11 September 2023
By Jeff St. John

The biomethane boondoggle that could derail clean hydrogen
If the Treasury Department doesn’t get hydrogen tax-credit rules right, it could enrich factory farms and fossil fuel producers rather than boost green hydrogen.

(Edwin Remsberg/VWPics/Universal Images Group via Getty Images)

Canary Media’s Down to the Wire column tackles the more complicated challenges of decarbonizing our energy systems.

The Inflation Reduction Act could lay the groundwork for the mass production of green hydrogen, a vital zero-carbon fuel that can help clean up industries from shipping to fertilizer production.

Or the law’s hundreds of billions of dollars of green hydrogen subsidies could be diverted into what critics call a massive potential greenwashing scheme, powered by fossil fuels and painted green with manure.

As the U.S. Treasury Department labors over the rules that will govern the climate law’s hydrogen incentives — known as the 45V tax-credit program — much of the public debate has centered on defining ​“green hydrogen,” which is created using water and clean electricity instead of using fossil gas.

But far less attention has been paid to the ​“renewable natural gas” (RNG) industry’s quiet push for the Treasury Department to allow clean hydrogen tax credits to go to producers who make hydrogen in the conventional, dirty way and buy the equivalent of a dodgy carbon offset that enables them to claim their production is clean.

The RNG industry is pressing the Treasury Department to adopt a controversial emissions accounting practice that has its roots in California’s Low-Carbon Fuel Standard, or LCFS. That scheme, which watchdogs say is already starting to be abused in California, allows producers of hydrogen and other fuels to cancel out their emissions by purchasing ​“carbon-negative” credits from commercial dairies and livestock operations that capture the planet-warming methane bubbling out of their manure lagoons.

California’s rules, critics say, are much more effective at turning factory-farm manure lagoons into subsidy gold mines than they are at actually reducing the carbon intensity of fuels sold in the state. In fact, many analyses indicate that they increase, rather than decrease, greenhouse gas emissions and air pollution.

And if the Treasury Department adopts key facets of California’s policy as it develops the climate law’s massive hydrogen subsidy program, it could replicate that outcome at a nationwide scale. That runs the risk of making 45V ​“the single greatest waste of climate money in U.S. policy history,” with the possible exception of the massive, decades-long subsidization of corn ethanol that has worsened climate and food crises, according to Danny Cullenward, an expert in carbon-offsets markets and a research fellow at American University.

Allowing fossil hydrogen producers to greenwash their product with manure-derived credits would also undercut the economics of truly green hydrogen — a fuel that climate researchers agree we need to produce in large quantities in order to decarbonize key heavy industries.

The fossil fuel giants and biomethane companies lobbying in support of California’s approach argue that it demonstrably reduces emissions by preventing methane, a highly potent greenhouse gas, from entering the atmosphere. They also claim it makes it financially feasible for livestock operations to control the massive methane emissions that result from the factory-farming practice of storing liquefied manure in massive lagoons.

But environmental groups say that the claimed emission reductions are based on shoddy accounting and that the government shouldn’t turn factory-farm pollution into an income stream.

“The purpose of that tax credit is to build out technology that can deliver clean hydrogen for the future,” said Julie McNamara, senior energy analyst with the Union of Concerned Scientists. ​“I certainly don’t think the intention was to have steam methane reformers” — the fossil-gas-fueled, highly emitting facilities that make nearly all hydrogen today — ​“using paper accounting to suddenly say it’s clean.”

“What’s worrisome,” she said, is that ​“these old assumptions are at risk of being exported across the country.”

The Treasury Department is expected to issue its guidance on the 45V hydrogen tax credits sometime in October.

How California allows dirty hydrogen to be greenwashed
The reason experts are so alarmed about this practice possibly making its way into federal law is that they’re already seeing its consequences unfold under California’s LCFS — the country’s biggest state-level ​“clean fuels” program and a model for similar programs nationwide.

Over the past year, Sasan Saadat, a senior research and policy analyst for the nonprofit Earthjustice, has tracked multiple applications from steam methane reformers (SMRs) to the California Air Resources Board (CARB), the state agency that manages the LCFS, seeking to claim that their operations are actually removing greenhouse gases from the atmosphere.

At a high level, the process behind these ​“book and claim” transactions works like this: Facilities that use fossil gas to make hydrogen sign contracts with commercial livestock operations that capture biogas from their manure lagoons and turn it into biomethane. The refining is done with machines called methane digesters. Under LCFS rules, California views these systems as ​“carbon-negative” and allows owners of these systems to sell corresponding ​“carbon-negative” credits. Hydrogen producers and other fossil-fuel providers can buy these credits — from factory farms not just in California but anywhere in North America — and are then able to sell their fuel as ​“carbon-free” in California.

