Impacts of the Inflation Reduction Act on the Economics of Clean Hydrogen and Synthetic Liquid Fuels

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 examined the impacts of the IRA provisions on the costs of producing hydrogen and synthetic liquid fuel made from natural gas, electricity, short-cycle biomass (agricultural residues), and corn-derived ethanol. We determined that, with IRA credits (45V or 45Q) but excluding the incentives provided by other national or state policies, hydrogen produced by electrolysis using carbon-free electricity (green H₂) and by natural gas reforming with carbon capture and storage (CCS) (blue H₂) is cost-competitive with the carbon-intensive benchmark gray H₂, which is produced by steam methane reforming. Biomass-derived H₂ with or without CCS is not cost-competitive under the current IRA provisions. However, if the 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 would need to be provided by other national or state policies in order for clean synthetic liquid fuel to be cost-competitive with petroleum-derived liquid fuels. The levelized IRA subsidies per unit of CO₂ mitigated for all of the hydrogen and synthetic liquid fuel production pathways, except for electricity-derived synthetic liquid fuel, range from $65-$384/t of CO₂. These values are within or below the range of the U.S. federal government's estimates of the social cost of carbon (SCC) in the 2030-2040 time frame.

Keywords: Bioenergy with carbon capture and storage (BECCS); Economics; Electrofuels; Energy policy; Hydrogen; Inflation Reduction Act (IRA); Synthetic liquid fuels.