Biomethane Threatens to Upend the Clean Hydrogen Tax Credit

May 25, 2023 | 12:15 pm
A Utah power plant releases clouds of pollution gases under a moody gray skyPatrick Hendry/Unsplash
Julie McNamara
Senior Energy Analyst

The Inflation Reduction Act’s new hydrogen production tax credit, known as code 45V, is intended to incentivize a shift to low-carbon hydrogen production by offering producers a credit that increases in value as the carbon emissions associated with produced hydrogen declines. With an outsized credit for the lowest-carbon tier, the incentive’s aim is clear: Drive deployment of hydrogen production technologies that will be needed by, and aligned with, the nation’s overall clean energy transition.

But instead of meeting that straightforward aim, a series of implementation loopholes threaten to fully undermine it. This includes loopholes related to biomethane, whereby heavily polluting fossil fuel-fired hydrogen production facilities—the very facilities the tax credit is trying to incentivize a shift away from—can cloak themselves as “clean” and reap full tax credit rewards, without having done anything but pushed around paper.

As a result, billions of dollars of public funds meant to drive the cleaning up of hydrogen could actually result in the bolstering of fossil fuel incumbents, not new clean facilities. Worse, by incentivizing hydrogen production pathways entirely misaligned with the true needs of the nation’s clean energy transition, the harmful consequences of allowing these loopholes could be felt long into the future. 

The Treasury Department, in collaboration with the Department of Energy and the Environmental Protection Agency, is responsible for protecting against such outcomes by developing guidance for tax credit implementation to ensure qualifying “clean” hydrogen is truly clean.

To date, most stakeholder engagement has focused on the lifecycle greenhouse gas (GHG) accounting framework required to accurately report the carbon intensity of electrolytically produced hydrogen, or hydrogen generated by using electricity to split water into hydrogen and oxygen. As detailed in this accompanying blogpost, that’s because the process is simultaneously the likeliest to meet the highest-qualifying credit tier, as well as the likeliest to unintentionally cause significant increases in carbon emissions if there are insufficiently rigorous implementation guardrails in place.

But the issues demanding rigorous attention in tax credit implementation don’t stop there.

Critically, the treatment of biomethane, or methane produced from anaerobic digestion of organic matter such as animal manure, sewage, or from landfills, threatens to undermine the veracity of carbon intensity calculations for both steam methane reforming as well as electrolytic pathways.

While it may seem obscure, the consequences are not. Simply on the basis of outdated biomethane assumptions and permissive paper accounting, heavily polluting, fossil fuel-fired hydrogen production projects could suddenly count as “clean.” 

As it finalizes tax credit implementation guidance, the Treasury Department must cinch tight this loophole by disallowing: 1) fuels to count as “carbon negative,” 2) the offsetting of pollution, and 3) the use of “book-and-claim” accounting by fossil fuel users.

How do biomethane, lifecycle carbon accounting, and the tax credit interact?

Biogas is the direct product of anaerobic digestion, primarily comprised of a mixture of methane and carbon dioxide, plus much smaller amounts of other gases. When biogas is processed to remove carbon dioxide and those other gases, it becomes biomethane, also sometimes referred to as “renewable natural gas.”

Once biomethane has been processed, it’s indistinguishable from the traditional fossil methane coursing through the gas grid. Which means that when it’s burned, the resulting carbon dioxide emissions are the same, as are the potent upstream climate impacts of it leaking out of gas infrastructure.

However, because of lifecycle GHG emissions accounting—the process by which the carbon intensity of produced hydrogen is evaluated for the tax credit—otherwise-equivalent hydrogen production pathways that run on fossil methane versus biomethane can end up at completely opposite ends of the hydrogen carbon intensity spectrum, with one heavily polluting and one, somehow, “clean.”

This split in outcomes is derived from the fact that lifecycle GHG accounting considers the upstream emissions from fuel production and sourcing alongside the emissions that occur at the final point of fuel production or use. Such a holistic perspective is important. Think, for example, of how the once-considered climate benefit of gas-fired power plants compared to coal-fired power plants rapidly eroded as greater understanding of the magnitude and impact of upstream methane leakage dramatically shifted the lifecycle impact of using gas, even though the smokestack comparisons never changed.

However, decisions around where lifecycle GHG boundaries are drawn, and what assumptions underpin the included components, have consequences that can lead to entirely different conclusions.

These boundary and assumption questions are at the heart of the debate over implementation criteria for the electrolytic hydrogen production pathway, as referenced above. But they are also highly relevant to the treatment of biomethane and, similar to choices around lifecycle accounting for electrolytic pathways, are at great risk of undermining the whole point of the tax credit if the Treasury Department fails to get it right.

Here’s why: Under certain assumptions, biomethane can be calculated as “carbon negative”—and everything goes sideways from there.

How can biomethane be considered “carbon negative”?

The fundamental question that biomethane lifecycle accounting turns on is: What would have happened to the original biogas if it had not been used for the production of hydrogen?

Under certain outdated accounting frameworks, the baseline assumption is that without voluntary intervention, methane from certain pollution sources would simply have been vented to the atmosphere. Capturing and using it, therefore, would swap potent methane emissions for comparatively lesser carbon dioxide emissions. When that framework is translated into lifecycle accounting, the GHG benefit of avoiding vented methane swamps the carbon dioxide subsequently generated from the gas’s use, which ultimately leads to eye-poppingly negative carbon intensity values. That means use of the fuel, even when it results in carbon dioxide emissions, would be calculated as a net positive for the climate.

This assumption is a relic of outdated perspectives where climate pollution is costless, businesses undertaking operations that result in climate pollution have no responsibility to limit it, and ongoing pollution is taken as a given. Carbon-negative accounting associated with limiting that pollution therefore functions as a de facto offset program.

