Prepared by Climate Bonds Initiative.

AC
TH C
TR E ELNE A FO ERN
T S SS AT
ZE IT I IN
LIRO O G G
N A
TO S

Summary
The IPCC has made it clear that
if we are to avoid catastrophic
climate change and limit
global warming to 1.5°C, global
carbon emissions must be cut
50% by 2030.

Fossil gas’s blind spot

Investment in fossil gas is a threat to achieving
the goals of the Paris Agreement. The scientificconsensus from the Intergovernmental Panel on
Climate Change (IPCC) and International Energy
Agency (IEA) is that the global carbon budget
to 1.5°C has no room for new unabated fossil
gas infrastructure or assets. Existing fossil fuelinfrastructure will emit more greenhouse gases(GHGs) than this budget without early retirement
or reductions in utilisation.1

Gas

Methaneleakage actually
70% higher

Fossil gas currently accounts for 22% of the EUenergy mix, 90% of which is imported, and 50%
from Russia.2

f globalby 2030

H al

s
on

bon emiss
r
i
ca

1.5C

Fossil gas will never be atransition fuel: gas-fired power
needs to be removed from thelist of transition activities.
Methane emissions from the energy sector
are 70% higher than official figures5 –all fossil gas operations urgently requireleakage mitigation. The extent to which thisunderestimation threatens the energy transitionand climate goals calls for a precautionary
approach – that fossil gas operations cannot
occur without certainty on leakage. Full value
chain leak detection and reduction technology,
alongside full lifecycle assessments of carbon
intensity, are critical.

Incremental change
will not prevent catastrophic
climate change.
The world needs to leapfrog from fossil fuels
to renewable energy. The energy transition
will be met not with incremental change butwith the rapid expansion of renewable energy(RE), energy efficiency gains, and low-carbonhydrogen. This report outlines the opportunity
for transformational change in fossil gas power
distribution and generation.

Leap torenewables

Fossil gas is mostly methane, a potent
greenhouse gas with a global warming potential
over 80 times that of carbon dioxide (CO2) on a
20-year time scale.3 Just 3% of methane leakage
can increase the carbon intensity of fossil
gas-fired power to reach that of a coal-fired
power plant.4
Gas has in the past been thought of as atransition fuel. The IPCC and IEA reports and theleakage factors make it clear that it cannot be
defined as such. Energy security issues arisingfrom Russia’s invasion of Ukraine make thetransition away from fossil gas more important
than ever.

OfficalmethaneleakageGas-fired power

Accelerating the fossil gas transition to net zero Climate Bonds Initiative2

Policy tools need to accelerate urgent action
on methane leakage, alongside efforts to reduceoverall demand. Policy will need to guidetransition pathways, addressing key risks such as
gas blending. These policies can also incorporatesocial development considerations to help
ensure a Just Transition.

Low-carbon hydrogenprovides a transition awayfrom fossil gas in many hard-toabate sectors.
Even conservative estimates expect hydrogento grow from 2% to 13-14% of the EU energy
mix. This will need rapid scaling of low-carbonhydrogen. Global hydrogen investment 2020-50
could total USD15tn.6
The scale of hydrogen project announcements
and these projects’ predictions of USD1-2/tH2
prices in 2022 show hydrogen poses a greater
opportunity than expected. Policy assistanceto hydrogen clusters can further accelerate thegrowth of the low-carbon hydrogen economy.
Immediate emissions benefits of hydrogen varysignificantly from sector to sector. To ensure
rapid emissions reductions by 2030, hydrogenuse will need to be prioritised for sectors withthe highest emissions reduction potential. For
example, the use of hydrogen in steel production
results in 98% emissions reductions,7 whereas incement production, hydrogen could only address
1/3 of emissions.8
Given the expected scarcity of the resource,hydrogen deployment should be prioritised
according to both impact and availability of otherdecarbonisation technologies.

The EU energy transition is estimated to increase
investment needs by EUR390bn per year over the
next ten years.9 While the transition investment
needs are high so are fossil fuel investment flows,
accounting for 45% of global energy investment.

FO

The energy sector needs increased
investment and large-scale realignment.

Gas-fired power, thanks to dangerous leakage
across the system, is no longer a transition fueland is also an energy security risk for Europe.
REPowerEU is a critically important opportunity
for the EU to transition away from all fossil fuels.

IL
SS

GAS INFRAS

R
UCTU ETR

Retrofitting gas infrastructure is a falsetransition pathway. As blending is not a viable
decarbonisation strategy, the only valid retrofit
pathway is repurposing infrastructure for 100%hydrogen distribution. Given the smaller role ofhydrogen in the future than fossil gas today andthe differing distribution needs retrofit potential
is extremely limited.

Large-scale installation of grid-connected
electrolysers will need to be linked to newrenewable energy generation; otherwise
they will increase fossil-powered electricity
demand, hindering grid decarbonisation –planned electrolysers in the EU RED II would
consume 50% of RED II planned renewableelectricity supply growth and so hinder griddecarbonisation, unless accompanied by new
dedicated renewables installations.

NO NEW

Incremental change is not aligned with the needfor rapid decarbonisation by 2030. The transitionis threatened by the inefficient and regressive
strategy of gas blending, from which a 5% byvolume hydrogen blend only displaces 1.6%of fossil gas. Blending has limited emissions
reduction potential, and creates stranded asset
risk and cost with the incremental retrofits/
technology replacements required for increasing
blending volumes. This can be addressed bypolicies incentivising transformational rather
than incremental change.

5% H2 gas
blend = only
1.6% fossil
gas reduction

Policymaking can guide the transition, defining
credible technologies with taxonomies andstandards and setting out pathways withstrategic energy and infrastructure policy. The
European Commission’s Fit for 55 policy package
provides an overview framework for this. This
report outlines how to deliver this, accelerate thetransition and avoid locking in investments infurther fossil gas infrastructure.

Hydrogen use will need to
be prioritised for sectors
with the highest emissions
reduction potential

H2

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

H2

H2

3

Contents

List of acronyms

Summary 2

bcm billion cubic metres
CBAM Carbon border adjustment mechanism
CCFD Carbon contract for difference
CCGT combined cycle gas turbine
CCS carbon capture and storage
CDA Complementary Delegated Act
CNG compressed natural gas
CO2 carbon dioxide
CSRD Corporate Sustainability
Reporting Directive
DA Delegated Act
DAC direct air capture
DNSH Do no Significant Harm
EBA European Banking Authority
ECB European Central Bank
ESAs European Supervisory Authorities
ESG environmental, social and governance
ESMA European Securities and Markets Authority
ETF exchange-traded fundETS emissions trading scheme
ETR environmental tax reform
GFC global financial crisis
GHG greenhouse gas
GPP green public procurement
GVA gross value added
HGV heavy goods vehicle
IEA International Energy Agency
IIGCC Institutional Investors Groupon Climate Change
IPCC Intergovernmental Panelon Climate Change
ISSB International Sustainability
Standards Board
LCOE levelized cost of energy
LDAR leak detection and reduction
LNG liquified natural gas
LRMC long run marginal cost
MS EU Member StatePCI Projects of Common Interest
PPAs power purchase agreements
PSF Platform on Sustainable Finance
QE quantitative easing
RE renewable energy
RFNBOs Renewable Fuels of NonBiological Origin
SFDR Sustainable Finance Disclosure Regulation
SMR steam methane reforming
TEN-E Regulation 347/2013 on Trans-European
Energy Networks
UNFCCC United Nations Framework Convention
on Climate Change
VRE variable renewable energy

1. Introduction 5
2. Fossil gas dominance in theenergy mix 7
3. Ensuring a credible transition 11
4. Facilitating transition awayfrom fossil gas 18
5. Facilitating transitions
to hydrogen 22
6. Mobilising investment
to meet 1.5°C 25
7. Conclusions 29
Appendices 30

Accelerating the fossil gas transition to net zero Climate Bonds Initiative4

1. Introduction

Only a few economic activities operate at ornear zero emissions today; most sectors requiresignificant financing, clear guidance, and aframework of supportive policies to facilitate theirtransition to net zero, particularly “hard to abate”
sectors, such as agriculture, chemicals, fossil gas,
cement and steel production. Greater attention
is now being paid to these hard to abate sectors
and detailed decarbonisation plans and pathways
are being published, showing that feasible low- /zero-emissions solutions are possible within areasonable timeframe. The challenge is not only indeveloping the technology but also in overcoming
financial and political barriers.
To date, the European Union has led the way inthe race to net zero with the ambitious Green
Deal strategy and associated Fit for 55 policy
package, yet challenges remain. Ensuring thesuite of policies and legislation emerging in the
EU to support net-zero transition are coherent
and mutually reinforcing. Making financeavailable to transition all sectors of the economy.
Ensuring transition is rapid enough to meetclimate targets.
This policy package aims to support the EU in
defining the necessary policy framework forfinancing the fossil gas transition. While primarily
focused on the EU context, many policy tools
are applicable globally. The decarbonisation
pathways used in this package follow theEU’s climate targets (2050 net zero and 2030
55% reduction target), the guidance of theIntergovernmental Panel on Climate Change(IPCC), and the 2021 International Energy Agency(IEA) Net Zero Roadmap.
Investing in the transition of the hard to abate
sectors is a unique opportunity for the European
economy to develop innovative technologies andbecome a front-runner in the renewable energy
economy, paving the way for continued global
leadership in industry and technology. Failure
to grasp this opportunity and a continuation ofbusiness as usual in the energy sector will risk
missing the EU’s vital climate targets and increase
the risk of physical climate-related damage. It
will also risk the locking in of billions of Euros

Figure 1. Carbon intensity of EU electricity production
500
400
300
200
g CO2e/kWh

There is growing evidence of the need to aim to
limit the rise in global temperatures to 1.5°C toavoid the most catastrophic impacts of climatechange. To achieve this limit, all sectors of theeconomy have to decarbonise rapidly, reducing
emissions to net zero by 2050 and achieving
significant reductions before 2030, particularly
in developed markets. Carbon emissions fromnow until 2050 need to stay within the global
carbon budget. This is the cumulative amount of
CO2 that can be emitted up to 2050 that will keep
warming to within 1.5°C and is estimated to run
out in just nine years.10 This is why the 2030 55%
emissions reduction is crucial.

100
0
1990

1995

2000

of stranded assets and a disorderly and chaotic
transition, exposing both the real and financial
economy to large transition risks and possible
financial crisis.
Energy supply (including fossil gas) accounts for
27% of emissions in the EU.11 Decarbonising this
sector is a key determinant of the success of thewhole economic transition. The IPCC and IEA
have also made it clear that the global carbon
budget to limit warming to 1.5°C has no room for
new fossil gas infrastructure and exploration.
While the growth of renewable energy has seen
large success in recent years and carbon intensityof electricity generation has halved from 1990
to reach 230.7g C02e/kWh in 202012, challenges
remain in transitioning the entire sector to net zero,particularly in areas where fossil energy supply
cannot be easily substituted with electricity. This
policy package focuses on the transition of the fossil
gas and hydrogen sectors. These are combined
due to interlinkages between the hydrogen andfossil gas transition pathways and associatedpolicies. Many fossil gas applications can be
replaced by renewables and electrification, suchas power generation and heating and cooling.
Certain uses will likely be better decarbonisedwith low-carbon hydrogen, such as industrial
high-grade heat and chemical feedstocks.
Climate Bonds Initiative has embarked on
an ambitious Transition Programme designed
to provide the industrial pathways, sustainablefinance standards, policies and investment
guidance needed to deliver credible transition in
the hard to abate sectors. Now that the technicalpathways and standards are emerging to provide
clear guidance for the actions industry needs
to take, the next step is to facilitate the flow offinance to deliver these actions and decarbonise
the sector. This fossil gas and hydrogen sectortransition policy paper is part of a series
focused on the policies and regulations neededin the European Union to facilitate the flow offinance necessary for the transition.

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

2005

2010

2015

2020

These policies will be complemented by the
Climate Bonds sustainable finance criteria for thehydrogen sector and fossil gas sector, which will
be released in 2022 and 2023.

This paper aims to address thefollowing key question:
How can the EU policy andsustainable finance frameworks
accelerate the fossil gas value
chain transition to net zero,in the most economicallyefficient way and withoutcompromising the transition
pathways of other sectors?
Section 2 summarises the current European
fossil gas and hydrogen sectors in terms of
size, emissions contribution, technologies andinvestment flows. It also assesses the investment
needs of the EU fossil gas transition.
Section 3 examines how policymakers can help
ensure the credibility of this transition, drawing on
existing EU policy and strategies and suggesting
specific recommendations on how these might
best deliver a credible transition. Section 4
establishes how policymakers can accelerate
emissions reduction in the fossil gas sector. The
growth of the low-carbon hydrogen economy isconsidered in Section 5, with measures suggested
to maximise its potential in the net-zero transition.
The policies outlined in sections 2-5 will require
capital availability. Section 6 suggests a range ofways that investment flows may be channelled
to the transition by government, central bank, or
regulator action.
Sections 3-6 are followed by summary policy
recommendations.

51.1 Methodology
This policy package is based on analysis of existing
EU policies and a review of literature relating
to energy transition policy. It is accompanied
by an assessment of the European fossil gas
and hydrogen sectors, including a summaryof the technologies. Sector and technology
information is based on the Hydrogen Council’s
2021 ‘Hydrogen Insights: A perspective onhydrogen investment, market development andcost competitiveness’,13 the IEA ‘World Energy
Investment 2021’14 and Eurostat data.
EU policies relevant to the sectoral transition
were identified and analysed against the Climate
Bonds Credible Transition Principles, see Figure
2, and the decarbonisation pathway set out by
the IEA, to assess their sufficiency in facilitating
the sector’s transition. Particular attention
was paid to the Fit for 55 policy package whichaims to deliver rapid decarbonisation in thenext decade, the Taxonomy Regulation andassociated Delegated Acts, and the plans
proposed in REPowerEU.

Figure 2. Climate Bonds Principles for a Credible Transition
1. In line with 1.5 degree
trajectory. All goals
and pathways need toalign with zero carbon by
2050 and nearly halving
emissions by 2030.
2. Established by science.
All goals and pathways
must be led by scientificexperts and be harmonised
across countries.
3. Offsets don’t count.
Credible transition goals
and pathways don’t
count offsets, but shouldcount upstream Scope 3
emissions.

