How Carbon Accounting Rules Shape Incentives for Hydrogen Production

Governments around the world have recently adopted policy support programs for hydrogen, tying the level of support to the assessed carbon intensity of the hydrogen produced. Here we compare alternative carbon accounting rules for determining the policy support available for hydrogen in terms of the resulting financial and carbon emissions performance of Power-to-Gas systems. We calibrate our model to reference plants eligible for the production tax credit available under the Inflation Reduction Act in the United States. Contrary to frequently articulated views, more stringent accounting rules generally provide investors with sufficient incentives to invest in Power-to-Gas systems. Nonetheless, even more stringent rules can lead to carbon intensity levels close to those for hydrogen produced from natural gas with carbon capture. Less stringent rules generally entail stronger investment incentives due to higher profitability, but also significantly higher emissions as investors procure more carbon-intensive electricity from the general grid.