Promoting carbon-neutral hydrogen through UNFCCC and national-level policies

Challenge

While significant progress has been made in reducing the emissions intensity of the electricity generation sector, the mitigation of greenhouse gas (GHG) emissions by other sectors, particularly transport and heavy industry, is facing significant challenges. Achieving the ambitious targets of the Paris Agreement requires an accelerated transition of these sectors to zero-carbon fuels. Moreover, for fossil fuel exporters to accept a stringent global response to the climate change threat, they need a new business model that is consistent with climate change mitigation (Michaelowa and Butzengeiger 2019). This business model can be built on hydrogen—an intermediate energy carrier that can easily be stored, shipped, and exported, by partially using existing gas infrastructure. Additionally, energy structures in consumer countries must be adjusted to facilitate the transition to green hydrogen economies. The Group of Twenty (G20) can play an important role in facilitating policy action in both hydrogen producing and consuming countries by creating a coordinating entity, implementing hydrogen lighthouse projects, and developing internationally accepted standards.

Hydrogen can be produced through intermittent renewables such as solar and wind, in which significant potential exists for key fossil fuel exporters (“green” hydrogen). Alternatively, it can be produced by using hydrocarbons as feedstock (“brown” hydrogen) and then sequestering the carbon geologically (“blue” hydrogen), involving carbon capture and storage (CCS).

Together, blue and green hydrogen can provide a powerful alternative to existing energy sources. However, the cost of green hydrogen is still three to ten times higher than that of brown hydrogen, while the cost of blue hydrogen is, on average, twice that of brown hydrogen. This cost gap must be eliminated to enable the replacement of GHG-emitting fossil fuels with a zero- or low-carbon energy carrier (on a life-cycle basis) and accelerate the transition of fossil fuel exporters to exporters of renewable energy in the form of green hydrogen.

However, closing the cost gap requires a coordinated, integrated policy response that harnesses instruments under the United Nations Framework Convention on Climate Change (UNFCCC) as well as dedicated national policy instruments that generate demand for green and, potentially, blue hydrogen. Such instruments must be designed to allow for the rapid development of hydrogen infrastructure, along with its ecosystem of applications and end-users. One must consider that several G20 countries such as Germany and other countries of the European Union, clearly aim to limit hydrogen use to green hydrogen (Dezem and Parkin 2020). By contrast, countries such as the UK and the Netherlands aim to actively work with blue hydrogen as an intermediary solution (Gasunie and TenneT 2019).

Proposal

The International Energy Agency’s (IEA’s) landmark report on hydrogen, “The Future of Hydrogen: Seizing Today’s Opportunities” (IEA 2019) provides a comprehensive overview of the current status of hydrogen production, transport, storage, and economic perspectives. Given the vast low-cost hydrocarbon reserves in oil and gas producing countries, blue hydrogen can significantly contribute to global energy systems. Combining current brown hydrogen production capacity with CCS can quickly create a large quantity of blue hydrogen. Thus, it boosts the development of the value chain and new applications, while providing time and space for green hydrogen deployment. The G20 brings together the key countries that could generate demand for green and blue hydrogen through dedicated policy instruments. For example, Japan aims to become a hydrogen-based society, while the European Union (EU) member states are implementing the “European Green Deal.”

The G20 countries have the technological capacity to upscale hydrogen technology. Moreover, the G20 can support efforts to agree on policy instruments under the UNFCCC, given its important role in various regional negotiation groups. Fossil fuel producing countries will find opportunities to export a cleaner energy carrier from their vast low-cost hydrocarbon reserves and from renewable sources in the long term. Meanwhile, energy importing countries will drastically reduce their GHG emissions as they accelerate the deployment of green, and other renewable, sources. Thus, the G20 is an appropriate forum to spur the development of an integrated multi-level set of policy initiatives that enables the generation of revenue for activities that produce green and blue hydrogen.

Proposal I
G20 countries should coordinate the rapid ramp-up of a new global hydrogen market
To achieve the desired rapid ramp-up of a global hydrogen market, international cooperation is fundamental, both in terms of political initiatives and standardizing technicalities.

This coordinative role can be assumed by either a new or an existing institution, for example, the IEA or the International Energy Forum (IEF), which can credibly represent the interests of all relevant actors: fossil fuel exporting countries, future hydrogen importing countries, and renewable energy producers. If a new institution is created, an International Hydrogen Economy Initiative (IHEI) can be established to serve as a policy coordination tool between hydrogen importers and exporters. Such an institution could develop its own dedicated niche, like the International Renewable Energy Agency (IRENA) did in the context of renewable energy.

