ANALYSIS | Would US blue hydrogen projects be clean enough to qualify for climate bill's new H2 tax credits?

Would US blue hydrogen projects be clean enough to qualify for climate bill's new H2 tax credits?

The new clean hydrogen tax credits outlined in the US Inflation Reduction Act (IRA) will only be available to projects that can demonstrate that they have a lower greenhouse gas emissions than 4kg of CO2-equivalent (CO2e) per kg of H2 produced.

Since the United States is one of the world's worst offenders when it comes to upstream methane emissions, there are questions about whether blue hydrogen produced from natural gas (with incomplete carbon capture and storage) will be able to qualify for the tax credits at all.

According to calculations done by Recharge, it might be possible for blue hydrogen projects with low methane leakage to qualify for tax credits of up to $0.75/kg. However, reaching the $3/kg rate that would be available to green H2 projects would be much harder.

Why US methane emissions are a problem

The United States Environmental Protection Agency (EPA) states that methane gas is emitted into the air "during the production, processing, storage, transmission, and distribution of natural gas and the production, refinement, transportation, and storage of crude oil".

The EPA says that, on average, 1.4% of methane produced in the US leaks into the atmosphere. However, a study published in the prestigious journal Science in 2018 found that methane emissions over the previous decade had amounted to a leakage rate of 3.5%, an increase attributed to the rise of fracking.

Another study by Stanford University, released in March this year, showed that methane leakage rate from the Permian basin in New Mexico was a staggering 9%. Methane emissions are important, because the gas is 29.8 times more powerful a greenhouse gas than CO2 over a 100-year period.

However, the IRA says that lifecycle GHG emissions will be calculated according to the GREET (Greenhouse gases, Regulated Emissions, and Energy use in Transportation) model developed by the Argonne National Laboratory. This model still uses calculations from 2007 that are based on the IPCC's 100-year global warming potential assessments. This means that for the purposes of the hydrogen tax credits, methane emissions will be given a CO2-equivalent score of 25, rather than the more up-to-date 29.8%.

Methane emissions and blue hydrogen

In order to make 1kg of grey hydrogen, 3.6kg of methane is needed. If 3.5% of the methane leaks, that's about 0.126kg of greenhouse gases released. This amounts to 3.15kg of CO2-equivalent under the GREET rules. Since each kg of grey hydrogen results in about 10kg of CO2 emissions, a 90% capture rate would result in an additional 1kg of carbon dioxide per kg of blue hydrogen— bringing the total to 4.15kgCO2e/kgH2 . This exceeds the tax credit limit, making it unattractive for producers

The calculations for methane leakage rates of 1.4% and 2.3% give total CO2e emissions per kgH2 of 2.25kg and 3.07kg, respectively. This would make such projects be eligible for tax credits of $0.60-0.75/kg (see tax credits panel, below).

But it’s important to note that the emissions from blue hydrogen projects would also include the energy required to run the carbon capture and sequestration equipment, which takes in CO2 from the capture solution, and also needs electricity to run the compressors. Plus, you need energy to get the CO2 to the storage site, and pump methane from the ground to production location. In order keep emissions low overall, renewable electricity would have to be used for all of these processes.

According to a 2021 study by the UK Hydrogen and Fuel Cell Association, higher carbon capture rates of up to 98% can be achieved by switching from SMR to a more expensive hydrogen production process called autothermal reforming (ATR), which requires the addition of pure oxygen. This could save an additional 0.8kg of CO2 per kg of hydrogen.

However, to qualify for the full $3/kg tax credit rate available to green hydrogen projects, the lifecycle emissions of the project would need to be under 0.45kgCO2e/kgH2. If methane leakage is at 0.25%, and if the carbon capture rate is 98%, then the project would just about qualify with a lifecycle emissions of 0.425kgCO2e/kgH2.

Although the methane leakage levels are low compared to national averages, the Inflation Reduction Act provides incentives for gas companies to reduce their methane emissions. These incentives include both rewards and punishments.

The new incentives to reduce methane emissions

Starting in 2024, if you leak methane gas, you will have to pay a fine. The amount of the fine starts at $900 per ton of methane gas leaked and goes up to $1,500 from 2026 onwards.

This will apply to natural production, transmission, processing, storage, "gathering and boosting", and LNG import and export equipment for any facility emitting more than 25,000 tonnes of CO2-equivalent per year. The methane leakage rate for these facilities must be below the following limit:

  • For production facilities: 0.2% of the natural gas sent to sale
  • “Non-production” natural gas systems: 0.05% of the natural gas sent to sale “from or through such facility”.
  • Natural gas transmission: 0.11% of the natural gas sent to sale “from or through such facility”.

The Act provides up to $1.55bn in grants, rebates and loans to help reduce methane emissions from oil & gas facilities.

The EPA defines "gathering and boosting" as the process of gathering pipelines and other equipment used to collect petroleum and/or natural gas from production wells, as well as compressing, dehydrating, sweetening, or transporting the petroleum and/or natural gas to a processing facility or transmission pipeline.

This means that blue hydrogen production facilities will not have to pay the fines, but it might make companies reduce their methane emissions. This would mean that more blue hydrogen projects could get the tax credit.

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