Connecting the dots on hydrogen trade
Jorgo Chatzimarkakis is CEO of Hydrogen Europe
An accelerated deployment of clean energy solutions is key to putting the world on track to meet its Paris commitments. Global greenhouse gas emissions must be cut by 43% by 2030 to limit global warming to 1.5°C. But emissions keep rising, by 410 million tons in 2023, taking them to a record level of 37.4 billion tons.
While the clean energy transition is advancing and showing signs of gradually slowing emissions growth, even as global energy demand grows, evidently more efforts are needed to decarbonise our energy system of which fossil fuels still make up 80% and still represent around three quarters of global greenhouse gas emissions.
Renewable hydrogen can accelerate climate action by helping decarbonise sectors from industry to transport and agriculture, while complementing renewable energy sources in decarbonising electricity grids without incurring prohibitive grid expansion costs and limitations.
Building on the work of the UAE consensus, including the goal to triple renewable energy by 2030, and progress made at COP28 from trade to certification, we can help give a renewed push to commercialise and realise the positive climate, economic, and security benefits of clean molecules for developing and developed countries alike.
When it comes to trade, the transfer of clean hydrogen from producer regions to consumer regions will be paramount. It will not be sufficient, in a European context, simply to manage the transport of hydrogen from Spain to Belgium or from Denmark to Germany – although this will be crucial too. But to meet total European hydrogen demand, not to mention the EU’s own explicit targets, it will be necessary to import hydrogen and ammonia from Africa, the Middle East, India, and beyond.
There are five main factors to making hydrogen a tradeable, affordable commodity that accelerates global decarbonisation. They are a) boosting demand for hydrogen, b) lowering the green premium on clean hydrogen compared to fossil fuels and fossil fuel-based hydrogen, c) implementing global standards and certification on clean hydrogen, d) financing the deployment of infrastructure and hydrogen production, and e) securing the hydrogen value chain.
This article will explore the roadmaps and challenges associated with each of these elements, aiming to shed light on the work to be done to equip ourselves with a much-needed global decarbonisation tool that will also enhance our energy security and aid socio-economic development around the world.
Boosting hydrogen demand
There is no clean tech and hydrogen deployment without ambitious and predictable climate policy. The next generation of Nationally Determined Contributions (NDC) should put the world on track to meet the goals agreed in Paris encouraging countries to set clear targets for the decarbonisation of power grids by 2035-2040 globally and the decarbonisation of transport and hard-to-abate industries.
Hydrogen is the clean, complementary fuel that can replace oil and gas in sectors where electrification is either not possible, or less desirable. It is also the answer to grid congestion and curtailment of renewable energy given its ability to be stored long-term, particularly given the COP28 pledge to triple renewable energy capacity by 2030.
Hard-to-abate sectors like iron, steel, and chemicals, cumulatively, make up more than 13% of global energy consumption and 11% of global CO2 emissions. In February 2024, the European Commission published its Communication setting EU targets for the reduction of greenhouse gases emissions by 2040 in which hydrogen represented up to 10% of the final energy demand, increasing to at least 16% by 2050, demonstrating the fundamental role it will play in the energy transition with nearly one fifth of market share.
It is therefore crucial that the world increases demand for low-emission hydrogen and its derivatives through the implementation of policy instruments such as binding targets, incentives, mandates, and public procurement initiatives, including by swiftly applying hydrogen grey-to-green targets in the European Union.
Governments should boost demand for low carbon products including through public procurement and lead the way to net zero by establishing clear sectoral decarbonisation goals and targets for the public procurement of low carbon products. There is no hydrogen demand without demand for low carbon products, which must find markets and be able to compete in the short-term with more polluting alternatives not only in the EU but also across the world. This will inevitably require coordination on carbon border adjustment tariffs or a climate club.
Reaching scale in clean energy deployment requires greater certainty in policy frameworks and bolder public demand targets. After the EU agree to switch 42.5% of existing grey hydrogen to renewable by 2030, we must now see implementation without delay by all member states. Only by swiftly and smartly implementing the demand targets across Europe will the hydrogen industry be able to scale up, lower costs and contribute to a globally competitive, green industrial European base.
Hydrogen’s value as a molecule lies in its decarbonisation potential, complementing renewable energy electrification where possible and offering itself as a more desirable alternative in other key sectors
Lowering the green premium
As mentioned, low carbon products have not yet achieved cost parity with their more polluting alternatives. Grey hydrogen, produced with natural gas without abatement, is today two times cheaper to produce than blue hydrogen and three times cheaper than renewable hydrogen, making the green premium of decarbonised ammonia, methanol, and steel, among others, range from 40 to 150%.
This leads to a conflict between the near-global ethos of market-based solutions and the ever-growing urgency to meet our climate goals. If we wish to even come close to our Paris targets and avoid the worst effects of climate change, we cannot wait for the economics to solve themselves. States must act to reduce the premium between fossil and low-carbon alternatives.
This can be achieved by introducing numerous and robust public support programs for low-carbon hydrogen, including and following the example of the European Hydrogen Bank. Lowering clean hydrogen costs is not only key to accelerating our decarbonisation timeline, but it is also vital to making our trade-exposed industries green and globally competitive at the same time.
