But even projects that do source fossil gas from the least leak-prone areas and capture high percentages of their carbon dioxide emissions may be hard-pressed to access the most lucrative tiers of the 45V tax credit.
According to an analysis by think tank RMI, even steam methane reforming plants that capture 90 percent of the carbon dioxide they emit and source fossil gas with very low upstream methane leakage rates of 0.2 percent would emit more than 2 kilograms of carbon dioxide equivalent for every kilogram of hydrogen they produce. That level of emissions would limit them to receiving only one-quarter of the highest credit, or 75 cents per kilogram of hydrogen. (Canary Media is an independent affiliate of RMI.)
But the 45V credit isn’t the only subsidy blue-hydrogen projects can access. The Inflation Reduction Act also boosted an existing credit for carbon-capture projects, known as 45Q, that offers up to $85 per metric ton of carbon captured from point-source emitters, including steam methane reformers.
Projects can’t claim both 45V and 45Q credits, forcing hydrogen producers to choose one or the other. But the 45Q tax credit doesn’t require steam methane reformers to measure the emissions-intensity of the hydrogen they produce, only the tons of carbon they capture, making it far simpler to implement.
A growing number of industry analysts are predicting that blue-hydrogen producers will seek the 45Q tax credit instead of undertaking the uncertain emissions accounting necessary to claim 45V.
And those producers would not necessarily be barred from selling the hydrogen they produce as “clean.” The Bipartisan Infrastructure Law ordered DOE to develop a Clean Hydrogen Production Standard to guide the definition of clean hydrogen. Under that definition, any hydrogen produced with 4 kilograms or less of carbon dioxide equivalent per kilogram of hydrogen is considered clean — a target that steam methane reformers could reach without achieving the highest rates of carbon capture and using fossil gas from regions with higher methane leakage rates.
The problem of “renewable natural gas” for hydrogen production
But there’s another way for blue-hydrogen producers to reduce their on-paper carbon emissions-intensity to a low enough level to achieve the highest tier of the 45V tax credit, Rote said.
One of the most concerning loopholes involves using credits for “renewable natural gas” — methane captured from rotting organic material in landfills, livestock farm manure lagoons or other sources, also known as biomethane — as a means of “erasing” the real-world carbon emissions caused by converting fossil gas into hydrogen and carbon dioxide.
This kind of emissions accounting is allowed by California’s Low Carbon Fuel Standard, the most widely used renewable fuel standard in the country. Under the state’s existing rules, methane captured from livestock manure lagoons and burned for energy is counted not just as carbon-neutral, but carbon-negative in its global-warming impacts. What’s more, the state’s standard offers livestock farms far greater carbon-negative ratings than other sources of RNG, such as landfills, food waste and wastewater treatment plants.
Environmental groups have decried this practice for years, calling it a perverse incentive for the state’s powerful dairy industry to expand harmful factory-farming practices. They argue that methane from livestock operations should instead be regulated as a global-warming threat by penalizing operators that fail to limit emissions — not rewarded as a monetizable resource that fossil fuel providers can purchase to offset their carbon emissions.
Since the creation of the 45V tax credit, these groups, and some lawmakers in Congress, have urged the Biden administration to prohibit similar “book-and-claim” accounting methods, which allow hydrogen producers to sign contracts with RNG production in another part of the country to offset the fossil gas they’re using to make hydrogen, from eligibility for the subsidies. Failing to do so, they warned, could allow owners of polluting steam methane reformers to claim that they actually emit less carbon than green hydrogen projects using carbon-free electricity.
Treasury’s guidance does contain some provisions for RNG to be used to make hydrogen that can earn 45V tax credits. But the guidance also lays out some important guardrails against the kind of accounting that California’s Low Carbon Fuel Standard program allows, said Julie McNamara, senior energy analyst with the Union of Concerned Scientists.
First, the guidance only explicitly allows one particular use of RNG, she said: using RNG that’s directly transported from landfills to hydrogen production sites. Other methods of using it may be permitted later, but only after further study.
