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ESG Investment Profiles, ESG Research

Hedging on Hydrogen

For years, hydrogen has been touted as a bridge to a renewable-energy future. Hydrogen fuel cells can generate power chemically, rather than through combustion, producing water⁠—and zero planet-warming greenhouse gases—as a sole byproduct. Hydrogen fuel cells also typically offer longer ranges than batteries, and offer the ability to be refueled rapidly, making them a better potential fit than electric for heavy industry and long-haul transportation.

With all these apparent advantages, it’s understandable to wonder why this bridge to the future is still under construction. For one, “green hydrogen,” produced via the electrolysis of water powered by renewable energy sources, is still expensive enough to make it uncompetitive in the energy market. Dirtier, less expensive alternatives are plentiful, including “brown hydrogen,” made from burning coal, and “gray hydrogen,” derived from carbon-intensive steam reforming of natural gas. The natural gas industry has touted “blue hydrogen” as an alternative, recapturing the carbon dioxide generated during the steam reforming process, but critics have suggested that hidden emissions in this approach make it worse than burning natural gas directly (while it also supports the continued development of natural gas infrastructure). Others point out the magnified impacts of hydrogen leaks: while the gas disappears from the atmosphere much faster than carbon dioxide, its impact in the first 20 years can be 33 times worse than that of CO2.

Finally, a less obvious but perhaps no less crucial obstacle to clean hydrogen adoption is that hydrogen’s most widespread use today is as a feedstock in oil refining and ammonia production (the latter of which typically becomes fertilizer). Which begs the question: if today’s demand comes mainly from traditionally “dirty” industries, and the promise of tomorrow is still prohibitively expensive, what might a hydrogen transition actually look like?

Air Products and Chemicals, Inc, provides a useful case study. While the company says it is “the global leader in the supply of liquefied natural gas process technology and equipment,” it also calls itself “the world’s largest supplier of hydrogen.” Together, these business segments make Air Products a key supplier to the traditional energy industry. But as the company points out, its products have generally served to make oil and gas production, distribution, and transportation cleaner and more efficient.

What do we make of a company that has long served the oil and gas industry, among others, by helping to reduce its environmental impact? One place to look is Air Products’ longer-term sustainability progress and goals. In 2020, the company reported a 10% year-over-year reduction in Scope 1 greenhouse gas (GHG) emissions, and a 7% reduction in Scope 2 GHG emissions, while setting a goal of a 33% reduction in its emissions intensity by 2030. Because emissions intensity is measured against sales volume, using this measure (which is rare among companies we follow) ensures the goal will grow with the company. For 2021, Air Products reported emissions intensity reductions of 4% alongside 16% revenue growth, and said it was on track to meet its 2030 goal—suggesting that decreasing emissions while growing revenues is within reach. Notably, Air Products does not purchase carbon offsets to meet its goals, instead sourcing renewable energy directly from suppliers (including a large-scale solar project in Arizona).

Perhaps even more telling are Air Products’ “megaproject” commitments. The company says a joint $7 billion venture in Saudi Arabia will be the world’s largest green hydrogen facility when it goes onstream in 2025, producing high volumes of hydrogen via clean electrolysis, along with nitrogen (by air separation) and green ammonia. A multi-billion-dollar energy complex in Edmonton, Alberta is slated to produce net-zero hydrogen, mainly by replacing natural gas steam methane reforming with an alternative process called auto-thermal reforming, said to recapture 85% of carbon emissions instead of 50% (the complex will also use onsite hydrogen power generation for further emissions reduction). Air Products is additionally planning what it says will be the world’s largest sustainable aviation fuel facility, a $2 billion project in California, and has reportedly already pioneered a first-of-its-kind, large-scale carbon capture project alongside two steam methane reformers located within the Valero Refinery in Port Arthur, Texas.

Air Products will have to continue to innovate in order for these and future projects to deliver on their promise of sustainability. In 2019, an incident at a California plant led to a significant hydrogen leak and explosion. And while the company touts additional blue hydrogen facilities it is developing, important questions remain about the sustainability of this technology. Still, for a company surrounded by industries that have been among the most resistant to transformative progress on sustainability, Air Products stands out starkly in its willingness to make big, proof-of-concept bets on hydrogen and other technologies. Lowering the future costs of renewable energy must begin with big investments now, and in both its current progress and its breadth of vision, we believe Air Products is showing the way.