Joint CATF-EDF principles on methane reporting for 45V

This blog was jointly authored by policy experts from Clean Air Task Force and Environmental Defense Fund. Our organizations share a common goal to maximize the climate benefits of clean hydrogen deployment, as well as reduce methane emissions from oil and gas operations. Individual sets of comments on the 45V hydrogen production tax credit from CATF and EDF have also been provided to the U.S. Department of the Treasury.

As the U.S. invests billions of dollars in clean hydrogen as a decarbonization solution, the 45V Clean Hydrogen Production Tax Credit stands to shape the future of the hydrogen industry and its potential impact on climate progress. 45V offers an incentive for producing clean hydrogen, regardless of method, so long as its greenhouse gas (GHG) intensity falls below a certain threshold – and the cleaner the hydrogen is, the more money producers can claim under the tax credit. 

Clean Air Task Force (CATF)  and Environmental Defense Fund (EDF) strongly support the purpose of 45V, which is to drive truly clean hydrogen production. The specifics of this tax incentive – how GHG emissions are counted – matter greatly, and both organizations have been tracking the details closely.

Treasury released draft guidance in December 2023, which included a strong framework for accounting for induced grid emissions for electrolytic-based hydrogen. But that guidance’s proposed treatment of fossil-based hydrogen presents certain questions – particularly when it comes to accounting for upstream methane emissions from oil and gas operations.

Methane emissions from the oil and gas supply chain are one of the most important factors affecting the overall GHG intensity of fossil-based hydrogen. Methane’s warming potential is over 80 times higher than CO2 over a 20-year period and 30 times higher over a 100-year period, and high rates of leakage can significantly erode the climate benefits of clean hydrogen. To ensure we’re driving investments in low-emissions projects, 45V guidance must accurately reflect the methane emissions of fossil-based hydrogen and incentivize continued mitigation.

CATF and EDF believe the following set of principles should guide decisions on methane accounting for 45V hydrogen eligibility:

1. Methane emissions vary substantially across companies and geographies; a single national average obscures true project emissions

Oil and gas methane emissions vary greatly depending on the geography, infrastructure and operational practices of upstream facilities. Leakage rates can range from below 1% (e.g., in the Marcellus region) to above 4% (e.g., in the Permian and Uinta basins). Using a single national average in the 45V-GREET model obscures this variability. 

This fixed leak rate is both under- and over-inclusive of true upstream emissions. On the one hand, it allows operators with dirtier supply chains to claim an artificially low emissions intensity for their hydrogen production, without incentive to improve their lifecycle emissions. On the other hand, a fixed rate undermines the incentive for operators to create cleaner supply chains by preventing them from accessing a higher section 45V tax credit when they source their gas from cleaner basins or suppliers. This could cause low-emissions projects to become economically unviable under 45V, causing them to turn to 45Q, which does not include any carbon-intensity or methane abatement requirements. 

Moreover, the current national average in the 45V-GREET model, 0.9%, is known to be an underestimate of the true national average. It excludes emissions from wells that produce and market both oil and gas (“co-producing wells”). It is also tied to EPA’s Greenhouse Gas Inventory (GHGI) for natural gas systems, which shows emissions decreasing over time – whereas measurement data have not shown a decline. Further, it does not include recent data showing that distribution segment emissions are significantly higher than EPA estimates.

2. Moving to more granular methane estimates (e.g., producer- or basin-specific) can be an important way to incentivize investments in methane emission reductions

A single national average is problematic for 45V because it does not encourage upstream methane providers to reduce their leak rates. Many companies, including some members of the Oil & Gas Climate Initiative, have committed to reduce their methane emissions substantially over the coming decades. Recognizing these reductions once they actually occur is an important way to incentivize continued improvements.

However, it is important to note that the hydrogen industry is projected to represent a small share of the overall demand for methane, and this 45V incentive must be paired with other efforts to reduce methane emissions uniformly across companies.

3. Cherry-picking (or optionality) should not be allowed if producer-specific rates are used

Producer-specific leak rates must be all-or-nothing. Allowing a hydrogen producer to choose between submitting their own number (which they’ll likely choose if they’re below the national average) or a fixed national average (which they’ll likely choose if they’re above it) would offer a carrot for outperformers while rewarding underperformance. 

The default national average as proposed would also paint a skewed picture of how the industry, as a whole, is performing. If only the underperformers are left claiming the fixed national average (with outperformers using their own numbers), then that default number is actually less than what any one of them is achieving. To remain accurate, the national average would actually need to be recalculated with the outperformers removed. Without this upward adjustment, 45V would be granting tax credit money to producers that may not deserve it for emissions reductions they did not achieve.

4. Estimates should be accurate, verified and overseen by a central government body

Treasury has acknowledged the current set of verification mechanisms are inadequate to validate producer-specific methane figures. Existing voluntary natural gas certification schemes vary widely in coverage, participation, integrity, and verification and monitoring requirements. Peer-reviewed studies using direct methane measurements continue to demonstrate that actual emissions are significantly higher than self-reported estimates contained in official inventories.

Moving to producer-specific methane figures would thus require the establishment of a robust measurement, reporting and verification mechanism. This could take place via ongoing improvements to Subpart W of EPA’s Greenhouse Gas Reporting Program, given that many upstream methane providers are already required to report methane emissions to this program under EPA’s oversight. EPA has committed to future reviews of subpart W this summer and every two years after. As EPA undertakes those reviews, incorporation of measurement-based regional-level estimates will be key to verify accuracy of self-reported data.

5. Measured (observed) data is more accurate

Using measurement-informed leak rates is the most scientifically rigorous and accurate way of accounting for upstream methane emissions. Numerous publicly available studies have measured methane leak rates in basins across the U.S. using ground-based measurements, aircraft measurements, or satellite data, making basin-specific estimates available for 45V purposes. And even more high-resolution instruments are becoming available. For example, MethaneSAT is an upcoming satellite capable of both broad coverage, high spatial resolution and high precision. Such data should be incorporated into future methane figures, so they are based on measured emissions rather than estimates.

EDF and CATF believe that upholding these 5 principles is critical to ensuring 45V incentivizes truly clean hydrogen and meets the Inflation Reduction Act’s climate objectives. There are a variety of options for ensuring proper upstream emissions accounting, as detailed above. This matters greatly, as it will determine investments in certain hydrogen production pathways and upstream emissions reductions, and may ultimately determine how climate beneficial hydrogen deployment in the U.S. will actually be.