Opportunities for Hydrogen Production with CCUS in China: Path to Carbon Neutrality

As the world’s largest greenhouse gas emitter, China faces enormous pressure to decarbonize its economy while sustaining rapid economic growth. In its ambitious quest to achieve carbon neutrality by 2060, hydrogen is emerging as a cornerstone of China's energy transition. However, the majority of China's hydrogen production still relies on fossil fuels, resulting in significant CO2 emissions. Carbon capture, utilization, and storage (CCUS) present a pivotal technology to decarbonize China’s existing hydrogen production infrastructure. This technical write-up provides a comprehensive analysis of the opportunities for hydrogen production with CCUS in China, focusing on its role in carbon neutrality, cost-effectiveness, regional opportunities, and policy recommendations.

China's Hydrogen Opportunity in the Context of Carbon Neutrality

Carbon Neutrality Target by 2060

China’s target of reaching carbon neutrality by 2060 requires sweeping reforms across its entire economy. Achieving this goal will involve reducing emissions from key sectors such as energy, transportation, and heavy industry, all of which contribute significantly to the country’s carbon footprint. As one of the leading global producers of hydrogen, China recognizes hydrogen’s potential as a low-emission energy carrier that can facilitate deep emission reductions across various sectors.

Hydrogen as a Versatile Solution for Decarbonization

Low-emission hydrogen is uniquely positioned to support decarbonization in sectors that are challenging to electrify, such as long-distance transport, chemicals, and iron and steel production. Hydrogen can be used as a clean fuel or feedstock, enabling emissions reductions in these hard-to-abate sectors. Additionally, hydrogen production contributes to air quality improvement, energy security by reducing reliance on fossil fuel imports, and technological innovation, as China explores advanced production methods and applications.

China as a Global Leader in Hydrogen Production

China currently leads the world in hydrogen production, accounting for approximately one-third of global hydrogen output. However, nearly all of this hydrogen is produced through carbon-intensive methods, such as coal gasification and natural gas reforming. This so-called "grey hydrogen" process emits large amounts of CO2, posing a significant challenge to China’s carbon neutrality ambitions. As the country scales its hydrogen economy, shifting towards low-emission hydrogen production methods will be critical.

The Role of CCUS in Decarbonizing China’s Hydrogen Production

CCUS is essential to reducing emissions from China’s fossil fuel-based hydrogen production, allowing the country to continue utilizing its abundant coal and natural gas reserves while aligning with its carbon neutrality goals.

• Reducing Emissions from Existing Plants: By retrofitting existing hydrogen production facilities with CCUS technology, China can reduce emissions from current production streams without completely overhauling its energy infrastructure. This allows the country to achieve immediate emission reductions and avoid locking in high-emission technologies for decades.
• Cost-Effective Hydrogen Production in Coal-Rich Regions: In regions with limited renewable energy resources but abundant coal reserves, coal-based hydrogen production with CCUS offers a cost-effective solution. This pathway enables China to use its domestic coal resources while mitigating CO2 emissions, presenting a viable medium-term solution before renewable hydrogen reaches commercial scale.
• Enabling Synthetic Fuel Production: CCUS can also facilitate the production of synthetic fuels, a critical low-emission solution for sectors like aviation, where hydrogen or direct electrification is difficult. By capturing CO2, China can combine it with hydrogen to create synthetic fuels, reducing emissions in hard-to-decarbonize sectors.

The Role of CCUS in China’s Energy Transition

China’s Active Pursuit of CCUS

China has been at the forefront of developing CCUS technology, with numerous projects in operation and various others at different stages of development. CCUS is viewed as an essential technology to decarbonize China's vast fossil fuel-based industries, including hydrogen production, cement, and steel.

• Policy Support for CCUS in the 14th Five-Year Plan: The inclusion of large-scale CCUS demonstrations in China’s 14th Five-Year Plan (2021–2025) reflects the government’s commitment to deploying this technology at scale. This policy support is crucial to overcome technical and financial barriers to widespread CCUS adoption.
• Carbon Intensity Standards for Hydrogen Production: As part of its carbon neutrality strategy, China has introduced carbon intensity standards for hydrogen production. These standards ensure that hydrogen production aligns with the country’s broader climate goals, guiding both electrolysis and fossil fuel-based hydrogen production with CCUS toward lower emissions.

Synergies Between Hydrogen and CCUS

The deployment of hydrogen production with CCUS creates important synergies that can accelerate the adoption of both technologies in China.

Cost Advantages of CCUS for Hydrogen Production

• Low-Cost CO2 Capture from Hydrogen Production: Hydrogen production, particularly from natural gas, generates relatively pure CO2 streams, making it one of the least costly options for CO2 capture. This cost advantage could attract early investments in CCUS infrastructure, positioning hydrogen as a catalyst for broader CCUS deployment in China.
• Fossil Fuel-Based Hydrogen with CCUS: In the near term, fossil fuel-based hydrogen production with CCUS is expected to remain cost-competitive with green hydrogen produced via electrolysis, particularly in regions with limited access to renewable energy. This creates an economic opportunity for China to continue using its fossil fuel resources while reducing emissions.