4. Technological viability
trumps economic
competitiveness. Pathways must
include an assessment of current
and expected technologies.
Where a viable technology exists,even if relatively expensive, it
should be used to determine thedecarbonisation pathway for that
economic activity.
5. Action not pledges.
A credible transition is backed
by operating metrics rather thana commitment/pledge to follow atransition pathway at some point in
the future. In other words, this is NOT
a transition to a transition.

The policy suggestions are also informed byliterature review. Key literature on the need todecarbonise the sector are the IPCC’s Assessment
Reports and the IEA’s World Energy Outlook,
Methane Report, etc. EU policy analysis is
supported by analysis from Bellona, Agora
Energiewende, WWF and the EU Platform on
Sustainable Finance.15 Key literature informing
policy recommendations include the Energy
Transition Commission’s 2021 ‘Making theHydrogen Economy Possible: Accelerating
clean hydrogen in an electrified economy’,16
the Hydrogen Council 2020 ‘Path to hydrogencompetitiveness: a cost perspective’17, E3G’s
Hydrogen Factsheets,18 IIGCC’s Net Zero Standard
for Oil and Gas companies.19
The paper is supported by extensive stakeholder
analysis. This analysis identifies vested
interests, assessing key stakeholders’ views andcommitments on the energy transition. The resultsof this analysis are summarised in Appendix III.

Accelerating the fossil gas transition to net zero Climate Bonds Initiative6

2. Fossil gas dominance in the energy mix
Fossil gas accounts for a large proportion of the
EU energy and electricity mix. Fossil gas power
plants are the European Union’s largest single
source of CO2 emissions from energy, at 231 Mt
CO2/year.20 In addition, methane emissions fromthe fossil gas value chain due to EU imports are
estimated to be 308-691 Mt CO2e/year.21 Includingthese fugitive methane emissions significantly
increases fossil gas carbon intensity, further
precluding its expansion as a transition fuel.
Leakage estimates are massively underreported;
methane emissions from the energy sector are
70% higher than official figures.22

Fossil gas’s blind spot

Officalmethaneleakage

Gas

Methaneleakage actually
70% higher

The EU fossil gas industry is highly dependenton imports and so is vulnerable to supply andprice shocks. Decarbonisation targets mean EU
fossil gas consumption should decrease 32–37%
by 2030.23 This puts new fossil gas infrastructure
at risk of stranding. One option for reducing
fossil gas emissions is using a different energy
vector, hydrogen. However, ‘hydrogen-ready’
infrastructure will also hold investment risk
given the expected differences in distribution
requirements of the two end uses.
Hydrogen production is currently mostly fossilbased, providing industrial feedstocks. Low-carbonhydrogen production is a fast-growing industry, withmany commercial-scale projects being initiatedglobally. Low-carbon hydrogen investment needs
rapid scaling to enable the decarbonisationof many energy-intensive industries. Greenhydrogen is expected to rapidly reach cost
parity with fossil hydrogen production, however,current CAPEX costs reduce the attractiveness ofinvestment – policymakers can help to channel
private finance flows into this nascent sector.
Investment flows are needed not only to financegreen projects but also to help manage down
emissions intensities of fossil fuel companies.

2.1 Scale of the fossil gas andhydrogen sectors
The EU energy mix24 in 2019was 36% petroleum products,
22% fossil gas, 15% renewableenergy, 13% nuclear and 13%
solid fossil fuels.25 The electricity
mix, in comparison, has higher
renewables penetration; 2020 saw renewables
overtake fossil fuels as the EU’s largest powersource for the first time – generating 38% ofelectricity, compared to 37% fossil fuels.26
Total consumption of fossil gas was 379.9 billion
cubic meters (bcm) in 2020,27 of which nearly 90%(2019) is imported, 50% from Russia,28 followedby Norway at 24% and Algeria at 10%.29 Fossil gas
is used in electricity generation (20%30), heating(primary energy source in buildings), industry(chemical feedstocks and heat) and transport(compressed (CNG) or liquified (LNG)). Germany

Figure 3. EU energy mix 201971
Other 0.1%

Renewableenergy15.5%
Nuclearenergy13.1%

Natural gas
22.3%

Solid fossil
fuels 12.7%

Total
petroleum
prducts
33.6%

is the largest fossil gas consumer, followed by
Italy and France.31
The value added from fossil gas extraction
is EUR6.5bn/year, from manufacture anddistribution EUR21.8bn/year, while hydrogen
manufacture’s value added is EUR3.8bn/year.32
EU hydrogen production totalled 14 bcm
in 2020,33 64% of which is captive hydrogen,produced on site of use. Production is mostly
small-scale, fossil-based specialist production
with very high greenhouse gas (GHG) emissions
per tonne of production (9.3 tonnes of CO2 per
tonne of hydrogen, or 280 gCO2/KWh directemissions from production).34 Usage is mainly
industrial, in fertiliser production, oil refining, andchemical feedstocks (75% crude oil refining andammonia and methanol synthesis).

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

Hydrogen is expected to fulfil a much larger rolein the future EU energy mix, growing from 2 to 1314% of the mix in 2050, bridging the gap whererenewable electricity is unable to replace fossil
fuels. Europe currently uses 339 TWh of hydrogena year, with use expected to increase to 667-4000
TWh in 2050.35 New potential applications forhydrogen include renewable energy storage,
mobility, and industrial high-grade heat.

2.2 New evidence reveals trueemissions of fossil gas
EU fossil gas power plants
produced 231 Mt of direct CO2
emissions in 2020, overtaking
lignite coal plants to become
the EU’s largest single source ofemissions from energy.36 The
direct GHG emissions intensity of gas-fired power
plants varies widely, from over 600 gCO2e/kWh to
365 gCO2e/kWh in the most efficient combined
cycle gas turbine (CCGT) plants.37 However, thesenumbers do not incorporate life cycle emissionsof fossil gas production supply chains. Increasing

Increasing evidence shows thatthe level of greenhouse gas
emissions from fossil gas-fired
power generation are close to
those of coal power emissions
due to methane leakage along
the extraction and distribution
supply chain.

7

evidence shows that greenhouse gas emissions
from fossil gas-fired power generation are muchcloser to coal power emissions due to methane
emissions in extraction and distribution. The
leakages of methane along the supply chain,
despite being small percentages (1-5%), still havea significant climate impact due to methane
being a much more potent greenhouse gas thanCO2 . Methane is shorter-lived in the atmospherethan CO2 but has a global warming potential(GWP) 82.5 times greater over a 20-year time
horizon, and a GWP of 29.8 on a 100-year scale.38
Ice core analysis has demonstrated thatanthropogenic methane emissions have been
underestimated by 25-40%.39 Underreporting of
methane leakage has led to an underestimationof fossil gas’s climate impact. Methane
emissions from the energy sector are
70% higher than official figures.40 Methaneleakage is a growing concern, with atmosphericconcentrations rising by record amounts over thelast two years.41
While upstream companies do have an incentive
to address leakage, posed by loss of revenue, thisis estimated to be only 1/10th of the environmental
cost of the leak.42 The majority of emissions alsocome from a very small number of leaks, with 5%of leaks contributing 50% emissions globally.43
Increasing evidence from satellite imagery andinfrared imaging shows unreported methaneleakages from pipelines in Europe. Therefore,
improvements in management are required toprovide continuous supply chain leak detection
and reduction (LDAR) are required.
With 90% fossil gas imported from outside theEU, estimates suggest less than a fifth of fossil gas
consumption methane emissions occur within
its borders. Fossil gas methane emissions
within EU borders are estimated to be 76
Mt CO2e, and emissions outside the borders
are estimated to be 232-615 Mt CO2e, withthe lower estimate calculated from national
inventories, and the higher from the research ofvalue chain emissions factors.44

One literature review estimates upstream(including transport) fossil gas GHG emissions
in the EU to be between 9.72 and 118.08g CO2 e/
kWh.45 With average direct emissions from EU
electricity plants at 270g CO2 /kWh, upstream
emissions are a significant element of the sector’s
climate forcing.
Pipeline emissions may be bringing carbon
intensity of fossil gas generation higher than coal
generation. However, challenges with monitoring
pipeline leakage, particularly in Russia – Europe’s
major gas exporter, mean there is considerable
uncertainty over leakage levels.

2.3The fossil gas value
chain presents challenges
for transition
The fossil gas industry
incorporates various actors andtechnologies across extraction,transmission, distribution andconsumption (see Figure 4).
This increases the complexityof its transition, as all these elements must be
accounted for in transition policymaking. Nealy
90% of EU fossil gas consumption is met byimports, delivered via pipelines, or shipped undercompression (CNG) or liquified (LNG).
Fossil gas infrastructure includes extractive
infrastructure, processing and compression
plants, pipelines for transmission anddistribution, combustion plants and other enduse infrastructure.
Currently emissions reduction measures inthis sector focus mainly on reducing fugitive
emissions in the pipeline by improving
LDAR, reducing venting and flaring, anddevelopment of carbon capture and storage(CCS) technologies at power plants. These
technologies are yet to reach net-zero alignment,
but fugitive emissions reduction efforts will
require significant growth to deliver rapid
emissions reductions in existing infrastructure.

This infrastructure is exposed to asset stranding
risk as EU fossil gas consumption is wound
down. Given current EU fossil gas overcapacity,
new fossil gas infrastructure presents a highinvestment risk.46
The declining role of fossil gas in the EU energy
mix has led to growth of plans for ‘hydrogenready’ or retrofit of fossil gas infrastructure.
However, even ‘hydrogen-ready’ infrastructure
poses investment risks as hydrogen and fossil gas
differ significantly in the geographical locationof demand and supply, and estimates of future
demand and supply patterns vary. ‘Hydrogenready’ infrastructure will also often still require
retrofit to carry hydrogen. While many elementsof the fossil gas value chain can be retrofitted
for the hydrogen economy, the volume of gas
being produced, distributed and stored will
be much smaller in a net-zero economy. Early
retirement may well prove the most cost-effective
decarbonisation strategy for much of the fossil
gas infrastructure.

2.4 Net zero-aligned low-carbonhydrogen production
Hydrogen (H2) production
is currently dominated byfossil-based production,accounting for 95% production,
this leads to nine to 12 tonnesof CO2 emitted for every
tonne of H2 produced.47 Electrolysis accounts
for 5% of production. The current hydrogen
economy is also very small and so requires
both decarbonisation and scaling to meet the
expected 2030 demand for low-carbon hydrogen.
The EU Hydrogen Strategy aims to grow EU
green hydrogen electrolyser capacity from below
1 GW to 40 GW in 2030. The transition requires
huge investments in electrolysers, renewableelectricity production and distribution, andextremely robust source of origin certification toprevent high-carbon hydrogen from entering the
supply chain.

Figure 4: Conceptual diagram of the fossil gas value chain
Imported liquefied
natural gas

Liquefaction
ExploreSEA

Local Gas
Company

Commercial/Businesses

Natural gas transmission

ROAD
PIPE LINE

Water, oil, andsulphur out

Industrial/
Manufacturing

PIPE LINE
PIPE LINE

Natural gas liquids

Fractionator

RAIL

PIPE LINE

DesignProcessing
Produceandplant
construct

Regasification

PIPE LINE

Distribution
Storage
Exported liquefied
natural gas
PIPE LINE

Manufacturing
Liquefied
feedstocks petroleum gas

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

Refineries

PIPE LINE

Identify

Undergroundstorage

Residential
Supplemental
gas supply
Power Plants

Liquefaction

8

Box 1: The rainbow of hydrogen production technologies

Hydrogen from coal gasification can also bereferred to as brown (from lignite) or black(from black coal).
Blue hydrogen: grey production
with carbon capture and storage(CCS). Retrofitting SMR plants withCCS can rapidly reduce emissions
from current production and meet demand
while green hydrogen production and storage
capacity ramp up.
There are also emissions associated with thefossil gas supply – upstream leakage rates
must also be included in emissions intensity.
Leakage rates are difficult to estimate, givena lack of monitoring, but are estimated to beThis report uses the EU Taxonomy criteria as
the threshold for ‘low-carbon hydrogen’. The
criteria require life-cycle GHG emissions lower
than 3t CO2e/tH2 from blue or green production(see Box 1 for an explanation of definitions).
Electrolysis would require electricity with carbon
intensity of 45g CO2e/kWh to meet this. For bluehydrogen production to achieve this, it will
require >90% CCS and <0.5% upstream leakage.48
Green hydrogen is most competitive in areas ofabundant renewable energy; this competitive
advantage of certain geographical locations canbe considered alongside demand locations andtransportation methods and costs when scaling
the hydrogen economy. Elevated fossil gas prices
may already have pushed grey hydrogen prices
higher than green.49 Green hydrogen is currently
undergoing rapid price decline, as RE costs continue
to fall and the cost of electrolysers decreases withscaling of production. The EU Hydrogen Strategy
uses a 2030 green hydrogen price of USD1.1-2.4
and USD2-2.5 for blue hydrogen.50 However,these predictions are likely highly conservative.
Europe’s largest green hydrogen project, HyDeal,is finalizing commercial offtake agreements with
ArcelorMittal and fertilizer company Fertiberia
of USD1.75-2/kg.51 Adani Group stated that theyplan to start producing green hydrogen in 2022
at about USD1.50/kg, reaching USD0.97/kgH2 as
production scales over 3-5 years.52
Low-carbon hydrogen will likely still not becompetitive with fossil fuels without highcarbon pricing in many applications. Even
with green hydrogen costing USD1/kg, green
ammonia for ships would cost 55% more thanheavy fuel oil and synthetic fuel would cost 65%
more than conventional jet fuel.53

lifecycle GHG emissions. Electrolysers areoften directly connected to a dedicated windor solar installation. Electrolysers run directly
off the grid would produce relatively highemissions-intensive hydrogen: electricity
emissions intensity need to be lower than
190g CO2e/kWh for the hydrogen to have lower
overall CO2 emissions than grey.76 However, as
decarbonisation of the grid progresses, gridbased electrolysers are expected to become
increasingly common, playing a potentialbalancing role to manage demand in the face ofvariable renewable supply. Electrolytic hydrogentechnology costs are assessed in Appendix II.

