Green, clean, and a fossil fuel killing machine. The policy debates surrounding hydrogen have been subject to a plethora of unregulated labels related to the greenhouse gas reduction potential of the technology. Because of this, anyone could simply claim he or she was producing green or clean hydrogen, even if that hydrogen would only be 10% or 20% less CO2-intensive than the original fossil-based alternative.

Leon de

Green, clean, and a fossil fuel killing machine. The policy debates surrounding hydrogen have been subject to a plethora of unregulated labels related to the greenhouse gas reduction potential of the technology. Because of this, anyone could simply claim he or she was producing green or clean hydrogen, even if that hydrogen would only be 10% or 20% less CO2-intensive than the original fossil-based alternative.
In this context, today’s <a href="https://ec.europa.eu/commission/presscorner/detail/en/ip_21_6682">Hydrogen and Decarbonised Gas Market Package</a> could provide much-needed clarity to set the course for a fully decarbonised future of Europe’s extensive gas infrastructure network. As part of the second batch of the European Commission’s Fit-for-55 package to reduce the EU’s greenhouse gas emissions by at least 55% by 2030 compared to 1990, one of the aims of the Hydrogen and Decarbonised Gas Market Package (HDGMP) is to properly define so-called “low-carbon” forms of hydrogen. This definition was left out of the recent proposal to revise the Renewable Energy Directive (RED III), as that only covers forms of hydrogen solely produced with renewable energy (hence the term “renewable hydrogen”).
Defining “low-carbon” hydrogen is crucial, as the EU’s heavy industry tries to decarbonise as fast as possible and does away with fossil-based hydrogen. This will require hundreds of terawatt hours of decarbonised hydrogen in the years to come, and it’s unlikely this will all be produced by renewable energy sources. But we have ambitious EU climate targets to meet for 2030 (-55%) and 2050 (climate neutrality) at the latest, and therefore any definition of “low-carbon” hydrogen should set a very clear decarbonisation pathway to meet those targets.
This is unfortunately where the HDGMP’s Directive on “<a href="https://ec.europa.eu/energy/sites/default/files/proposal-revised-gas-markets-and-hydrogen-directive.pdf">Common rules for the internal markets in renewable and natural gases and in hydrogen</a>” risks not meeting the objective. In particular, the Directive defines low-carbon hydrogen as “hydrogen the energy content of which is derived from non-renewable sources, which meets a greenhouse gas emission reduction threshold of 70%”, full stop. If the EU does not include in the definition of low-carbon hydrogen a clear path to full decarbonisation by 2050 at the latest, it risks opening the door for supporting hydrogen projects that may never be able to achieve a 100% GHG reduction.
That is because many financial incentives will be linked to the definition of low-carbon hydrogen: For example, the future <a href="https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal/delivering-european-green-deal_en">Energy Tax Directive</a> will allow governments to put the lowest energy taxes on “low-carbon fuels” that include low-carbon hydrogen, and it may also be eligible for a string of national and EU funding such as the future Energy and Environmental State Aid Guidelines (EEAG) and EU Emissions Trading System (EU ETS) Innovation Fund.
And then there’s the risk of lock-in effects. Some may argue that each EU policy can be revised upwards, and that we can therefore wait with making the definition of low-carbon hydrogen more ambitious. However, it would be extremely dangerous to wait and hope for a revision in the distant future to do the trick. Natural gas and hydrogen infrastructure can have an <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1011506/Hydrogen_Production_Costs_2021.pdf">estimated lifespan</a> of 30 years or more, and energy companies make a business case based on that estimate. Sudden changes in what is considered sustainable or not may ruin the business case of a long-term project completely (just ask the “advanced” biofuels crowd). Also in this situation, it might simply be too costly to upgrade a hydrogen plant that was never intended to be fully decarbonised, to set it up with such a task after it’s been built.
This can lead to costly court cases and might force governments into expensive buy-outs to put these hydrogen projects offline prematurely. Recent history has been clear that this risk can become a reality, quickly: For example, the Onyx coal-fired power plant in the Netherlands was only built in 2015 as one of the most modern coal plants in Europe at the time, only to be seen as unfit-for-the-future a few years later. In November 2021, the Dutch government was forced to buy out the current owners for a whopping EUR 212 million to take it offline as soon as possible.
Some may say the damage has already been done in the <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32021R2139">recently agreed delegated act</a> on climate change mitigation of the Sustainable Finance Taxonomy (SFT), which unfortunately already allows the financial sector to label financing to any hydrogen-based project as “sustainable” if such activities complies with a life-cycle GHG emission savings requirement of 73.4% for hydrogen (i.e. lower than 3tCO2e/tH2). Fortunately, the technical screening criteria of the SFT also require the hydrogen-based project to identify which “physical climate risks” may affect its performance during its expected lifetime. This requirement will hopefully nudge any credible financial sector institution to push the project in question to present a credible plan towards full decarbonisation.
In short, the EU’s Hydrogen and Decarbonised Gas Market Package would be best served with a robust and ambitious definition of low-carbon hydrogen from the get go. The Directive should therefore adopt a definition of &quot;low-carbon hydrogen&quot; that can demonstrate a full GHG reduction threshold by 2050 at the latest, with concrete intermediate GHG reduction targets (e.g. -80% and -90% CO2 reductions) in between.That would help make any hydrogen-based project coming online today to be(come) fit-for-the EU Green Deal.
Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.

