Inflation Reduction Act impacts on the economics of clean hydrogen and liquid fuels

TL;DR

The paper analyzes how the Inflation Reduction Act influences the costs and competitiveness of low-carbon hydrogen and liquid fuels in the US by examining various production pathways and policy incentives.

Contribution

It provides a detailed assessment of IRA incentives on the economic viability of different low-carbon fuel production methods and explores policy extensions needed for competitiveness.

Findings

Green hydrogen from electrolysis becomes cost-competitive with gray hydrogen.

Biomass-derived hydrogen could be cost-effective if certain IRA credits are extended.

Synthetic liquid fuels require policy support to match petroleum fuel costs.

Abstract

The Inflation Reduction Act (IRA) in the United States provides unprecedented incentives for deploying low-carbon hydrogen and liquid fuels, among other low greenhouse gas (GHG) emissions technologies. To better understand the prospective competitiveness of low-carbon or negative-carbon hydrogen and liquid fuels under the IRA in the early 2030s, we examine the impacts of IRA provisions on costs of producing hydrogen and synthetic liquid fuel made from natural gas, electricity, short-cycle biomass (agricultural residues), and corn-ethanol. With IRA credits (45V or 45Q), but excluding incentives provided by other national or state policies, hydrogen produced by electrolysis using carbon-free electricity (green H2) and natural gas reforming with carbon capture and storage (CCS) (blue H2) are cost-competitive with the carbon-intensive benchmark gray H2 from steam methane reforming. Biomass-derived H2 with or without CCS is not cost-completive under current IRA provisions. However, if IRA allowed biomass gasification with CCS to claim a 45V credit for carbon-neutral H2 and a 45Q credit for negative biogenic-CO2 emissions, this pathway would be less costly than gray H2. The IRA credit for clean fuels (45Z), currently stipulated to end in 2027, would need to be extended, or similar policy support provided by other national or state policies, for clean synthetic liquid fuel to be cost-competitive with petroleum-derived liquid fuels. Levelized IRA subsidies per unit of CO2 mitigated for all hydrogen and synthetic liquid fuel production pathways, except electricity-derived synthetic liquid fuel, range from 65 to 384 $/t CO2, which is within or below the range in U.S. federal government estimates of the Social Cost of Carbon (SCC) in the 2030 to 2040 timeframe.