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Having a true green hydrogen industry depends on that not happening.
In late December, the Treasury Department proposed draft regulations to implement the Inflation Reduction Act’s generous hydrogen production tax credit. Under Section 45V of the tax code, eligible projects must show that their life cycle greenhouse gas emissions fall below exacting benchmarks. Treasury’s final rules will determine how hydrogen projects are allowed to calculate their emissions and direct the flow of tens of billions of tax dollars — or more.
Most of the discussion that followed focused on the draft rule’s proposed guardrails for green hydrogen, which is produced from water using clean electricity. The climate policy community in particular largely approved of Treasury’s approach, in part because it lays the groundwork for hourly emissions accounting in the electricity sector — essentially, making sure that clean energy is being made and used in real time, a foundational shift needed for deep decarbonization.
But when it comes to producing hydrogen from methane — which is how nearly all hydrogen is made today — Treasury’s draft was incomplete. In place of a concrete proposal, the draft regulations raised detailed technical questions about what should be allowed in the final rule. Among these was the suggestion that hydrogen production from fossil fuels might qualify for tax credits by using methane offsets. This, quite simply, would undermine the tax credit’s entire purpose.
If the final regulations authorize methane offsets, then the 45V tax credit could end up subsidizing fossil fuel projects, stifling the nascent green hydrogen industry and locking in emissions-intensive infrastructure for decades to come. Just as concerning, authorizing offsets for the hydrogen production tax credit would also pave the way for similar treatment in the upcoming implementation of technology-neutral clean energy production ( Section 45Y) and investment tax credits (Section 48E).
To understand how offsets could affect the strategic outlook for the hydrogen industry, we looked at how the Treasury Department calculates the life cycle emissions of hydrogen production from natural gas, which is essentially just methane. Treasury’s draft regulations propose to use a bespoke life cycle analysis model to determine whether hydrogen projects qualify for the tax credit, and if so, what level of support they will receive.
This model has several important features: It accounts for CO2 emitted in the process of producing hydrogen from methane, which is straightforward, as well as methane emissions from upstream gas production, processing, and pipeline transportation, which is not. (Unfortunately, it doesn’t include impacts from hydrogen, which itself is an indirect greenhouse gas that contributes to global warming.)
The model’s treatment of methane emissions is particularly important. Although the academic literature suggests a national average above 2% and finds impacts above 9% in some cases, the model assumes that gas supply chains emit only 0.9% of the methane they deliver. Differences in methane emissions matter a lot, even when they look small. That’s because methane traps about 30 times as much heat as CO2 over a 100-year period, so its calculated CO2-equivalence is that much larger.
As a result, Treasury’s proposed approach undercounts the true climate impacts of hydrogen production, particularly hydrogen made from methane. Even so, fossil hydrogen production faces a narrow path to qualifying for the tax credit. For example, a fossil hydrogen project would have to capture more than 70% of its CO2 emissions and buy enough clean electricity to power all its operations — either directly as energy or indirectly as energy credits — even to qualify for the lower tiers of the tax credit. And even though projects’ actual methane emissions are likely to be undercounted, the model’s assumptions are enough to disqualify fossil projects from the highest tax credit tier, which is substantially more lucrative than any of the others.
Because of the difficulty of achieving high CO2 capture rates, some analysts have argued that fossil hydrogen projects will instead wind up applying for tax credits under Section 45Q of the IRA, which provides incentives for sequestering CO2 underground without the hydrogen tax credit’s exacting emissions standards.
But a fossil hydrogen project can claim totally different outcomes if it’s allowed to buy environmental certificates that claim to avoid methane emissions in the first place, a.k.a. methane offsets. The logic goes like this: If someone else was going to emit methane to the atmosphere, but agrees instead to capture and inject it into a gas pipeline network, then a hydrogen producer can buy a certificate from that other methane producer representing that same captured gas and potentially treat their own fossil gas as negative emissions.
For example, consider a large dairy that sends cow manure to uncovered manure lagoons, which produce significant methane emissions. Suppose the dairy installs a methane capture system and sells credits to a hydrogen producer, which then claims to have avoided the dairy’s methane emissions — even if these emissions could be avoided in other ways, like alternative manure management or flaring. Because methane is considered almost 30 times more impactful than CO2 over a 100-year period, the CO2-equivalence of avoiding methane emissions is larger than the project’s direct CO2 emissions, and therefore the resulting hydrogen production process gets a negative carbon intensity score.
