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■ Date: Oct 24th, 2022
Unlocking the Potentials of Hydrogen Credits:
See How Chinese Companies are Leading the Change in
Bringing Hydrogen to Carbon Trading
Author of this article
【In brief】
- Two Chinese hydrogen projects, one renewable hydrogen production project, and one hydrogen fuel cell logistic truck project are seeking CDM crediting to issue international carbon credits. Another hydrogen fuel cell commercial vehicle project is up for CCER issuance at home.
- Hydrogen credit issuers expand from upstream to downstream, going from green hydrogen producers, hydrogen fuel cell vehicle operators, to vehicle end-users based on different emission baseline scenarios.
- Hydrogen credit can be sold either as a stand-alone product (unbundled credit) or bundled with hydrogen (bundled credit). If it is sold as a stand-alone product, the issuer should pay extra attention to the double-counting between the credit retiree and the physical hydrogen product buyer.
Keywords: #Carbon Credits #Carbon Emission Trading #Green Hydrogen #Hydrogen Fuel Cell Electric Vehicle (FCEV) #CDM #CCER #Carbon Inset
If you like this article, please also refer to our comprehensive analysis report "Emissions Trading Scheme in China" in our database.
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Hydrogen has been well-recognized as an alternative energy carrier that helps bring the world toward a carbon neutral future. However, low-carbon hydrogen is not cost-competitive. Exploring new pathways to finance the hydrogen economy is a crucial breakthrough and this is where the carbon market could step in. An emerging pathway is to develop low-carbon hydrogen projects to issue tradable credits, i.e. hydrogen credits, in the voluntary carbon market. Globally, Verra and Gold Standard, the world’s two largest voluntary carbon standards, have teamed up to develop a set of methodological frameworks for hydrogen projects, aiming to credit the full suite of low-carbon hydrogen activities.
Domestically, leading municipal governments have sent strong policy signals to finance hydrogen through carbon trading. Currently, in China’s national emission trading scheme, Beijing Green Exchange manages CCER (Chinese Certified Emission Reduction) transactions, and Shanghai Environment and Energy Exchange is in charge of CEA (Chinese Emission Allowance) transactions. Considering the carbon market resources and experience, hydrogen credit pilot transactions may first take place in any of the two cities in the foreseeable future. In fact, Beijing has included the establishment of a hydrogen credit scheme, in which certified low-carbon hydrogen projects are eligible to issue and trade CCER (Chinese Certified Emission Reductions) in the city’s five-year plan of hydrogen development (北京市氢能产业发展实施方案(2021-2025)). A similar move could be observed in Shanghai in its recent policy release to support low-carbon hydrogen projects involved in carbon trading (关于支持中国(上海)自由贸易试验区临港新片区氢能产业高质量发展的若干政策). (See China's Emissions Trading: The Opportunities Ahead )
While the development of hydrogen credit has started to bloom both at home and abroad, a series of problems are yet to be tackled. Particularly, what types of projects can issue hydrogen credits? Who can make a creditable claim on the emission reductions generated from alow-carbon hydrogen activity? What does a potential hydrogen credit transaction flow look like? How to deal with double-counting issues across the hydrogen value chain? These are the pet topics not only for policy and standard makers but for those companies who are eyeing the opportunities to earn extra benefits through hydrogen credit trading. In this article, we take an in-depth look at three recent initiatives led by Chinese companies, including a green hydrogen producer, a hydrogen fuel cell electric vehicle (FCEV) manufacturer, and a FCEV operator, to see what are their strategies for building hydrogen credit business models, and sharing our thoughts on addressing double-counting issues.
Case study 1: A renewable hydrogen production project that supplies green hydrogen for buses at the Winter Olympics could be the first-of-its-kind to issue carbon credits under CDM.
General Introduction:
Three Chinese organizations, China United Hydrogen Technology Research Institute (国氢中联氢能科技研究院), Longyuan (Beijing) Carbon Asset Management Technology (龙源(北京) 碳资产管理技术有限公司), and Shanghai Environment and Energy Exchange have proposed a new methodology in May, 2022, pending approval from Clean Development Mechanism (CDM), for calculating emission reductions from renewable hydrogen production projects to sell carbon credits. The first in line for this proposed methodology is a wind power hydrogen production project - Guohua Hebei Chicheng Wind Hydrogen Project Phase I (国华河北赤诚风氢储多能互补示范项目制氢站一期项目), expecting to be the first-of-its-kind to earn CER (Certified Emission Reduction) credits.
A methodology is a go-to-standard for any emission reduction project that eyes on issuing carbon credits. Once the proposed methodology is approved, many more renewable hydrogen production projects could be put in place, following the first project example.
Given the Chinese domestic voluntary emission reduction program CCER is currently under suspension, earning CDM approval in the international market might offer similar projects a quick pathway to the domestic market once CCER resumes.
