Europe needs to enhance its motivators for renewable hydrogen production
In 2025, a comprehensive analysis titled "Hydrogen in the Reformed EU ETS" was published by Nils Bruch, Falko Ueckerdt, and Michele Knodt as part of the Kopernikus-Project Ariadne, Potsdam. This analysis delved into the implications of the reformed European Union Emissions Trading System (EU ETS) for the competitiveness and emissions reductions of hydrogen production.
The EU framework for hydrogen aims to decarbonize sectors difficult to electrify, such as the chemical and steel industries. Producers of low-emission hydrogen, including renewable green hydrogen, can now sell their excess emission allowances on the market and thus reduce their cost disadvantage. This advantage also applies to producers of low-carbon hydrogen from non-renewable sources.
However, the reformed EU ETS has a limited effect on the competitiveness of green hydrogen due to the exclusion of methane emissions and the low CO prices. The regulatory requirements for production are currently too lax and allow excessively high residual emissions relative to the climate targets.
To address these challenges, additional political measures are required to support the market ramp-up of renewably produced hydrogen at the necessary speed and scale. Effective options for additional support include an increasingly rigid standard for low-carbon hydrogen and the inclusion of upstream emissions, including methane, in EU emissions trading.
Moreover, stricter standards for low-carbon hydrogen and incorporating upstream emissions into the EU Emissions Trading System can enhance the environmental credibility and market acceptance of hydrogen products. Other support measures could involve closing the price gap by reducing regulation to achieve competitive production costs, providing targeted demand incentives and guarantees for early investors, and establishing legal certainty and financing perspectives for infrastructure beyond core hydrogen networks such as storage and distribution grids.
Technology-specific instruments for low-carbon hydrogen are also needed to meet EU climate targets. The revision of the EU Emissions Trading Directive in 2023 will provide the same number of free permits to hydrogen manufacturers, regardless of the energy source and associated emissions, from 2025.
In conclusion, the reform of the EU ETS has set the stage for a more consistent pricing of CO across all types of hydrogen production. However, additional political measures and technology-specific instruments are essential to ensure the rapid and sustainable growth of renewable hydrogen production in line with the EU's climate targets.