If your head is spinning at this point, welcome to the world of offsets. Outcomes depend on counterfactual scenarios that can’t be measured or observed, burning fossil fuels can supposedly reduce pollution, and even the verb tenses are hard to parse.
Vertigo aside, the practical implications of methane offsets for the hydrogen production tax credit are enormous. Without methane offsets, fossil hydrogen projects couldn’t benefit much from the hydrogen tax credit; even with strict carbon capture and storage pollution controls, they can't meet the life cycle requirements for the top tier and would likely prefer to claim a smaller carbon storage tax credit instead. But if projects can use methane offsets, they can easily reduce their calculated emissions to qualify for the top tier of the hydrogen production tax credit.
This would also mean these fossil projects could undercut truly clean hydrogen projects. Green hydrogen projects that comply with the draft guardrails will have to invest in novel electrolyzer technologies and new clean power sources. The top tier of the tax credit provides enough money to make clean hydrogen projects competitive, but methane offsets are a lot less expensive than electrolyzers. If fossil producers can qualify with cheap offsets, they can pocket the difference and outcompete clean producers who have to invest in costly infrastructure.
We set out to estimate the amount of methane offsetting needed to qualify fossil projects for the top production tax credit tier. You can review our calculations here; for the carbon intensity of putatively negative emissions feedstocks, we used a conservative estimate that is about half the level of what other researchers use.
Remarkably, a fossil hydrogen project without carbon capture could qualify for the top production tax credit by offsetting just 25% of its fuel use. And a fossil hydrogen project that abates 90% of its CO2 emissions could earn the top tier of the tax credit if it bought offsets for just 4% of its fuel use.
So far a lot of the discussion about negative carbon intensity scores has focused on methane captured from livestock manure, but Treasury’s draft regulations also make reference to the possibility of capturing “fugitive emissions,” which could include methane emitted from the oil and gas sector or even from coal mines. If methane offsets are made eligible across a wide range of fugitive emissions, the hydrogen tax credit — which was designed as a generous incentive to promote innovation in new technologies — could end up subsidizing incumbent emitters.
Treasury’s hydrogen regulations will also set an important precedent for how offsets are treated in other government policies. The last set of tax credits in the IRA, a pair of technology-neutral investment and production tax credits for clean electricity generation, are under development this year. It’s great news that soon the U.S. federal government will support a full range of clean technologies, not just solar and wind — but not if those policies encourage higher-emitting activities that claim to be clean through the use of offsets. There are a few existing markets for methane offsets already, and certain segments of the economy — particularly the dairy industry — are hungry for more.
At the end of the day, the Biden administration faces a similar set of issues when it comes to producing hydrogen from methane that it did with clean hydrogen produced from electricity and water. If the tax credits encourage green hydrogen projects in places where it is difficult to supply cheap and clean electricity, then those projects risk becoming stranded assets when the tax credits expire. Similarly, if the tax credits encourage hydrogen production from chemical feedstocks and methane offsets, they will prop up fossil fuel infrastructure that could keep operating long after the requirement to buy offsets expires.
For all the complexity, though, one thing is clear: We won’t get a true green hydrogen industry if the Treasury Department decides to subsidize methane offsets — which, when you put it like that, doesn’t make much sense in the first place.
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Recovering from the Los Angeles wildfires will be expensive. Really expensive. Insurance analysts and banks have already produced a wide range of estimates of both what insurance companies will pay out and overall economic loss. AccuWeatherhas put out an eye-catching preliminary figure of $52 billion to $57 billion for economic losses, with the service’s chief meteorologist saying that the fires have the potential to “become the worst wildfire in modern California history based on the number of structures burned and economic loss.” On Thursday, J.P. Morgan doubled its previous estimate for insured losses to $20 billion, with an economic loss figure of $50 billion — about the gross domestic product of the country of Jordan.
The startlingly high loss figures from a fire that has only lasted a few days and is (relatively) limited in scope show just how distinctly devastating an urban fire can be. Enormous wildfires thatcover millions of acres like the 2023 Canadian wildfires can spew ash and particulate matter all over the globe and burn for months, darkening skies and clogging airways in other countries. And smaller — and far deadlier fires — than those still do not produce the same financial roll.