Figure 1: FCEV in Beijing Winter Olympics
Project Overview:
Invested and constructed by the project owner Guohua (Chicheng) Wind Power Co., Ltd. (国华赤诚风电有限公司), a subsidiary of China Energy Investment (CHN Energy), the project uses the renewable electricity generated by Guohua Chicheng’s wind farm to produce hydrogen. The project's annual output is 16 million Nm3/a, with 99.999% hydrogen purity. The water electrolyzer is provided by John Cockerill Jingli Hydrogen Technology Co., Ltd. (考克利尔竞力（苏州)氢能科技有限公司). Located in the city of Zhangjiakou, Hebei province, the project was one of the stations that provided green hydrogen for more than 1,200 hydrogen fuel cell buses during the 2022 Beijing Winter Olympics.
Figure 2: Simplified hydrogen value chain of Guohua Hebei Chicheng Wind Hydrogen Project Phase I
Project Emission Reductions:
According to the project design document, the project is expected to achieve an annual emission reduction of 41, 457 tCO2e, with a ten-year fixed crediting period. The project’s baseline emission is hydrogen production from coal. In other words, the project’s emission reductions come from hydrogen production source switching - replacing fossil fuels with renewable sources (switching grey hydrogen to green hydrogen).
Figure 3: Simplified equation of project emission reductions
Hydrogen Credits Transaction Flow - Green hydrogen producer as the credit issuer
The project owner, Guohua (Chicheng) Wind Power, may choose to sell the credits either as a stand-alone product (unbundled credit) or bundled with hydrogen (bundled credit). The key difference between bundled and unbundled credit is whether the credit attribute is attached to the physical hydrogen product. Selling unbundled credit is a common way in today’s voluntary carbon offset market, in which the credit retiree and the physical product user are two different parties, and the price of each is subject to two markets, i.e., the carbon credit market and the hydrogen trading market.
Figure 4: Carbon offset model
Bundled credit, on the other hand, refers to the credit attribute travels together with the physical product, aka “Carbon Inset” - a emission-reduction product (e.g., green hydrogen) carrying its attribute transferring from a upstream supplier (e.g., a green hydrogen producer) to its downstream consumers (e.g., an industrial goods producer who uses green hydrogen as feedstock) along a single supply chain. In such a case, a green hydrogen producer could sell green hydrogen at premium.
Figure 5: Carbon inset model
Comparison between selling bundled and unbundled hydrogen credits from an issuer’s perspective
Selling bundled credits:
Pros:
- Avoid double-counting. Double-counting between the credit retiree and the physical product buyer could avoid.
- Make the green attribute visible. The issuer could have more bargaining power by selling a visible GREEN attribute.
Cons: The number of buyers may limit, both in terms of geographic locations and the actual demand for hydrogen consumption. Hydrogen producers may prefer local buyers, considering the feasibility and costs of hydrogen storage and transportation.
Selling unbundled credits:
Pros:
- Flexible transactions. Credit issuers can sell unbundled credits at any time and to any buyer, regardless of business type or geographic location (e.g., can be both domestic and overseas buyers), as the credit buyer does not necessarily have to consume hydrogen.
- Generate more revenue. Unbundled credits can be sold as a financial derivative or other financial products, generating more revenue for the credit issuer.
Cons: Double-counting/claiming should be carefully addressed. Once the credit is sold, the physical hydrogen products cannot be considered GREEN in emission reduction accounting, which would otherwise cause double-counting. In other words, once the green hydrogen producer issues and sells the credits to a credit retiree, it cannot claim to sell low-carbon hydrogen product to the physical product buyer, since the attribute would belong to the credit retiree.
Addressing double-counting/double-claiming of supply chain (Scope 3) emission reductions among multiple entities in a value chain
Selling bundled credits, however, may raise another concern about double-counting/double-claiming between a company and its upstream suppliers/downstream consumers. For example, a green hydrogen producer may claim to produce and sell “Carbon Free” hydrogen to its downstream customer to reduce Scope 3 emissions (i.e., classify the emissions into the category of processing of sold products in Scope 3). Meanwhile, its customer, an industrial goods producer, may claim that it purchases and uses “Carbon Free” hydrogen as feedstock to reduce its Scope 1 emissions. In such a case, double-counting/double-claiming on a single GHG reduction may occur.
There is a lack of guideline specifying how the attribution should occur to avoid double counting in supply chain (Scope 3) emission reductions by far. Double counting is an inherent part of scope 3 accounting. Each player in the value chain has some degree of influence over emissions.
