Gray, blue, or moo hydrogen? How gas companies are milking California’s LCFS

Zero-carbon green hydrogen made from renewable electricity has been having its moment in the sun with big headlines and hefty subsidies provided under the Inflation Reduction Act. That’s not the only type of hydrogen entering the market, either; there’s a whole rainbow of even more esoteric hydrogen color categories if you care to look. But what if I told you the most valuable hydrogen in the United States right now has been aptly referred to as “moo hydrogen”? Rather than a new conversion technology, this process involves pairing generic, natural gas-derived gray hydrogen with an upstream credit for dairy manure management somewhere else in the country.

California’s Low-Carbon Fuel Standard credits alternative fuels based on their life-cycle greenhouse gas (GHG) emissions—the greater the GHG reduction relative to the program’s target, the more credits a given fuel generates. Typically, the life-cycle emissions for a given fuel are assessed based on emissions across that fuel’s supply chain (“well-to-wheel”). Low-carbon fuels generally are measured to emit less well-to-wheel GHG emissions than conventional fossil fuels. However, a growing share of credits in the LCFS have been generated not by replacing carbon-intensive fossil fuels with alternative fuels, but rather, via credits for changes in behavior in completely unrelated sectors.

A fuel pathway currently up for approval in California provides a great example of what’s happening. A run-of-the-mill hydrogen producer that generates hydrogen by reforming fossil natural gas from the gas grid has proposed purchasing environmental attributes from a large dairy farm generating biomethane from dairy manure…all the way in upstate New York. As the thinking goes, because that farm is no longer venting that methane into the atmosphere, and that methane is instead combusted into CO2, that farm should be credited for avoiding the powerful climate-forcing effects of methane. This means that anywhere in the country, if a farm can reduce its methane emissions from dairy manure beyond what is legally required and then pump that natural gas into the gas grid, it can be credited for that methane reduction under the LCFS as part of a “book-and-claim” approach. This functions similarly to a carbon offset program, but without any requirements for demonstrating additionality. By purchasing the “attributes” of the methane (i.e., ensuring that nobody else claims it), a hydrogen producer in California can therefore credit their fossil-derived hydrogen with the sizable credits from avoided methane emissions.

How valuable are these credits, exactly? The GHG intensities claimed in the pathway application range from -116 to -282 grams of CO2-equivalents per MJ of supplied hydrogen (in contrast to approximately 100 gCO2e/MJ for natural-gas derived hydrogen). Even with a depressed LCFS credit price of approximately $100/tonne CO2e, this adds up to as much as $3 to $6 per kg of hydrogen (with the exact value depending on the CI and the type of vehicle it is used in). That’s nearly double the value that the LCFS provides for green hydrogen made from an electrolyzer using renewable electricity, as well as almost double the maximum credit value that the Inflation Reduction Act (IRA) provides in tax credits for green hydrogen. Unlike gray hydrogen producers purchasing attributes from distant farms as they tap into the existing natural gas grid, genuine green hydrogen producers actually have to purchase and deploy electrolyzers to produce their green hydrogen.

In other words, California’s credit system can generate more value for out-of-state farms changing their manure management practices, and for incumbent natural gas-based hydrogen producers, than for new fuel technologies. While reducing on-farm emissions is a noble cause in principle, each credit from on-farm behavioral changes outside of California is potentially displacing a credit that could be generated by replacing petroleum with an alternative fuel like green hydrogen. California’s Air Resources Board (CARB) should pause and consider whether subsidizing the installation of dairy digesters on the other side of the country is the intended outcome of the LCFS, or whether guardrails are necessary to prevent a flood of out-of-state, out-of-sector credits. Approximately 30% of dairy biogas credited under the LCFS already comes from out of state farms, and that share is likely to grow. A recent ICCT analysis found that there was limited potential for additional dairy projects in-state, with the largest potential for future growth likely to come from large, out-of-state dairy projects.

The recent profusion of pathways that rely on upstream negative emissions crediting in the LCFS points to a broader vulnerability within transport policies based on life-cycle assessment. When policies like the LCFS offer the highest carbon prices in country (approximately three to four times the cost of an allowance in California’s cap and trade system), the urge to shoehorn GHG reductions in other sectors of the economy into transportation is obvious. However, the high carbon prices in transport sector policies are attributable to the technical challenges of decarbonizing this sector, in contrast to lower-hanging fruit in the power or agricultural sectors. Without safeguards, these types of inclusions can blunt the impact of fuels policies like the LCFS by flooding compliance with credits from activities that are tangential to the transport sector.

Unfortunately, CARB has proposed little to mitigate the issues caused by “moo hydrogen” and similar crediting practices. As part of its recent AB32 scoping process to evaluate changes to climate programs such as the LCFS, CARB has proposed imposing deliverability requirements for new RNG pathways and a phaseout of avoided methane emissions crediting for new projects starting in 2030. Notably, hydrogen projects are excluded from the new deliverability requirements, retaining the status quo for pathways like the one discussed here. Though the LCFS provisions for crediting avoided methane emissions are certainly well-intentioned and aimed at reducing methane emissions from California’s own agricultural sector, they’ve grown counterproductive, and are now sending money out of state while diluting the impact of the LCFS. An accelerated phaseout of avoided methane emissions credits in the LCFS, in conjunction with direct support for California dairy farms to adopt new, less emissions-intensive manure management practices, would be a win-win for the LCFS and California’s methane emissions reduction goals.