP.
Deliverability of the clean energy, ensuring an apples-to-apples comparison
It stands to reason that for an electrolyser to claim that a clean energy project is offsetting its grid electricity consumption by displacing fossil fuels, the clean energy project needs to be delivering power into the same grid where the electrolyser is located and displacing fossil electricity in proportion to the fossil electricity drawn by the electrolyser.
Consider this example: an electrolyser located in Wyoming and drawing coal power — and therefore producing very high emissions — should not be able to rely on a solar project in California that is mainly displacing other solar projects and some gas power — ie, displacing much lower emissions than those produced by the electrolyser in Wyoming. Such an electrolyser would produce high net emissions and should not be subsidised.
But ensuring this deliverability of clean power is not clear-cut. The US is not one sprawling, well-connected grid; transmission constraints are widespread.
Therefore, any emissions accounting system should impose a rigorous geographic boundary around where the electrolyser and clean energy project should be located to ensure that clean electricity is delivered into the same grid where the electrolyser is situated.
Granular temporal matching, because annual matching is way too loose
Emissions on the grid vary widely depending on the time of day: when the sun is shining during the day or wind is copious at night, emissions are lower as wind and solar projects — where those are present —generate electricity.
In contrast, when wind and solar generation is paltry and electricity demand is high, emissions can be very high due to the utilisation of coal and gas plants.
An electrolyser drawing grid power should only be allowed to claim that its consumption is offset by clean energy during times when this clean energy is actually generating. Therefore, there needs to be some strong correlation, or “temporal matching”, between times of electrolyser operations and times of clean energy generation.
Some argue that annual matching is sufficient — ie, as long as the clean energy project operates within the same year as the electrolyser, the latter should be able to claim that its grid consumption is adequately offset.
Evidence points to the contrary.
Consider this example: an electrolyser consuming fossil electricity during evening hours — and producing significant emissions — but purchasing EACs from a solar project generating during daylight hours and mainly displacing other solar projects. Net electrolyser emissions would be very high.
The Princeton study finds that annual matching is widely ineffective at truly reducing electrolyser emissions, even when additionality and deliverability conditions are met, and would subsidise hydrogen resources with emissions up to five times the minimum threshold to qualify for the tax credits.
A recent European study reaches a similar conclusion.
Requiring hourly matching between the electrolyser and clean energy projects — ie, that the electrolyser operates within the same hours as the clean energy projects it claims are offsetting its emissions — offers sufficient rigour.
And the good news is that market and policy forces are already moving in this direction.
Corporate giants like Google and Microsoft are committed to hourly matching their grid electricity use with clean electricity and successfully piloting it; leading organisations like EnergyTag and M-RETS are successfully developing the hourly tools and systems needed and are confident that those could be widespread in time for clean hydrogen development; and President Biden’s Executive Order 14057 sets out the goal of powering federal facilities with 100% carbon-free electricity by 2030, including 50% on an hourly basis.
IRA tax credits and those parallel forces could therefore be mutually reinforcing.
The cost of a flop is too high; the IRS and DOE should get this right
It is critical that the IRS and DOE get the system right if hydrogen is to fulfil its potential as a climate solution.
Whatever system the US adopts will also have global ripple effects, as countries are attempting to mirror it.
The European Parliament recently scrapped fairly solid rules for hydrogen producers in response to threats by industry players that they would migrate to the US with its generous tax credits (we are closely monitoring the new rules set to be released by December 15).
This is the wrong signal. The US should set world leading standards to meet the IRA’s intent, scale up truly “clean” hydrogen sources, and lift global boats.
Never has something so wonky as emissions accounting frameworks been so eminently important.
The IRS and DOE can and should get this right.
Rachel Fakhry is senior advocate working on hydrogen issues at the NDRC (Natural Resources Defense Council), a non-profit international environmental advocacy group headquartered in New York City.
A version of this article was first published as an “expert blog” on the NDRC website.