Assessing the impact of low-carbon hydrogen regulation in the EU
Delegated Act on low-carbon fuels: key aspects for consolidating the market and aligning with net-zero objectives
The market rules for clean hydrogen production are currently being negotiated and defined. In Europe, following the official adoption of the Hydrogen and Decarbonised Gas package in May 2024, the European Commission must prepare a delegated act on low-carbon fuels within a year. This is a key milestone for the industry. Based on Deloitte’s in-house energy models, the study analyzes how regulatory design affects the market uptake of different production technologies and the resulting climate impact of the future hydrogen economy.
Clean hydrogen is a key element in achieving the EU’s climate objectives, especially in areas where direct electrification is not feasible. As of today, the hydrogen economy is starting to emerge. Establishing clear and effective regulation, definitions, and certification schemes is crucial now, as these are the prerequisites for building the market and unlocking investments.
The low-carbon fuels DA will define the accounting rules and requirements for hydrogen to be considered low-carbon and provide the basis for a certification scheme. It will cover various production routes for clean hydrogen, such as power grid-based electrolysis or natural gas-based production with carbon capture, utilization and storage (CCUS), also known as blue hydrogen.
Sustainability must remain at the forefront of efforts
It is important to ensure that the EU’s future hydrogen production is genuinely low-carbon and aligns with EU climate objectives. The Renewable Energy Directive (RED III) requires renewable hydrogen to have a greenhouse gas (GHG) emission saving of at least 70 per cent compared to a fossil fuel comparator, i.e., a maximum threshold of 3.38 kg CO2eq per kg of hydrogen. However, to be consistent with the EU’s net-zero emission target, the carbon intensity threshold would gradually need to decrease to around 1 kg CO2eq by 2050. Any positive emissions would lead to additional difficulties in accomplishing net-zero objectives. The application of a gradually decreasing threshold could save up to 230 MtCO2eq of emissions by 2050. The production and market share of fossil gas-based low-carbon hydrogen will then be determined by the extent to which gas suppliers can adopt the most effective technologies to cut upstream emissions (see Figure 1).
Using a dynamic hourly granular grid emissions accounting framework could unlock additional environmental benefits at little extra cost. It would incentivize the use of electrolyzers to enhance the system’s flexibility, addressing a critical need, as electricity generation increasingly relies on variable solar and wind energy sources. It would send operational signals to electrolyzers to maximize the use of low-carbon electricity, as this corresponds to periods when market prices are lowest. Applying such hourly granular grid emission accounting would lead to an additional saving of 30 MtCO2eq (from 2030 to 2050) compared to an accounting framework based on yearly averages (see Figure 2).
Low-carbon hydrogen regulation will shape competitiveness between supply pathways
Hydrogen production costs vary significantly by technology and country, driven by natural gas and electricity prices, renewable resources and infrastructure availability. National disparities in terms of renewable endowments, legacy power mixes, access to CO2 storage sites or hydrogen import infrastructure translate into country-specific hydrogen supply pathways across the EU.
Our modelling results show that grid-based hydrogen production is projected to grow rapidly and become the dominant production route in the EU, driven by the increasing integration of renewables into national grids. The initial development will vary across member states due to differences in legacy power mixes and, as discussed above, will be influenced by the choice of methodologies for accounting grid emissions. As renewable electricity production will grow rapidly, grid-connected electrolyzers should operate with a high degree of flexibility, combined with a large-scale hydrogen storage infrastructure.
Natural gas-based hydrogen production could play a role in the EU but its large-scale deployment faces major uncertainties such as the availability of CO2 transport and storage infrastructure, and the volatility of natural gas prices. Moreover, upstream emissions, including methane leaks, still need to be effectively mitigated. Compliance with emission thresholds requires steam methane reformers with advanced CCS technologies (with a capture rate of 90% or more) and minimal environmental impacts from upstream gas production. Current fossil gas-based hydrogen production in the EU, sourced from the US or Algeria, fails to meet carbon intensity standards even when using advanced capture technologies.
Hydrogen imports are essential for the EU, providing access to low-cost hydrogen and addressing internal production gaps. Pipeline imports from neighboring regions with abundant fossil gas or renewable resources are highly competitive and will form a key part of the EU’s hydrogen supply. The EU must enforce equally stringent environmental standards upon international suppliers to ensure that the benefits of EU hydrogen imports are not outweighed by increased emissions elsewhere.
The regulatory framework must be clear, unlock market opportunities and ensure climate targets are met
For policymakers, developing the EU low-carbon hydrogen certification scheme requires a balanced and deliberate approach. The DA needs to consider the specificities of each potential low-carbon production route and fit within the existing regulatory framework, aligning with EU industrial, energy, and environmental goals. It must also navigate the diverse energy landscapes of member states, each with unique power mixes, energy resources, infrastructures, and policies. Additionally, it should provide clarity and stability for hydrogen economy stakeholders while remaining adaptable to future uncertainties. The critical considerations for the upcoming DA are:
Establishing an appropriate and comprehensive regulatory framework must provide a clear and consistent vision to get market players moving.
Gradual adoption of decreasing emission thresholds, in line with the objective of climate neutrality in 2050.
A dynamic grid emission accounting methodology with a sufficiently precise granularity to align electrolyzer operations with power system needs, while creating market opportunities.
The carbon footprint of fossil gas-based hydrogen should be closely monitored, with careful consideration of the origin and upstream emissions of the fossil gas feedstock.
The upcoming Delegated Act on low-carbon fuels is an opportunity to reassess priorities and balance the short-term needs of the hydrogen industry with national and EU strategic, economic and sustainability goals. Recognizing and addressing these complexities could lay the foundation for a sustainable and resilient hydrogen economy in the EU.
Our approach: Combining Deloitte’s energy system model DARE and international hydrogen trade model HyPE to assess the future hydrogen market in the EU
This study provides scientific and quantitative evidence on the potential implications of key regulatory design aspects of the forthcoming DA on low-carbon fuels. Deloitte’s energy models (DARE and HyPE) have been combined to comprehensively represent the future of the European electricity system, hydrogen production potential, pipeline trade and seaborne imports until 2050. This modelling framework makes it possible to understand how policy decisions will inevitably shape the competition between hydrogen production technologies, including short- and long-term implications for the environment, economic competitiveness, and resilience.
For a detailed look at the impacts of EU low-carbon hydrogen regulation, download our Hydrogen Study here.
