Editor's note: This is the first installment of a two-part series examining the future of green hydrogen in Europe. Part one outlines the potential benefits of green hydrogen and examines the obstacles to its full adoption in the bloc. Part two analyzes possible avenues for the development of a competitive global green hydrogen market and the impacts such a market would have on climate, geopolitics and energy security.

The European Union is betting on green hydrogen to help reach its 2050 net-zero targets while maintaining industrial and economic competitiveness thanks to the fuel's potential to decarbonize hard-to-abate productive sectors of the economy, but significant constraints cast doubt over this strategy's viability. The European Union considers green hydrogen, which is hydrogen produced entirely using renewable energy resources, a pivotal element of its decarbonization strategy. This is primarily because green hydrogen could significantly reduce the carbon emissions of so-called hard-to-abate sectors like heavy industries (such as cement, steel and chemicals) and activities like heavy-duty transport (such as trucking, shipping and aviation). For this reason, in 2020 the European Union adopted its hydrogen strategy, which aims to scale up and decarbonize hydrogen production in the bloc with the ultimate ambitious goal of producing 10 million tons of green hydrogen by 2030. In 2022, in the wake of Russia's invasion of Ukraine, the European Union doubled this target by introducing a goal of importing an additional 10 million tons of the fuel by 2030 as part of its REPowerEU plan, Brussels' strategy to reduce the European Union's dependence on Russian fossil fuels while simultaneously accelerating the transition to clean energy. Also in 2022, the European Union created its Hydrogen Bank, a financing instrument to support projects facilitating the production or import of green hydrogen, launching an initial 800 million euro ($861.73 million) pilot tender in 2023 and preparing a second 2.2 billion euro auction for the fall of 2024. The next year, Brussels adopted its Net-Zero Industry Act, a plan to scale up green technologies manufacturing in the European Union, including the electrolyzers needed to produce green hydrogen. And most recently in February 2024, the European Commission approved 6.9 billion euros in state aid under the "Hy2Infra" Project of Common European Interest for the development of large-scale electrolyzers to produce green hydrogen as well as infrastructure to import, transport and store green hydrogen under a project spanning seven EU countries.

• The goal of the European Union's hydrogen strategy, together with other initiatives such as the Clean Hydrogen Partnership and the Clean Hydrogen Alliance, is to support the development of a hydrogen market in Europe and expand hydrogen use in sectors where it can offer a viable replacement for fossil fuels. In this, the Hydrogen Bank plays a crucial role. Its goal is to help scale up the green hydrogen market (alongside the deployment of renewables in the bloc) thanks to a subsidy of up to 4.50 euros per kilogram of hydrogen produced.
• The development of EU-wide hydrogen infrastructure able to store and transport the fuel to demand centers across the bloc is also key to a rapid and significant hydrogen market ramp-up. Hy2Infra will help develop 3.2 gigawatts (GW) of large-scale electrolyzers to produce green hydrogen domestically, about 2,700 kilometers (about 1,678 miles) of transmission and distribution pipelines, 370 gigawatt-hours (GWh) of storage facilities, and 6,000 tons of import infrastructure for liquid organic hydrogen carriers. Germany alone will provide 4.6 billion euros of the overall approved 6.9 billion euros in state aid, with most infrastructure set to be developed in the country. Public funding is expected to unlock an additional 5.4 billion euros in private investments.
• Separately, Germany has unveiled plans to invest billions of euros to help its industry and power generation plants transition from fossil fuels to hydrogen and to develop an infrastructure network aimed at importing green hydrogen in the future.
• Outside the European Union, green hydrogen is increasing in prominence on the energy transition agendas of a growing number of countries, many of which have adopted national hydrogen strategies and are pouring increasing resources into developing a green hydrogen market. For instance, the United States introduced two key pieces of legislation aimed at accelerating hydrogen breakthroughs: the Inflation Reduction Act and the Bipartisan Infrastructure Law. The Inflation Reduction Act provides incentives with provisions for green hydrogen and fuel cell technologies, including a hydrogen production tax credit (known as 45V) of up to $3 per kilogram based on carbon intensity. The Bipartisan Infrastructure Law has authorized a total of $8 billion in federal funding for green or low-carbon regional hubs as well as $1 billion to improve green hydrogen production methods.

