Assessing the impact of the low-carbon hydrogen regulation in the EU

The hydrogen economy is still in its infancy. Establishing clear and effective regulation, definitions, and certification schemes is a prerequisite for market creation and investments. 

Following the official adoption of the Hydrogen and Decarbonised Gas package in May 2024, the European Commission must, within a year, prepare a Delegated Act on Low-Carbon Fuels for which low-carbon hydrogen is the key component. This act will define the accounting rules and thresholds required to define hydrogen production methods as low-carbon, forming the basis of a certification scheme. It will cover various production routes, including power grid-based electrolysis, fossil gas-based production with CCUS, and extra-EU imports, all of which have the potential to contribute to reduce greenhouse gas emissions. The upcoming Delegated Act will complement the existing regulation on renewable hydrogen¹. 

Illustration of the key dimensions at play with the low-carbon regulation

Study context

Using a detailed modelling of the EU power sector and imports opportunities, this study provides scientific and quantitative evidence on the potential implications of key regulatory design aspects of the forthcoming Delegated Act on Low-Carbon Fuels. Deloitte’s models (DARE and HyPE) have been combined to comprehensively represents the future of the European electricity system, hydrogen production potential in the different supply pathways, pipeline trade and seaborne imports up until 2050. This modelling framework makes it possible to understand how policy decisions will inevitably shape the competition between technologies, with short- and long-term implications on the nascent hydrogen industry's environmental integrity, economic competitiveness, and resiliency. 

Sustainability must remain at the forefront of the efforts

The primary objective of the regulation must be to ensure that the hydrogen produced is genuinely low-carbon and aligns with the EU climate objectives.  

• The Renewable Energy Directive (RED III)² sets a 94 gCO₂eq/MJ fossil fuel comparator and requires at least a 70% GHG emission reduction, translating to a carbon intensity threshold for hydrogen of 3.38 kgCO₂eq/kgH₂. However, compatibility with the EU’s net-zero target would require the carbon intensity threshold to decrease from 3.38 to 1 kgCO₂eq/kgH₂ in 2050. This requires a gradual decrease of the emission threshold towards 2050, which is the only way to rule out any production based on fossil gas with still significant upstream emissions and from electricity grids with residual emissions. Thanks to a progressively more stringent threshold, up to 230 MtCO₂eq emissions would be saved by 2050.  
  
• Using a dynamic hourly-granular grid emission accounting framework also yields environmental benefits at little extra-cost. This would increase the contribution of electrolysers to system flexibility – needed for the growing addition of renewable capacities – while creating market opportunities that would otherwise have been blocked with an accounting method based on annual averages. The operating profiles of electrolysers would align with fluctuations in carbon intensity in the electricity grid, which also correspond to periods when market prices are lowest. We find that applying such hourly-granular grid emission accounting leads to an additional 30 MtCO₂eq decrease (from 2030 to 2050) compared to an accounting framework based on yearly averages.
  

Low carbon hydrogen regulation will shape competitiveness between supply pathways

Hydrogen production costs vary significantly by technology and country, influenced by natural gas and electricity prices, meteorological conditions and infrastructure availability. National disparities in terms of renewable endowments, legacy power mixes, access to CO₂ storage sites or hydrogen import infrastructure translate into an heterogeneity of supply trajectories across the EU countries.  

• Grid-based hydrogen production rapidly grows and becomes the dominant production route in the EU mix, driven by the increasing integration of renewables into national grids. Initial development varies across member states due to differences in legacy power mixes and is influenced by choices of grid emissions accounting methodologies. As clean electricity production needs to grow rapidly to meet rising demand, grid-connected electrolysers should operate with a high degree of flexibility, and a large-scale hydrogen storage infrastructure is essential for their deployment. 
  
• Gas-based hydrogen production could play a key role in the EU hydrogen supply but its large-scale deployment faces major uncertainties. The deployment of reformers with CCUS presents technical challenges linked to the deployment of the technologies and infrastructure needed to capture and transport CO₂ but is also dependent of gas imports, whose price is highly volatile and whose upstream emissions still need to be reduced. Indeed, compliance with emission thresholds requires steam methane reformers with advanced CCS technologies (90% or more capture rate) and minimal environmental impact from upstream gas production. Current fossil gas-based hydrogen production in the EU, sourcing from the US or Algeria, fails to meet carbon intensity standards even when using advanced capture technologies.  
  
• Hydrogen imports are essential to the EU, providing access to low-cost foreign production and addressing internal production gaps. Pipeline imports from neighbouring regions with abundant fossil gas or renewable resources are highly competitive and form a key part of the EU hydrogen supply. Meanwhile, high transport and conversion costs reduce the competitiveness of seaborne imports. The EU must enforce equally stringent environmental standards to international suppliers to ensure that the benefits of EU hydrogen imports are not offset by increased emissions elsewhere.   

Key lessons

For policymakers, developing the EU low-carbon hydrogen certification scheme requires a balanced and deliberate approach. This regulation must 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 establishment of an appropriate and comprehensive regulatory framework must provide a clear and consistent vision to get market players moving 
  
• We suggest the gradual adoption of decreasing emissions thresholds, in line with the objective of climate neutrality in 2050, to replace the current value of 3.38 kgCO₂eq/kgH₂ 
  
• A dynamic grid emission accounting methodology with a sufficiently precise granularity should be used to align electrolysers operations with power system needs, while creating market opportunities 
  
• Emission factors for fossil-gas-based hydrogen should be closely monitored, with careful consideration given to the origin and carbon footprint 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, EU strategic, economic objectives, and sustainability goals. Recognizing and addressing these complexities can lay the foundation for a sustainable and resilient hydrogen economy in the EU

¹ The REDII (https://eur-lex.europa.eu/eli/dir/2018/2001/oj) and the subsequent RFNBO Delegated Acts of February 2023 on minimum GHG threshold and GHG accounting methodology. 

² Directive (EU) 2023/2413 of 18 October 2023 on the promotion of the use of energy from renewable energy sources. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=OJ:L_202302413