This is how the EU can make hydrogen economically viable

Europe has massive green hydrogen ambitions. The bloc is committing substantial investments to building hydrolysis capacity of as much as 40 GW by 2040, with 6 GW to be operational by 2024. However, this capacity will not come cheap because green hydrogen is several times more expensive than the other “colours” of hydrogen, which unfortunately involve the use of fossil fuels.

Europe sets great store by hydrogen as one of the stars in its renewable energy future reality show. The most abundant of the planet’s elements could be used for energy storage or for power generation. It can also be mixed with natural gas and, again, used for power generation and heating but at a lower carbon cost.

Wood Mac analysts expect the cost of producing green hydrogen to fall by an impressive 64% by 2040 across the world and in some places this cost drop will come sooner. The forecast, however, has a catch. It ties this cost drop in green hydrogen to cheap renewable energy generation—which is not a given—and massive government support to enable the necessary scaling of the technology to make it economical.

There is always more than one way to do something, and the EU may have inadvertently found the way to make green hydrogen more appealing to the businesses it wants to win over with it—the big industrial polluters. The way: make carbon emissions even more expensive than green hydrogen.

Reuters recently reported that carbon prices in the EU had hit a record high of over $45 per tonne. It’s worth clarifying here that “carbon prices” actually means the prices for permits to emit carbon dioxide, which Brussels obliges businesses to buy in a bid to stem their enthusiasm for polluting. The price rise is a logical consequence of the EU’s tightening of its emission reduction targets last year. Just this week, it tightened them again.

Under the new targets, the EU will need to reduce its net carbon emissions by 55% from 1990 levels by the end of this decade. This was up from an earlier goal of at least 40% but lower than a more ambitious goal of 60%, which, apparently, Europe’s lawmakers have dropped as unrealistic. This new target will likely make carbon permits even more expensive, bringing them closer to par with green hydrogen.

“Rising fossil fuel prices will boost green hydrogen’s competitiveness, further strengthening the case for this technology in the coming years,” Wood Mac’s analysts said in their 2020 report that hailed “the decade of hydrogen”. The process may be similar with carbon permits as demand for them picks up in the face of tighter emission restrictions.

Carbon prices may need to go a lot higher than they are now for green hydrogen to make sense. As of last year, the cost of producing a kilogram of green hydrogen at a grid-connected hydrolyser was $8.81, according to the International Council on Clean Transportation. This compares with $2.36 per kilo of blue hydrogen produced from gas with carbon capture—and carbon capture is a costly technology. According to the ICCT, green hydrogen costs could fall to $5.77 per kilo by 2050, which would certainly be a substantial decline. Yet they would still be higher than the costs of blue hydrogen.

For all the abundance of optimistic green hydrogen cost forecasts, they all tend to be lacking in specific details on how exactly this cost decline will be achieved. In the absence of such detail, these reports begin to sound more wishful than fact-based. If this is what they are, then it is reasonable to expect that the EU will seek to boost the adoption of hydrogen through other means, such as making its alternatives prohibitively expensive to boost its appeal. If you can’t make what you want to sell cheaper, make everything else even more expensive.