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23 July 2021updated 05 Nov 2021 9:58am

Green hydrogen to get targets, free carbon credits in EU

The business case for hydrogen has received a boost with the European Commission's ‘Fit for 55’ climate and energy package.

By Sonja van Renssen

The importance of hydrogen to get Europe to net-zero greenhouse gas emissions by 2050 shone through in the European Commission’s ‘Fit for 55’ climate and energy package. No dedicated proposal was outlined for the energy carrier, but support measures surfaced in plans to revise the EU carbon market, accelerate the roll-out of renewables and reform Europe’s energy taxation system.

European Commissioner for Energy Kadri Simson looks on as European Commissioner for the European Green Deal Frans Timmermans speaks during an online news conference on renewable energy in Brussels in November 2020. (Photo by Francisco Seco/POOL/AFP via Getty Images)

Hydrogen advocates were enthusiastic. The EU has come one step closer to becoming a global leader in hydrogen development,” said Jorgo Chatzimarkakis, secretary-general of industry group Hydrogen Europe. “By putting targets on the use of hydrogen in industry and transport, the EU stands a real chance to achieve climate objectives, create thousands of jobs and protect its industry.”

Campaigners were conflicted. Senior gas campaigner Tara Connolly at Global Witness, an NGO, accused the Commission of an “inconsistent and incoherent hydrogen policy”. She cited how “fossil-based” (blue) hydrogen was excluded from certification under the EU renewable energy directive, but given support through continued free EU carbon credits for producers, tax breaks for consumers, and a green light for it as a sustainable fuel in shipping.

“In the transition phase we will need all low-carbon hydrogen solutions,” said EU Energy Commissioner Kadri Simson at the launch of ‘Fit for 55’. Hydrogen has exploded onto the European energy scene in recent years. Policymakers see great promise for it to help decarbonise heavy industry and long-distance transport – aviation, shipping and possibly trucks, also through hydrogen-based liquid fuels – and to store wind and solar power to help balance the grid.

Hydrogen as a renewable fuel

Stakeholders agree the Holy Grail is green hydrogen, or hydrogen made from renewables-powered electrolysis. However, many, including the Commission, also see a transition role for blue or low-carbon hydrogen made from a natural gas with carbon capture and storage (CCS). Blue hydrogen will get its own certification system in a ‘Hydrogen and Decarbonised Gas Market Package’ in the final months of 2021, said the Commission.

In the transition phase we will need all low-carbon hydrogen solutions. Kadri Simson, EU Energy Commissioner

In the meantime, the ‘Fit for 55’ package proposes defining and certifying green hydrogen as a renewable fuel in an updated renewable energy directive. Simson presented this as a big step forward. In practice, however, whether green hydrogen counts as a green fuel will depend on the details laid out in a so-called delegated act, which should be agreed by the Commission on consultation with national experts by the end of the year. 

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Climate campaigners and industry are lobbying intensely to get their voices heard. Campaigners want strict rules to ensure the renewable energy used to produce green hydrogen and any derivative fuels (efuels) is additional to existing plans and projects. Otherwise, fuel producers risk diverting wind and solar power away from far more efficient direct electrification. Hydrogen advocates argue that focusing on building up the green hydrogen market should be the focus, at least in the first half of the decade.

Targets and tax breaks

Green hydrogen gets it first-ever dedicated EU targets in the new renewable energy directive. Chatzimarkakis singles out a 50% target for renewable hydrogen consumption in industry as the top win, realising this will likely depend on a carbon border adjustment mechanism, to keep industries like fertilisers globally competitive. There is also a 2.6% target for renewable hydrogen and efuels (renewable fuels of non-biological origin) in transport. This exceeds a new target of 2.2% for advanced biofuels.

Within the transport target, the Commission has big plans for efuels in shipping and aviation. In aviation, a senior EU official highlighted that sustainable fuels make up just 0.05% of jet fuel today “with no European production”. The goal is to grow that 50-fold to 2.5% in 2030. A ReFuelEU Aviation Initiative would require fuel suppliers to blend in sustainable fuels at EU airports, with a specific share for efuels rising from 0.7% (out of 5% sustainable fuels) in 2030 to 28% (out of 63%) in 2050.

Pure hydrogen and electricity are “promising options”, but excluded for aviation on the grounds they will only be available for short-haul flights and after 2035.

For shipping, the FuelEU Maritime Initiative sets a maximum limit on the greenhouse gas intensity of energy used by ships calling at European ports in a bid to drive the take-up of “renewable and low-carbon fuels”. These include decarbonised (blue) hydrogen and its derivatives methanol and ammonia. Shipping stakeholders see the greatest potential for biofuels, followed by batteries, in 2030, but decarbonised hydrogen and its fuels by 2050. Ships’ greenhouse gas intensity must fall by 2% in 2025 and 6% in 2030, down to -75% by 2050.

Complementary to these targets, the Commission proposes to lift tax exemptions for aviation and maritime fuels used in intra-EU traffic, in a new energy taxation directive. It also wants to base taxes on energy content, not volume – removing an implicit advantage for conventional fuels – and redefines minimum rates taking into account fuels’ environmental performance.

