Industrial and innovation policy can speed up the Green Hydrogen transition

Green hydrogen (GH2) as a means to decarbonize industry is now well-ingrained in the policy discourse. Around 45 countries are devising or have published hydrogen strategies, and several agreements have been concluded between countries to set up tomorrow’s trade routes for hydrogen. Despite these efforts, we are still far from a world where GH2 plays a key role as a source of energy, given that demand for GH2 is limited and the infrastructure for GH2 is confined to industrial areas. Moreover, global electrolyser capacity amounts to just a few hundred megawatts, which lies significantly below the target of 115 GW by 2030 to meet the GH2 demands for all the published and announced strategies, and again far below the forecasted target of 5 TW by 2050, according to IRENA’s World Energy Transitions Outlook.

The prevalence of Green Hydrogen strategies around the world

On the one hand, the lack of clear demand for GH2 impedes investment, while policymakers, on the other, may be wary of supporting a technology without a clear understanding of the cost benefit and business model. With neither a clear demand for GH2 nor a public policy, investors may deem GH2 projects too risky. This gridlock between investors, developers, policymakers and off-takers must be resolved to kick-start initial GH2 projects and to promote the development of a solid GH2 sector, while simultaneously supporting socioeconomic objectives, such as decent jobs and a clean environment.

The prevalence of GH2 export routes around the world

Aside from the present lack of demand, GH2’s high production costs are hampering its industrial application. For instance, although the steel and chemical industries are major hydrogen users, many companies are reluctant to shift to GH2. Under the present market conditions, higher priced green products are competing against established lower priced grey options, particularly in capital-intensive sectors with low-profit margins. Without environmentally-conscious consumers and adequate market policies, green product manufacturers will continue to struggle to recover their production costs and remain competitive. Market policies such as regulation, knowledge brokerage, innovation promotion and public procurement could facilitate the uptake of GH2, for example, by reducing the price of environmental goods and increasing the costs of conventional ones. Technical barriers as well as the risk of carbon leakage are further compounding the problem of GH2 uptake.

Innovation and industrial policy to support GH2

Market-driven factors such as lack of demand and uncertain production costs creates a gridlock for Green Hydrogen.

Innovation and industrial policy can offset non-conducive market conditions.

Market-driven factors are still not conducive for a speedy GH2 transition. Innovation and industrial policies can address market failures through a range of interventions that could make GH2 production viable in the broader context of a country’s structural transformation. GH2 is an integral part of the "Green Industry Policy" approach, which is aimed at achieving societal objectives, including a shift towards low-carbon manufacturing and resource efficiency.

A multi-faceted industrial policy is needed to facilitate the emergence of GH2 as a breakthrough technology in a world that is heavily locked into fossil fuel-based technologies. Such a policy would help bridge the gap between market requirements, sustainability/ climate requirements and hydrogen technology development.

Source: Adapted from IRENA (2022) Green hydrogen for industry: A guide to policy making, International Renewable Energy Agency, Abu Dhabi.

Industrial policy must promote speedy adoption of GH2 technology and innovation and introduce a ban or mandated phase out of fossil fuel-based technologies (e.g. SMR, blast furnaces). Blacklisting certain technologies within a climate-consistent timeframe can open up space for decarbonized solutions. Alternatively, a whitelist of decarbonized technologies could achieve a similar result. The implementation of binding GH2 quotas in the industrial sector could generate stable demand for GH2, thus reducing offtake risk. Additionally, measures could be introduced to ensure that GH2 production does not have any indirect impacts on extending the lifetime of fossil fuel plants. Crucially, measures to ramp up and guarantee sufficient supply of renewable electricity will also be necessary to prevent competition between GH2 production and other green electrification sectors. Public R&D funding for pivotal research activities, pilot and demonstration projects can help alleviate apprehensiveness, test feasibility and endorse learning by doing. Scaling up the adoption of GH2 technologies requires putting in place skilling and reskilling programmes. Such measures will foster a new generation of experts in hydrogen-related technologies and accompanying academic educational programmes, e.g. hydrogen engineering.

Secondly, financing for the uptake of breakthrough GH2 technology must be made available. The landscape of financing mechanisms for green projects is evolving rapidly and could include grants and loans for each phase of project development, from feasibility studies to commissioning; tax rebates to promote carbon emission reductions by decreasing firms’ tax liability if they invest in carbon-neutral processes; carbon contracts for difference, which can support greater price stability and bridge the price gap between GH2 and fossil fuel prices, thereby complementing ETS revenues; bilateral auctions for GH2, which can regulate the balance between demand and supply. Financing mechanisms are also needed to internalize climate change-related externalities. This could entail tighter use of emission trading systems (ETS) or carbon pricing and the lifting-off of grandfathering while other sectoral exemptions from carbon pricing/ETS can ensure that energy-intensive industries are not sheltered from climate responsibilities.