While green hydrogen has limited applications today, it could eventually provide a viable energy alternative in hard-to-abate sectors and tackle issues related to renewable energy resources. Hydrogen is produced by separating it from the other elements in the molecules where it is found naturally. The two most common methods of producing hydrogen are steam-methane reforming, which produces CO2 emissions, and electrolysis, which involves splitting water molecules into hydrogen and oxygen using electrolyzers and does not produce any emissions. In the latter method, if the electricity used is sourced from renewable energy such as wind or solar, the hydrogen obtained will be labeled as green. In the former method, hydrogen is labeled as gray if the produced CO2 is released into the atmosphere, and it is labeled as blue if it is captured and stored. Today, nearly 99% of hydrogen produced globally is sourced from fossil fuels. While hydrogen has several diverse potential applications, it is currently mostly used in oil refining, methanol manufacturing and the production of ammonia for fertilizers and other chemicals. As virtually all the hydrogen used in these applications comes from fossil fuels, these are also the sectors where green hydrogen has the most emissions reduction potential in the short term. Hydrogen could be used in several other sectors such as transport, power generation and home heating, but in many of these applications, other more cost-competitive and readily available technologies such as batteries, biofuels and heat pumps offer better alternatives to hydrogen for now. Yet hydrogen offers several advantages that, if technologies are scaled up and costs brought down, could help replace fossil fuels in sectors where electrification is difficult, such as long-haul transport and heavy industries, and tackle challenges related to renewable energy resources like wind and solar, such as their intermittent output that does not always match demand and difficulties in transporting power to remote locations far from where renewable energy is produced. In fact, green hydrogen is one of the most promising options to store surplus energy from renewables and use it when demand is higher and/or transport it over long distances when renewable resources are scarcer via pipelines or in liquid form by ships.

• Global demand for hydrogen, driven by industrial demand and almost entirely supplied from fossil fuels, has more than tripled since 1975 to reach 95 million tons in 2022, and demand continues to rise. However, given how green hydrogen today accounts for only 0.1% of all hydrogen produced worldwide, this growth has so far contributed to producing CO2 emissions rather than abating them, with 6% of global natural gas and 2% of global coal demand going to hydrogen production in 2022, according to the International Energy Agency. Therefore, hydrogen is now responsible for about 830 million tons of carbon dioxide per year.
• Since natural gas is the primary source of hydrogen production, hydrogen production costs are closely linked to natural gas prices (accounting for 50%-75% of the production costs). Therefore, making hydrogen is now relatively cheap in places that enjoy relatively low natural gas prices like North America, Russia and the Middle East, and it is more expensive in natural gas-importing countries like Europe, Japan, South Korea and China.
• In the past, green hydrogen has failed to pick up as a widely used energy resource due to safety concerns and the elevated costs of production. However, today's new wave of interest is driven by a global commitment to net-zero emissions under the Paris Agreement and increasingly more affordable renewable energy (primarily wind and solar) and electrolyzers needed to produce it. 

However, the commercialization of green hydrogen faces several technical hurdles across the entire fuel's value chain, from production and storage to transport and end-use, that will complicate its uptake. Producing green hydrogen is still expensive and energy-inefficient. As renewable energy prices continue to decrease, the cost of producing green hydrogen is expected to fall over time. However, at present, electrolysis remains the most expensive production method, costing on average two to three times more than steam-methane reforming (even with carbon capture and storage). Moreover, around 20%-40% of the energy used in the process is lost, and electrolyzers have a short lifespan (typically less than 10 years) which makes them costly to use. This is particularly the case in Europe, where the costs for electrolyzer systems are nearly four times higher than in China, which dominates global large-scale electrolyzer manufacturing. To resolve issues around the high costs of green hydrogen, the European Union is reportedly considering introducing Contracts for Difference to subsidize the purchase of green hydrogen by offtakers and bridge the gap between the price producers need and what buyers are willing to pay. However, this would require the European Hydrogen Bank to distribute significantly more resources, which fiscally conservative member states may resist. 