Industrial Clusters as Hubs for Hydrogen and CCUS

• Shared Infrastructure: By co-locating hydrogen production and CCUS facilities in industrial clusters, China can reduce costs through shared infrastructure for CO2 and hydrogen transport and storage. This reduces the need for separate pipelines and storage facilities, leveraging economies of scale to make the projects more economically viable.
• Attracting New Investments: Industrial clusters equipped with shared CCUS infrastructure can also attract new industries seeking to decarbonize their operations. The presence of CCUS and hydrogen production capabilities makes these regions attractive for industries like chemicals and cement, which require low-emission feedstocks and fuels.

Revenue Generation from CO2 Utilization

CCUS-equipped hydrogen production facilities can generate additional revenue by utilizing captured CO2 in applications such as enhanced oil recovery (CO2-EOR), which remains economically viable in certain regions of China. Although the long-term climate benefits of CO2-EOR are debated, it provides a transitional revenue stream that can improve the economic viability of CCUS projects in the short to medium term.

Challenges and Policy Recommendations

Despite the opportunities for hydrogen production with CCUS, several challenges remain, requiring robust policy support and targeted interventions.

Scaling Up CCUS Deployment

Scaling up CCUS in China faces technical, financial, and regulatory hurdles. More robust policy measures are needed to incentivize wider adoption, including:

• Financial Incentives: Direct funding, operational subsidies, and tax incentives for CCUS-equipped hydrogen production can encourage early investment and scale-up. For example, integrating CCUS into China’s emissions trading scheme (ETS) would create a market-based mechanism for carbon capture, making it more financially attractive for industries.
• Reducing Technical Barriers: China must invest in research and development (R&D) to address technical barriers to CCUS deployment. This includes improving capture technologies, reducing costs, and enhancing the efficiency of CO2 transport and storage. Continued innovation is key to making CCUS an economically viable solution for hydrogen production.

Developing Hydrogen Infrastructure

A major barrier to the widespread adoption of hydrogen in China is the lack of dedicated infrastructure, including pipelines, storage facilities, and refueling stations.

• Policy Measures to Accelerate Infrastructure Development: China should implement policy measures to accelerate the build-out of hydrogen infrastructure. This includes offering financial support for hydrogen pipeline networks, subsidizing refueling stations, and creating hydrogen storage facilities. Industrial clusters, where hydrogen production is concentrated, should be prioritized for infrastructure investments.
• Collaboration Between Public and Private Sectors: Public-private partnerships (PPPs) can play a critical role in building hydrogen infrastructure, pooling resources, and sharing risks between government and industry.

Promoting Innovation in Hydrogen and CCUS Technologies

Continuous innovation is crucial to reducing the costs and improving the performance of both hydrogen and CCUS technologies. China should focus on:

• R&D Funding: Increasing funding for R&D initiatives related to hydrogen production technologies, particularly for fossil fuel-based hydrogen with CCUS and electrolysis with renewable energy sources.
• Demonstration Projects: Supporting large-scale demonstration projects that integrate hydrogen production with CCUS will help to validate technologies and reduce perceived risks for investors.
• Fostering Collaboration: Encouraging collaboration between research institutions, industry, and government agencies will drive technological breakthroughs and facilitate the rapid commercialization of innovative hydrogen and CCUS solutions.

Sustainable Biomass Sourcing for Hydrogen Production with CCUS

Producing hydrogen from biomass with CCUS presents an opportunity for carbon removal, as the CO2 captured during production is effectively removed from the atmosphere. However, careful consideration must be given to:

• Sustainable Biomass Availability: Ensuring a reliable and sustainable biomass supply is crucial to avoid competition with other sectors, such as agriculture and biofuels. Policymakers must develop guidelines for biomass sourcing that prioritize environmental sustainability and avoid land-use conflicts.
• Carbon Removal Potential: Biomass-based hydrogen production with CCUS should be integrated into China’s carbon neutrality strategy as a carbon removal option. However, its overall potential depends on sustainable feedstock availability and the development of efficient technologies for biomass gasification and CO2 capture.

Conclusion

China's ambitious carbon neutrality goals position hydrogen as a critical element of its energy transition. However, the current reliance on carbon-intensive hydrogen production methods poses a significant challenge. CCUS technology presents an opportunity to decarbonize existing hydrogen production from fossil fuels, allowing China to leverage its domestic resources while reducing emissions. By strategically combining hydrogen production with CCUS, China can accelerate its transition to a low-carbon hydrogen economy, reduce reliance on imports, and contribute to global climate goals. To realize these opportunities, China must scale up CCUS deployment, invest in hydrogen infrastructure, and foster continuous innovation in both hydrogen and CCUS technologies. Robust policy