Solutions are always over difficulties. According to the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (Scope 3 Standard), since double counting within Scope 3 inherently occurs, there could be a level of acceptance for purposes of reporting scope 3 emissions to stakeholders, driving reductions in value chain emissions, and tracking progress toward a scope 3 reduction target. To ensure transparency and avoid misinterpretation of data, a company should clarify any potential double counting of reductions or credits when making claims about Scope 3 reductions. For example, a company may claim that it is working jointly with partners to reduce emissions, rather than taking exclusive credit for scope 3 reductions. (See China's Emissions Trading: The Opportunities Ahead )
Case study 2: A hydrogen fuel cell logistic truck project designed to replace traditional diesel-powered trucks seeks CDM crediting, expected to bring along the world’s first methodology for FCEV emission reductions.
General Introduction:
Refire group (重塑集团), a leading Chinese fuel cell system integrator, has cooperated with six organizations, Sinopec Sales (中石化销售), Sinopec Capital (中石化资本), Climate Bridge (环保桥), China Hydrogen Alliance Research Institute (中国氢能联盟), Shanghai Environment and Energy Exchange (上海环境能源交易所), and Fuzhou University to build a new methodology for FCEV emission reductions, pending for CDM final approval. A hydrogen fuel cell logistic truck project is proposed under this methodology.
Project Overview:
The project owner is a FCEV operator called Qingliqingwei (QLQW, 氢力氢为), Refire’s downstream customer. By introducing 320 fuel cell logistic trucks in the city of Foshan, Guangdong province, the project plans to replace an equivalent number of diesel trucks that were previously operated by QLQW for freight transport. (See FCEV Operators in Logistics Industry in China)
Project Emission Reductions:
The project will achieve an annual emission reduction of 7,671 tCO2e during a ten-year crediting period. The baseline scenario is the operation of 320 diesel trucks with comparable local capacity, meaning that the project’s emission reductions come from vehicle switching - replacing diesel trucks with FCEV. The project is considered zero emissions as the hydrogen used by the FCEV is generated from renewables.
Figure 6: Simplified equation of project emission reductions
Hydrogen Credits Transaction Flow - FCEV operator as the credit issuer
A FCEV operator typically provides fleet leasing and management services, such as real-time communication, driver coaching & route efficiency, fleet compliance, vehicle data monitoring and tracking, etc. to FCEV end-users (Business-to-Business). A potential hydrogen credit transaction flow may go from QLQW to its downstream customers, who sign contracts with QLQW to enjoy the logistic operation services.
So far, QLQW has partnered with JD.com, China’s second-largest ecommerce company after Alibaba, to provide FCEV logistic services in the city of Foshan. In addition, global companies like IKEA and AB InBev are also QLQW’s downstream customers.
Providing a full package of logistic operation services is the main business that QLQW is trying to go for. While in reality, especially at a time when the FCEV operation industry has yet to gain a firm foothold in China, few customers would pay for the logistic services. These downstream customers are highly price-sensitive and thus would instead only lease FCEV to replace the original diesel-powered fleets than paying extra for the logistic services.
Besides, multinational companies like IKEA and AB InBev have built long-term partnerships with their fleet operation providers for years. Therefore, switching the diesel trucks to FCEV would be much more efficient than replacing the entire fleet management team.
To make its logistic services more attractive, QLQW may sell bundled credits with its FCEV operation services to better market its add-on services. In addition, by selling visible credit attributes, QLQW could attract more customers, particularly those global companies with carbon neutral pledges and are more cautious about attribute ownership.
One thing to be noted is that, QLQW’s downstream FCEV users would not be able to claim the ownership of emission reductions once the credits are sold as stand-alone products to a third party outside QLQW’s value chain, given that the attributes would belong to the third-party who retires the credits.
Figure 7: Hydrogen Credits Transaction Flow - FCEV operator as the credit issuer
Another critical point to be highlighted is, agreements between the FCEV operator and the hydrogen producer, hydrogen refuelling station(s), and FCEV manufacturer, are required to avoid double-counting of emission reductions.
Case study 3: Feichi Technology, a FCEV manufacturer under Meijin Energy, is working on the first domestic methodology for FCEV to help its end-users issue carbon credits
In June 2021, Feichi Technology (飞驰科技), a leading Chinese FC commercial vehicle manufacturer under Meijin Energy, partnered with China Classification Society Quality Certification Company (中国船级社), a third-party verification body, and Hydrogen Mountain Technology (氢山科技), an IoT data platform operator, to jointly develop the first domestic methodology for FCEV emission reduction. The methodology aims to provide a unified standard for the FCEV sector to quantify emission reductions and issue tradable credits, offering a quick pathway to similar projects to tap into the carbon market.