Decarbonising hydrogen: How low can you go?

Following the Fit-for-55 package, here's Leon's initial analysis of the EU Emissions Trading System (EU ETS) revision proposal. Long story short: it becomes more difficult to pollute, but sustainable frontrunners are still disadvantaged compared to laggards.

Following Wednesday 14.07.21's <a href="https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal/delivering-european-green-deal_en">Fit-for-55 package</a>, here's Leon's initial analysis of the <a href="https://ec.europa.eu/info/sites/default/files/revision-eu-ets_with-annex_en_0.pdf">EU Emissions Trading System (EU ETS)</a> revision proposal. Long story short: it becomes more difficult to pollute, but sustainable frontrunners are still disadvantaged compared to laggards.
<h2>On the EU ETS target</h2>
The emission reduction goal increased to -61% by 2030 compared to 2005, which covers the sectors of industry and power, but also intra-EU aviation and maritime.
As some who were around last year remember, this is taken from last year's <a href="https://eur-lex.europa.eu/resource.html?uri=cellar:749e04bb-f8c5-11ea-991b-01aa75ed71a1.0001.02/DOC_1&amp;format=PDF">2030 Climate Target Plan</a> (see table below). Unfortunately, this implies that the target for stationary installations (industry/ power) is only -64%, which means the EC picked a less ambitious scenario.
<img src="https://illuminem.b-cdn.net/articlebody/8d6c3725063332b44f5c061a02f2ebdbac564022.png" alt="undefined" />
A big plus: the Linear Reduction Factor, which reduces the annual cap of all allowances in the system,&nbsp;almost doubled to 4.2% as of 2024, combined with a one-off reduction or "rebasing" of 119 mln allowances (scenario AMB2c in the picture). This leads to a big 15%-POINT cut in free allowances (FA). This LRF was a huge battle in the previous reform, so hope it stays.
<img src="https://illuminem.b-cdn.net/articlebody/352e69aca82d4c8f5a6ac7f3050f6c15c3ea2349.png" alt="undefined" />
An important miss: while everyone's commenting on the Commission's proposal to add road transport and buildings to the EU ETS, the major polluting sector missing is the municipal solid waste sector. As long as they are left out of the ETS, it improves the business case to burn municipal waste and does not incentivise investments in recycling/reusing infrastructure. This is a <a href="https://zerowasteeurope.eu/2021/03/eu-ets-municipal-incinerators-debunk-industry-claims/">major problem</a>.
Another big miss: preventing the Cross Sectoral Correction Factor or CSCF, which would shave off FA for all EU ETS sub-sectors if applied. The famous tiered approach (option CL1, which creates different grades of carbon leakage risk and based on that caps the FA per sector) lost to the "strengthened benchmark" option (CL2 in the picture).
<h2>What does this all mean?</h2>
<img src="https://illuminem.b-cdn.net/articlebody/138b4b945767a5208d578c5cb90c8edeac00bfe6.png" alt="undefined" />
First of all, what are EU ETS product benchmarks? They and their main issue are described in the picture, which is taken from another <a href="https://carbon-pulse.com/132901/">op-ed article.</a>​
<blockquote>How could this have happened? Well, the way these free handouts are given out is based on a very technical process called &ldquo;product benchmarks&rdquo;. A whole value chain like that of steel is not put into a single benchmark, but instead each technique in the production process gets its own benchmark. For example, the key ingredient for iron to produce steel is iron ore. Therefore, most producers of iron ore are placed in the so-called Sintered Ore benchmark. Within this benchmark, each Sintered Ore producer competes to produce the &ldquo;cleanest&rdquo; sintered ore and this determines who receives the most free allowances. The big problem with this? Cleaner techniques to produce iron are excluded from this benchmark. For example, the Swedish iron ore group LKAB produces iron with a technique using iron ore pellets, which are basically little iron ore balls, whereas sintered ore are small iron ore rocks. Both can be used interchangeably to produce iron and eventually steel. The big catch? LKAB&rsquo;s production of pellets emits only around one tenth of the greenhouse gases emitted by the average sintered ore installation. By a rough estimation, a large-scale transition from sintered ore to pellets production and use in the EU would &ndash; in itself &ndash; represent yearly climate gains of 16 million tonnes of CO2 emissions. This by comparison is almost equal to the annual CO2 emissions of Sweden&rsquo;s entire industry. However, because it is a slightly different technique, the Commission and the EU steel lobby do not want it to be included in the sintered ore benchmark, and therefore LKAB is prevented from setting the standard for CO2 efficiency in its industry. Its dirtier competitors meanwhile are being kept alive with free handouts because they only have themselves to worry about. Sustainable frontrunners like LKAB are being heavily disadvantaged.</blockquote>