0.5-4.1% of supply. Given methane’s far higher
greenhouse potency than CO2, this increases
the carbon intensity of grey and blue hydrogenproduction; at a 1.5% leakage estimate, thisequates to 3t CO2e/tH2.73
For blue hydrogen to meet carbon intensity
thresholds, it requires high levels of CCS and effective
methane leak detection and mitigation. CCS
efficiency is expected to reach 85-95% efficiency but
is currently much lower. Blue hydrogen’s average
emissions intensity is 143-218g CO2e/kWh. 74
Green or renewable hydrogen is
produced from renewable electricityfuelled electrolysis of water. Electricity
is used to split water molecules intohydrogen and oxygen. The conversion process
entails a 30% loss of energy.75

Pink hydrogen is also electrolytichydrogen, but the electrolysers
are powered by nuclear energy.
Due to the low carbon intensity of
nuclear energy, pink hydrogen is also very low
carbon. Nuclear’s ability to run electrolysers
continuously means this could help rapidly
scale the hydrogen economy.

Green hydrogen production from electrolysis
does not directly emit any GHGs as long as
the electricity inputted is renewable, althoughelectrolyser production will entail a level of

2.5 Investment flows required
for the transition

Carbon pricing will be required to close thecost gap. In some industries, this may alreadybe possible. For example, recent project
announcements suggest competitive green steel
production this decade.54 Additionally, the use ofgreen hydrogen translates to a negligible impact
on final product prices, resulting in a trivial ‘green
consumer premium’ except in aviation.55

The EU energy transition will
increase energy investment
needs by EUR390bn peryear over the next ten years
compared to the averageannual investment of the last
decade.57 In Europe, investment in the electricity
sector is expected to increase, but the rate ofthis increase needs to accelerate to meet therequirements of transition. There is a large
need for increased investment in renewablegeneration, transmission and storage for direct

Currently, at least 2,100 hours of electrolyser
operation are needed for competitive hydrogenproduction cost (for feedstock production), but
the high cost of some end products, such astransportation fuel, makes electrolysis a viableoption for such end uses.56

Figure 5. Global investment in the electricity sector compared with annual
average investment needs, 2026-30, by scenario77
2500
Battery storage
2000

Fossil fuels with CCUS

Electricity networks

Nuclear

Fossil fuels without CCUS
1500

Renewable PowerSTEPS = Stated Policies Scenario
SDS = Sustainable Development Scenario

1000
USD Billions (2019)

Grey hydrogen, referred to as fossilbased hydrogen in the Commission’shydrogen strategy, is produced via
steam methane reforming (SMR) or
oil/coal gasification. Carbon intensity of steam
methane reforming is 222-325 gCO2e/kWh.72

NZE = Net Zero Emissions by 2050

500

02011-15

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

2016-20

2021E

STEPS
2026-30

SDS
2026-30

NZE
2026-30
9

Fossil fuels currently account for 45% of global
energy supply investment,61 capturing andredeploying these investment flows is crucial
to enabling transition. Investment flows need
to be redirected from fossil fuel processes toclean energy processes. These flows also need
to be directed towards nascent and developing
technologies, such as electrolysers, that are
crucial to the green energy transition rather
than being captured by the most profitable
technologies. Investment needs are also complex
as the fossil gas companies still require investment
to make the transformational changes tobecome green energy companies. This provides
opportunities for sustainability-linked bonds orother KPI-linked financing. Investors will need
to identify whether such KPIs and transition
strategies are robust and credible.62
The EU Hydrogen Strategy, adopted in 2020,
plans investment in 80 GW of electrolysers (in the
EU and EU Neighbourhood) by 2030 to grow theshare of hydrogen in the energy mix from less than
2% to 13-14% by 2050. It projects cumulative
investment in green hydrogen of EUR180470bn by 2050 and EUR3-18bn in blue, including
retrofitting existing SMR plants with CCS.63 The
size of the 2050 hydrogen industry is estimatedat USD2.5trn sales of hydrogen and equipment.64
The Strategy estimates EUR24-42bn investments
in electrolysers, EUR220-340bn to provide thenecessary additional renewable electricity, andEUR65bn investment for hydrogen transport,
distribution and storage, from now to 2030.65

250

200

150

g CO2e/kWh

100

50

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The gross value added (GVA)59 of the EU clean
energy sector has seen average annual growthof 5% since 2010 and reached EUR133bn in2018.60 However, this growth needs to accelerate
and be accompanied by a decline in fossil
fuel production and use. Phase-out of fossil
fuel-fired power generation, and increasing
electrification will require a large increase ininvestment in the electricity sector. Figure 5
shows the scale of this requirement.

Figure 6. EU wholesale gas prices, Dutch TTF, EUR/MWh78

Apelectrification of appropriate infrastructure and inelectrolysers). Existing infrastructure also requires
modification; grey hydrogen production facilities
need transformation to low-carbon hydrogenproduction. Investment can also be used totransform the fossil gas sector – rather thanstranding this entire EUR28.3bn/year industry,58transformation of infrastructure, workforce,expertise and other assets can minimise financial
losses whilst substantially contributing to theeconomic transition.

Demand for green investment products currently
outstrips supply, as demonstrated by thegreenium66 seen on many green bonds comparedto their vanilla equivalents.67 Investors are
attracted to renewables not only for low carbon
credentials and lower transition risk exposure but
also their performance. Recent years low-yieldenvironment linked to central banks’ quantitativeeasing programmes and the post-covid
stimulus packages are favourable to long-term
investments. Renewable power companies
show lower volatility and outperform both listed
fossil fuel companies and public equity market
indices (10-year global market return of 422.7%,
compared to 59.0% for fossil fuels).68

Over 20% of fossil gas plants in Europe are now
lossmaking and, in the US, new onshore windand solar investment options already cheaper
than the continued operation of existing gas
plants. Carbon Tracker projects the costs for bothrenewable technologies will fall to levels lessthan half the long run marginal cost (LRMC) forgas by 2030.70

Fossil gas investment is becoming
increasingly unattractive
Fossil gas-powered electricity generation is
becoming non-cost competitive with renewableenergy. Median levelised cost of energy (LCOE)
of fossil gas CCGT power was USD71/MWh in
2020, while onshore wind LCOE was USD50/
MWh and solar PV USD56/MWh.69 Recent EU
gas price volatility has increased the gap withrenewables, with wholesale prices surging to
EUR180/MWh in December 2021 and EUR227/
MWh in March 2022. In a year, the price of fossil
gas has surged from EUR19/MWh to EUR115/
MWh on 1 April 2022, see Figure 6.

Accelerating the fossil gas transition to net zero Climate Bonds Initiative10

3. Ensuring a credible transition
Alongside measures to disincentivise highemitting and incentivise low-emitting activities,
the transition of the fossil gas sector requires
significant guidance to ensure transition
investments are aligned with the 1.5°C trajectory
and are economically feasible. This is vital toensure the success of the transition and to
generate investor confidence.
Presented in December 2019, the European
Green Deal sets out a roadmap for the EU toachieve climate neutrality by 2050, decouple
economic growth from resource use andachieve a just transition.79 In the frameworkof the Green Deal, the European Commission
has also announced a renewed sustainablefinance strategy, to lay out the policies needed
to finance the transition of EU economic
activities towards climate neutrality while
ensuring recovery from the COVID-19 crisis.
This strategy aims to create the regulatory
framework to channel both public and private
sectors’ investments into sustainable activities.80
One-third of the EUR1.8tn investments from the
Next Generation EU Recovery Plan and the EU’s
seven-year budget will finance the European
Green Deal.
The ‘Fit for 55’ policy proposal is aninterconnected set of policies to deliver theGreen Deal, aimed at transformational changeof economy, society and industry. The package
strengthens eight existing pieces of legislationand presents five new initiatives across a rangeof policy areas and sectors: climate, energy andfuels, transport, buildings, land use and forestry.81
The ambition of the Fit for 55 proposals are
expected to be strengthened by the REPowerEU

Table 1: Components of the ‘Fit for 55’ proposal
Pricing

Targets

Rules

ETS with aviation

Effort Sharing Regulation

Stricter CO2 for vehicles

ETS extension to include maritime,road transport and buildings

LULUCF Regulation

Alternative Fuels
Infrastructure

Energy Taxation Directive

Renewable Energy
Directive

Carbon Border Adjustment
Mechanism

Energy Efficiency
Directive

ReFuelEU
FuelEU

Support measures
Social Climate Fundplans; as the Commission seeks to accelerateenergy sector decarbonisation as part of efforts
to curtail reliance on Russian fossil gas.82
The EU sustainable finance framework consistsof the EU taxonomy, disclosure regime andinvestment tools. Disclosure requirements
include the impact of a company’s activities on
the environment and society and the businessand financial risks faced by a company due to its
sustainability exposures (the ‘double materiality’concept). These are complemented by a setof investment tools to enable financial market
participants to align their investment strategies
with the EU’s climate and environmental goals
and provide greater transparency to market
participants. These include the EU Climate
Transition Benchmarks and the EU Paris-aligned
Benchmarks,83 and the legislative proposal fora European green bond standard, intended tocreate a high-quality voluntary standard to help
issuers attract sustainable investments.84

Table 2: EU Sustainability Disclosure Regime forfinancial and non-financial companies134
Instrument

Corporate
Sustainability
ReportingDirective (CSRD)
proposal

Sustainable
Finance Disclosure
Regulation (EU)2019/2088

Taxonomy Regulation(EU) 2020/852

Scope

All EU large
companies and all
listed companies(except listed microenterprises)

Financial market
participants offering
investment products,
and financial advisers

Financial market
participants; allcompanies subject to
CSRD

Disclosure

Report on the basisof formal reporting
standards, subject toexternal audit

Entity and productlevel, on sustainability
risks and principal
adverse impacts

Turnover, capex, andopex from products oractivities associatedwith Taxonomy

StatusUnder negotiation,
expected to apply
from 2023

Applies from 10 March
2021

Applies from January2022

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

Policies to guide
green investment
Institutional investors are
increasingly voicing theirsupport for action to address
climate change.85 However,there are still too few tools
to help ensure that theirinvestments are making a significant impact,
particularly for debt-based investments. The
market needs transparent and robust sciencedriven guidance on which assets and activities
are consistent with a rapid transition to a
low-carbon economy. Taxonomies have been
designed to address this need and easily identify
the assets, activities and projects needed todeliver a low carbon economy in line with thegoals of the Paris Agreement.
The EU sustainable finance strategy isunderpinned by the sustainability reporting
regime of the Non-financial Reporting Directive(NFRD) (soon to be replaced by the Corporate
Sustainability Reporting Directive (CSRD)), theSustainable Finance Disclosure Regulation(SFRD) and the Taxonomy Regulation andDelegated Acts. Mandatory disclosure of climate
risks is an important prudential tool and canfacilitate information sharing between thereal and financial economy; CSRD reporting isdesigned to inform SFDR reporting. Central banks
and supervisors are seeing increasing demand
for mandatory disclosure regimes, especiallyfrom investors who are highly aware of the risks
posed by lack of visibility of portfolios’ climate
exposure and impact.86
Taxonomies provide clear guidance to investors
on what constitutes a green activity forinvestment and to bond issuers on the eligible
use of proceeds for green bond issuance.
Taxonomies can also underly climate credit
risk assessment: an organisation’s exposure toclimate risk depends on the carbon-dependency,
location and physical resilience of their assets.
The Climate Bonds Taxonomy can be used by
11

Figure 7. Taxonomy development around the world

RussiaUK

CanadaMongolia

European Union

China

Kazakhstan
MexicoDominican Republic
Colombia

Taxonomy in place

BrazilIndia
Sri Lanka
Malaysia
Indonesia
ASEAN

Chile

South Africa
New ZealandTaxonomy in discussion
any entity to identify which assets, activities andassociated financial instruments are compatible
with trajectory to net zero by 2050.87
National taxonomy developers increasingly
recognise the value of alignment andinteroperability in enabling international
investment flows. EU Climate Diplomacy canencourage this and hold other countries
to a high standard to safeguard the global
transition, possibly leveraging the IPSF
Common Ground Taxonomy.88
Taxonomies can also be used to assess what
constitutes a credible transition investment
or activity. Climate Bonds Criteria are being
developed for the transition of hard-to-abate
sectors. The work of the EU Platform on
Sustainable Finance (PSF) on extending theTaxonomy to cover negative and low impact
activities89 is expected to inform assessmentsof companies’ or activities’ position on thetransition pathway.

Ensuring a science-based EU Taxonomy
In 2016, the European Commission accepted arecommendation by the EU High-level Expert
Group on Sustainable Finance to develop
an EU Sustainable Finance Taxonomy. Its
development has been supported by the workof the Technical Expert Group (TEG), and its
successor, the Platform on Sustainable Finance(PSF). The Taxonomy Regulation entered into
force in July 2020, with the first Delegated
Act, covering climate change mitigation andadaptation activities, entering into force on
1 January 2022. The EU Taxonomy has beendeveloped as part of the wider EU Sustainable
Finance Strategy and its primary use is tosupport mandatory disclosure of sustainable
investments and assets by investors, banks, andcorporates in the EU.