• In Europe, the production costs for green hydrogen are approximately $6 per kilogram, in stark contrast to $2 per kilogram for its gray counterpart produced using natural gas. Given that electricity prices constitute about 80% of the production costs for green hydrogen, its price reduction in the near term appears unlikely. The feasibility of green hydrogen becoming more economically competitive than gray hydrogen thus hinges significantly on a steady increase in carbon pricing making the latter more expensive or on subsidies making the former more affordable for potential users, such as through the introduction of Contracts for Difference. 
• Additionally, the infrastructure for hydrogen, such as pipelines, can be up to 50% more costly to construct compared with those for natural gas, while road transport for hydrogen technologies, such as fuel cells and storage tanks, represents a considerably costlier option than traditional internal combustion engines.

Moving green hydrogen from the typically remote locations where it is produced to demand centers, either by ship or pipeline, remains challenging and expensive. Storing and transporting hydrogen can be challenging due to the high amount of energy needed for compression (which consumes around 30% of the hydrogen's energy content), material durability concerns (for things like fibers, metals and polymers), and potential contamination in bulk storage that may require further purification before end-use. Moreover, transport and distribution are further complicated by inadequate infrastructure, existing natural gas pipeline suitability issues, loss during ship transfer due to boil-off and the need for expanded refueling networks. This means transporting large quantities of hydrogen over long distances by ship is both expensive and inefficient compared with fossil fuel alternatives like liquefied natural gas. Green ammonia, which is green hydrogen mixed with nitrogen, offers a safer and cheaper solution as a hydrogen carrier to liquid or compressed hydrogen, as it requires less energy to liquefy and transport thanks to its higher volumetric energy density and relative ease of handling. Yet, green ammonia is still relatively expensive to produce, and it requires energy to be split back into hydrogen upon arrival at its destination. Against this backdrop, hydrogen will likely continue to be transported mostly via pipeline, but the development of hydrogen infrastructure remains slow and expensive. All these issues, particularly the high associated costs, mean demand for green hydrogen is still lagging, which does not provide strong enough business incentives to invest in production and distribution. 

• The often-remote location of renewable resources used to produce green hydrogen would necessitate additional investments in transportation infrastructure, including pipelines, conversion and liquefaction units, and storage facilities, thus significantly increasing the initial capital required. Pipelines present the most cost-effective method for hydrogen transport, particularly since large refineries and chemical plants already employ them extensively. However, the existing global infrastructure, which consists of approximately 4,500 kilometers of hydrogen pipelines, falls short of meeting anticipated future demand. Existing natural gas pipelines cannot directly carry hydrogen due to the risk of embrittlement. However, with appropriate technical modifications, some existing natural gas pipelines could be repurposed for hydrogen transportation. Notably, Germany's extensive natural gas pipeline network, spanning around 600,000 kilometers, is poised to play a crucial role, as it can generally be transformed into hydrogen pipelines at a lower cost compared with the construction of new ones. This will offer Germany, and Europe, a strategic advantage in developing a hydrogen economy.
• Shipping hydrogen requires conversion into liquid hydrogen or ammonia and is only cost-competitive for long-distance travel. However, even in its liquefied and superchilled form, hydrogen's volumetric density remains considerably lower than that of liquefied natural gas, which requires significantly less tanker capacity for the same amount of energy. Moreover, even when stored in thermally insulated cryogenic tanks, liquid hydrogen loses daily about 1% of its content due to evaporation, which results in significant losses over long distances. These factors end up increasing the costs of shipping liquid hydrogen. On the other hand, while converting hydrogen into ammonia makes it easier, cheaper and safer to handle, the initial conversion into ammonia for transport and the ultimate reconversion back into hydrogen for consumption leads to energy losses, ultimately adding to the final costs.