Regulatory framework needed to speed up the development of a European hydrogen economy

February 2022

To support the demand for renewable and low-carbon gases in hard-to-abate sectors, the EU needs to take decisive steps in designing fit-for-purpose EU legislation to support the swift deployment of a hydrogen economy in line with the European Commission’s ambitions. In our view, the following four areas of action are crucial to make this transition happen:

1. A consistent and well-coordinated EU regulatory framework that supports the development of a competitive cross-border market and a pan-European network for hydrogen. The forthcoming legislation on EU gas decarbonisation should be the main instrument for this, complemented by the revision of RED II (REDIII) with due consideration to maintaining a flexible approach to business. Setting unnecessarily restrictive measures risks jeopardising the EU’s hydrogen ambitions and sectoral integration goals.
2. Clear and consistent EU-wide definitions for hydrogen. To meet the increasing demand with manageable costs, all forms of carbon-free electricity should be able to play a role in the production of hydrogen. Instead of classifying hydrogen using various “colour codes”, the definition of sustainable hydrogen should thus be based on the carbon footprint of hydrogen. Such a threshold has been set as 3.4 tCO2/eqtH2 under the draft RED III and as 3.0 tCO2/eqtH2 under the draft Hydrogen and Gas Package. Power purchase agreements backed by guarantees of origin and stand-alone guarantees of origin of electricity should be used to define the renewable characteristic of hydrogen together with other forms of sustainable hydrogen.
3. Energy taxation fit for hydrogen. Hydrogen is not within the scope of the existing Energy Taxation Directive (ETD), so rules for its taxation require clarification. This should be done as part of the upcoming revision of the ETD. The key issue is to define which part(s) of the hydrogen value chain will be subject to taxation. The Directive should allow member states to apply lower tax rates or exempt electricity used for the electrolysis process from energy taxation. Specific levies on top of the price of electricity used for electrolysis should be reduced to a minimum. The usage, transmission and distribution of sustainable hydrogen should be similarly subject to lower tax treatment.
4. Support mechanisms and incentives focused on EU hydrogen production. To drive the demand for hydrogen, ambitious carbon pricing through the EU ETS is essential. However, as hydrogen technologies are not yet fully mature, support mechanisms are needed to speed up their deployment. Revised EU State Aid Guidelines should establish a common EU framework for hydrogen-related incentives and support mechanisms applicable in all member states. The focus should be on guaranteeing demand for sustainable hydrogen (e.g. competitive tenders and carbon contract for difference) together with incentivizing production.

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