Singapore

Australia

Taxonomy in draft
Taxonomy in development

Japan
South Korea
VietnamThailandPhilippines© Climate Bonds Initiative 2022

The Taxonomy will eventually provide criteria
for activities’ contribution to six environmental
objectives, covering sustainable water use,
circular economy, pollution prevention andbiodiversity in addition to climate mitigation andadaptation. The Commission is also considering
extending the scope of the Taxonomy to coversignificantly harmful and low impact activities
and to cover social issues. This will be informedby the work of the PSF.90
Agreeing on standardised criteria for highemitting activities is a fundamental step in
guiding investors to invest in credible transition
activity, asset owners’ engagement andpolicymakers to incentivise the transition.
Criteria can be utilised by governments insetting regulations or recommendations for
decarbonising the sector. The EU Taxonomy
is particularly relevant because it will ensurethat investments falling under its criteria will
be eligible for green bonds under the EU Green
Bond Standard. As the EU Taxonomy lays out
long-term standards, it also serves the purposeof encouraging investment in innovativetechnologies and transition-friendly investments:a critical issue for “hard-to-abate” sectors such as
the steel industry.91
The Complementary Delegated Act on
fossil gas and nuclear energy threatens theTaxonomy’s credibility
The EU Taxonomy’s criteria for electricity andhydrogen generation and infrastructure arescientifically credible. However, on 9 March 2022,
the Commission adopted a Complementary
Delegated Act (CDA) proposing criteria for fossil
gas and nuclear power as green transition. The
criteria for fossil gas-fired electricity introduce
weaker thresholds than those established by
the first DA on sustainable activities for climatechange adaptation and mitigation objectives.

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

While limiting production and use, it covers
plants permitted up to the end of 2030 – this
could lead to stranded assets and increased loss
and damage from climate change.
The CDA describes the need to recognise thatfossil gas and nuclear energy can contributeto EU decarbonisation, stating that the use offossil gas in electricity generation, CHP anddistrict heating/cooling “should be qualified astransitional … given that renewable energies
that comply with the appropriate threshold are
not yet commercially available at a sufficientscale”. However, wind and solar technologies are
now mature and scalable – this justification does
not stand for electricity generation.
The CDA introduces two different sets of criteria
for fossil gas activities. While the first (1)(a) is inline with the 1st DA’s significant contribution
criteria on climate mitigation, the second (1)(b)
introduce weaker criteria for facilities permitted
by 31 December 2030. Criteria (1)(b) establish
thresholds of direct GHG emissions lower than
270g CO2e/kWh of the output energy or annual
GHG emissions of the activity below an averageof 550kg CO2e/kW of the output energy of the
facility’s capacity over 20 years.
The 270g threshold matches the Do no Significant
Harm (DNSH) requirements of the Taxonomy
Regulation and reflects the average emissions
intensity of EU power generation. However, as
this covers direct emissions, not full lifecycle,
fugitive methane emissions that would be
unaccounted for in these plants would bring theemissions intensity far higher than 270g CO2e/kWh, consequently doing significant harm to theprinciple (2) of Climate change mitigation.
The use of the 2030 end date for permitting
would expose investors to a high level ofstranded asset risk, given the 25-30 year lifetimes
12

of EU plants would mean they were in operation
beyond the 2050 carbon neutrality target.
Similarly, caveats requiring plans for the plantto switch to renewable or low-carbon gases by2035 could also lead to asset stranding, given
the uncertainties around the role of hydrogen inelectricity generation.
The criteria introduced in the CDA threaten
the usability and credibility of the Taxonomy
and pose a threat to the EU energy transition.
Approving the CDA would risk locking the EU intoa high carbon trajectory incompatible with its
climate targets. If MEPs reject the CDA, this gives
the Commission an opportunity to redraft Parisaligned transition criteria for the sector.

Transparency obligations encouraging green
The SFDR92 lays out sustainability disclosure
obligations for financial market participants.
It was introduced to prevent fragmented
development of disclosure measures andreduce information asymmetries acrossfinancial products and regions, possible market
inefficiencies and competition distortion.
The Regulation updates fiduciary duty
requirements; growing evidence of climate riskmateriality to investment portfolios means due
diligence to clients now includes sustainability
risks alongside traditional financial risks. The
SFDR importantly considers double materiality– the impact of investments on sustainability
factors and the impact of sustainability factors
on investments.
Level 1, entity-level requirements became
effective as of 01/03/2021. These require
disclosure of sustainability risk exposure,
integration and management policies andexplanation when they deem sustainability
risks not to be relevant. Application of level 2,
product-level requirements has been delayed to
01/01/2023.93
The SFDR classifies funds into three strategies
for product-level disclosures; Article 6 funds do
not incorporate any sustainability considerations
into the investment process, Article 8 funds
promote certain environmental or social
characteristics (light green), and Article 9 funds
target sustainable investments (dark green).
Article 8 and 9 funds each require additional
disclosures, for Article 8 funds to demonstrate
how promoted characteristics are met, and for
Article 9 funds to show alignment with theirenvironmental or social objectives. In July 2021,
Article 8 and 9 funds respectively covered 30.3%
and 3.7%, respectively, of fund assets.94 Article 8
and 9 classifications are increasing steadily, andconcerns over credibility are growing.95
To reduce the burden of disclosures, the SFDR
has been designed in alignment with the CSRD.
When approved, the CSRD will increase the scopeof companies required to make non-financial
disclosures. With both directives requiring

disclosure against the EU Taxonomy,
portfolio managers will be able to use
company-level disclosures to feed directly into
portfolio disclosures.
Financial companies covered by SFDR andcompanies covered by the NFRD will also
disclose information on how and to what
extent their activities meet the Taxonomy
criteria. These requirements are set out in
Article 8 of the Taxonomy regulation. The CSRD
will widen the scope of companies covered by
Article 8. The Taxonomy, therefore, has
the power to further specify the regulations
set out in SFDR and CSRD/NFRD. From 2024,
European banks will also report their green
asset ratio, using the Taxonomy criteria, todemonstrate the extent to which their activities
are associated with Taxonomy-aligned
economic activities.
Lack of regulatory alignment and data
availability, standardisation, and verification willpose a challenge in the application of the EU
Taxonomy to non-EU assets on banks’ balance
sheets. While EU-based companies are subject
to the CSRD, non-EU based companies do nothave a legal incentive or obligation to generate
relevant data.96 A European bank lending mostly
to European corporates covered by CSRD could
find reporting much simpler than a one withhigh international exposure and a much higher
proportion of assets that are out of scope of
the CSRD.97 Global alignment of taxonomies
or international comparability mechanisms
are crucial, hence the importance of theInternational Sustainability Standards Board(ISSB). Meanwhile, guidance from European
Supervisory Authorities on applying the EU
Taxonomy to non-EU based assets would bevaluable to asset managers.

Coherent standards providing
market certainty
Standards facilitate green
and transition bond issuanceby providing issuers clear
guidance on aligning debt
issuance and business models
with the Paris Agreement.
Green standards and criteria are closely linked
to taxonomies, and they provide the technicalcriteria underpinning credible taxonomies
and providing confidence for the market.
Scientific criteria provide investors with theassurance that investments are Paris aligned,
allaying greenwashing concerns and reducing
due diligence requirements. International
cooperation on standards will also facilitate
green international trade and the cross-borderinfrastructure required for the energy transition.
The Climate Bonds Standards for hydrogen andfossil gas are in development and will be released
in 2022 and 2023.

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

Standards are required for the decarbonisationof the fossil gas sector on the carbon intensityof end uses such as electricity generation,
heat, and industrial materials. The use of
declining thresholds for carbon emissions, asseen in the EU Taxonomy, provides the sector
with long term guidance on how to align with
the net-zero trajectory.
Standards can inform gas companies’ transition
pathways, ensuring emissions reductions aresteep enough to reach net zero. This can prevent
situations of under-ambition; some fossil gas
producers’ emissions reduction plans solely
tackle fugitive emissions which, while important,
do not make up the entirety of their emissions.
Similarly, those which plan gas blending
as a decarbonisation strategy are limited
by infrastructure’s ability to cope with highproportions of hydrogen and so are unlikely to
reduce emissions by more than 3%, see page 18.
Standards are crucial for hydrogen, given
the range in carbon intensities of hydrogenproduction. They can overcome the confusion
created by the many varying descriptions ofhydrogen. For example, ‘clean’ hydrogen can
describe solely green hydrogen or include
blue hydrogen at varying levels of CCS. Given
the multiple production methods resulting ina chemically uniform gas, it is important thatcriteria be technology-neutral, establishing aclear net zero-aligned carbon intensity threshold.
The EU Taxonomy’s criteria for hydrogenproduction requires lifecycle GHG emissions
lower than 3t CO2e/tH2 from blue or green
production. This would require >90% CCS and<0.5% upstream leakage for blue hydrogen.98
The EU’s CertifHy project, in comparison, defines
low-carbon hydrogen as below a maximum
threshold of 4.4t CO2e/tH2 on a full lifecycle
basis. This is around 60% below grey hydrogenlevels – reflecting capture rates currently easily
achievable in SMR+CCS. Not only is this threshold
too weak, but it also provides a very confusing
signal to project developers over what is
considered a “green” hydrogen investment in theEU, and has the potential to weaken ambition.
The use of an emissions threshold also prevents
electrolysis being run off potentially high-carbon
grid electricity; Only Norway, Sweden, France,and Lithuania have grid CO2 intensities below
the level of 45g CO2e/kWh for EU Taxonomycompliant electrolytic hydrogen, while several
countries’ grids would result in carbon intensity
higher than grey hydrogen.99
Robust standards take full value chain andlife cycle emissions into account, enabling
investors to make informed investment decisions
without fears of greenwashing or underreportingof emissions. These lifecycle assessments also
ensure consistency and compatibility with GHG
certification schemes for other commodities likeelectricity or fossil gas.
13

Guarantees of origin for hydrogen are needed,
given the emissions intensity can only beestablished from production analysis, not the final
product. These can build on lessons from biofuel
certification schemes. As grey, blue and greenhydrogen are chemically identical, such a scheme
will be vital once hydrogen trade picks up.
The Commission’s December 2021 proposed
framework of legislative proposals to decarbonise
the gas markets (hereinafter gas package)100
contradicts the EU Taxonomy in not making
reference to lifecycle emissions for the assessmentof renewable gases, defining all hydrogen as“low-carbon” if it meets a direct GHG reduction
potential of 70% compared to fossil gas. Thiscan to lead to stranded asset creation if suchinfrastructure does not qualify as net zero-aligned.
Standards can also inform regulation. Particularly
in transition, where wide-ranging regulation
is likely to impact these industries, basing all
regulations on the same robust standards anddefinitions will provide clarity and certainty
to the market. Aligning all legislation with theTaxonomy definition of renewable hydrogen will
best deliver the Green Deal and carbon neutrality.

Aligning standards internationally
The EU Hydrogen Strategy envisages significant
hydrogen imports, targeting equivalent electrolyser
capacity in the EU Neighbourhood as within the EU.
Defining common standards at the international
level is crucial to enabling the trade of any energy
sources, including low-carbon hydrogen andreducing GHG emissions in all regions.
International collaboration will be vital tohydrogen standards and guarantees of origin.
International recognition and consensus on
low-carbon hydrogen standards will enableinternational trade, helping to establish the global
market. For example, the Hydrogen Production
Analysis Task Force from the International
Partnership for Hydrogen and Fuel Cells in the
Economy (IPHE) aims to develop a harmonised
methodology and terminology to define andstandardise clean hydrogen across different
countries. As hydrogen is likely to become
a globally traded commodity, international
guarantees of origin certifications will be needed
assessing the CO2 emissions of all types ofhydrogen available on the market so that lowcarbon hydrogen would not have to face unfair
competitiveness of fossil-based hydrogen.101
The IFRS Foundation has announced theestablishment of the International Sustainability
Standards Board (ISSB) at COP26.102 The ISSB’s
objective is to develop such global standards witha clear focus on sustainability and environmental,social and governance (ESG) issues. Common
standards help countries plan cross-borderprojects, especially the needed infrastructure,
leading to lower costs, faster implementationand security of supply. In particular, agreeing

on standards and targets is crucial to gas
composition, especially for hydrogen, and it would
improve international trade and infrastructuredevelopment for low-carbon hydrogen. Suchstandards need to be focused on sustainability,
operation and pipeline requirements.103

The limited role ofcarbon pricing
Carbon pricing is
implemented to fix market
distortions and capture
the external costs of GHG
emissions by charging
emitters, either with a tax onemissions or a “cap and trade” system whereby
sectors are allocated a certain level of emissions
allowances. By placing a cost on emissions,carbon pricing can improve the business casefor green technologies and incentivise efficiency
gains. To do so, prices need to be high enoughto have a material impact and not be weakened
by free emissions allowances. Part of carbon
pricing’s value is its technology neutrality,
enabling the market to find the most costeffective solutions to carbon-intensive activities.

/tCO2

Carbon pricing increases the competitivenessof green technologies with traditional, carbonintensive technologies. A carbon price will help
close the gap between low-carbon hydrogen andconventional fuels. For example, even at USD1/kg hydrogen, green ammonia for ships would cost
55% more than heavy fuel oil and synthetic fuel65% more than conventional jet fuel. There is alsoa premium at an intermediate product level, nearzero green steel will be 40% more expensive,104
which the carbon price can help reduce.
However, carbon pricing alone is unlikely tomake hydrogen cost competitive with fossilbased energy and products. While, a carbon priceof EUR79-103/tCO2 in 2030 is estimated to berequired to make green hydrogen competitive
with grey, it is calculated that fossil gas willremain a cheaper option when the carbon priceis below EUR200/tCO2. Renewable hydrogen
would need prices of EUR300/tCO2 to reachbreak-even and then have to contend withcarbon leakage issues.105
The EU carbon price, established via the
Emissions Trading System (ETS) doubled
over 2021, from EUR33.69/tCO2 on 4 January
to EUR80.65 on 31 December.106 The ETS works
through a “cap and trade” system: within this cap,
companies buy or receive carbon allowancesthat they can trade with each other. It covers
energy-intensive industry, fossil fuel power
generation and commercial aviation,107 and an
extension to buildings and transport fuel and themaritime sector is proposed amongst the ‘Fit for
55’ policies, as is an increased rate of emission
reduction, to 61% reduction on 2005 levels by
2030 for ETS sectors by lowering the annual

Accelerating the fossil gas transition to net zero Climate Bonds Initiativeemissions cap in line with the 2030 pathway.108
The ETS is being extended to building andtransport fuel producers, from 2026. The scheme
focuses on upstream fuel suppliers.
The Carbon Border Adjustment Mechanism(CBAM) proposed in Fit for 55 is designed toprevent carbon leakage and ensure EU emissions
reductions contribute to global decline whilst
protecting EU industrial competitiveness.109 It
covers aluminium, cement, electricity, fertilisers,
iron and steel imports from the rest of theworld. Itis expected to affect Russia, China, UK
and India the most.110 The CBAM is intended
to substitute the free allowances of the ETS.
The EU Commission has proposed a reductionof free allowances currently allocated toenergy-intensive sectors with the elimination ofallowances covered by the CBAM from 2026 andcompletely phased out by 2035. Under the CBAM,ETS-sector importers would purchase certificatesequivalent to the ETS carbon price, minus any
carbon price paid in the country of production.
The CBAM would be applied from 2023 and EU
importers subjected to payments from 2026.111
The CBAM will prevent carbon leakage and therelocation of high-emitting activities outside theEU. Broadening its scope and including indirectemissions will further protect EU companies frominternational competition. Stakeholders need tobe reassured on the future evolution of carbon
prices to make informed investment decisions.
Clear signals on free emissions allowance phaseout and faster application of the CBAM will provide
this certainty and ensure allowances do not water
down the whole carbon pricing mechanism.
The ETS is designed to limit emissions, letting
the market set a price and enable the most costefficient methods of cutting carbon emissions.
However, this creates price uncertainty,
particularly given uncertainty over reductionsof allowances.112 A carbon price floor would
provide a price stability mechanism to reduce
volatility of price and ensure resilience of thefinancial system to carbon pricing. Germany
already plans to introduce a minimum domestic
carbon price of EUR60/tCO2 if an EU-wide floor
price cannot be implemented.113 The EU can also
consider supporting the IMF staff proposal for aninternational carbon price floor. 114 This suggests
a differentiated price floor of USD25, USD50 and
USD75 depending on development levels.
Carbon pricing has in the past been suggested as
an all-encompassing solution to competitivenessof green technologies. However, while it can
improve the economic case for green investments,
other policies are required to further disincentivise
fossil fuels and overcome issues of inertia,
uncertainty and demand. Carbon pricing needs
to be introduced alongside other measures toensure speed of transition, as markets are notsolely driven by price – carbon pricing acts as asupportive mechanism for other regulations.

