Industry working towards generating carbon credits from hydrogen, SAF, direct air capture: report

The lack of methodologies to generate carbon credits from clean energy technologies like low-emissions hydrogen, sustainable aviation fuels (SAF) and direct air capture and storage (DACS) is hindering investment, but the industry is working to develop these crediting methodologies, according to a report issued April 16.

The report, co-authored by the International Energy Agency and Temasek's decarbonization investment subsidiary GenZero, comes amid growing industry queries around whether these fast-growing energy transition businesses will be able to avail revenues from carbon credits.

Singapore's energy regulator is looking to introduce hydrogen and its derivative fuels into the city-state's fuel mix for power generation alongside natural gas and LNG, and the government was one of the world's first to mandate targets for the use of sustainable fuels in aviation.

"There are currently no crediting methodologies to generate SAF carbon credits, and only a few methodologies for low-emissions hydrogen, which are limited in scope. Some DACS methodologies have been developed recently, but their applications have yet to scale," said the report titled Role of Carbon Credits in Scaling Up Innovative Clean Energy Technologies.

Low emissions hydrogen

It said that as of April, only one crediting methodology allows the issuance of carbon credits from the production and use of low-emissions hydrogen -- the Clean Development Mechanism (CDM) AM0124 methodology for the production of hydrogen using renewable energy -- although many are under development.

"Verra, Gold Standard and the China Certified Emissions Reduction standard are in the process of developing further methodologies that may involve low-emissions hydrogen applications," said the report, issued at the Ecosperity Conference in Singapore.

It said the most comprehensive attempt to develop low-emissions hydrogen crediting methodologies to date is the Hydrogen for Net Zero (H2NZ) initiative that covers the hydrogen supply chain, encompassing production, transportation, storage and utilization in areas like heating or clean steel production.

"The H2NZ initiative is in the process of developing its first methodologies, which can be used by Verra and Gold Standard," the report said.

A robust methodology for low-emissions hydrogen would need to account for the global warming potential of hydrogen, which can be as high as 12 times that of CO2, even though it is not a greenhouse gas, the report said, adding that project developers would need to monitor leakage of hydrogen.

Aviation fuels

For SAF, Gold Standard has plans for developing a crediting methodology for fuel switching in aviation and SAF certificates are also available that certify the fuel's production from sustainable feedstocks, such as waste oil or renewable energy e-fuels, it added.

But one of the challenges for SAF crediting methodologies would be to avoid double issuance for the same emissions reductions.

"When an airline uses SAF, it lowers its own Scope 1 emissions while also reducing the Scope 3 emissions of its passengers. This creates a question of who can claim the reduction: the airline, the passenger who bought a SAF certificate or a SAF carbon credit, or both?," the report said.

This can be resolved if there is clear guidance to ensure that any SAF co-claiming is done with the highest environmental integrity.

Direct air capture

The report said that unlike other technologies, DACS projects lack marketable byproducts besides the captured CO2, making it crucial to generate revenue through carbon credits and other policy mechanisms that value the environmental attributes of DACS.

"Despite the high costs of removing CO2 from the atmosphere, the demand for carbon credits issued from DACS projects is already high," it said, adding that many corporations have signed forward contracts to purchase DACS credits and the challenge is around scaling them up.

These include Frontier, which was founded by Stripe, Alphabet, Shopify, Meta, McKinsey Sustainability and Airbus; and NextGen, a jointly managed carbon removal credit facility by South Pole and Mitsubishi with advance market commitments by Boston Consulting Group, LGT Private Banking, Mitsui O.S.K. Lines, Swiss Re and UBS, the report said.

The methodologies to issue carbon credits from DACS include ones by Puro.earth, Global Carbon Council, Verra, American Carbon Registry, Isometric, Canada's Greenhouse Gas Offset Credit System Climeworks/DNV and Gold Standard.

According to the report, the annual estimated investment across the three technologies in 2023 was $9 billion, which needs to increase to nearly $300 billion annually by the early 2030s and nearly $700 billion by 2050.

"In 2050, nearly three-quarters of the investments will be required for low-emissions hydrogen and hydrogen-based fuels, with DACS making up about 20% and SAF just over 6%," the report said.