Thirdly, as mentioned above, industrial policy must ensure that there is sufficient and consistent demand for GH2. Policy instruments to facilitate this objective include sustainable public procurement, which would serve as an initial and stable driver of demand for green goods and materials; the use of quotas for green materials, creating the foundation of a green materials market which currently does not yet exist. Large consumers of basic materials (e.g. carmakers) would have to prove that they purchase a predetermined minimum amount of green materials. This instrument would need to be used in tandem with eco-labelling as a mechanism to convey information to consumers on products that meet environmental standards and to nudge them towards buying low-impact products. Another instrument that has the potential of changing consumer behaviour and increase demand for GH2 is product-related taxation instruments, e.g. tax differentiation and capital allowances.

Fourthly, national and international policy coordination is indispensable. An industrial policy that supports GH2 must factor in decarbonization strategies to ensure that the adoption of policies is tailored to national and local conditions, to clearly signal the forthcoming changes to stakeholders, and to take its broader impact into consideration. Regulations and standards must be agreed on across countries to allow for hydrogen trade and to determine its minimum quality. To protect local industry from the risk of carbon leakage and to impose the same carbon price on imported goods, carbon-based import taxes such as the proposed European Border Carbon Adjustment Measure could be considered.

An opportunity for the Global South

Countries in the “Global South” with a high low-cost hydrogen potential are developing export-oriented hydrogen sectors. This entails support for the development of appropriate infrastructure to produce and export hydrogen. For example, auctions have been held in Chile to support the deployment of the first 388 MW of GH2. Colombia’s GH2 strategy includes measures to support both hydrogen shipping capacity to meet expected international demand as well as firms’ export ambitions, while promoting the country’s role as a prospective logistics hub in the Caribbean.

If carefully planned, GH2 can induce a geopolitical shift in production, trade and energy security to the benefit of the Global South. As discussed in the anchor piece for this GH2 series, countries in the Global South are likely to benefit from new paths to industrialization which a shift to GH2 would create, thereby generating new jobs and additional welfare benefits. The relocation of manufacturing would be most suited for industrial commodities such as aluminium, ammonia, iron, jet fuel and methanol. Three elements can drive this phenomenon2, namely (i) the willingness of industrial agglomerates to relocate; (ii) the cost of transporting finished or semi-finished products compared to the transport of energy, and (iii) the cost of energy.

Setting up new production facilities in renewables-rich countries does not necessarily imply the closure of plants elsewhere. On the contrary, the energy transition offers scope for growth in many industries. More ammonia will be needed to fuel international shipping and more steel will be required, given the expected population growth and the energy sector’s new infrastructure requirements.

Transporting green goods will be cheaper than transporting GH2. Energy-intensive industries have the opportunity to establish new facilities in countries with low-cost renewable surpluses, exporting semi-finished products (e.g. reduced iron) or finished goods (e.g. cars); the cost of energy may be a key factor in their decision.

The potential of renewable energy and land availability in the Global South create a major competitive advantage for regions with surplus renewable resources to become sites of green industrialization. Even though the cost of renewables is falling across the globe, sizeable differences in terms of cost between countries and regions remain. Therefore, energy sector policies to reduce the political, regulatory and financial risks that renewable energy developers might face are instrumental for decarbonizing the local energy sector and attracting green industrialization.

Industrial policies to support GH2 supply and demand are still in their infancy and are mostly drawn from policies that were once used to promote the uptake of renewable energy. Yet differences between the two cases exist and adjustments will have to be made as we learn by doing. Nevertheless, this should not prevent any country from establishing a GH2 sector and from sharing its experiences.

Green Hydrogen can induce a geopolitical shift in production, trade and energy security to the benefit of the Global South

Emanuele Bianco is Programme Officer at the International Renewable Energy Agency (IRENA).
Manuel Albaladejo is Country Representative for Argentina, Chile, Paraguay and Uruguay, at the United Nations Industrial Development Organization (UNIDO).
Smeeta Fokeer is Industrial Development Officer at the Climate and Technology Partnership Division (CTP) of the United Nations Industrial Development Organization (UNIDO).
Nele Wenck is Junior Specialist at the United Nations Industrial Development Organization (UNIDO) and PhD student at Imperial College London.
Petra Schwager is Chief of the Energy Technologies and Industrial Applications Division at the United Nations Industrial Development Organization (UNIDO).

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).