A methane digester at a dairy farm in California. (Scott Strazzante/The San Francisco Chronicle via Getty Images)

The logic is that methane, which is also the primary ingredient of fossil gas, is a far more potent greenhouse gas than carbon dioxide in the short term. Even if the methane captured from manure lagoons is later burned to generate electricity, heat homes or fuel vehicles, emitting carbon dioxide in the process, keeping it from entering the atmosphere as methane could be considered a net positive for the climate. The farms that produce RNG usually burn it to generate electricity on-site or, more rarely, inject it into existing fossil-gas pipelines.

But the LCFS credit-accounting structure fails to grapple with the real-world impacts of the polluting industries that use it, Saadat said. Fossil-gas hydrogen producers applying for LCFS credits, such as FirstElement, Iwatani and Shell North America, plan to keep using fossil gas to produce hydrogen, thereby emitting carbon dioxide as well as other pollutants into the air of the communities they’re in, and simply claim the credits from far-off methane digesters to capture clean-fuel subsidies from the state.

Not only does this eliminate on-paper emissions for producers of fossil-based hydrogen, but under LCFS accounting rules it can actually be considered carbon-negative, he noted — akin to directly removing carbon from the atmosphere. The LCFS program treats RNG from concentrated livestock farming as having a far greater greenhouse-gas-reduction impact than any other source of the fuel, including landfills, wastewater treatment plants and food waste.

Saadat and other climate advocates say CARB’s accounting on RNG carbon intensity is absurdly misguided.

“Nowhere in the chain of producing this are we drawing carbon out of the atmosphere and burying it in the ground,” Saadat said. ​“But this is being treated as this super-powerful carbon sequestration, on the premise that nothing else could control this methane.”

Hydrogen producers don’t even have to prove that the methane digesters they’re funding are ​“additional,” meaning farms built them because of the hydrogen producers’ investment, he said. One application for LCFS credits from hydrogen producer FirstElement is with the Deer Run Dairy Digester in Kewaunee, Wisconsin, which has been running since 2013, he noted.

Even if these hydrogen producers were spurring the construction of new manure-lagoon methane digesters, Earthjustice and many other environmental groups question the rationale of rewarding those investments with special treatment. They want regulators to penalize livestock operators for the planet-warming emissions their manure lagoons create and push them to curb those emissions.

While overall U.S. methane emissions have declined since 1990, EPA data indicates that agricultural-sector methane emissions have risen dramatically. The primary culprit is the factory-farming practice of liquefying manure and storing it in lagoons, ponds or pits where it decomposes into methane in the absence of oxygen, rather than using more traditional manure-management methods that emit little to no methane.

Manure lagoons have ​“become the preferred and cheapest way to manage waste,” said Tyler Lobdell, a staff attorney for Food & Water Watch.

It’s also a lucrative way to manage waste, thanks to California’s LCFS. The value of the program’s incentives has enabled manure-digester investments that would otherwise fail to make economic sense, according to analysis from Aaron Smith, an economics professor at the University of California, Davis.

Without the revenue from selling LCFS credits, biomethane from manure-lagoon digesters would cost about 10 times more to produce than it could earn from being sold at fossil-gas wholesale prices, he noted. In that sense, LCFS incentives put dairy operators in the position of ​“farming methane rather than milk,” he wrote.

But despite years of demands from environmental groups to impose regulations on livestock and dairy farms to reduce the incentives for this practice, in California CARB is currently planning to allow the existing ​“carbon-negative” system to persist well past 2030.

This could serve as a perverse incentive for livestock operators to manage their manure in ways that increase their methane emissions in order to earn more money from capturing them, Cullenward said. ​“There’s credible evidence that we’re getting there on the basis of LCFS alone,” he said, and ​“there’s no doubt that the 45V credit” would dramatically increase that incentive — if the Treasury Department decides to adopt California’s policies.

The pressure to bring ​“book and claim” to federal clean hydrogen policy
California’s LCFS policy has spurred a ​“brown gold rush” of capital chasing the value of methane captured from manure lagoons. Even so, the program’s ramifications for hydrogen production are limited by its relatively small scale; it only applies to fuels sold in California for road transportation.

But if the program’s approach were scaled up to a national level, the ramifications would be enormous. The U.S. as a whole has roughly 10 million metric tons of hydrogen production capacity, the vast majority made by SMR plants using fossil gas. And there’s a growing amount of biomethane that could be used to offset that hydrogen production: Research firm Wood Mackenzie forecasts that U.S. biomethane production could see a tenfold increase by 2050.

