The Serious Risks Around Treatment of Biomethane in 45V

In December, the Treasury Department and the Internal Revenue Service proposed regulations governing implementation of the 45V Clean Hydrogen Production Tax Credit, passed as part of 2022’s Inflation Reduction Act.

A substantial portion of the guidance and supporting materials is dedicated to electrolytic production of hydrogen; i.e., using electricity to split water into hydrogen and oxygen. I break down key aspects of the proposal’s electrolyzer requirements, including the rigor of its core organizing framework and the risks posed by possible compliance flexibilities, in a separate blogpost, found here.

But electrolysis isn’t the only hydrogen production pathway capable of qualifying for 45V—and it isn’t the only pathway that could unintentionally result in incentivizing pollution increases, not decreases, in the absence of sufficiently rigorous guardrails.

In particular, emissions loopholes related to biomethane and fugitive methane (i.e., methane released from fossil fuel systems) could entirely undermine the climate benefits of the hydrogen tax credit and, worse, drive vast amounts of public dollars to subsidize what are ultimately still heavily-polluting fossil fuel-based projects, now just greenwashed as “clean.”

Furthermore, these loopholes could cross over into the electrolytic emissions accounting framework, threatening to fully undermine the rigor of the three-pillars approach.

To defend against such negative outcomes, Treasury must explicitly prohibit pollution offsets within the 45V framework. It must also adopt rigorous assumptions around baseline counterfactuals, set strong guardrails governing fuel eligibility, and require robust fuel deliverability, tracking, and certification requirements.

How biomethane and fugitive methane enter the “clean hydrogen” conversation

Today, the overwhelming majority of hydrogen is produced via steam methane reforming (SMR)—a process that generates enormous amounts of climate- and health-harming pollution. Traditional SMR-based hydrogen isn’t anywhere close to qualifying for the 45V credit.

If carbon capture and sequestration (CCS) is installed at a reforming facility, resulting in what is sometimes referred to as “blue” hydrogen (as opposed to renewables-based electrolytically produced “green” hydrogen), a reformer might qualify for 45V. But that requires a very high rate of onsite capture, a very low emissions footprint associated with powering CCS equipment and transporting and storing carbon, and a very low rate of upstream methane emissions.

Each of these requirements is challenging to achieve in isolation; meeting all three at once is unlikely. As a result, it’s commonly suggested that fossil-based hydrogen facilities are likelier to pursue the less-stringent—but also less valuable—45Q carbon capture credit.

But that assertion ignores a potentially glaring loophole in 45V: carbon offsets.

Depending on how the 45V guidance is finalized, carbon-intensive hydrogen production facilities could qualify as “clean” simply by procuring enough fuel offset credits to get their emissions rate under the 45V threshold—even if they would otherwise fail on the merits.

Such an outcome would be disastrous in pollution impact and an obvious and egregious misuse of taxpayer funds: 45V is meant to drive the transition toward truly clean hydrogen production, not deepen the roots of today’s heavy polluters.

These issues all come to a head around how biomethane and fugitive methane are defined and accounted for within the 45V analytical framework.

The proposal mostly asks questions—but it sets some key bounds

Compared to other parts of the December proposal, the section on biomethane (also referred to as “renewable natural gas” or “RNG” in the proposal) and fugitive methane is extremely short—just two pages—and dominated by questions.

But the proposal isn’t all open-ended as Treasury introduces three fundamental organizing principles that should strongly inform how the remaining questions are resolved.

Treasury intends to issue rules for biomethane and fugitive methane that are “logically consistent” with the three-pillars approach. From the start, the proposal is clear that just as the three pillars are demonstrably required to ensure accurate electrolytic emissions accounting, so too is it necessary to set approaches that ensure a full and accurate emissions accounting for biomethane and fugitive methane. However, Treasury also recognizes there are significant differences between electricity and gas systems and between carbon-free electricity and biomethane/fugitive methane wastes, resulting in necessary divergences in approach.