14

Accelerating renewableenergy investment
The Renewable Energy
Directive (RED II) was adopted
on 11 December 2018 as partof the Clean Energy Package
for All Europeans. It included
guidance for the Commission
to publish a Delegated Act on Renewable Fuels
of Non-Biological Origin (RFNBOs), expected
in 2022. The revision of the Renewable Energy
Directive is one of the regulatory pieces
presented in the ‘Fit for 55’ package proposal.
This sees a strengthening of RE targets from 32%
to 40% by 2030, bringing the directive in linewith the 2030 emissions target,115
The 40% target represents almost a doubling of
the current RE share of energy consumption.116
This revision strengthens targets in sectors
where progress in integrating renewables
has been slower to date (such as transport,
buildings and industry) and includes measuresto accelerate RE deployment. These include
new provisions to facilitate collective renewableenergy power purchase agreements (PPAs),
simplifying administrative procedures, labelling
methodology for industrial products produced
using renewable energy and a cross-borderpilot project to foster regional cooperation. The
revision also targets a significant increase inrenewable hydrogen usage.
Calculations by Bellona suggest that the targets
for RFNBOs in industry and transport would
require 500 TWh of renewable electricity – half
the total RE generation in 2019.117 Therefore, it is
crucial that the additionality of new renewablegeneration to meet the needs of new electrolysis
hydrogen production is included in RED II, toprevent the potential cannibalization of half
the renewable energy installations targeted.118
Given the energy losses of the electrolysis
process, direct electrification is a more efficient
decarbonisation method. Industrial targets could
be adjusted to encourage direct electrification
wherever possible
Notwithstanding the work to be done on the
RNFBO DA, the principle of additionality can beembedded in several articles of the proposed
RED II revision. In Article 2 (Definitions), thedefinition of ‘renewable fuels of non-biologicalorigin’ and the definitions of ‘renewable fuels’and ‘renewable liquid and gaseous transport
fuels of non-biological origin’ could state thatthe renewable energy source for these fuels is
additional. Articles 22a and 25 can also include
an additionality requirement for RNFBOs tocount towards targets.
Requiring prioritisation of direct electrificationand including GHG intensity targets in Article 22awould incentivise energy efficiency alongside
renewable energy usage.119 Article 22a targets a
50% replacement of grey hydrogen usage withgreen hydrogen in industry – this is a strong
target as it directs the use of green hydrogen
where it is most needed. However, the ambitionof industry targets can be raised from a 1.1%
annual increase in RE use in industry to 2.2%.
1.1% is not a stretch target for industry as it
would be achieved anyway with the Directive’s
increase in grid renewables and grey-to-greenhydrogen targets.
Given the relative scarcity of hydrogenproduction, targets can be accompanied by
guidance on priorities for end uses, for example,
prioritising HGVs, shipping and aviation in thetransport sector. Bringing RNFBO targets intransport in line with ReFuelEU and FuelEU
would help ensure targeted use of hydrogenin aviation and shipping, respectively. The
inefficiencies and financial impacts on
consumers of gas blending, see page 18 could
be reduced by caveating against the renewableenergy targets in Article 24 (District heating andcooling) being achieved with gas blending.
Without additionality and production correlation
requirements, there is a potential for RED II toeffectively subsidise fossil fuel-based RNFBO
production, creating market distortion as gridpowered hydrogen production would always
outcompete off-grid RE powered hydrogen due
to longer running times.120 This presents aninvestment risk to those investing in hydrogenclusters and off-grid installations, contradicting
the priorities of the EU Hydrogen Strategy.121
Without strict controls on the carbon-intensity ofthis grid-based hydrogen, this could incentivise
high-carbon hydrogen over low-carbonhydrogen, undermining green capital flows.
It is important that hydrogen producers holdresponsibility for the renewable electricity inputs
they require; this will ensure a level playing
field between hydrogen investments and could
encourage RE producers to invest in greenhydrogen as a grid balancing tool, installingelectrolysers to offtake surplus energy which
would otherwise be curtailed and therefore
increasing the running hours of RE installations.
Grid flexibility can be further promoted in the
RED II revision – particularly in Article 3, whichsets the overall target for MS. Article 3 could also
promote direct electrification and require theadditionality of RE generation to safeguard griddecarbonisation.
The criteria for renewable fuels of non-biologicalorigin and recycled carbon fuels require GHG
emissions savings of at least 70% for these fuels
to be counted towards RED II targets (Article
29a). Aligning with the EU Taxonomy definition offull lifecycle emissions reductions of 73.4% and3tCO2/tH2122 will ensure coherency of legislation
Targets for RE uptake could also be paired withinvestment targets. Specific targets are set for
certain industries, recognizing the differing

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

Additionality refers to thematching of new hydrogenelectricity demand withextra renewable generation.
Additionality requires
electrolysers to be associatedwith dedicated new
REinstallation or powered bysurplus renewable energy.
If additionality is omitted
from hydrogen definitions,electrolytic hydrogen willotherwise endanger the wider
economic transition.
speeds of transition; for example, a new target
is set for 49% of energy use in EU buildings tocome from RES and a target for renewable fuelsfrom non-biological origin (i.e., mainly hydrogen)in transport of 2.6 %. Investment targets would
guide member states (MS) to enable green
investment in areas which currently show lessfavourable conditions than wind farms etc.

Ensuring green hydrogen delivers deep
emissions reduction
The delegated act of the RED II on Renewable
Fuels of Non-Biological Origin (RFNBOs) will
determine the quality of green hydrogen under
RED II by dictating what electricity can be used
to produce it. The DA was due at the end of 2021
and has yet to be published. Since the 2018
RED II, hydrogen has risen significantly up thedecarbonisation agenda, and the EU has set
targets for largescale electrolyser deployment
and hydrogen use by 2030 and 2050. This has
put pressure on the commission to weaken the
DA’s additionality and production correlation
requirements to ease deployment of electrolysers.
The guidance in RED II (2018) on the DA
suggested three requirements; temporal andgeographical correlation of hydrogen and RE
production and an additionality element.123
However, this guidance is not binding, and latest
drafts of the DA show a weakening of theserequirements. The DA is likely to not include
additionality in practice, with hydrogen suppliers
guaranteed a certain level of electrolyser running
time (4000-5000 hours/year) regardless ofgrid carbon intensity and removing suppliers’
responsibility for adding renewable energy to
the grid. Without additionality, the electricity
requirements of the hydrogen use targeted in
the revision have the potential to absorb half theplanned RE expansion.
Standard guarantees of origin will not be
sufficient to guarantee geographical andtemporal correlation, instead dedicated PPAs will
help ensure low carbon hydrogen production.
Additionality rules will ensure decarbonisationof the energy system stays on track.124 Gridconnected electrolyser installations will need tobe accompanied by new RE installations or run
15

Leap torenewables

only when there is a surplus of RE which would
otherwise be curtailed or dissipated.
A strong DA will include the requirements set out
in the 2018 RED II: temporal and geographicalcorrelation of hydrogen and RE production andadditionality of supply. See also page 22.

Strategic infrastructuredevelopment
Cross-border energy networks,
on average, have a life
expectancy of 80-years forgas pipes and between 40and 80-years for electricity
infrastructures or equipment.
Consequently, current investments determine
the structure of the EU energy system for the
coming decades. Directing these investments
toward the infrastructure necessary for the clean
energy economy is an important element ofenergy transition policymaking.
Regulation 347/2013 on Trans-European Energy
Networks (TEN-E) provides a framework to foster
the “timely development and interoperabilityof trans-European energy infrastructure”. It
accelerates infrastructure projects that support
EU energy policy goals; functioning andintegrating the internal energy market, securityof supply, promotion of energy efficiency andintegration of renewable energy sources. It
addresses the identification and implementationof Projects of Common Interest (PCIs), projects’regulatory treatment, and eligibility criteria forfinancial assistance under the Connecting Europe
Facility budget for Energy (CEF-E).
The Council and Parliament have reached aprovisional agreement on a new TEN-E revision,
aiming to align TEN-E with the EU Green Deal.125
The revision attempts to anticipate the EU’s
future energy infrastructure needs and promotes
the use of innovative energy carriers such ashydrogen. The revision ends support for new
dedicated fossil gas and oil infrastructure,established mandatory sustainability criteria
for projects and focuses on smart grids,
electrification and hydrogen.
New gas infrastructure is allowed to carrya blended mix of hydrogen and fossil gas/
biomethane until the end of the decade.
Strengthening these requirements, for example,
requiring project evaluation according to theircontribution to the hydrogen economy after
2030, can remove any short-term incentive
to design these pipelines to meet current gas
needs, as will specifying a high minimum blendof hydrogen. Fossil gas end-use appliances andinfrastructures tend to require retrofit to receive
over a 10% blend of hydrogen, so a minimum
blend over 10% would mean the gas would only
be able to be used by hydrogen-ready appliances
and industrial units, while a lower blend would
have negligible impact on emissions.

Gas-fired power
Improving interoperability of European energy
networks can provide resilience to variable
renewable energy (VRE) supplies and improveenergy security. EU initiatives on wholesale
electricity market integration such as market
coupling help to improve cross-border gridconnectivity within the EU,126 but similar
initiatives could be introduced to enable
electricity trade with the EU Neighbourhood, seepage 27.
PCI allocation now includes sustainability criteria,prioritising those projects that have the greater
impact in transition to net-zero, particularly
in building up renewable capabilities in thosecountries currently most dependent on fossil
fuels will ensure an efficient use of resources toachieve largescale emissions reductions.

Tackling fossil gas energy
security issues
Energy security is threatenedby issues of energy supply
variability and by overrelianceon imports, particularly fossil
gas. Energy security concerns
around fossil gas have beenbrought to the fore by the war in Ukraine. Almost
half of EU fossil gas is supplied by Russia. The war
in Ukraine has prompted action to rapidly reduce
EU reliance on Russian gas.
Variable renewable energy supply driven by dailyand seasonal variation in wind and solar intensity
is seen as a threat to continuous energy supply,with the 2021 winter energy price surge blamedon renewable energy penetration by some.
However, this was driven by fossil gas shortages,
as global demand spiked following the economic
restart out of lockdown. Fossil gas has beenpresented as a source of long-term energy security
in an electricity system with high renewablepenetration. However, import reliance has been
revealed as a major source of vulnerability, firstby the 2021/22 winter supply issues and then by
the efforts to reduce imports from Russia.127

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

The European Commission published its
REPowerEU communication on 8 March 2022
to make Europe independent of Russian fossil
fuels “well before 2030”, by reducing fossil gas
consumption by 155 bcm (amount imported
from Russia in 2021). 100 bcm of this reduction
are targeted by the end of 2022.128 Concrete
proposals are expected in May. REPowerEU
consists of two pillars: diversifying gas supplies
and reducing dependence on fossil fuels throughincreasing energy efficiency and RE penetration.
The communication suggests co-legislators
boost the Fit for 55 proposals with higher/
earlier renewable energy and energy efficiency
targets.129 A plan will be proposed based on
identification of suitable projects and reforms
at national, regional and EU levels. Pillar 1,
gas supply diversification, is planned throughincreasing LNG imports and pipeline imports
from other countries.130
Current supply disruption risks are currently
perceived as far higher than future transition risks.
Mid-stream infrastructure for intra-state fossil
gas transmission may be needed, particularly
for those nations predominantly served by
Russian pipelines such as Germany. However,fossil gas supply diversification investments
will require careful evaluation of their ability tomeet current needs and comparison with lowercarbon alternatives, particularly in terms of timescales for project delivery. Energy efficiency
gains and other demand-side responses
should also be incorporated into assessment ofinvestment needs.131
The EU may require new fossil gas import
capacity for immediate supply diversification
but it is still on track for continued excessive net
import capacity, and new LNG terminals may
not be built in time to address immediate gas
needs.132 New LNG infrastructure introduces alarge stranded asset risk.
The Global Gas Infrastructure Tracker estimatesthat proposed EU expansion of net gas
import capacity to be 160.2 bcm/year costing16

EUR26.4bn. This does not include the over 70
bcm/year announcements made following theinvasion of Ukraine. Given the 100 bcm reduction
in gas consumption forecast in Fit for 55, thisrepresents a significant investment risk.133
Building new fossil gas infrastructure needs to
be avoided as much as possible to avoid lock-in
to asset stranding and jeopardising emissions
targets. Switching import reliance to anothercountry will also still leave energy security
vulnerabilities. Lock-in risks are also posed by longterm offtake contracts; EU negotiators are likely
to carefully negotiate contracts to ensure theyalso avoid lock-in risks. However, lock-ins of pricepremiums for these contracts will be very likely.
The communication also covers a ‘hydrogenaccelerator’, increasing the ambition of theHydrogen Strategy with an additional 15 mt/year(five EU produced, ten imported) of renewablehydrogen. This will require significant RE capacity– the current 10 mt target in Fit for 55 will alreadyrequire 477 TWh RE. Therefore, it is vital that
additional RE is linked to this new accelerator.
Reduced demand will be key to these rapid
reductions in consumption. The REPowerEU
communication states the importance of theenergy efficiency first principle and suggests
strengthening of Fit for 55 policies on energy
efficiency, particularly in homes. Pillar 2 alsoplans renewable energy acceleration withsimplification of permitting. This is a key
bottleneck to overcome and could also improve
the investibility of renewable energy. Increasing
renewables penetration is suggested to bepossibly achieved with carbon contracts fordifference, see page 25.