If this perspective ever held water, it unequivocally now does not.

Today, climate pollution is increasingly either directly regulated—see, for example, recent EPA standards for carbon pollution from vehicles, power plants, and oil and gas operations—or affixed with a fee. And for the pollution sources that have escaped actionable accountability to date, wherever they sit in the economy, it’s a question of when, not if.

As a result, the right baseline assumption for biomethane lifecycle GHG accounting should be one where the methane has been entirely captured or avoided to start, such that there is no assumed net climate benefit from its use.

Adopting this approach would also help to avoid the present perverse incentive of rewarding the production of otherwise-avoidable methane, leading to bad outcomes like increasing the size of concentrated animal feeding operations (CAFOs) or keeping organic waste in landfill streams instead of pursuing policies to limit and divert it. This is a particularly relevant concern when it comes to biomethane, as many of the sources from which it is derived bring with them towering environmental injustices and acute harms that reach far beyond their climate contributions.

What are the implications of carbon-negative fuels for the hydrogen tax credit?

Because carbon-negative fuels effectively open the door to offsetting, their presence can wreak havoc in climate policies that were not explicitly designed with their inclusion in mind. This makes rigorous guardrails around their incorporation key. For the hydrogen production tax credit, there are three primary concerns.

First, by using even just a small share of carbon-negative methane, traditional fossil fuel-based resources can suddenly be calculated as “clean.”

This is clearly of relevance for steam methane reforming and autothermal reforming pathways, as these facilities could qualify for the highest credit tier simply on the basis of a minor share of the fuel being used, not on the ability to capture carbon as the credit had ostensibly been designed to create space for.

However, the implications are also relevant to electrolytic hydrogen production pathways, as carbon-negative fuel accounting could also mean that gas-fired power plants running on a minor portion of biomethane could be considered “clean” as well—and could even net out some blend of coal-fired power. This would entirely undermine the otherwise-fought-for rigor around the electrolytic production path.

Second, because of the above, the “clean hydrogen” tax credit will subsidize hydrogen production projects that are now, and will always be, heavily polluting, not clean.

These projects are at further risk because even if the fuel remains calculated as carbon-negative going forward—which it will not—biomethane is extremely resource-constrained and is of interest to many fossil fuel-dependent industries. This means that it is certain to increase in price over time, with priority going to those industries that do not have other means of decarbonizing their processes—which is very much not the case for hydrogen production.

The tax credit, then, will waste enormous amounts of money propping up and building out a fossil fuel-based hydrogen industry entirely incompatible with the clean energy transition, briefly “clean” on paper but, ultimately, heavily polluting to the end.

Finally, frameworks allowing carbon-negative fuels have traditionally treated the gas grid as a continuous whole and allowed for the decoupling of environmental attributes from physical deliverability, so these implications would be capable of stretching to reach any and every polluter across the country. This means, for example, that a hog farm in Missouri could produce biomethane claimed by a steam methane reformer in California, or a dairy farm in Minnesota could produce biomethane claimed by gas-fired power plant in Florida.

Beyond the straightforward absurdity of this approach, as well as the challenging questions it introduces for appropriate accounting for highly consequential gas grid methane leakage, this nation-spanning “book-and-claim” framework would also undermine the deliverability requirements central to upholding the rigor of the electrolytic production pathway.

How can the Treasury Department close these loopholes?

If Treasury allows carbon-negative accounting for biomethane, it will effectively be using taxpayer dollars intended for building out clean hydrogen infrastructure to instead offset the costs of methane pollution abatement from an entirely different set of sectors. Furthermore, the hydrogen production projects that are enabled as a result of carbon-negative accounting will be neither durable nor scalable contributors to climate progress, and they will come at the expense of supporting truly clean investments.

The implementation guidelines under development by the Treasury Department provide an opportunity to guard against these harmful and misguided outcomes. To start:

  1. Treasury must not allow carbon-negative accounting—in any part of the lifecycle GHG analysis framework. Such accounting would turn the tax credit into a de facto offset program and undermine the incentive’s ability to direct investments toward its true purpose: supporting the buildout of durably climate-aligned production projects.
  2. If despite these risks Treasury still allows carbon-negative values, Treasury must not allow carbon-negative fuels to be used for offsetting or netting. This would mean in practice that a carbon-negative fuel would be cut off at “zero” and would not be able to average out heavily polluting production, be it electrolytic across production hours, or steam methane reforming across fuel blends or varying carbon capture levels.
  3. In its treatment of biomethane in the hydrogen tax credit, Treasury should not allow use of book-and-claim accounting by fossil fuel users. This practice enables steam methane reformers and gas-fired power plants that are actually running on fossil methane to use paper accounting to declare their processes “clean” without any shift in technology or practice, fully counter to the intent of the program and unhelpfully diverting funds from clean hydrogen producers to biomethane polluters. This could also lead to pernicious ends in the electrolytic pathway if netting is allowed, as any electrolysis project coming in just above the GHG threshold could “source” negative carbon intensity electricity from the nearest gas plant to even out their numbers.

Without question, methane leaked to the atmosphere from manure lagoons and other sources of biogas is deeply harmful to the climate. The top priority should be to avoid its creation in the first place—but the methane that remains should be captured and put to productive use. However, in evaluating the lifecycle GHG value of that resulting methane, the starting assumption should be that the methane is a source of pollution requiring direct action, not an optional offset.

This is all the more critical given that sources of biomethane are often heavily entangled with significant environmental and moral injustices, far more complex than a singularly climate-focused policy can address, and at great risk of being exacerbated, not alleviated, if the Treasury Department were to keep such an outdated and misguided assumption in place.