It’s in coastal Southern California where you find large population centers areas known by all to be at extreme risk of fire. And so a fire there can destroy a whole neighborhood in a few hours and put the state’s insurance system into jeopardy.
One reason why the projected economic impacts of the fires are so high is that the structures that have burned and the land those structures sit on are very valuable. Pacific Palisades, Malibu, and Santa Monica contain some of the most sought-after real estate on planet earth, with typical home prices over $2 million. Pacific Palisades itself has median home values of around $3 million, according to JPMorgan Chase.
The AccuWeather estimates put the economic damage for the Los Angeles fires at several times previous large, urban fires — the Maui wildfire in 2023 was estimated to cause around $14 billion of economic loss, for example — while the figure would be about a third or a quarter of a large hurricane, which tend to strike areas with millions of people in them across several states.
“The fires have not been contained thus far and continue to spread, implying that estimates of potential economic and insured losses are likely to increase,” the JPMorgan analysts wrote Thursday.
That level of losses would make the fires costlier in economic terms than the 2018 Butte County Camp Fire, whose insured losses of $10 billion made it California’s costliest at the time. That fire was far larger than the Los Angeles fires, spreading over 150,000 acres compared to just over 17,000 acres for the Palisades Fire and over 10,000 acres for the Eaton Fire. It also led to more than 80 deaths in the town of Paradise.
So far, around 2,000 homes have been destroyed,according to the Los Angeles Times,a fraction of the more than 19,000 structures affected by the Camp Fire. The difference in estimated losses comes from the fact that homes in Pacific Palisades weigh in at more than six times those in rural Butte, according to JPMorgan.
While insured losses get the lion’s share of attention when it comes to the cost impacts of a natural disaster, the potential damages go far beyond the balance sheet of insurers.
For one, it’s likely that many affected homeowners did not even carry insurance, either because their insurers failed to renew their existing policies or the homeowners simply chose to go without due to the high cost of what insurance they could find. “A larger than usual portion of the losses caused by the wildfires will be uninsured,” according to Morningstar DBRS, which estimated total insured losses at more than $8 billion. Many homeowners carry insurance from California’s backup FAIR Plan, which may itself come under financial pressure, potentially leading to assessments from the state’s policyholders to bolster its ability to pay claims.
AccuWeather arrived at its economic impact figure by looking not just at losses from property damage but also wages that go unearned due to economic activity slowing down or halting in affected areas, infrastructure that needs to be repaired, supply chain issues, and transportation snarls. Even when homes and businesses aren’t destroyed, people may be unable to work due to evacuations; businesses may close due to the dispersal of their customers or inability of their suppliers to make deliveries. Smoke inhalation can lead to short-, medium-, and long-term health impacts that take a dent out of overall economic activity.
The high level of insured losses, meanwhile, could mean that insurers’ will see less surplus and could have to pay more for reinsurance, Nancy Watkins, an actuary and wildfire expert at Milliman, told me in an email. This may mean that they would have to shed yet more policies “in order to avoid deterioration in their financial strength ratings,” just as California has been trying to lure insurers back with reforms to its dysfunctional insurance market.
The economic costs of the fire will likely be felt for years if not decades. While it would take an act of God far stronger than a fire to keep people from building homes on the slopes of the Santa Monica Mountains or off the Pacific Coast, the city that rebuilds may be smaller, more heavily fortified, and more expensive than the one that existed at the end of last year. And that’s just before the next big fire.
Suburban streets, exploding pipes, and those Santa Ana winds, for starters.
A fire needs three things to burn: heat, fuel, and oxygen. The first is important: At some point this week, for a reason we have yet to discover and may never will, a piece of flammable material in Los Angeles County got hot enough to ignite. The last is essential: The resulting fires, which have now burned nearly 29,000 acres, are fanned by exceptionally powerful and dry Santa Ana winds.
But in the critical days ahead, it is that central ingredient that will preoccupy fire managers, emergency responders, and the public, who are watching their homes — wood-framed containers full of memories, primary documents, material wealth, sentimental heirlooms — transformed into raw fuel. “Grass is one fuel model; timber is another fuel model; brushes are another — there are dozens of fuel models,” Bobbie Scopa, a veteran firefighter and author of the memoir Both Sides of the Fire Line, told me. “But when a fire goes from the wildland into the urban interface, you’re now burning houses.”
