08 Jul 2021

A proposed Hydrogen Guarantee of Origin Scheme: A major step in Australia becoming a world leader in the hydrogen sector

By Nick Thomas, Faith Taylor, Dan Howard and Cloe Jolly

The Australian Government is seeking industry input on a Hydrogen Guarantee of Origin Scheme, to provide transparency as to the carbon emissions associated with hydrogen production. It's a critical step in promoting Australia's international competitiveness in the hydrogen industry.

The Australian Government has released, for public comment, a discussion paper for the proposed design of a Hydrogen Guarantee of Origin (Hydrogen GO) certification scheme.

The establishment of a hydrogen GO certification scheme is a priority under Australia's National Hydrogen Strategy. The release of the Discussion Paper reaffirms Australia's desire to take a lead role in the development of a clean hydrogen industry and to be a key competitor globally in that industry.

What is a hydrogen certification scheme and why is it important?

A Hydrogen GO certification scheme will impose a standardised process for measuring, tracing and certifying the carbon footprint of a hydrogen product.

While certification schemes are not a new concept, the certification of hydrogen products is new. International customers and trading partners have shown a clear preference for zero and low-emissions hydrogen and, as social and environmental concerns become more prevalent, consumers, export partners, investors and lenders are increasingly seeking "low carbon" supply chains, in order to meet their own sustainability targets.

While obtaining certification could increase the costs of bringing hydrogen products to market, it will also make those products more attractive, and potentially enhance the attractiveness of their producers as well. Producers will also be able to build social licence with a trusted green/blue hydrogen product and enhance investor appeal. Hydrogen buyers and consumers will have the certainty they need to confirm that the hydrogen they purchase has been produced with no net carbon emissions. This is particularly important given hydrogen can be produced in a number of ways including from fossil fuels themselves or by using energy generated from fossil fuels.

Certification is a priority not only in Australia, but also in the work of the influential International Partnership for Hydrogen and Fuel Cells in the Economy (IPHE), in which Australia is involved. Several hydrogen certification schemes are in development worldwide, and scheme alignment will be important in encouraging international trade.

Design of Australia's proposed Hydrogen GO Scheme

In order to balance the pressing need for a domestic certification scheme to support hydrogen project development and the value of alignment with international frameworks under development, Australia's Hydrogen GO scheme draws on aspects of the proposed European CertifHy scheme and current thinking in the IPHE. The initial Hydrogen GO scheme will also only verify and track:

  • hydrogen production technology/pathways, including the primary fuel source;
  • carbon emissions associated with production (and only scope 1 and scope 2); and
  • production location.

These key points would be identified on the GO certificate issued.

The scheme proposed in the Discussion Paper represents the first components of a potentially broader scheme, which could be used to track the use of renewable energy and clean hydrogen in a range of renewable or low-emission products. The scheme could also be expanded later to track and certify water consumption and other production or environmental and social factors.


Coverage

To accelerate scheme establishment, it is proposed that the certification scheme will initially only focus on the production of hydrogen gas itself.

Further, although the Government has expressed an intention to cover all technologies for producing clean hydrogen (in line with the views of IPHE members), at this stage the Discussion Paper presents methodologies for guaranteeing the origin of hydrogen for the three main production pathways relevant to Australia:

  • Electrolysis with electricity;
  • Coal Gasification with Carbon Capture and Storage (CCS); and
  • Steam Methane Reforming (SMR) of natural gas with CCS.

The Discussion Paper notes that the scheme is likely to evolve over time to include:

  • additional hydrogen production pathways;
  • additional components of the hydrogen value chain (e.g storage and transport);
  • certification of hydrogen energy carriers and derivatives (e.g. ammonia and liquid hydrogen); and
  • other related and downstream products (e.g. low-emissions/green steel and 'green gas' blends like biomethane).

System boundary

The system boundary is the part of the hydrogen value chain for which emissions are to be measured and to which the guarantee of origin will apply. The following possible system boundaries have been considered in the Discussion Paper:

Go Scheme Graphic

Choosing a boundary involves balancing completeness and complexity. A "well-to-gate" boundary (ie. up to product creation), which is applied to CertifHy's scheme, is proposed as a starting point for the Hydrogen GO scheme. This includes all upstream emissions associated with supply of feedstocks (including extraction, processing and transportation of fossil fuels) as well as emissions incurred during hydrogen production. It excludes emissions associated with capital goods and downstream emissions (such as hydrogen transport, supply, handling, consumption and end-of-life). The Discussion Paper states that while gate-to-gate is most closely aligned with the National Greenhouse and Energy Reporting Scheme (NGERS), it is also the most common approach in international frameworks and most likely to be adopted by international hydrogen certification schemes.

Other parts of the value chain may eventually be included in the Hydrogen GO scheme. The Discussion Paper suggests that conversion, transport and storage steps may be included within the system boundary at a later date, as this would increase transparency over emissions associated with delivered hydrogen.


Carbon accounting frameworks

In order to minimise the reporting burden, there has been a preference amongst stakeholders that the Hydrogen GO scheme will leverage existing Australian carbon accounting frameworks (such as NGERS and Climate Active), to the extent practicable. However, these do not necessarily account for all upstream and downstream emissions which would be covered in a 'well-to-gate’ certification scheme.