Recommendations on ensuring
a credible transition• The EU Taxonomy establishes a scientific100g CO2e/kWh declining threshold for green
electricity generation. The Complementary
Delegated Act to the Regulation on fossil
gas and nuclear power uses weaker criteria.
Approving the CDA would risk locking the EU
into a high carbon trajectory incompatible with
its climate targets. If MEPs reject the CDA, thisallows the Commission to redraft Paris-aligned
transition criteria for the sector.
• Inconsistency of standards could
hinder transition investments andcreate market imbalances. Applicationof consistent scientific definitions, using theTaxonomy full lifecycle emissions thresholdof 3tCO2e/tH2, across all legislation will ensure
consistency of policymaking and streamline
transition investments.
• Carbon pricing has been proposed as a fix-all
solution to enable the transition, but action
is not solely driven by price. Accompanying
carbon pricing with other regulations,subsidies and R&D support, as seen in the Fit
for 55 package, will prevent over-reliance on
pricing signals to enable the transition.
• Electrolyser installations could appropriate
large swathes of electricity grids’ new renewableinstallation, hindering grid decarbonisation.
Including additionality requirements in RED II
and its Delegated Act, ensuring electrolysers
are accompanied by dedicated renewableinstallations, will prevent this.
• There is a risk that the TEN-E requirements
on gas pipelines could allow subsidise
fossil gas infrastructure. Specifying a highminimum blend of hydrogen will ensure theinfrastructure is not used to simply meetexisting fossil gas requirements.
• European energy security is threatened byreliance on fossil gas imports. Gas switching
is not the path forward. Diversifying gas
supplies may meet short term energy needs
but long-term energy security will be provided
by rapid transition to an energy mix met
almost entirely by domestic renewable energy
production. Energy security investments
should therefore avoid locking in new fossil
gas infrastructure, prioritising renewableinfrastructure installations whenever possible.

Accelerating the fossil gas transition to net zero Climate Bonds Initiative17

4. Facilitating transition away from fossil gas
The existing fossil gas sector will need toundergo transformational change to align withnet zero. The required policy scenario to limit
warming to 1.5°C modelled by the Inevitable
Policy Response (IPR RPS) sees global fossil gas
demand dropping 60% by 2050, and 75% in the
power sector.135 Energy modelling also makes
it clear that developed markets such as the EU
will need the highest ambitions on emissions
reductions.136 The policies outlined above will
help to encourage companies to transition
their businesses. However, policymakers canprovide further guidance on these transitions,
to minimise asset stranding risks and ensure
efficiency of the whole economy transition.
These policies can also ensure economicallyefficient transition priorities, avoiding
damaging efforts such as gas blending which
ultimately hinder transition and increase
stranded asset risks.
Fossil gas infrastructure leaks methane, agreenhouse gas, 82.5x stronger than CO2 on a
20-year timescale. Methane emissions fromthe energy sector are 70% higher than official
figures; recognising the true carbon intensity offossil gas will help guide the energy transition
to truly low-carbon investments. Reducing
methane leakage is a significant challenge,
given that 4/5 of the methane leakage
associated with EU fossil gas consumption isbeyond EU borders. The severity of this issue
will require precautionary regulation, thatany gas infrastructure operation must provide
evidence of low enough leakage rates, using
LDAR, to avoid the need for corrective action.
The difficulties of this will be far higher thansimply not using fossil gas.
For a successful transition of the fossil gas
sector, it is important to consider the vested
interests of nations with large gas reserves,and gas sector actors with high sunk costs infossil gas infrastructure. Hydrogen cannot be
used to enable continued expansion of fossil
gas infrastructure and instead be prioritisedfor hardest to abate sectors such as steel andfreight where it has the greatest decarbonisation
potential. A limited portion of fossil gas
infrastructure may be repurposed for low-carbonhydrogen processes, but this will not provide
a transition strategy for the whole fossil gas
distribution and transportation sector.
Shareholders and investors can also play
an important role in prompting transition ofcompanies, calling for climate action, requesting
greater ambition, and engaging with companies
on the benefits of the transition. Fossil gas
companies need to grasp the opportunity
posed by the transition, recognising first-moveradvantages and the favourable investment
landscape for green investments.

Urgently reducing methaneleakage from fossil gas
Fossil gas infrastructure leaks
methane along the entire
value chain. Methane has a
GWP 82.5 times that of CO2 on
a 20-year time scale and 29.8
on a 100-year scale.137 So evensmall leakage rates have a significant climate
impact. The European Commission’s proposal fora regulation on methane emissions reduction in
the energy sector seeks to address emissions fromupstream oil and gas activities, coal mines andfossil gas transmission, distribution and storage.138
Methane emissions are consistently
underestimated, as demonstrated by ice core
analysis.139 The IEA has found that global energy
sector methane leakage is 70% higher thanofficially reported.140 Underreporting of methaneleakage has led to an underestimation of fossil
gas climate impact. This will likely have also led
to an overestimation of its potential role in the
future energy mix if energy system models haveused too low carbon intensities for fossil gas.
The uncertainty around methane leakage datameans the risk of underestimating the impact offossil gas emissions needs countering with robust
regulation. The majority of emissions also comesfrom a very small number of leaks, with 5% of leaks
contributing 50% of emissions globally.141 Thismeans that for leak detection and reduction (LDAR)
to be effective, it must cover the entire supply chain.
While upstream companies do have an incentive
to address leakage, posed by loss of revenue,
this is estimated to be only 1/10th of theenvironmental cost of the leak.142 Increasing
evidence from satellite imagery and infrared
imaging shows unreported methane leakages
from pipelines in Europe. Therefore, regulationis required to enforce improvements inmanagement and continuous supply chain LDAR.
The proposed Methane Regulation would
establish requirements for companies to measureand quantify their asset-level methane emissions
at source and carry out comprehensive surveys
to detect and repair methane leaks in theiroperations and bans venting and flaring practices.
However, the severity of methane leakage’s
underestimation and climate impact calls for astrong precautionary approach in the regulation.
Reinforcing supply chain LDAR in the regulationand specifying regularity of pipeline inspection will
ensure whole value chain coverage.
The regulation will not apply to fossil fuel imports
until the 2025 regulation review. With 90% fossil
gas imported from outside the EU, estimatessuggest less than a fifth of methane emissions
from fossil gas consumption occur within its
borders, 76 Mt CO2e compared to 232-615 Mt

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

CO2e.143 Extending the framework to imports
would tackle far more of the EU’s fossil gas
methane emissions.
Fugitive emissions can increase a fossil gas-fired
power plant’s emissions intensity by 30% andbring its carbon intensity in line with coalfired power due to methane’s very high global
warming potential.144 Use of lifecycle emissions
thresholds means methane leakage is included
in assessments of fossil gas end uses such as
electricity generation. This enables accurate
assessment of fossil gas-fired power’s carbon
intensity and comparison with other technologies.

Avoiding gas blending
Gas blending entails mixing
a certain proportion ofhydrogen, or other low
carbon gas, into the fossil
gas supply. At hydrogenvolumes up to 10%, this does
not require retrofit of distribution or end-use
infrastructure. However, given the lower energy
density of hydrogen, a 5% blend by volume
would only displace 1.6% of fossil gas supply145
and so blending levels cannot be equated withemissions reduction. Impact is further reduced if
blue hydrogen is used.
Gas blending also reduces the decarbonisation
potential of hydrogen. Combustion of hydrogenfor domestic heating or electricity generation
results in energy losses of around 30% during
the conversion process from electricity tohydrogen.146 Hydrogen is better suited to uses
where direct electrification is not possible, suchas industrial processes.
Gas blending is not aligned with the Climate
Bonds Principles for a Credible Transition,
see Figure 2. Blending does not align withzero carbon by 2050 and there are otherviable technologies which provide deeper
decarbonisation of fossil gas end uses.
Incremental change is not aligned with the needfor rapid decarbonisation to 2030. Prioritising
dedicated hydrogen infrastructure will avoid costinefficiencies and lock-in risks.
For those elements of the grid which will beneeded for hydrogen distribution, blending does
not enable a smoother transition to a 100%hydrogen grid, as it would still need retrofits once
blending limits (around 10% volume) are reached– this could incentivize inefficient, incremental
retrofit efforts, further slowing transition.
Blending also poses a risk to the just transition,
see page 20. Blending would mean costs ofhydrogen development would fall to current
fossil gas consumers, further driving up energy
bills, despite their not necessarily being the
primary beneficiaries. A just transition requires
18

the cost of the hydrogen transition to be borneby its primary beneficiaries and demand centres.
Equally, unnecessary replacement of boilers andother end use infrastructure would also causesignificant cost to the consumer.
Various stakeholders advocate for gas blending
as a way to boost demand in the near term andso drive down costs of hydrogen production.
However, gas blending could hinder transition ofother activities for which hydrogen is currently
the only viable decarbonisation technology
by absorbing much of the EU’s hydrogenproduction. These sectors are far better suited toboost demand without creating asset stranding
and other investment risks.

Accelerating buildings
decarbonisation
Domestic consumption
accounts for 41% of final EU
fossil gas consumption.147 The
heating and cooling sector
is a Commission priority forachieving decarbonisation
targets, also targeted in the REPowerEU
communication. The IPR RPS sees global
building sector gas demand fall to almost zeroin 2050.148 Gas is used for space heating, cooking
and hot water in commercial and domestic
properties. This variety of uses and the large
number of independent stakeholders requires avariety of policy levers to enable decarbonisation.
Building decarbonisation will entail largescale
reduction in fuel demand through insulationand passive technologies. Residual heating
requirements can be met by various solutions:
heat pumps, decarbonised district heating andhydrogen boilers, alongside energy efficiency
improvements. Given the range of building types
and energy efficiency and insulation levels, caseby-case analysis is required to determine the mostcost-effective solution for each context. REPowerEU
mentions accelerated deployment of rooftop solar
and heat pumps. UK scenario analysis found a
top-down “blanket” solution such as all-electricor all-hydrogen is projected to cost 2 or 3.5 times
as much respectively compared to a bottomup approach that chooses the best low carbon
heating solutions on a place-by-place basis.149
In most cases, low-carbon hydrogen is not likely tooutcompete direct electrification in decarbonisingdecentralised heating as it is more expensive
than electric heat pumps and requires applianceretrofit. Blanket incentives for hydrogen-based
decentralised heating would undermine strategic
deployment elsewhere in the economy and create
inefficiencies.150 However, it could be a midterm
decarbonisation option for district heating – ininstances where waste heat, geothermal, and heatpumps can’t be used.
Incentive schemes for individual interventions
are already present across the EU, for example

Italy’s 2019 Ecobonus and 2021 Superbonus tax
relief scheme.151 This triggered a 500% increasein home renovations 2020-2021.152 However it is
only available for privately-owned houses, withpublic administrations having to access the Conto
Termico instead and neither scheme available forcommercial property. It is also available for any
energy efficiency measure, regardless of efficiency
gains made, whereas the EU Taxonomy requires
building retrofits to make a significant contribution
to energy savings to qualify as green.
New buildings provide an opportunity for greater
ambition. The recast of the Energy Performance of
Buildings Directive (EPBD) requires new residentialbuildings to be net-zero in operation from 2030
and new public buildings by 2027.153 This can bestrengthened to prohibit the supply of fossil fuels
to new buildings. The longer phase-in time could
be used for full lifecycle emissions, given the
difficulties in decarbonising building materials.
Preferential capital requirements on green
mortgages provide a fiscally efficient incentive forbuilding decarbonisation. Green mortgage schemes
offer more favourable lending conditions againsthouses with a certain level of energy efficiency
or for green energy interventions. These can besupported by the central bank, following the modelof Hungary’s Magyar Nemzeti Bank (MNB) which
discounts capital requirements against lenders’balance sheet exposure to green mortgages,
reflecting their reduced risk of default.154

Limits of repurposing fossil gas
infrastructure
Retrofit of fossil gas
infrastructure for hydrogen orsynthetic fuels is promoted
widely as a transition pathway
for the fossil gas sector.
However, the cost of such
retrofit and the differing natures of the two
economies mean this will likely be the case for avery small proportion of existing infrastructure.
For the same reason, new ‘hydrogen-ready’fossil gas infrastructure cannot be assumed tobe needed for hydrogen distribution. Labelling‘hydrogen-ready’ fossil gas infrastructure as green
poses an investment risk in both asset stranding
and greenwashing accusations, see page 11.
Public authorities and financial actors will needto keep in mind that the retrofit potential of gas
infrastructure is limited and not overestimate theimportance of gases in the net-zero economy.
Objective metrics can be used to assess future
retrofitting against other decarbonisation
strategies and in the context of national energy
infrastructure requirements.
Several fossil gas distributors already target ahydrogen transition. As part of Snam’s aims totransport 100% hydrogen and biomethane by
2050, it is working to develop hydrogen refuelling
infrastructure for Italian railways and on projects