Treasury adopts a cautious approach in the face of deep uncertainties, declining to set policy positions where the record is ambiguous. Despite the fossil fuel industry and industrial agriculture’s enormous lobbying efforts to suggest otherwise, it remains the case that absolutely fundamental uncertainties persist related to biomethane and fugitive methane, each of which have the potential to result in policy outcomes completely opposite to that which was intended. Treasury reckons with several of these key uncertainties through related questions in the proposal:

• The magnitude of climate contributions from biomethane and fugitive methane—and not just scale, but sign—as well as the degree to which any such contributions could be accurately attributed to a policy intervention.
• The potential for perverse incentives, with policy mechanisms intended to address the climate impacts of these waste streams instead increasing their production and harms.
• The inability to accurately and robustly document, track, certify, and exchange environmental attributes associated with their production, transport, and use.
• The inability of climate-focused interventions to account for the deeply harmful additional impacts associated with certain of these fuel sources, and how climate-focused solutions can in fact lead to net-worse outcomes.

Treasury is cognizant of the risk of perverse incentives, seeking robust safeguards to defend against them. Methane captured from landfills, wastewater treatment plants, anaerobic digesters, or fossil fuel systems is first and foremost a pollution mitigation problem, and the direct and indirect pollution associated with its capture is linked with a wide range of accompanying harms. Treasury rightly recognizes that policies incentivizing the capture and use of these wastes are perversely at risk of driving an increase in their production—an unambiguously bad outcome—and raises questions about policy mechanisms to help avoid.

Four critical issues requiring resolution

There are four key issues related to treatment of biomethane and fugitive methane in 45V that, depending on their resolution, will set the bounds for just how large a role these alternative sources of methane will have in the policy and—critically—whether and to what degree they will contribute to greenwashing fossil-fuel based hydrogen production. These are the key issues to watch in the time ahead.

1. Offsets. Offset systems credit pollution reductions that occur in one sector of the economy against pollution generated in another, such that on paper a polluter can report an artificially lower level of emissions than actually occurred. In reality, however, even when offset systems have strict standards and safeguards in place—which 45V does not—they have still repeatedly failed to achieve the emissions reductions they claim, instead propagating fraudulent carbon accounting. Moreover, inclusion of offsets would be entirely discordant with the intention of 45V, which is specifically designed to incentivize technology and process innovations to enable truly clean hydrogen production. Allowing project qualification via offsetting undermines that innovation while further entrenching polluting production projects.

Because 45V is proposed to be determined by a facility’s annual aggregate emissions divided by annual aggregate production, if fuels with negative carbon intensity values are included (see next) and no offset restrictions are in place, then a polluter could simply procure whatever amount of negative carbon intensity biomethane/fugitive methane necessary to get the annual emissions rate below the 45V threshold—even if the totality of their facility emissions would otherwise render them ineligible.

Solution: Treasury must prohibit pollution offsets of any kind within 45V. If negative carbon intensity fuels are allowed, they cannot be used to offset any amount of a facility’s real emissions.

2. Baseline counterfactuals. Eligibility for 45V is premised on a facility’s lifecycle greenhouse gas emissions rate. Within that calculation, the emissions associated with use of a fuel, such as methane, can change based on assumptions about where that fuel came from and what might have otherwise happened to it. This counterfactual scenario can have an enormous impact on the emissions associated with use of the fuel; some lifecycle-based policies have exploited this portion of lifecycle analysis to assign deeply negative carbon intensity scores to certain fuel sources. This has the perverse effect of rewarding polluters rather than holding them accountable to reduce their pollution.

The California Low-Carbon Fuel Standard’s treatment of biomethane from manure lagoons is the main precedent for this kind of approach—and it is highly contested by experts and advocates. It is an open secret that the intent of these scores was not to clean up transportation fuel but rather to serve as a means of subsidizing investments in anaerobic digesters to address pollution from California’s dairies. A similar repurposing of the 45V credit would be entirely out of scope of the statute.