It is not the first move Feichi has taken to bring hydrogen fuel cell projects to the carbon market. In May 2021, Feichi Technology signed a strategic cooperation agreement with China Energy Conservation Association (中国节能协会), Hydrogen Mountain Technology (氢山科技), China Automotive Engineering Research Institute Co., Ltd. (中国汽研), and China Classification Society Quality Certification Company (中国船级社). What Feichi is trying to do is to build a credit trading platform for its FCEV end-users and help these end-users, who contribute real emission reductions to obtain verification and issue CCER. The revenue generated from credits trading will be shared between Feichi Technology and its customers.
More recently, Meijin Carbon Asset Management Company (美锦碳资产管理) and Hydrogen Mountain Technology have received a patent issued by the National Intellectual Property Administration, specializing on GHG emission reduction data monitoring system. The system will be installed in FCEV, providing real-time monitoring of the traveling and hydrogen consumption to accurately calculate the emission reductions.
Figure 8: Feichi Technology's Partnerships
Similar to the second case study, the project emission reductions come from fuel-switching, replacing diesel trucks with FCEVs. (Noted: According to CDM draft small-scale methodology CDM-MP88-A05: Hydrogen fuel cell vehicles, by-product hydrogen FCEV is considered zero emissions)
Figure 9: Simplified equation of project emission reduction
The initial purpose of Feichi’s proposal is to offset the emissions from its parent company Meijin, one of China's largest coal and coke producers, from coal and coking production. We anticipate that after Feichi’s customer issues hydrogen credits, the parent company Meijin may purchase and retire these credits, or at least part of the credits, to offset its coal and coking emissions to reach carbon neutral at the Group level. Once Feichi’s customer issue hydrogen credits and sell to a third party (e.g., another company has no relation to Meijin’s hydrogen business sector) , the emission reduction attribute would be transferred to the third party, in such case Meijin and FCEV end-user cannot claim its ownership on the corresponding reductions. Likewise, when Meijin retires this credit for their business activities outside this hydrogen supply chain, FCV end-users cannot claim emission reducion. In such a case, Meijin has to be considered the same as a third party.
Figure 10: Hydrogen Credits Transaction Flow - FCEV end-user as the credit issuer
Double-counting in two different supply chain decarbonization activities
A double-counting that should be avoided in this hydrogen credit flow is, once Feichi’s customers issue credits and sell to a third party, the corresponding amount of reduction should not be counted to offset Meijin’s emissions toward its Group carbon neutral target. This kind of double counting of offsets usually occurs between the credit buyer and the carbon-free product user in two value chains, where both companies count the same reduction to meet their climate targets, respectively. According to the GHG protocol, this kind of double-counting should be addressed by registries (e.g., CCER, VCS) that allocate a serial number to all traded credits and ensuring the serial numbers are retired once they are used. In the absence of registries, double-counting could be tackled by a contract between the seller and the buyer. Unlike double-counting in a single company’s supply chain (Scope 3) that inherently exits, double-counting in two different value chains should be carefully addressed.
Three Key Takeaways:
Hydrogen credit issuers expand from upstream to downstream. Unlike traditional carbon offset projects where the credit issuers are typically the very upstream suppliers, i.e., renewable energy generators, the hydrogen credits scheme embraces a more diverse group of credit issuers, moving down along the supply chain and may, in the future, include C-end consumers, such as hydrogen fuel cell passenger vehicle owners.
Bundled vs. unbundled hydrogen credits. A key question hydrogen credit issuers should consider whether they choose to sell their credits bundled with the physical hydrogen product or not. Once an issuer chooses to sell unbundled credits, its product should no longer be considered “green” in carbon accounting, which would otherwise lead to double-counting of emission reductions between the credit retiree and the physical product buyers. From this point of view, selling bundled credit - physical hydrogen product with a premium could be an optimal strategy to avoid double-counting. If the hydrogen credit issuer chooses to issue unbundled credits, some measures should be taken to avoid double-counting, e.g., via a contractual agreement with the physical hydrogen product buyer.
Double-claiming in Scope 3 emissions. Double claiming is an inherent part of scope 3 accounting - Your supplier’s scope 3 emissions overlap with your scope 1, or your Scope 3 emissions are your customer’s scope 1. There could be a level of acceptance of Scope 3-related emission reductions. Special guidance for corporates to make creditable claims have not been released yet. In the future, blockchain could provide better solutions to solve this issue. (See Blockchain – Game Changer in Energy Industry)
Reference:
1. 北京市经济和信息化局. 2021.08.16. 北京市氢能产业发展实施方案（2021-2025年）.
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3. CDM official website. NM0381: Emission reduction by hydrogen production from renewable energy sources.
4. CDM official website. SSC-NM107: Emission reduction by hydrogen fuel cell vehicles
5. Greenhouse gas protocol official website. A Corporate Accounting and Reporting Standard.
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If you like this article, please also refer to our comprehensive analysis report "Emissions Trading Scheme in China" in our database.
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