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

piloting hydrogen in several other industries.155
Those companies which are already remodellingas integrated energy players or even transitioning
to become pureplay low-carbon energy providers
are already reaping the benefits; for example,Ørsted’s transition away from fossil fuel relianceto become the largest offshore wind energy
producer in the world.156
The IPR RPS sees gas + CCS accounting for all
remaining EU fossil fuel generation after 2035,157
and CCS retrofit could provide significant
emissions reductions from existing plants.
However, this would require very strong action
on fugitive emissions to meet even DNSH
requirements of the EU Taxonomy and is unlikely
to reach low enough emissions intensity toqualify as a green investment.
The different geographies of fossil gas andhydrogen supply and demand, in terms ofvolume and location, limit pipeline retrofit
potential for hydrogen transport. Distributors
cannot expect this to be an adequate transitionof their business model.
Policymakers can play a crucial role in thisprocess by assessing national distribution
requirements and carrying out a comprehensive
cost-benefit analysis. Transparency in thisprocess and the planning and timelines
for networks also helps investment andidentification of potential routes.
Governments and fossil gas distributors will alsoneed to accept that much of the gas transmission
and distribution network will become stranded
assets (this will vary across countries and regions)as future demand of low carbon gases are never
expected to reach that of current fossil gas
demand, and transport requirements will vary
widely. Building new gas infrastructure according
to expected future hydrogen distribution
requirements will help prevent asset stranding.
While there are opportunities in repurposing
existing infrastructure, which is highlighted in
the European Commission’s hydrogen strategy,
policymakers will need to also take the depreciationof repurposed infrastructure into account.
An example of pipeline repurposing is provided
by Dutch state-owned network operator, Gasunie,
which will develop a Dutch national hydrogen
network at the initiative of the Dutch government.
Given hydrogen’s current lack of profitability, full
deployment would not be possible without thispublic sector initiative. This grid is necessary forthe deployment of the hydrogen value chain toenable industry and other sectors to transition
into hydrogen, so this initiative prevents a possible
future bottleneck. 85% of existing pipelines will
be repurposed to save costs. The project amounts
to EUR1.5bn and is due for completion by 2027.158
Gasunie expects the costs to be 4 times lower thanif entirely new pipelines were laid. The capacityof the network is 10 GW, equal to 25% of the total

19

The only exception to this is posed by thepossible role of hydrogen in grid balancing.
Once the electricity grid sees a high proportionof renewables, issues of supply variability
pose a challenge on daily and seasonal scales.
Balancing (smoothing supply/demand peaks)
could be achieved through green hydrogenproduction, storage, and combustion inrepurposed fossil gas-fired plants, alongsideother measures such as smart usage
technologies and batteries.
Given the inefficiencies in hydrogen combustion(energy losses at each stage of electricityhydrogen-electricity conversion) and constraints
on hydrogen supply, power plant repurposing
will need careful regulation to ensure that it is
only used for grid balancing. Specifying hydrogen
power plants as balancing service providers161
would also allow hydrogen power stations to
be paid appropriately for their role, allowing fora price premium reflective of the value of gridbalancing while protecting consumers from thecost of hydrogen power being run as baseload.

A holistic approach to
Just Transition

looking to transform their business models
from fossil-based energy generation to
renewable energy generation. Opportunities toleverage the existing workforce skillset include
project planning, manufacturing of support
structures, installation and grid connection, andoperations and maintenance.163 According to
the International Energy Agency, approximately
40% of the total lifetime costs of an offshore windproject has significant synergies with the offshore
oil and gas sector.164
Carbon pricing policies on road transport andbuildings can produce regressive distributional
effects, affecting proportionally more low- andmiddle-income households than high-income165
because low-income households spend a higher
share of income on energy. The new proposed
ETS scheme for buildings and mobility will likely
result in more inequalities and in an increase inenergy poverty since the additional costs would
likely be passed on to the consumers. With
energy prices increasing due to Ukraine warrelated disruptions,166 these impacts will needcareful consideration.
The European Commission presented a Just
Transition Mechanism in January 2020 anda proposal for a Social Climate Fund in July
2021. The size of the Social Climate Fund willcorrespond to a dedicated share of the revenues
from the auctioning of emission allowances
under the building and road transport ETS. The
Social Climate Fund would be financed by 25%of the expected emissions trading revenues
for building and road transport fuels. It will
provide EUR72.2bn of funding to MS, for theperiod 2025 – 2032. With a proposal to draw onmatching MS funding, the Fund would mobilise
EUR144bn. However, the European Commission
has estimated that until 2030 around EUR350bn(of this, EUR130bn in the transport sectorand EUR110bn in the buildings sector) will beneeded in additional energy system investment
annually to meet the ‘Fit for 55’ targets. Greater

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

Cost-benefit analysis found laying new pipes
alongside fossil gas pipes to be the mostefficient method, utilising existing planningpermission and excavation. This demonstrates
how assets beyond physical infrastructure canbe considered for repurposing.

involvement of public funds will be needed toaddress this, given the limited inflows of private
capital to such projects.
There is also a question on whether the proposal
is ambitious enough to sufficiently compensate
poorer European households so that the costsof transition are shared fairly. The proposed
design of the Fund may also not be effective
since it plans to compensate households
using revenues arising from carbon pricing ontransport and buildings, which will be mainly
paid by households themselves.167 Dependency
on revenue from the building/transport fuel ETS,
which will be implemented from 2027, means theFund’s implementation will be severely delayed,with consumers only able to access support once
they are already impacted by the ETS.
New state aid guidelines seek to align state aid ruleswith the Green Deal. These provide support for RE
expansion and coal phase-out but include a special
clause to allow the lowest GDP MS to transition
from coal to gas. Criteria for fossil gas projects to
win EU state aid approval include being ‘futureproof’ and hydrogen/biogas-ready and preventlock-in effect by demonstrating a decarbonisationbon emissrica

by 2030

Just transition efforts can minimise the impact
on those employed in the fossil gas sector.
Reskilling this workforce will reduce job losses
and associated opposition to transition. Thiscan also create efficiencies for companies

The collaborative approach is designed toachieve fossil fuel parity (targeting EUR1.5/
kg including transmission and storage) with arapid scale-up of production and an integrated

value chain approach.179 This largescale
project is presented as an alternative tothe local, MW-scale projects. HyDeal uses
co-location of electrolysers and renewables(up to 1 GW per site), connected to a pipeline
network built along existing gas pipelines, withhigh-capacity underground storage to serve
industrial off takers.180

son

The energy transition posesrisks to social development.
Restructuring of the
global energy system has
the potential to increase
inequalities and hinderdevelopment if mismanaged. However, it also
holds potential to facilitate development,
tackling important inequalities such asenvironmental quality and fuel poverty. Just
Transition measures often have a narrow focus
on protecting jobs in developed market fossil fuelindustries. Widening these measures to include
other measures of social development and a
global perspective can ensure greater impact.162

A consortium of 30 solar developers,
electrolysis manufacturers and contractors,
gas transmission systems operators, energy
groups, infrastructure funds and consultants
initiated by DH2 energy has launched HyDeal
Ambition. They aim to install 95GW of solar
and 67GW of electrolysis capacity in Iberia
by 2030 to deliver 3.6 million tonnes of greenhydrogen annually across Spain, France andGermany using the existing gas transmission
and storage network.

f global

Repurposing plants to run on hydrogen or otherlow carbon gases has been promoted as a way torapidly scale demand for low-carbon hydrogen
and/or to decarbonise fossil gas-fired power.
However, with RE providing a much cheaper andcost-effective way to decarbonise the electricity
sector, this is not a viable strategy for allgas power plants. There is an opportunity
to repurpose fossil gas plants’ electricity gridconnections for hydrogen production sites.
Such creative reworkings will ensure maximum
capture of transition opportunities by the sector.

Box 2: HyDeal Ambition, an example of largescale repurposingof fossil gas infrastructure

H alenergy consumption of Dutch industry; althoughin time this can be expanded further.159 Dutch
industry currently amounts to 25% of total CO2
emissions in the Netherlands.160

1.5C

20

pathway.168 However, being hydrogen/bio-gas readyis not a valid decarbonisation strategy given the
differing geography of future hydrogen demand
to fossil gas demand – this extra support would
be better placed enabling electrification and RE
expansion. Elevated fossil gas prices mean thatcoal to gas transition is also likely to create a large
financial burden, hindering the just transition.
Allocation of the Social Climate Fund and state
aid can be strengthened by incorporating awider understanding of the social impacts of thetransition, beyond job losses and fuel prices andincluding metrics such as health, environmental
quality and natural capital stocks.169

Investor engagement
for transition
Transition-related
investments are profitable.
Renewable power is alreadydemonstrating a superior risk
and return profile compared
to fossil fuels. The IEA andthe Centre for Climate Finance & Investment
found that the market correlation of a reference
renewable power portfolio fell during a market
downturn, indicating a potential diversification
benefit of renewables investments. Renewable
power was also more resilient than fossil fuels
during the pandemic period of severe stress andvolatility.170 This shows asset managers are able
to channel finance towards green investments
whilst meeting customer expectations on risk
and return. Also, annualised volatility is lower for
renewable power than fossil fuels in global andadvanced economies portfolios. However, formore nascent and high-risk technologies, private
capital which requires lock-in investments ofseveral years may require further incentives fromrisk-sharing mechanisms, guarantees etc.
Asset owners are often pressured to divest fromfossil fuel investments to green their portfolios,
however, there is growing understanding thatdivestment does not materially reduce carbon
emissions and should instead be used as alast resort sanction in engagement strategies.
Divestment is resulting in fossil fuel assets being
increasingly held by private investors, reducing
the visibility of these investment flows; however,private investors will eventually come under EU
disclosure obligations.
Engagement is increasingly recognised as a
powerful tool to accelerate companies’ actions.
Investors in fossil gas firms can use shareholder
rights such as AGM votes to influence thecompany’s strategy (Investor Activism), for example,
shareholder resolutions on emissions reduction
targets at ConocoPhillips (fossil gas) and Phillips
66 (oil and gas) achieved majority shareholder
approval, despite ConocoPhillips recommending a‘no’ vote. These actions were supported by Climate
Action 100+, an investor-led coalition engaging

with the world’s largest GHG emitters to ensure
they take action on climate change.171
Investors can engage with companies to request
they implement transition strategies, examine theambition level of these strategies and request an
increase in ambition. To do so, they can use the
Climate Bonds Principles for a credible transitionand sector criteria, see Figure 2.172 This is especially
important in a sector where many transition plans
are characterised by energy efficiency gains and/or reliance on unproven technologies such as
direct air capture (DAC) or on offsets.
Even in passive investing, transition can beconsidered, and investors increasingly selectclimate-related passive funds based on asset
managers’ track records and stewardshipcapability expectations.
Asset managers can find it difficult to engage withtransition sectors such as natural gas given green
portfolio’s carbon intensity requirements or find thatcreation of low-carbon indices result in domination
by sectors such as technology or web services.
With much investor action on climate currently
voluntary, there is room for regulation to harmoniseand enforce such action. The EU’s SFDR regulation,
see page 11, will help do so but incorporating climate
considerations into fiduciary duty could do so too.

Removing fossil fuel subsidies forclarity of policy signals
Fossil fuel subsidy phaseout
is key to ensuring policy
coherency, freeing up
spending for green subsidies
and strengthening the carbon
price signal. The EU committed
to phasing out inefficient fossil fuel subsidies
at COP26 and agreed the 8th EU Environment
Action Programme (EAP) in December 2021,
but without concrete deadlines for subsidy
phase-out. EU fossil fuel subsidies amounted to
EUR52bn in 2020, compared to EUR78bn for RE in
2019.173 Setting a deadline would provide a clear
signal to investors of the need to move awayfrom fossil fuels.
The proposed Revised Energy Taxation Directivein ‘Fit for 55’ includes aligning minimum tax rates
for heating and transport with climate objectives.
It will also remove exemptions and reduced
rates, such as for maritime and aviation fuel, thatencourage fossil fuel use.174 This should reduce theharmful effects of energy tax competition whileproviding revenue for member states and ensuringcoherency of economic policy, preventing dilutionof carbon price signals – see page 14.
The use of environmental tax reform (ETR) canensure consumers are not disadvantaged bysubsidy removal, channelling the savings into justtransition measures such as grants for refitting
home heating systems. As stated in the 2021 Stateof the Energy Union Report: “Fossil fuel subsidies

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

should come to an end. With lower expenditures
for fossil fuel subsidies and pollution relateddisease, national budgets will have a greater
margin for investments in innovative technologies,
in green skills, and in mitigating potential
distributional effects of the transition.”175
The revision of the Energy Taxation Directive also
sets minimum taxation levels for renewable andlow-carbon gases used as heating or motor fuel of
EUR 0.15/GJ (compared to EUR 0.6/GJ for fossil gas).
These minimum taxation levels can be used to guidethe application of low-carbon hydrogen in areas
where it is most needed for decarbonisation.176
Several MS coal phaseouts see fossil gas as abridging technology from coal to renewables,
despite the low cost of renewable technologies.177
Elevated fossil gas prices and the cost of building
up fossil gas infrastructure to achieve the low levelof emissions savings from fossil gas-switchingmeans this makes little economic sense,178 even
before the likelihood of fossil gas infrastructure
stranding in 2050 is considered. Fiscally efficient
coal phaseout guidance would instead encouragea direct switch to renewables.