This jump from chaparral shrubland into neighborhoods has frustrated firefighters’ efforts to gain an upper hand over the L.A. County fires. In the remote wilderness, firefighters can cut fire lines with axes, pulaskis, and shovels to contain the blaze. (A fire’s “containment” describes how much firefighters have encircled; 25% containment means a quarter of the fire perimeter is prevented from moving forward by manmade or natural fire breaks.)
Once a fire moves into an urban community and starts spreading house to house, however, as has already happened in Santa Monica, Pasadena, and other suburbs of Los Angeles, those strategies go out the window. A fire break starves a fire by introducing a gap in its fuel; it can be a cleared strip of vegetation, a river, or even a freeway. But you can’t just hack a fire break through a neighborhood. “Now you’re having to use big fire engines and spray lots of water,” Scopa said, compared to the wildlands where “we do a lot of firefighting without water.”
Water has already proven to be a significant issue in Los Angeles, where many hydrants near Palisades, the biggest of the five fires, had already gone dry by 3:00 a.m. Wednesday. “We’re fighting a wildfire with urban water systems, and that is really challenging,” Los Angeles Department of Water and Power CEO Janisse Quiñones explained in a news conference later that same day.
LADWP said it had filled its 114 water storage tanks before the fires started, but the city’s water supply was never intended to stop a 17,000-acre fire. The hydrants are “meant to put out a two-house fire, a one-house fire, or something like that,” Faith Kearns, a water and wildfire researcher at Arizona State University, told me. Additionally, homeowners sometimes leave their sprinklers on in the hopes that it will help protect their house, or try to fight fires with their own hoses. At a certain point, the system — just like the city personnel — becomes overwhelmed by the sheer magnitude of the unfolding disaster.
Making matters worse is the wind, which restricted some of the aerial support firefighters typically employ. As gusts slowed on Thursday, retardant and water drops were able to resume, helping firefighters in their efforts. (The Eaton Fire, while still technically 0% contained because there are no established fire lines, has “significantly stopped” growing, The New York Times reports). Still, firefighters don’t typically “paint” neighborhoods; the drops, which don’t put out fires entirely so much as suppress them enough that firefighters can fight them at close range, are a liability. Kearns, however, told me that “the winds were so high, they weren’t able to do the water drops that they normally do and that are an enormous part of all fire operations,” and that “certainly compounded the problems of the fire hydrants running dry.”
Firefighters’ priority isn’t saving structures, though. “Firefighters save lives first before they have to deal with fire,” Alexander Maranghides, a fire protection engineer at the National Institute of Standards and Technology and the author of an ongoing case study of the 2018 Camp fire in Paradise, California, told me. That can be an enormous and time-consuming task in a dense area like suburban Los Angeles, and counterintuitively lead to more areas burning down. Speaking specifically from his conclusions about the Camp fire, which was similarly a wildland-urban interface, or WUI fire, Maranghides added, “It is very, very challenging because as things deteriorate — you’re talking about downed power lines, smoke obstructing visibility, and you end up with burn-overs,” when a fire moves so quickly that it overtakes people or fire crews. “And now you have to go and rescue those civilians who are caught in those burn-overs.” Sometimes, that requires firefighters to do triage — and let blocks burn to save lives.
Perhaps most ominously, the problems don’t end once the fire is out. When a house burns down, it is often the case that its water pipes burst. (This also adds to the water shortage woes during the event.) But when firefighters are simultaneously pumping water out of other parts of the system, air can be sucked down into those open water pipes. And not just any air. “We’re not talking about forest smoke, which is bad; we’re talking about WUI smoke, which is bad plus,” Maranghides said, again referring to his research in Paradise. “It’s not just wood burning; it’s wood, plastics, heavy metals, computers, cars, batteries, everything. You don’t want to be breathing it, and you don’t want it going into your water system.”
Water infrastructure can be damaged in other ways, as well. Because fires are burning “so much hotter now,” Kearns told me, contamination can occur due to melting PVC piping, which releases benzene, a carcinogen. Watersheds and reservoirs are also in danger of extended contamination, particularly once rains finally do come and wash soot, silt, debris, and potentially toxic flame retardant into nearby streams.
But that’s a problem for the future. In the meantime, Los Angeles — and lots of it — continues to burn.