While the EU Hydrogen Bank is a remarkable advancement in this direction, the first auction will only support 0.15Mt of renewable hydrogen per year, 0.75% of the RePowerEU target, with subsidies ranging €37-51 cents/kg H2. Future auctions should grow in size of support offered, and member states ought to implement their own support mechanisms modelled on the success of the Hydrogen Bank.
Simultaneously, as we increase support for low-carbon fuels like hydrogen, we should also be phasing out inefficient fossil fuel subsidies and repurposing towards clean alternatives. According to the IMF, global fossil fuel subsides were $7 trillion or 7% of GDP in 2022, 18% of subsidies (close to $1.3 billion) being explicit to undercharge for supply costs, and the other 82% being implicit undercharging for environmental costs and forgone consumption charges.
The phase out of fossil fuel subsidies can lower the premium between clean and grey hydrogen, particularly if subsidies are reinvested in accelerating clean hydrogen deployment through production and offtake support instruments.
Another solution that would have a substantial effect is to set a meaningful and effective carbon price that reflects the full costs of externalities. Today, only 24% of global emissions are covered by a carbon pricing instrument, and only 1% are priced above the recommended level of $50-100 per ton range by 2030.
Free CO2 emissions are keeping polluting energy prices artificially low and making the uptake of clean alternatives like clean hydrogen painfully difficult. A broader and bolder carbon price would internalise the cost of greenhouse gas emissions and facilitate investments into renewable and hydrogen technologies.
Countries should be encouraged to develop carbon pricing instruments and support the Global Carbon Pricing Challenge, announced by Canada at COP26, to cover at least 60% of global emissions with carbon pricing instruments by 2030.
Speaking the same language: regulation, global standards, and certification
Hydrogen’s value as a molecule lies in its decarbonisation potential, complementing renewable energy electrification where possible and offering itself as a more desirable alternative in other key sectors. To ensure its viability as a tradeable commodity, Europe and the world must align on aspects of regulation, global standards, and certification of hydrogen products.
Strict and unnecessary regulation is keeping the prices of renewable hydrogen artificially high and slowing down its uptake. Requirements forcing hourly correlation between electrolyser use and renewable electricity production limit electrolyser utilisation rates and substantially increase costs.
Most importantly, and given the accelerated decarbonisation of our grids, these requirements are not even needed on climate grounds, with laxer alternatives achieving a similar impact on greenhouse gas emissions reductions.
From a European perspective, we need policies that are not captive to ideology and that do not hamper the application of the principle of technology neutrality, which is not only key to prioritise emissions reductions but also compatible with fair and secure energy transitions. Most countries and regions have not followed suite with this level of unnecessary regulation, and it must remain that way.
For effective hydrogen trade, the world must agree on what is being traded and how to certify it. Each hydrogen production method carries with it a different carbon profile, and these must be well understood by the market.
It is crucial to promote the alignment of national and regional standards for hydrogen, including the development of common frameworks and guidelines that ensure hydrogen interoperability and that are based on the carbon intensity of the hydrogen molecule, following already globally recognized standards at ISO.
We must also promote, simplify and implement hydrogen certification, including by supporting the COP28 declaration of intent on mutual recognition of certification schemes. Lastly, hydrogen trade can be simplified with the introduction and development of a hydrogen ‘passport’.
Financing hydrogen infrastructure and deployment
Approximately US$2 trillion are necessary to deploy clean hydrogen at the scale needed for a Paris aligned pathway, $100 billion a year in emerging markets and developing countries, with a global financing gap reaching $500 billion until 2030.
With less than 10% of all clean hydrogen projects announced worldwide achieving a Final Investment Decision (FID), more needs to be done to unlock the funding and financing necessary for clean hydrogen to strengthen its contribution to global decarbonisation.
There are clear signs of improvement on the FID number. In July 2024, within just one month, six European hydrogen projects reached FID, collectively representing nearly 1 GW of electrolyser capacity, set to be built by 2030. They are located in Scotland, Spain, Belgium, Netherlands and two projects in Germany.
This geographic distribution, which does not even include France or Denmark – two countries with low-carbon energy grids and good production potential – shows the viability of hydrogen projects across Europe and should be cause for much encouragement in the market.
As time goes by, banks and private financiers will grow more comfortable with the structure of hydrogen deals, which tend to be large and complex. Support from the public sector in the form of grants and subsidies will also crowd-in the much-needed private capital needed to finance this great endeavour.
Critically, while 85% of global clean energy investment today is in advanced economies, clean hydrogen can be an opportunity for emerging and developing countries: they represent 39% of all clean hydrogen projects under development and can attract 50% of the global financial support between now and 2030.
Infrastructure development requires long-term planning, financing, procurement, and governance among member states, and is a pre-condition for expanding renewable energy deployment, growing the hydrogen market, and ultimately making the European Union a hub of clean technologies at the service of its economy and its people.
Securing hydrogen supply chains
Europe needs a strategy to ensure that we have the technologies we need to fulfil our ambitions without increasing our dependencies. With China already representing 34% of global capacity for electrolyser manufacturing and with a project pipeline that exceeds domestic needs, the import of cheap and subsidized clean technologies can prevent European domestic manufacturers from reaching the scale they need to become locally and globally competitive.
In a rapidly changing world in which companies compete in increasingly uneven playing fields, we must act pre-emptively to avoid the mistakes of the past, finding anticipatory ways for our manufacturers to grow and compete, at home and abroad, boosted by domestic demand, and without sacrificing the speed of the transition.