Initially, the institution/IHEI could focus on accelerating interactions between the Gulf region—and other potential suppliers such as Australia (see Bruce et al. 2018), Canada, Russia, and the USA—and Japan and the EU, who are likely to become key hydrogen importers in the next decade based on their self-defined energy policy targets. This could be achieved by supporting the development of long-term blue and green hydrogen delivery contracts that are linked to joint investment in the infrastructure needed to generate and transport the hydrogen. As the EU has announced a significant strengthening of its nationally determined contribution (NDC) under the Paris Agreement and following the EU Commission’s “New Green Deal,” the role of hydrogen in achieving the EU’s mitigation target is becoming more important. The institution/IHEI could become a direct component of Saudi Arabia’s G20 presidency year strategy.

The institution/IHEI should coordinate research and development on green and blue hydrogen and initiate new demonstration projects, which will be critical in advancing technologies to reduce production costs. In addition, it should define standards for the different hydrogen types and qualities, for example, maximum emissions for green and blue hydrogen (eventually differentiated into sub-categories such as “A-quality” and “B-quality”), considering the specific upstream emission profiles and long-term permanence. The set of standards should also include monitoring, reporting, and verification (MRV) requirements and safety standards for production, transportation^[1], and storage.

The institution/IHEI could also study the design of national-level instruments that incentivize the production of green and blue hydrogen and test policies in its member states. This design should assess the extent to which policies should incentivize both producers and end-consumers to switch to green/blue hydrogen. An initial set of possible policies could be:

1. green hydrogen “feed-in” tariffs (i.e., price premiums for green hydrogen similar to renewable feed-in tariffs),
2. governmental subsidies covering the price differential between classical fuels and green/blue hydrogen, or
3. tax reduction for hydrogen types that stay below certain emission limits (e.g., 2 kg CO₂/kgH₂).

In addition, further efforts are required to enable the commercial transport and storage of hydrogen, lowering costs, and ensuring safety in all stages of the process. Hence, forward-looking policies should cover the entire supply chain; this would also help to address competitiveness issues, as lowering the cost of all elements of the supply chain will prevent competitive distortions.

Moreover, the institution/IHEI could develop a blueprint to provide long-term policy support for hydrogen. Any international coordination efforts should ensure that national sovereignty of all G20 member states Is respected, and that all international policies are non-discriminatory.

Proposal II
G20 countries are best positioned to develop “lighthouse” bilateral initiatives under the cooperative approaches of Article 6.2 of the Paris Agreement
Such initiatives could build on the activities undertaken by Japan in the context of the Joint Crediting Mechanism (JCM) for bilateral collaboration on greenhouse gas mitigation. Japan and Saudi Arabia are already collaborating under the JCM and, thus, would be ideal candidates for the first activity, which could be mobilized before 2025 and highlighted at COP 27 of the UNFCCC, to be held in 2022.

Other major economies, like several EU member states, have declared their interest in making use of bilateral agreements under the UNFCCC. Therefore, this might be an excellent opportunity to rethink and renew the economic collaboration between oil-exporting countries and Europe under a new, low-carbon umbrella, for even closer economic partnerships. The same applies to countries in other regions, such as China, India, Brazil, Indonesia, Mexico, and South Africa.

Numerous countries around the world (including Eastern European and North African countries) are already considering the ramp-up of their green hydrogen production. Therefore, we see a window of opportunity over the next 1–2 years for first-movers to initiate new, long-term economic partnerships.

Proposal III
G20 countries should coordinate a hydrogen program to develop baseline and monitoring methodologies for generating emission credits under international market mechanisms
To enable the generation of emission credits, baseline and monitoring methodologies for the use of green and blue hydrogen are required, in the context of the Paris Agreement’s Article 6.2 and 6.4 mechanisms. Key G20 countries should develop and use such methodologies in the context of Article 6.2 pilots (Greiner et al. 2019) and then submit them to the Supervisory Body of Article 6.4 under the UNFCCC. Such methodologies are necessary to enable the generation of carbon credits and associated revenues. It should be noted that the bottom-up nature of Article 6.2 allows G20 countries with different circumstances to experiment with innovative approaches that could be more difficult to gain consensus on under Article 6.4, which is subject to international rules. Methodologies should reflect both direct emissions (scope 1, e.g., CO₂ emissions from reforming) and indirect emissions from the power sector (scope 2, e.g., CO₂ emissions from power production related to electrolysis). In addition, uncertainties around the permanence of stored carbon must be reflected, similar to how it was done in the context of CCS/EOR activities under the Clean Development Mechanism (CDM) of the Kyoto Protocol.

