The new clean hydrogen tax credits outlined in the US Inflation Reduction Act (IRA) — which was passed by the Senate on Sunday and may become law as soon as this weekend — will only be available to projects that can demonstrate lifecycle greenhouse gas (GHG) emissions of less than 4kg of CO2-equivalent (CO2e) per kg of H2 produced.

Hydrogen: hype, hope and the hard truths around its role in the energy transition
Will hydrogen be the skeleton key to unlock a carbon-neutral world? Subscribe to Accelerate Hydrogen, powered by Recharge and Upstream, and get the market insight you need for this rapidly evolving global market.

As lifecycle GHG emissions include upstream methane emissions — for which the US is one of the world’s worst offenders — questions have been raised over whether blue hydrogen produced from natural gas (with incomplete carbon capture and storage) will be able to qualify for the tax credits at all.

Calculations by Recharge — outlined below ­— show that it might be possible for blue hydrogen projects with low methane leakage to qualify for tax credits of up to $0.75/kg, but reaching the $3/kg rate that would be available to green H2 projects would be much harder (see panel at bottom of article).

Why US methane emissions are a problem

According to the US Environmental Protection Agency (EPA), methane is emitted to the atmosphere “during the production, processing, storage, transmission, and distribution of natural gas and the production, refinement, transportation, and storage of crude oil”.

Officially, 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, put the figure at 2.3%, while a Cornell University paper the following year 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 — and 82.5 times more powerful over 20 years — according to the latest assessments by the International Panel on Climate Change (IPCC).

However, according to the IRA, 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 — which still bases its calculations on the IPCC’s 100-year global warming potential assessments from 2007.

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

Generally speaking, about 3.6kg of methane is required to make 1kg of grey hydrogen. If 3.5% of that methane leaks, that amounts to 0.126kg — or 3.15kg of CO2-equivalent under the GREET rules.

As each kg of grey hydrogen results in about 10kg of CO2 emissions, a 90% capture rate — the maximum achievable by the standard steam methane reforming (SMR) process, according to multiple studies — would result in an additional 1kg of carbon dioxide per kilo of blue hydrogen — taking the total to 4.15kgCO2e/kgH2, immediately putting it above the tax credit limit.

The same calculations for methane leakage rates of 1.4% and 2.3% give total CO2e emissions per kgH2 of 2.25kg and 3.07kg, respectively, which 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 lifecycle emissions for blue hydrogen projects would also take in the energy required to run the carbon capture and sequestration equipment, which requires heat to remove CO2 from the capture solution, as well as electricity to run the compressors — and the energy required to get the CO2 to the storage site, and pump the methane from the ground to the production location. Renewable electricity would probably have to be used for all these processes in order to keep the overall emissions to an absolute minimum.

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, according to a 2021 study by the UK Hydrogen and Fuel Cell Association. This could save an additional 0.8kg of CO2 per kg of hydrogen.

However, qualifying for the full $3/kg tax credit rate available to green hydrogen projects would require lifecycle emissions of under 0.45kgCO2e/kgH2.

Methane leakage of 0.25%, with a 98% carbon capture rate — and 100% renewable electricity for all other processes — would just about get a blue hydrogen project there, with 0.425kgCO2e/kgH2.

While such low methane leakage levels might seem like a stretch given the national averages, the Inflation Reduction Act gives added incentives — both carrots and sticks — for gas companies to reduce their methane emissions.

The new incentives to reduce methane emissions

Under a separate part of the Inflation Reduction Act, methane leaks would be subject to fines — known as “waste emissions charges” — from 2024 onwards starting at $900 per tonne of CH4, rising to $1,500 from 2026 onwards.

This will apply to onshore and offshore 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 and with methane leakage rates above the following limits:

  • 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”.

At the same time, up to $1.55bn in grants, rebates and loans are being made available under the Act to help reduce methane emissions from oil & gas facilities.

According to the EPA, “gathering and boosting” refers to “gathering pipelines and other equipment used to collect petroleum and/or natural gas from onshore production gas or oil wells and used to compress, dehydrate, sweeten, or transport the petroleum and/or natural gas to a natural gas processing facility, a natural gas transmission pipeline or to a natural gas distribution pipeline”.

While this appears to rule out blue hydrogen production facilities as being subject to the upcoming fines, they might spur companies to vastly reduce their upstream methane emissions, which in turn would allow more blue H2 projects to reap the rewards of the clean hydrogen tax credit scheme.

Details of the US clean hydrogen tax credit

The $433bn Inflation Reduction Act of 2022 creates a tax credit that would pay clean hydrogen producers up to $3 per kilogram (adjusted for inflation).

The size of the tax credits available to US clean hydrogen producers depends on the lifecycle greenhouse gas (GHG) emissions of each project — and more importantly, on how much staff are paid.

So the basic tax credit rate for “qualified clean hydrogen” is set at $0.60/kg, with a sliding scale depending on lifecycle emissions — measured in carbon dioxide-equivalent (CO2e) — of the H2 produced.

Hydrogen manufactured with less than 0.45kg of lifecycle CO2e emissions per kg of H2 would receive 100% of the credit, followed by 33.4% for 0.45-1.5kgCO2e/kgH2, 25% for 1.5-2.5kg and 20% for 2.5-4kg.

The lifecycle emissions would have to be verified “by an unrelated third party”, and only projects that start construction before 2033 would qualify.

However, the wage requirement in the new bill seems to be the most important part of the deal — multiplying the size of the tax credit by a factor of five.

Producers would be eligible for this boost if they ensure “that any laborers and mechanics employed by contractors and subcontractors in the construction of such facility… shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such facility is located as most recently determined by the Secretary of Labor”.

Importantly, these lifecycle emissions are calculated from “well to gate” — in other words, they would include upstream methane emissions in the production of blue hydrogen (which is made from natural gas with incomplete carbon capture and storage).

Also, the IRA states that blue hydrogen projects would be ineligible for H2 tax credits if they already receive federal tax credits for carbon capture and storage — but green hydrogen projects would also be allowed to receive renewable energy tax credits valued at $30/MWh in addition to the hydrogen ones.