No. 199: Policy Support for Electrolytic Hydrogen: Impact of Alternative Carbon Accounting Rules

Governments worldwide have recently launched policy support programs for hydrogen, where the level of support is to be tied to the carbon intensity of the hydrogen produced. Here we analyze the impact of alternative accounting rules for assessing the carbon intensity of electrolytic hydrogen on the financial and emission performance of Power-to-Gas (PtG) systems. We initially calibrate our model to reference plants eligible for the production tax credit specified under the Inflation Reduction Act in the United States. Contrary to common beliefs, we find that more stringent accounting rules provide investors with sufficient incentives to invest in PtG systems today. Yet, they can still lead to life-cycle average carbon intensity levels close to those for hydrogen produced from natural gas with carbon capture. Less stringent rules generally entail higher investment incentives but also significantly higher emissions. Overall, our findings reflect the incentives for investors to utilize capacity by procuring additional, carbon-intensive electricity from the general grid.