Green hydrogen crucial in climate change fight

The switch to a CO2-neutral economy by 2050 has begun. Green hydrogen will be vital if we want to fight climate change cooperatively as a society.

Measures on the route to a climate-neutral economy have so far centered on power from renewable sources. But important businesses like steel and shipping won’t convert to electricity, green or not. The key to decarbonizing these locations is hydrogen.

However, the creation of hydrogen on the basis of fossil fuels does produce CO2 . The hydrogen produced can only be labeled “green” if it is created by means of electrolysis and using renewable energy. In order to make the global economy climate-neutral, the electrolysis capacity would have to be boosted from today roughly half a gigawatt to around 850 gigawatts by 2030. A vast potential that also makes hydrogen infrastructure a highly appealing investment topic. Mainly because to the currently low production capacity and accompanying low economies of scale, green hydrogen is not yet competitive with fossil fuels. In order to enable the technology make a breakthrough more rapidly, the most significant industrialized countries, the EU and the United Nations have already begun a number of legislative measures and others are in the works. Germany, France, Great Britain, the USA, Canada, and Japan have developed hydrogen policies, however they are not legally enforceable. A reliable legal environment for investors needs adopting actions that set funding instruments in motion.

Supply-oriented tools such as subsidies or grants minimize the production costs of green hydrogen. Accelerated tax depreciation regulations for capital expenditures decrease the tax burden for the project companies in the first few years of operation. The EU’s IPCEI law, for example, uses this method.

On the demand side put CO 2 -Prices and taxes. They cost fossil fuels and greenhouse gas emitters. This makes green hydrogen more appealing. EU emissions trading is heading this way.

CCfDs also target demand. Simply explained, a governmental agency agrees with companies that produce CO2 to use green hydrogen at a defined price. The state compensates the corporation if certificate prices fall below this. Instead, the firm pays the state. In this approach, green hydrogen becomes just as inexpensive as fossil fuels, and there are no free-rider impacts. So far, CCfDs have not been employed for the hydrogen economy. However, the European and national legislators are expected to initiate similar laws.

Increasing incentives

CO2 mandates a set percentage of ecologically friendly energy sources in intensive sectors like fuel, steel, and chemical. Transport follows the EU’s Renewable Energy Directive RED II. The “Fit for 55” climate policy package includes RED II and many directives and regulations that affect the hydrogen strategy.

RED II requires 32% of EU electricity to come from renewables by 2030. It sets a target of 14% for the transport sector and obliges Member States to ensure this in their territories by 2030 for road and rail transport. The guideline also specifies fuels that can be used to meet the aim, such green hydrogen or e-fuels.

This year, a stricter version will require more renewable energy. Other restrictions, including tax regulations, strengthen the incentive to invest in so-called renewable fuels of non-biological origin, like green hydrogen. However, restrictions are also planned that are meant to strengthen the criteria according to which hydrogen is considered “green”. These would hurt projects with electricity supply contracts signed after 2027. Overall, however, the present and proposed laws favor the long-term establishment of a market for green hydrogen.

German law implements EU directives. This regulation requires oil and gas businesses to gradually cut CO2 emissions by introducing biofuels or green hydrogen e-fuels.

The timely development of a green hydrogen economy is increasingly gaining the interest of institutional investors. The energy crises and climate change are lending extra momentum to the demand for corresponding investment opportunities. Illiquid investments are essential for financing the low-carbon economy transition, making them more vital.

Commitment

State actors are committed to advancing the hydrogen economy through the current and planned regulatory framework. This protects financial investors who want to profit from the technology’s huge development potential. At the same time, they must keep a close eye on any regulatory developments, since changes in the funding environment can have a substantial impact on the profitability of specific projects. The switch into a CO 2 -neutral economy by 2050 has commenced. Green hydrogen will be an important component of this if we want to fight climate change cooperatively as a society.