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Meanwhile, green hydrogen barely exists — just 1 percent of hydrogen in the U.S. is made with clean electricity and water through use of electrolyzers. The Inflation Reduction Act’s subsidies offer the fledgling industry a real chance at rapidly changing that picture, but only if the money goes to companies producing bona fide green hydrogen.

That’s why there’s a loud and ongoing public debate around what, precisely, the 45V program should treat as green hydrogen. It’s been the subject of major political ad campaigns, the cause of disputes between Democrats in the U.S. Senate, and the source of a growing rift between clean energy advocates.

But all of it could be rendered more or less moot if Treasury decides to port over California’s LCFS structure, Cullenward warned. In that scenario, fossil-based hydrogen plants could theoretically contract with livestock methane-digester projects anywhere in North America to achieve, on paper, a carbon-negative rating.

Today, making clean hydrogen via electrolysis costs about $5 to $6 per kilogram, compared to about $1 to $2 per kilogram for hydrogen made from fossil gas. If fossil-gas hydrogen producers can qualify for the same $3-per-kilogram tax credits offered to the cleanest hydrogen under 45V, it would shut down the true green hydrogen economy before it even begins.

“If you allow RNG to come into the market” and open the door to ​“traditional hydrogen with these junk offsets,” the result would be to ​“blow up the competitiveness of electrolytic green hydrogen,” Cullenward said. ​“The only question would be how many digesters can you slap together.”

But that disastrous outcome for green hydrogen would create a tremendous opportunity for the renewable gas industry, which could explain why its members are pushing for that outcome.

RNG industry players haven’t yet explicitly stated that they intend to go after federal green hydrogen tax credits in this way. But many of these companies are actively lobbying the Treasury Department and the U.S. Department of Energy, which is developing a methodology for measuring the greenhouse-gas impact of various hydrogen production pathways, to embed California’s LCFS policies in the 45V tax-credit rules.

In a November 2022 letter to the DOE, the Coalition for Renewable Natural Gas trade group advocated for ​“market-based instruments” like those used in California’s LCFS to be included in the federal government’s rules for determining the greenhouse-gas impacts of hydrogen production.

Allowing existing hydrogen producers to claim credits from methane digesters that feed their gas into fossil-gas pipelines will ​“allow the widespread, distributed buildout of renewable resources utilizing common energy delivery infrastructure which already exists,” the letter stated, ​“so that first-movers can successfully purchase clean energy without physical limitations.”

Sam Wade, the coalition’s director of public policy, told Canary Media in an email, ​“Book and claim is a proven accounting method that allows upstream sources of clean power and gas to be built and that supply matched to the relevant buyers,” including hydrogen production facilities.

Wade, who spent four years overseeing the LCFS program as head of CARB’s Transportation Fuels branch before joining the coalition in 2019, said that alternative forms of biomethane accounting, by contrast, ​“would preclude most bioenergy-to-hydrogen projects from access to the tax credit, constrain RNG project development, and thus delay significant methane abatement of organic waste emissions.”

Similar views were echoed in comments to the Treasury Department’s 45V rulemaking proceeding from producers of RNG and fossil fuels including hydrogen and industrial gas producer Air Liquide, oil-refining giant Valero and the U.S. unit of Dutch oil giant Shell, as compiled by environmental nonprofit Friends of the Earth.

Many major oil and energy companies have also recently made large investments in biomethane production. In the past year, U.K.-based oil major bp acquired U.S. RNG producer Archaea for $4.1 billion, Shell bought the Danish company Nature Energy for nearly $2 billion, and Florida-based energy company NextEra purchased $1.1 billion in RNG assets from U.S.-based Energy Power Partners.

The industry’s lobbying efforts have a shot at success in part because of language in the Inflation Reduction Act itself.

The law requires the Treasury Department to use the ​“GREET model” — a methodology developed by DOE’s Argonne National Laboratory — or a ​“successor model” to GREET to determine the lifecycle greenhouse gas emissions of hydrogen production. The GREET model is used in both EPA’s Renewable Fuel Standard and CARB’s LCFS, and it provides the quantitative justification for treating dirty hydrogen offset by manure-digester credits as if it’s clean.

Cullenward said the IRA’s reliance on the GREET model ​“as an acceptable way to calculate lifecycle emissions” is problematic. ​“I expect industry is already saying, ​‘Hey, Treasury, California says it’s OK.’”