​"Strengthened benchmarks" mean these benchmarks get a higher maximum annual improvement rate, from 1.6% to 2.5%.
<h2>The big problem?</h2>
Big sectors have lobbied the EC in the past to show their technological progress was very small, hence they will get a very low improvement rate.
<img src="https://illuminem.b-cdn.net/articlebody/9807b029d68216a747c5de8572f96b1cc01982f6.png" alt="undefined" />
Comparing the benchmark values from <a href="https://op.europa.eu/en/publication-detail/-/publication/25d79153-02b6-4370-974c-2a45baf79167">Decision&nbsp;2011/278/EU</a> with the&nbsp;<a href="https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32021R0447&amp;qid=1625038359648&amp;from=en">recently published updated benchmark value list for 2021-2025</a> you see that the Sintered ore benchmark will be &ldquo;improved&rdquo; from 0.171 t CO2/ton product in 2007/2008 to 0.157 by 2023 (8.2% improvement over a 15-year period!) and the Hot metals benchmark from 1,328 to 1,288 (3.0% improvement).
<img src="https://illuminem.b-cdn.net/articlebody/430d1927742d42c4be231a521bd30905632353dc.png" alt="undefined" />
So, the fact that the maximum benchmark improvement is now set higher does not mean that polluting industries will actually be imposed that maximum improvement if you lobby hard enough.
Problematic: EU ETS benchmarks are the basis for how many FA are handed out. This is exactly the issue with the current product benchmark system. Old technologies are only competing with themselves for FA instead of with newer, cleaner solutions.
<h2>The benchmark system must be reformed</h2>
And this is where the EU ETS proposal brings some hope: it states that the EC wants to make the product benchmark system more technologically neutral and by ensuring equal treatment of installations independent of the technology or production process used. This sounds very promising, BUT:
<img src="https://illuminem.b-cdn.net/articlebody/94006e125ecfd46937d23e973fae650f5599d565.png" alt="undefined" />
It's not at all clear yet how the EC will translate its intentions to change the scope of the EU ETS product benchmarks into Annex I to <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R0331&amp;rid=1">Delegated Regulation (EU) 2019/331</a>, which is where the benchmark descriptions are placed. The EC will have to probably do this through new delegated acts in the future.
The goal for the sustainable frontrunner lobby should be: it shouldn't matter how you produce something (e.g. steel), as long as it's done as cleanly as possible.
Therefore, benchmarks should move away from technology-specific EU ETS product benchmarks to value chain-wide product benchmarks that stimulate competition between different technologies on their CO2 reduction potential.
<img src="https://illuminem.b-cdn.net/articlebody/eae4dcff1f2030bbb8436e08f19b8663f99f53a2.png" alt="undefined" />
<h2>Another big miss: the Carbon Border Adjustment</h2>
Only phasing out free allowances for CBAM sectors by 2035 is way too slow to enable a level-playing field with sustainable frontrunners, who hardly benefit from these things while their laggard competitors do.
<img src="https://illuminem.b-cdn.net/articlebody/b35777d354714941d7b1d2ffb4ef4e223a815cce.png" alt="undefined" />
So now what? It is now up to ambitious Members of the European Parliament (e.g. Pascal Canfin, Michael Bloss, Back Eickhout and Mohammed Chahim) and Member States in the Council to show more vision on the aforementioned concerns and make this EU ETS reform work for sustainable frontrunners.
illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.

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Leon de Graaf

Leon de Graaf

Decarbonising hydrogen: How low can you go?

EU's carbon market: not yet fit-for-frontrunners

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