The guidance also explicitly bars existing fossil-gas-fueled hydrogen production from claiming that it has undergone a “facility modification” that would allow it to claim the tax credit simply by switching from conventional fossil gas to RNG, she said. That could prevent existing steam methane reformers from simply switching to using RNG to win the tax credit, although it would allow newly built facilities designed to use RNG.
But Treasury’s guidance does state that it will seek public comment on proposals that could allow broader use of RNG for hydrogen production, she said. It also lays out plans to find ways to use “fugitive methane,” such as the methane that escapes from coal mines to pollute the atmosphere, if it can be captured and put to use for hydrogen production instead.
The Union of Concerned Scientists and other environmental groups are urging the Treasury Department to tread carefully in crafting these rules. They argue against allowing blue-hydrogen producers to use the most common RNG emissions accounting methods to justify earning 45V tax credits — particularly those that involve negative carbon-intensity scores like those that livestock manure methane now receives under California’s Low Carbon Fuel Standard.
“If you count it as anything less than zero, you’re ‘trueing up’ polluting from another existing source,” she explained. For example, a steam methane reformer operator could continue to use fossil gas for most of its hydrogen production but augment it with some negative-carbon-intensity RNG that, on paper, counterbalances the real-world carbon emissions that continue to pour out of its facility, she said.
Wolak noted that the Fuel Cell and Hydrogen Energy Association has joined a number of other hydrogen industry groups in advocating for rules that would allow blue-hydrogen producers to use RNG in ways that align with existing RNG tracking and verification systems.
“We would not want to see limitations to the use of RNG that could otherwise really assist in producing low-carbon and reduced-carbon hydrogen, and set barriers that would have an unintended consequence of limiting the amount of hydrogen that can be produced,” he said.
But the Treasury Department’s guidance does note that it considers existing RNG tracking and verification systems to have “limited capabilities” that will need to be addressed before they could be adapted for use for claiming the 45V tax credits.
Its list of flaws includes the fact that existing systems “do not clearly distinguish between inputs” or “verify or require verification of underlying practices claimed by RNG production sources,” providing little or no underlying data with which to test claims of emissions-intensity of RNG sources.
That could give the Biden administration a strong basis for barring these methods from being used for 45V accounting methods, McNamara said. It also has the authority to require hydrogen producers to use only RNG that’s directly delivered to them, rather than using “book-and-claim” processes.
These kinds of steps will be vital if the Treasury Department wants to avoid the prospect of today’s dirty hydrogen producers signing contracts with dairy farms and other sources of RNG that allow them to earn the top tier of 45V tax credits for hydrogen they continue to make from fossil gas, Rote said.
“For the lower tax-credit tiers, the differences between 45V and 45Q are not that different,” she said — about 10 to 20 cents more per kilogram of hydrogen for 45V than for the 45Q tax credits for the amount of carbon captured for the equivalent amount of hydrogen production. “So in those cases, it’s likely that a producer might opt for 45Q.”
“But it is really significant for the top tax-credit tier of $3 per kilogram,” she said. “If there’s a pathway for those producers to receive the full 45V credit — for example by blending with RNG — that’s where you see the pressure to go after the top tier.”
Sara Gersen, a senior attorney in the Clean Energy Program at nonprofit group Earthjustice, agreed that “the prospect of a facility being able to generate these very, very generous tax credits for gray hydrogen with a smattering of biomethane in the feedstock is quite problematic.”
The Treasury Department could avoid that outcome, she said. “One of the major things we’re going to be asking for is to ensure that no biomethane resource is treated as a carbon-negative resource,” she said. “If we were to treat biomethane from swine and cow manure the same way we treat biomethane from landfills, this wouldn’t be an issue.”
“I have some optimism that Treasury is going to read our comments carefully and implement rules that avoid that outcome,” she added. “They’re trying to incentivize innovation,” not help companies “create dirty hydrogen and greenwash it.”