Solution: Treasury must adopt a credible baseline comparison for biomethane and fugitive methane. In this rulemaking, venting is not an appropriate counterfactual; at minimum, Treasury should set a baseline comparison of capturing and flaring.

3. Fuel eligibility. Biomethane and fugitive methane are derived from underlying fuel sources; establishing eligibility requirements for these sources is a critical means of ensuring additionality of benefits on the one hand and limiting the likelihood of perverse outcomes on the other. Moreover, fuel eligibility requirements can also help to avoid rewarding feedstocks that perpetuate public health and environmental justice harms.

Solution: Treasury must establish rigorous feedstock eligibility requirements to actualize pollution benefits while defending against perverse outcomes, including:

• Prohibiting crediting of biomethane or fugitive methane that has previously been put to productive use—i.e., burned for energy or heat or used as a feedstock;
• Prohibiting crediting biomethane or fugitive methane from sources that could have avoided creation of methane in the first place via alternative practices—such as diversion of organic waste from landfills, any methane arising from oil and gas operations, or alternative manure management strategies at concentrated animal farming operations;
• Prohibiting crediting of biomethane or fugitive methane sources that are demonstrated to come from practices harmful to surrounding communities; and
• Prohibiting crediting of biomethane or fugitive methane derived from feedstocks arising after the date of implementation of the IRA as a means of defending against an incentive to increase waste streams.

4. Fuel deliverability, tracking, and certification. Biomethane and fugitive methane are, at the end of the day, methane, indistinguishable from fossil methane once in the pipeline. Robust tracking and verification of environmental attributes are fundamental to ensuring the veracity of climate claims by hydrogen producers; however, unlike in the power sector, no credible systems exist for tracking and verifying attributes associated with biomethane or fugitive methane from source to sink.

Solution: Treasury must set tight geographic bounds around eligible fuel deliverability regions and rigorous fuel tracking and certification requirements to ensure the environmental benefits promised are the environmental benefits delivered. This includes rigorous accounting of source and pipeline methane leakage. If systems cannot meet the necessary tracking and certification requirements, Treasury must limit eligible fuels to only those accessed via direct pipeline connection.

What’s at stake

The climate implications of these decisions cannot be overstated. A few examples:

• If the regulations allow offsetting and apply a baseline counterfactual of venting, a blue hydrogen facility that would otherwise fail to qualify for 45V could procure approximately 5 percent biomethane and suddenly count as eligible for the top $3 credit tier. A grey hydrogen facility—as in, exactly the type of hydrogen production facility the tax credit was intended to incentivize the shift away from—could qualify for the top credit tier with an approximately 20 percent blend.
• If the regulations define “fugitive methane” broadly, the nation’s oil and gas companies with the worst environmental and operational performance records could suddenly reap enormous taxpayer-derived profits from delaying action on installing pollution controls, with all that vented gas now counted as “fugitive methane” eligible for capture and valuation as a negative carbon intensity fuel.
• If the regulations fail to account for methane leakage at the source of these alternative methane feedstocks and/or along the pipelines used to transport it, it could credit many sources as beneficial to the climate when, in reality, they are net climate burdens.

And these examples just scratch the surface.

Moreover, they say nothing of the towering equity and justice implications tied to each, nor the many ways in which these implications could derail the rigor of the electrolyzer three-pillars requirements.

What comes next

Lax accounting frameworks related to biomethane and fugitive methane would enable fossil fuel-based hydrogen producers to qualify for the top tier of 45V and drive vast sums of money to industrial agriculture; as a result, fossil fuel interests and industrial agriculture interests have been undertaking aggressive lobbying to secure mutually favorable outcomes.

But these outcomes would be ruinous for everyone else, failing to deliver climate benefits, propping up extraordinarily harmful and unjust systems instead of addressing their root cause, and subsidizing hydrogen production infrastructure completely at odds with that demanded by our clean energy future.

The good news is, Treasury seems to recognize these risks, flooding the record with documented doubts and flags. The key now is to ensure those appropriately recognized concerns translate into necessarily rigorous finalized 45V guidance.