Systemwide emissions and the importance of the three pillars for section 45V hydrogen production tax credit

Requirement

The text of section 45V requires an evaluation of systemwide emissions impacts when assessing lifecycle greenhouse gas emissions.

Section 45V explicitly adopts the definition of “lifecycle greenhouse gas emissions” from the Clean Air Act (CAA), which includes both “direct emissions” and “significant indirect emissions” that are related to the entire fuel production lifecycle – including feedstock generation, extraction, production, and distribution. 

The CAA definition cites “significant emissions from land use changes” as an example of “significant indirect emissions.” Consider, for example, the Renewable Fuel Standard, which uses the same definition of “lifecycle greenhouse gas emissions” as section 45V. The Renewable Fuel Standard increases demand for biofuels, which can lead to “significant emissions from land use changes” if farms shift from supplying corn for human consumption to corn for ethanol production. This shift will cause other farms to deforest more land to fill in the gaps in food demand. In this way, the production of biofuels increases systemwide greenhouse gas emissions. 

Just as EPA must consider the systemwide land use emissions impacts stemming from production of a biofuel feedstock (e.g., corn), Treasury must consider systemwide grid emissions impacts stemming from production of a hydrogen feedstock (e.g., electricity). These systemwide emissions can come from (1) the lack of sufficient clean electricity supply to meet new demand from electrolyzers, (2) the consumption of electricity by electrolyzers when clean resources are not producing, or (3) the lack of ability to deliver clean electricity to the electrolyzer.  

All of these factors create greater demand on the hydrogen producer’s local electricity grid. If this greater demand is partially or entirely filled with high-emitting fossil-based generation, there will be an increase in systemwide emissions. Without additional guardrails, a hydrogen producer plugging an electrolyzer into the grid will produce hydrogen with systemwide emissions ranging from ~10–40 kg CO₂e/kg H₂, up to four times higher than conventional fossil-based generation and magnitudes higher than the section 45V tiers. 

Solution

The three pillars limit systemwide emissions from electrolytic hydrogen. 

Instead, if a hydrogen producer uses clean electricity that abides by the “three pillars” of (1) incrementality, (2) hourly matching, and (3) deliverability, as outlined in Treasury’s proposed guidance, the systemwide emissions can be near zero. Hydrogen projects must purchase and retire energy attribute certificates that are: (1) generated from newly built clean electricity generators (see discussion of potential alternative compliance pathways here); (2) generated in the same hour as the hydrogen producer uses the electricity to produce hydrogen; and (3) generated in the same region as the hydrogen production facility. Without incrementality, a project may divert existing clean power from the grid, causing the gap to be filled partially or entirely by high-emitting fossil-based generation. Without hourly-matching, dirtier generation sources may supply electricity for hydrogen production when clean energy is not available. And without deliverability, projects may claim clean electricity that is locked behind grid constraints like congestion while being supplied by closer, dirtier generators.