Experience from the CDM indicates that the development of internationally approved methodologies takes 2–3 years (including development, international review, revisions, and approval). Therefore, the process should be initiated with sufficient lead time. The development of methodologies provides a public good to any country, including those outside of the G20 and, thus, helps to prevent imbalances regarding competitiveness.

Key Recommendations

1. G20 countries should establish international coordination for a rapid ramp-up of the new global hydrogen market.
2. G20 countries are best positioned to develop “lighthouse” bilateral initiatives under the cooperative approaches of Article 6.2 of the Paris Agreement.
3. G20 countries should coordinate a program for the development of baseline and monitoring methodologies for generating emission credits under international market mechanisms.

Disclaimer
This policy brief was developed and written by the authors and has undergone a peer review process. The views and opinions expressed in this policy brief are those of the authors and do not necessarily reflect the official policy or position of the authors’ organizations or the T20 Secretariat.

References
Bruce, Sam, Max Temminghoff, Jenny Hayward, Elizabeth Schmidt, Christopher Munnings, Doug Palfreyman, and Patrick Hartley. 2018. “National Hydrogen Roadmap: Pathways to an Economically Sustainable Hydrogen Industry in Australia.” CSIRO. Last modified August 23, 2018. https://www.csiro.au/~/media/Do-Business/Files/Futures/18-00314_EN_NationalHydrogenRoadmap_WEB_180823.pdf?la=en&hash=36839EEC2DE1BC38DC738F5AAE7B40895F3E15F4

Dezem, Vanessa, and Brian Parkin. 2020. “Germany Sees No Role for Natural Gas in Draft Plan for Hydrogen.” Bloomberg Green. Last modified March 5, 2020. https://www.bloomberg.com/news/articles/2020-03-05/germany-sees-no-rolefor-natural-gas-in-draft-plan-for-hydrogen-k7ev6f5t?utm_source=CP+Daily&utm_campaign=bad90770a7-CPdaily06032020&utm_medium=email&utm_term=0_a9d8834f72-bad90770a7-36104189

Gasunie and TenneT. 2019. “Infrastructure Outlook 2050.” TenneT. Last modified February 14, 2019. https://www.tennet.eu/fileadmin/user_upload/Company/News/Dutch/2019/Infrastructure_Outlook_2050_appendices_190214.pdf

Greiner, Sandra, Thiago Chagas, Nicole Krämer, Axel Michaelowa, Da rio Brescia, and Stephan Hoch. 2019. “Moving towards Next Generation Carbon Markets – Observations from Article 6 Pilots.” Climate Focus and Perspectives. Last modified June 2019. https://www.climatefocus.com/publications/moving-towards-nextgeneration-carbon-markets-%E2%80%93-observations-article-6-pilots

IEA (International Energy Agency). 2019. “The Future of Hydrogen: Seizing Today’s Opportunities – Executive Summary and Recommendations.” Last modified June 2019. https://iea.blob.core.windows.net/assets/8ab96d80-f2a5-4714-8eb5-7d3c157599a4/English-Future-Hydrogen-ES.pdf

IRENA. 2020. “Global Renewables Outlook: Energy Transformation 2050.” IRENA. Last modified April 2020. https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2020/Apr/IRENA_Global_Renewables_Outlook_2020.pdf

Kearney Energy Transition Institute. 2020. “Hydrogen Applications and
Business models.” Last modified July 2020. https://www.kearney.com/documents/17779499/18269679/Hydrogen+applications+and+business+models_single_page.pd/c72700b3-e66a-6338-82bb-46ca8031e86d?t=1594994670696

Michaelowa, Axel, and Sonja Butzengeiger. 2019. “Breakthrough of Hydrogen
Technologies until 2030: Chances and Risks for Gulf Countries, International Policy Implications.” EDA Insight, Emirates Diplomatic Academy, Abu Dhabi. Last modified September 2019. https://eda.ac.ae/docs/default-source/Publications/eda-insight_hydrogen-economy_en_final.pdf?sfvrsn=2

Appendix
[1] . Including international marine transportation.