“I don’t care how many resources you have; when the fires are burning like they do when we have Santa Anas, there’s so little you can do,” Scopa said. “All you can do is try to protect the people and get the people out, and try to keep your firefighters safe.”
Plus 3 more outstanding questions about this ongoing emergency.
As Los Angeles continued to battle multiple big blazes ripping through some of the most beloved (and expensive) areas of the city on Thursday, a question lingered in the background: What caused the fires in the first place?
Though fires are less common in California during this time of the year, they aren’t unheard of. In early December 2017, power lines sparked the Thomas Fire near Ventura, California, which burned through to mid-January. At the time it was the largest fire in the state since at least the 1930s. Now it’s the ninth-largest. Although that fire was in a more rural area, it ignited for some of the same reasons we’re seeing fires this week.
Read on for everything we know so far about how the fires started.
Five major fires started during the Santa Ana wind event this week:
Officials have not made any statements about the cause of any of the fires yet.
On Thursday morning, Edward Nordskog, a retired fire investigator from the Los Angeles Sheriff’s Department, told me it was unlikely they had even begun looking into the root of the biggest and most destructive of the fires in the Pacific Palisades. “They don't start an investigation until it's safe to go into the area where the fire started, and it just hasn't been safe until probably today,” he said.
It can take years to determine the cause of a fire. Investigators did not pinpoint the cause of the Thomas Fire until March 2019, more than two years after it started.
But Nordskog doesn’t think it will take very long this time. It’s easier to narrow down the possibilities for an urban fire because there are typically both witnesses and surveillance footage, he told me. He said the most common causes of wildfires in Los Angeles are power lines and those started by unhoused people. They can also be caused by sparks from vehicles or equipment.
At about 27,000 acres burned, these fires are unlikely to make the charts for the largest in California history. But because they are burning in urban, densely populated, and expensive areas, they could be some of the most devastating. With an estimated 2,000 structures damaged so far, the Eaton and Palisades fires are likely to make the list for most destructive wildfire events in the state.
And they will certainly be at the top for costliest. The Palisades Fire has already been declared a likely contender for the most expensive wildfire in U.S. history. It has destroyed more than 1,000 structures in some of the most expensive zip codes in the country. Between that and the Eaton Fire, Accuweather estimates the damages could reach $57 billion.
While we don’t know the root causes of the ignitions, several factors came together to create perfect fire conditions in Southern California this week.
First, there’s the Santa Ana winds, an annual phenomenon in Southern California, when very dry, high-pressure air gets trapped in the Great Basin and begins escaping westward through mountain passes to lower-pressure areas along the coast. Most of the time, the wind in Los Angeles blows eastward from the ocean, but during a Santa Ana event, it changes direction, picking up speed as it rushes toward the sea.
Jon Keeley, a research scientist with the US Geological Survey and an adjunct professor at the University of California, Los Angeles told me that Santa Ana winds typically blow at maybe 30 to 40 miles per hour, while the winds this week hit upwards of 60 to 70 miles per hour. “More severe than is normal, but not unique,” he said. “We had similar severe winds in 2017 with the Thomas Fire.”
Second, Southern California is currently in the midst of extreme drought. Winter is typically a rainier season, but Los Angeles has seen less than half an inch of rain since July. That means that all the shrubland vegetation in the area is bone-dry. Again, Keeley said, this was not usual, but not unique. Some years are drier than others.
These fires were also not a question of fuel management, Keeley told me. “The fuels are not really the issue in these big fires. It's the extreme winds,” he said. “You can do prescription burning in chaparral and have essentially no impact on Santa Ana wind-driven fires.” As far as he can tell, based on information from CalFire, the Eaton Fire started on an urban street.
While it’s likely that climate change played a role in amplifying the drought, it’s hard to say how big a factor it was. Patrick Brown, a climate scientist at the Breakthrough Institute and adjunct professor at Johns Hopkins University, published a long post on X outlining the factors contributing to the fires, including a chart of historic rainfall during the winter in Los Angeles that shows oscillations between very wet and very dry years over the past eight decades. But climate change is expected to make dry years drier in Los Angeles. “The LA area is about 3°C warmer than it would be in preindustrial conditions, which (all else being equal) works to dry fuels and makes fires more intense,” Brown wrote.