Member states will have the option of introducing a zero-energy tax for sustainable fuels for planes and ships, while the Commission suggests the lowest minimum rate of €0.15 ($0.18) per gigajoule should apply to renewable hydrogen and efuels in road transport and heating. To the dismay of campaigners like Connolly, the Commission also wants blue hydrogen to benefit from this low rate for a transitional period of ten years. It also sees a role for regular (grey) hydrogen, natural gas and LPG “in the short and medium term” and suggests they should be taxed at two-thirds the rate of conventional fuels for ten years. 

On the infrastructure side, the Commission wants to see one hydrogen refuelling station for light and heavy duty vehicles every 150km along Europe’s main motorways by 2030, and at “urban nodes”, where motorways intersect or connect up with local and regional traffic. The EU Sustainable and Smart Mobility Strategy targets 1,000 public hydrogen refuelling stations by 2025. At the end of 2020, there were only 125 hydrogen stations in the EU, serving a fleet of just 2,000 vehicles.

Car CO2 rules: missed opportunity

For all the new targets and tax rebates, fuel suppliers were deeply critical of the Commission’s decision not to recognise efuels in EU car CO2 standards. [The requirement for] fully zero-emission vehicles from 2035 means no combustion engine will be possible anymore,” says Tobias Block from the eFuel Alliance, which includes companies along the supply chain, including Siemens Energy, ExxonMobil and Bosch.

If we are not allowed to use renewable fuels in the road sector, using renewable fuels only in other sectors will be more expensive. Tobias Block, eFuel Alliance

In effect, carmakers are being forced to choose between battery electric and fuel cell hydrogen cars. “That could make investments in renewable fuels quite hard,” Block continues. “If we are not allowed to use renewable fuels in the road sector, using renewable fuels only in other sectors will be more expensive.”

Alessandro Bartelloni at trade association FuelsEurope agrees. “It is a pretty different business case for investors without road transport. The cost of renewable and sustainable fuels will go down with economies of scale and lessons learned, when innovative fuels are allowed to supply the road market.” Efuel investors say the road transport market has a much higher ability to pay than energy-intensive industries and is essential to get a hydrogen economy up and running. Daniel Mes from the cabinet of Commission vice-president for the Green Deal, Frans Timmermans, told an event in July that efuels were too expensive for cars and a political no-go.

Instead of fining carmakers for failing to meet the latest EU car CO2 standards, the eFuel Alliance would like the money to go to developing fuels. Volkswagen paid €100m in penalties last year for missing its fleet CO2 target. If efuels were recognised in the car CO2 standards, some of that could money could go to efuels instead.

The Commission argues that mixing up policies for fuels and vehicles could blur responsibilities for decarbonisation, undermine the effectiveness of car CO2 standards and increase administrative burden. However, Block argues that for shipping, the Commission has opted for a “well-to-wake” approach that considers vessel and fuel together. Efficient use of renewables means generating power in sometimes far-flung places and using efuels to transport it, as well as direct electrification, Block argues.

Fuel suppliers will be lobbying the Commission to include efuels in new truck CO2 standards that have yet to come out.

Free EU ETS allowances

In ‘Fit for 55’, the other boost for green hydrogen comes from the EU ETS reform. This introduces free carbon allowances for green hydrogen or electrolyser producers to level the playing field with producers of natural gas-based hydrogen. At present, the latter, like other industrial installations, get free allowances to protect them from the potential risk of carbon leakage, or leaving Europe for regions with weaker carbon constraints.

If installations are efficient, however, they can sell some of these allowances and make a profit. The free allowances amount to a subsidy their green competitors do not get. Rather than ending free allowances for grey (no CCS) hydrogen producers, the Commission is introducing them for everyone.

Most electrolysers will not be eligible because a minimum of 25 tonnes of daily [hydrogen] production is imposed, ruling out any electrolysers under 100MW. Sandbag

"Broadening the scope [of free allocation] would effectively prevent that those plants converting to low or zero-carbon technologies are facing competitive disadvantages,” the Commission says. Once there are “a few plants” using these technologies, the benchmarks for free allowance allocation “will also be further reduced”, it adds. The Commission expects a “rather limited” effect from this scope extension, also because it expects low-carbon technologies to replace, not complement, those that already exist.

Brussels-based NGO Sandbag criticised the extension of free allowances to electrolysers, underlining they will have to wait until 2026 for their quotas to kick in, and even then “most electrolysers will not be eligible […] because a minimum of 25 tonnes of daily [hydrogen] production is imposed […], ruling out any electrolysers under 100MW”. The current state-of-the-art electrolyser is only around 20MW, says Sandbag.

Hydrogen is also likely to benefit from a plan in the EU ETS reform to extend the remit of an ETS-fed Innovation Fund to carbon contracts for difference, whereby the Fund would pay for the difference between a project’s implied carbon price and the current ETS price. The Commission suggests hydrogen is a potential beneficiary. The Fund will also almost double in size to more than €50bn over ten years.

'Fit for 55' may not have targeted hydrogen, but the energy carrier’s reach through the proposal is pervasive.

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