OPINION | Why the success of the US hydrogen tax credit will hinge on how emissions are determined
A weak system that unreasonably allows dirty electricity to offset renewable energy means 'green' H2 could actually have higher emissions than grey hydrogen, writes Rachel Fakhry
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).
Hydrogen: hype, hope and the hard truths around its role in the energy transition
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.
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.
Grid-connected electrolysers can increase emissions
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.
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.
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.
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.
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.
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.
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.
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.
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.