That observation is backed up by a number of comments from biofuels and oil and gas companies to the Treasury Department citing California’s LCFS as an appropriate model for how it should implement greenhouse gas accounting for the 45V tax credit. Several oil companies and biomethane trade groups have also asked the Treasury Department to lock in existing GREET model methodologies for the 45V tax credit and bar any changes derived from updated models.

McNamara agreed that the law’s language around this model raises ​“some concern, if Treasury isn’t challenged, that some of these assumptions will just be ported over” from California’s LCFS to the federal 45V tax-credit program.

The case for and against manure-to-biomethane as a climate solution
Proponents of manure methane digesters point to longstanding policies in the U.S. and Europe that consider them an important contributor to combating climate change that dairies and livestock operations couldn’t afford without incentives.

“We believe biogas is renewable because the feedstocks that biogas are made from are infinite and plentiful in their supply,” Patrick Serfass, executive director of the American Biogas Council and former vice president for the National Hydrogen Association, said in an interview. ​“Therefore, hydrogen made from biogas should be considered clean.”

But a host of analysts have questioned the validity of California’s LCFS approach — and the generous treatment of livestock methane in general. If one accounts for methane that leaks from digesters and from the fossil-gas pipelines it can be injected into, that can erase many of the benefits ascribed to capturing the gas.

So might accounting for the emissions associated with producing manure, such as transporting and feeding animals or the ​“enteric” emissions from cow burps, which are excluded from LCFS calculations.

Critics have also highlighted multiple instances of CARB ​“double-counting” the emissions reductions from livestock methane-capture operations to meet multiple climate targets. They’ve also consistently challenged the LCFS program’s lack of rules to require that the money paid by carbon-emitting fuel producers be tied to actually building new methane digesters — challenges that CARB has consistently rejected.

Serfass argued that the economics of livestock operations prevent farmers from engaging in more expensive manure-management practices. He also pushed back against the proposition that regulators should penalize livestock operators for methane emissions rather than paying them to abate the emissions.

“If in some future policy, all the manure lagoons in California were required to capture their emissions,” he said, it ​“would rocket the price of milk and the price of beef. Do Americans want that?”

But Jeremy Martin, senior scientist and director of fuels policy at the Union of Concerned Scientists, said that paying livestock operators to reduce methane emissions from existing manure lagoons needs to be a ​“transitional strategy” rather than a ​“permanent entitlement.”

“It doesn’t make sense to make pollution generation a major revenue stream” for dairies and livestock operations, he said. ​“Then we’ve created a system where we have to continue to pay them to not pollute, otherwise the whole system collapses.”

How to keep California policy from going nationwide
But the Inflation Reduction Act’s hydrogen tax-credit program — which if done right could help decarbonize some of the hardest-to-abate industries — does not have to become a boondoggle.

The Union of Concerned Scientists and several other like-minded organizations have laid out a number of steps the Treasury Department can take to avoid that outcome.

McNamara summarized the key steps in a May article. First, the 45V program should not allow carbon-negative accounting for biomethane, in contrast to current LCFS accounting rules. Second, it shouldn’t allow book-and-claim accounting to mask the real emissions of fossil-fueled hydrogen production, she wrote.

To embed these principles in how the 45V program works, the Treasury Department will need to take a fresh approach to the GREET model, McNamara told Canary Media.

“The statute doesn’t say it has to use GREET — it says GREET or a successor model,” she emphasized.

That gives the Treasury Department options. One would be to retain the GREET model’s analytical framework but update its input assumptions, which critics say are undercounting the greenhouse-gas impacts of the oil and gas industries today, to better represent the real-world implications of what it’s modeling.

The GREET model will also need retooling to manage the broader complexities of measuring the greenhouse gas emissions of hydrogen production, many commenters to the Treasury Department have noted.

For example, the Institute for Policy Integrity at the New York University School of Law has asked the Treasury Department to work quickly with DOE to develop a successor model that can accurately assess the ​“marginal emissions” impact of electrolyzers using a mix of clean and dirty grid power.

It’s also important to remember that policy preferences play a key role in how technical models like GREET are put to use. Critics of CARB’s LCFS program have highlighted that its current generous treatment of livestock methane digesters is based on changes made in 2018 to encourage more investment in reducing emissions from California’s dairy industry.

The Treasury Department has its own latitude to issue guidance that does not risk undermining the Inflation Reduction Act’s goal of creating a clean and sustainable hydrogen industry, McNamara said.

“One of the reasons there’s so much interest in getting these implementation criteria right,” she said, is that, ​“as California has shown with LCFS, once something is implemented, it’s incredibly hard to change it.”