In order to be aligned internationally, while drawing on Australian frameworks, the Discussion Paper proposes that the initial Hydrogen Go scheme uses:

  • International Organization for Standardization (ISO) standards and the Greenhouse Gas Protocol (GHG Protocol) as an overarching framework for estimating product-related emissions;
  • Intergovernmental Panel on Climate Change (IPCC) and NGERS guidelines to support specific emissions calculations and to provide emissions factors; and
  • Climate Active and GHG protocol guidance on scope 2 (electricity) emissions.

Verification of renewable energy

The Discussion Paper recognises that, assuming most large scale hydrogen creation projects will source grid electricity, the use of renewable energy in creating hydrogen could be verified using large scale generation certificates (LGCs) under Australia's current Renewable Energy Target (RET) scheme.

However, LGCs cannot be created for electricity which is generated below the generator's renewable power baseline, and the RET scheme is scheduled to end in 2030. Currently proposed international verification schemes do not have these limitations.

The Discussion Paper proposes a new renewable "guarantee of origin" (GO) certificates to supplement LGCs and eventually provide the sole verification source.


Treatment of offsets

The international position on whether a certification scheme should recognise offsets for residual carbon emissions, and focus on a net carbon footprint, is not yet clear. The Discussion Paper outlines two options:

  • Option 1: In line with IPHE discussions thus far, offsets would not be included. This would mean only gross emissions would be recorded as an attribute on the GO certificate but a deduction in emissions would still be applied where emissions are captured as part of the production process (eg. where CCS occurs onsite or where a third party permanently stores the emissions that arise from the hydrogen production facility in geological formations).
  • Option 2: Australia carbon credit units (ACCUs) from registered Emissions Reduction Fund (ERF) projects could be used to reduce the net emissions from hydrogen production. It is likely that if this option is pursued, both gross and net offsets would be recorded on the GO certificate to provide full transparency to consumers. Further, given there is debate around the permanence of non-geological carbon storage, the source of the offset would need to be tracked.

The Discussion Paper notes that Option 2 would create an additional source of demand for ACCUs and may put forward pressure on the ACCU price. Additionally, there is a risk that if this option was progressed, Australia's Hydrogen GO scheme may be inconsistent with international developments.


Carbon accounting methodology

Chapter 3 of the Discussion Paper details the carbon accounting methodologies proposed for measuring the emissions associated with the three main hydrogen production pathways, leveraging existing Australian frameworks where practicable. A key aspect of the methodology proposed is that it is considering allocating a proportion of emissions from a production pathway to co-products created by the pathway. That is, under the proposed approach, the conceptual formula for deriving the amount of emissions associated with hydrogen can be summarised as:

Hydrogen emissions = Gross emissions within well-to-gate boundary — Carbon capture (removals) — Co-product emissions

where:

  • gross emissions include all scope 1 and 2 emissions arising in the well-to-gate boundary (methodologies for estimating scope 1, 2 and upstream emissions are detailed in the Discussion Paper). The Discussion Paper also considers the treatment of hydrogen produced using directly sourced renewable electricity (like onsite solar and wind) and electricity sourced indirectly (like through power purchase agreements or programs like GreenPower);
  • emissions permanently captured and stored will be subtracted from gross emissions. Carbon capture utilisation and storage is to be defined in line with the NGERS Determination and both the gross emissions and the stored emissions will be measured and tracked to provide process transparency;
  • emissions attributed to co-products (meaning other saleable products produced through the hydrogen production process) will also be subtracted from the gross emissions; and
  • emissions associated with capital goods, overhead operations and corporate activities are excluded in accordance with the GHG Protocol Corporate Standard.

Carbon accounting methodologies are highly technical and the methodologies proposed in the Discussion Paper are complex. It is also important to note that the proposal departs from what is proposed in the CertifHy scheme and so stakeholders should query whether it should be included in Australia's GO scheme at all.


Regulatory framework, governance and administration

The Clean Energy Regulator is proposed to be the body responsible for administering the scheme, given its existing role in supporting similar registries/schemes in the sector. Administration of the Hydrogen GO scheme will align closely with that of existing certificate-based schemes, such as the RET.

New legislation may be introduced to support the certification scheme for hydrogen (with amendments made as the market evolves to support the certification of renewables and other low-emissions products/commodities). Alternatively, new regulations could be established under the National Greenhouse and Energy Reporting Act 2007 (Cth) and Australian National Registry of Emissions Units Act 2011 (Cth).

Making your views known

With 35 hydrogen production projects currently in the pipeline across Australia, there is high demand for a hydrogen certification scheme to be operational as soon as possible. This is to allow hydrogen producers to incorporate certification into their project and offtake agreements and to build on Australia's international reputation as an exporter of a credible and valuable green hydrogen product.

Public consultation on the Discussion Paper is now open with submission due by 30 July 2021.

We recommend that hydrogen industry stakeholders familiarise themselves with the Discussion Paper and consider lodging a submission, as these submissions will inform the initial design of Australia's Hydrogen GO scheme.

Related Knowledge

Get in Touch

Get in touch information is loading

Disclaimer

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.