COP26 Concludes, Hydrogen in the Reconciliation Bill, and More

This year’s climate conference in Glasgow has ended, though the work of addressing climate change is far from over. With the Glasgow Climate Pact, nearly 200 nations acknowledged that countries’ current emissions reductions don’t do enough to prevent significant climate damages and agreed to return next year with more ambitious plans to reduce greenhouse gas emissions. The pact is the first of its kind to include language that explicitly refers to coal—but although countries agreed to reduce coal use and to roll back subsidies for other fossil fuels, participating nations have not promised to halt coal production entirely. Other notable agreements include the US-led pledge to cut methane emissions by 30 percent by the end of 2030; a pledge to end deforestation by 2030; and a joint United States–China agreement to work together on reducing greenhouse gas emissions, with China committing for the first time to develop a plan to curb methane. The bilateral agreement does not reflect major shifts in either country’s climate plans, but this surprise agreement between the world’s two biggest polluters has inspired some optimism.

On a new episode of the Resources Radio podcast, RFF’s Vice President for Research and Policy Engagement Billy Pizer shares takeaways from his time in Glasgow attending COP26. Pizer describes the recent transformation of climate summits into highly publicized events, which in turn has galvanized commitments from nations, subnational governments, and private companies. Pointing to the pressure that the mass convergence of people exerts on world leaders to ramp up their climate ambition, Pizer notes that there’s no substitute for in-person negotiations. Ultimately, Pizer contends that the conference offered some major successes; namely, the bilateral agreement between the United States and China to curb methane. “China and the United States are the two biggest emitters, and so, when they are aligned and working together, it creates momentum for everybody else to join in,” Pizer says. “Having some sort of positive signal and momentum is really important. I think it helps leverage more concessions and actions by other countries.”

The US House of Representatives passed the reconciliation package in their vote today; the bill now goes to the Senate, while policymakers navigate lingering policy disagreements and debate the bill’s potential impacts on the federal deficit. Current drafts of the Build Back Better Act incorporate significant funding for clean energy tax credits, including funds to incentivize clean hydrogen production. Debates over the bill remain in flux—especially with some policymakers vocally skeptical about plans to boost “blue” hydrogen, which is produced from fossil fuels and offsets its emissions through carbon capture. But recent drafts of the bill have included provisions to expand the existing 45Q program and to create a new tax credit under 45X of the Internal Revenue Code. Under this new program, hydrogen produced with zero life-cycle emissions would be eligible for a $3-per-kilogram tax credit, while hydrogen produced from natural gas with carbon capture would be eligible for less generous subsidies.

In a new blog post, RFF’s Jay Bartlett and Alan Krupnick explore the ins and outs of how the reconciliation package incentivizes clean hydrogen. While the scholars note that the proposed credit of $3 per kilogram of green hydrogen is high relative to immediate climate benefits, they say that such an incentive is necessary to reduce costs and to build up economies of scale. Blue hydrogen projects can qualify for either the 45Q tax credit or the new 45X tax credit, but the scholars note that the 45X incentive in the House version of the act might not be generous enough to attract hydrogen producers. That could be bad news for decarbonization, since the 45Q credit provides an incentive for projects to maximize carbon dioxide capture rather than to minimize total emissions. “Hydrogen incentives can both support the development of technologies with great long-term promise and enable cost-effective reductions in hydrogen emissions in the near term,” Bartlett and Krupnick conclude. “The 45X tax credit manages the former well. The latter also can be accomplished with the 45X tax credit … but only if the credits are sufficiently high.”

In the later stages of COP26, world leaders secured a long-awaited agreement around global carbon markets, finally finishing the Paris Agreement rulebook after years of heated debates. Article 6 is the final provision in the 26-article Paris Agreement that signatories have agreed to; the article involves global rules around how countries trade carbon offsets—whether through a cap-and-trade system or some other program. An agreement nearly materialized at COP25 two years ago, but Brazilian negotiators advocated for a “double counting” loophole that would have allowed countries—when either buying or selling credits—to count the trade toward their national emissions reductions. Other points of contention involved how to count carbon credits created under the Kyoto Protocol, which precedes the Paris Agreement, and whether a tax on carbon credits should be levied to fund climate adaptation in developing countries. Under the terms of the agreement, the United Nations will certify qualifying carbon projects and make it easier for nations to generate emissions credits that can count toward their nationally determined contributions.

In a new blog post that draws from a reflection posted on his blog An Economic View of the Environment, RFF University Fellow Robert Stavins walks through major takeaways from COP26 and sketches out lingering disagreements that likely will animate future climate policymaking. Pointing out that modern COPs are as much about formal negotiations as they are about attention-grabbing public and private agreements, Stavins walks through big stories for the press (e.g., the timeline for nations announcing more ambitious emissions reduction goals) and big stories for “policy wonks” (e.g., Article 6 of the Paris Agreement to buy and sell emissions allowances across borders). Progress on this front could be important in the years ahead, Stavins notes. “Such linking need not be restricted to pairs of cap-and-trade systems. Rather, heterogeneous linkage among cap and trade, carbon taxes, and performance standards is feasible,” Stavins contends. “Such linkage lowers costs, enabling countries to be more ambitious.”