Recommendations on
facilitating transition awayfrom fossil gas• Incremental change is not aligned with the needfor rapid decarbonisation by 2030. The transitionis threatened by the inefficient and regressive
strategy of gas blending, from which a 5% byvolume hydrogen blend only displaces 1.6%of fossil gas. Blending has limited emissions
reduction potential and creates stranded asset
risk and cost with the incremental retrofits/
technology replacements required for increasing
blending volumes. This can be addressed bypolicies incentivising transformational rather
than incremental change.
• Methane leakage brings gas-fired power carbon
intensity in line with that of coal power. Thismeans gas is not a transition fuel. Leakage is 70%
higher than reported – all fossil gas operations
urgently require leakage mitigation. The extent
to which this underestimation threatens theenergy transition and climate goals calls fora precautionary approach – that fossil gas
operations cannot occur without certainty
on leakage. Full value chain leak detection andreduction technology, alongside full lifecycle
assessments of carbon intensity are critical.
• There is growing evidence that fossil fueldivestment does not result in real economy
GHG emissions reductions. Investor
engagement can directly influence fossil gas
companies to decarbonise their operations.
• The EU has committed to phasing out inefficientfossil fuel subsidies. Setting a deadline would
provide a clear signal to investors of the need tomove away from fossil fuels21

5. Facilitating transition to hydrogen
A net-zero economy will require large quantities
of renewable hydrogen. Estimates vary on
exact quantities as end uses have various
decarbonisation pathways, but the EU Hydrogen
Strategy estimates hydrogen to grow from 2% to13-14% of the energy mix by 2050.
With EU hydrogen production currently
dominated by small scale grey hydrogenproduction, it will need to undergo expansion
and transition simultaneously. This will require
strong private-public sector collaboration to
grow nascent technologies, strategic deployment
to prevent supply chain bottlenecks, and robust
regulation to ensure hydrogen’s contribution to
the energy transition.
95% of current hydrogen production is fossil-based;
this presents an immediate emissions reduction
opportunity. These plants could be retrofitted with
CCS to allow continued use of existing assets whilst
lowering emissions intensity.181 However, bluehydrogen’s emissions intensity (from both residual
CO2 emissions not captured by CCS technology
and methane emissions in the fossil gas supply)
mean there is a need for robust lifecycle
emissions standards to ensure Paris-alignment
and prevent incremental emissions reductions.

Increasing the ambition of the
EU Hydrogen Strategy
The EU Hydrogen Strategy182
plans investments of 80 GW
electrolysers by 2030 (57%of which in EU), so as tomeet the strategic vision forclimate neutrality, with theshare of hydrogen in the energy mix predicted
to grow from less than 2% to 13-14% by 2050.
These targets are likely to be increased by the
REPowerEU plans, page 16. Roadmaps andstrategies provide a market signal, increasing
investor confidence while also shaping the
growth trajectory of an industry, ensuring policy
and infrastructure frameworks are in place tosupport the new industry.
Whilst the Strategy prioritises renewable (green)hydrogen, it suggests that other forms of lowcarbon hydrogen are needed in the short/medium
term to reduce emissions from current production
and support future uptake of renewable hydrogen.
The decarbonisation of current SMR production
with CCS presents an immediate emissions
reduction opportunity. Given varying capture ratesof CCS, using the EU Taxonomy criteria for hydrogen
will simplify understanding of viable hydrogentechnologies. This can ensure the constructionof SMR+CCS plants which are net zero-aligned
and avoid stranded asset risks. It can also enable
investment, facilitating green bond issuance inhydrogen and ensuring investor confidence in a
project’s Paris and Taxonomy alignment.

The Hydrogen Strategy’s Roadmap sets out
three phases for the hydrogen industry, initiallyprioritising scale-up of electrolyser manufacture,with hydrogen valleys and EU-wide infrastructuredevelopment beginning in the 2nd, 2025-2030
phase. The roadmap sees green hydrogentechnologies reaching maturity in the 3rd phasetowards 2050 and being deployed at scale acrosshard-to-abate technologies.183 Accelerating
the Roadmap, prioritising immediate cluster
development and large scale deployment from2025 would encourage greater earlier investment
and send a signal to industry to invest in hydrogen
inputs at the next investment cycle,184 not after 2030.
The Hydrogen Strategy import targets arealso seen as potentially overambitious, given thelimited RE installations in the EU Neighbourhoodand the need for these countries to also meettheir own net zero strategies. This raises Just
Transition concerns if emerging markets withhigh RE potential are producing and exportinghydrogen to Europe and not getting any of the
RE benefits. Policies will need to ensure against
increasing the low-income countries’ resource
curse; see page 26 for how trade policies mighttackle this.
EU-wide and national strategies can help ensure
policy coherency, ensure that demand andsupply are aligned, and prevent contradictory
policymaking that can potentially reduce investor
confidence. It is also important that strategies are
consistent over time. for example, some see thehydrogen development pathway to be a stepwise
progression from grey to blue to green, neglecting
the fact that each production method requires
different infrastructure — while demand canseamlessly evolve in this fashion, supply cannot.
Almost all MS have set hydrogen targets. National
electrolyser targets are at 38GW by 2030, near
the EU’s 40GW capacity target. However, national
Hydrogen Strategies vary; while Germany’shydrogen strategy185 sees only green hydrogento be sustainable in the long term, others
also include blue hydrogen. Bringing national
strategies in line with the EU Strategy andTaxonomy threshold will enable intra-EU tradeand investment.

Accelerating growth throughhydrogen clusters
Hydrogen clusters or valleys
are areas where hydrogen2
production and consumption
2
are developed together,2
ensuring demand and supply2
scale together, creating a local
hydrogen economy or hydrogen ecosystem.

H
H
H
H

The EU Hydrogen Strategy places thedevelopment of “Hydrogen Valleys” in the second

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

phase (2025-2030) of its roadmap.186 However,cluster development in the first phase would
enable uptake of hydrogen technologies whilst
still higher cost, given the lower distribution costsof linked supply and demand, and reducing the
supply chain complexity created by transport
requirements. Bringing clusters forward in theroadmap would help scale the market.
Co-locating supply and demand overcomes the
specific challenges of the hydrogen value chain.
Simultaneous development of production,
storage, transport and use can de-risk investment
and drive self-reinforcing development. This
demand certainty is very important to make thebusiness case for investments in production.
Hydrogen valleys can also be established withsimplified planning permissions, overcoming
authorisation issues.
Clusters can be supported with subsidies, suchas on electricity tariffs. Economic support canalso be provided by underwriting long term
purchase agreements or providing blended
financing to the early development of end-use
applications. Clusters can be located in existing
industrial areas where hydrogen is possibly
already produced. For example, in industrial
ports - encouraging refining and chemical plantsthat currently use grey hydrogen to shift tocleaner production. The hydrogen can also fuelships and trucks, power nearby steel plants etc.
Inland transport hubs also have high potential
for cluster development, as do refining/fertiliser
clusters and steel plants.187 Hydrogen clusters canalso utilise public-private partnerships, targeting
key technologies and capabilities.
Hydrogen clusters also provide wider economic
stimulus; as such they are well suited to Next

Box 3: HyBalance: hydrogenvalley development in
Denmark
The Danish HyBalance project, led by Air
Liquide, was funded with EUR15m from theEuropean Fuel Cell and Hydrogen 2 Joint
Undertaking. With Danish electricity production
dominated by wind power, hydrogenproduction can store energy that would
otherwise be lost and so ensure grid stability.207
The project demonstrates the role ofhydrogen in balancing the electricity
grid, see page 24. Hydrogen is stored incompressed cylinders and is transported via
pipelines and trucking to provide industrial
feedstocks and transportation fuels.208
The project has also stimulated the growthof a local hydrogen economy, attracting
companies such as a fuel cell manufacturer.209

22Generation EU (NGEU) funding. The EUR800bn
NGEU recovery package provides economic
stimulus following the COVID-19 economic
shutdown. EUR250bn is funded by green bondissuance. The green bond framework is alignedwith the EU Taxonomy and explicitly excludes
fossil gas infrastructure.188
The Recovery and Resiliency Facility (RRF)
provides EUR672.5 billion of loans and grants toMember States. Countries must allocate at least
37% and 20% of investments to the green anddigital transitions. The RRF represents a unique
opportunity for the EU to significantly advance its
transition to a climate-neutral economy in line with
the Paris Agreement objectives. 100% of investment
must meet the EU Taxonomy’s DNSH principles,while green projects are evaluated against the
EU Taxonomy. Only green hydrogen is eligible toreceive funds from this stimulus package.
An example of the use of EU funds for transitionis the development of the Hydrogen Valley in
Tarragona, which is currently a petrochemicalindustry hub. Spain has committed to allocate
EUR1.55bn over the next three years to greenhydrogen projects and expects this public
support to mobilise up to EUR8.9bn by 2030.189

Safeguarding griddecarbonisation
For green hydrogen to be a
viable decarbonisation option,
RE capacity needs dramaticscale up. The 40GW planned
EU electrolyser capacity will
require 80-120GW additional
RE capacity, on top of the 50 GW already required
per year to reach climate neutrality. Anticipating
supply chain needs will be crucial to prevent
bottlenecks – green hydrogen could generate
extra 300,000 TWh demand on the 800,000 TWh
demand of direct electrification.190
Given the carbon intensity of European electricity
grids, policymakers are clear on the need to linkgreen hydrogen (physically or contractually)
to RE installations. For instance, electrolysis
hydrogen produced in Germany directly fromthe grid would be as carbon-intensive as greyhydrogen – emitting 3.5 times more CO2 than the
EU Taxonomy threshold of 3 tCO2/tH2.191
However, requirements safeguarding carbon
intensity of electrolytic hydrogen will alsoneed to ensure hydrogen production does
not cannibalise RE production. There is adanger of large swathes of RE intended forgrid decarbonisation being dedicated toelectrolysers and therefore not contributing
to the decarbonisation of electricity supply.
Enabling legislation such as RED II (3.4), TEN-E(3.5) and the REPowerEU plans (3.6) will needto ensure and catalyse additional deploymentof renewables to meet the needs of hydrogenproduction.

Additionality requires either off-grid production,
on-grid associated with dedicated new RE
installation or on-grid and powered by surplus
renewable energy. Electrolysis hydrogenproduction will otherwise endanger the wider
economic transition if additionality is omitted.
These additionality requirements will require
careful drafting to allow room for green hydrogen’s
possible role in grid balancing. The EU Hydrogen
Strategy sees hydrogen playing a balancing role,providing a medium-term supply buffer from themid-2020s. Electrolysis presents one way for a
100% VRE grid to mitigate surging or blackouts by
operating electrolysers at times of low demand,storing the hydrogen for combustion in power
plants at times of high demand, and/or feeding thehydrogen into distribution for hard-to-abate sectors.
Hydrogen has potential for daily and seasonal
grid balancing and may be more cost-competitive
than batteries. With increasing penetration of
VRE, periods of surplus will be longer, with zeroor negative market prices for electricity enabling
the use of high CAPEX solutions such as hydrogenproduction. However, the losses of the conversion
process mean shorter-term balancing needs may
be best met by batteries or pumped hydropower.
Hydrogen from surplus electricity may be best
suited to seasonal grid balancing – given the greater
suitability for long-term storage – or for sector
coupling and transportation fuel production.
Incentives and market rules could encourage
electrolyser operators to use RE that would otherwise
be curtailed. One strategy would be locating themin areas with recurring grid congestion.192 However,green hydrogen is not the only option for gridbalancing and is an inherently inefficient process.

Maximising emissions reduction
by prioritising hydrogen
application
Green hydrogen will likely
be the most competitive
low carbon option across
22 applications by 2030,
comprising 15% of global

Hydrogen use will need to
be prioritised for sectors
with the highest emissions
reduction potential

H2

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

energy consumption193. There are certain sectors
where hydrogen is expected to be a major methodof decarbonisation (i.e., the ‘no regret moves’194)
such as steel, (long haul) aviation, shipping,industrial feedstock and high-grade heat. Policy
can accelerate technological development andearly adoption in these areas with high potential
demand. The IEA identified refining, chemicals,
iron and steel, freight and long-distance transport,
buildings, and power generation and storage as
the most promising sectors.195.
Stimulating demand for low-carbon hydrogenis required to incentivise production. Policies
are needed to create demand and investor
confidence. Creating new lead markets goes
hand in hand with scaling production. Long
term offtake agreements can reduce market
uncertainty; however, few sectors are market
ready to provide large-scale hydrogen demand.
An immediate priority for the hydrogen economy
is to replace the current use of grey hydrogenwith green and stimulate its development insectors with guaranteed long-term demand.
Current grey hydrogen consumers such as
fertiliser and chemicals producers present‘captive demand’ and can be prioritised. Fossil
gas price surges are also likely to accelerate thetransition of fertiliser production. Mandates could
be set on the use of low-carbon hydrogen forfeedstocks and eventually extended to outrightbans on high-carbon hydrogen use.196
Hard-to-abate sectors such as steel, heavy-dutytransport and chemicals require prioritisation forhydrogen usage over those such as heating which
are currently possible and cheaper to electrify.
Public sector funding for pilot programmes,
such as the EU’s InnovFin facility, can prioritise
these sectors, particularly as many hydrogentechnologies are currently still only at pilot stages
and require scaling.
Mobility will also provide a large market forhydrogen. Liquid hydrogen, ammonia andsynthetic aviation fuel for heavy-duty vehicles,
shipping and aviation can provide large scale

H2
H2

23

demand. These are not as likely to be electrified,given the size and weight of the batteries required
for their power. While synthetic aviation fuels
will see a considerable cost premium, hydrogenfuel electric vehicles (FCEVs) would break evenwith diesel in HGVs if hydrogen were available
at USD4.5/kg – commercial-scale pilot projects
are already in the pipeline with significantly
lower planned hydrogen prices. Mandates could
help drive uptake in shipping and aviation,
setting strong targets to stimulate synthetic fueldevelopment; this could also prevent emissions
targets from being met with damaging biofuels
practices, as seen with corn ethanol in the US.
In sectors where other decarbonisation
technologies exist, transition incentives canremain technology-agnostic to ensure costeffective application. While public transport
will mostly be electrified, certain applications,such as long-distance, remote and high-altitude
railways will find hydrogen more cost effective.
Public transportation fleets provide a significant
opportunity for long term offtake agreements tostimulate production, see page 26.
Demand creation is vital for the scaling up of
decarbonised or low carbon energy sources.
Market signals such as phase-out dates will help
stimulate this and increase acceptance of thegreen premium.197 These can also be supported
by manufacturing targets for electrolysers andinvestment support for large scale manufacture
and installation.198 While it is often best for policy
to be technology-neutral, allowing the most costeffective and efficient technologies to come to thefore, there is a role for policy which accelerates
economies of scale and the experience curve fora specific technology. Competitive electrolysis
requires 70GW capacity, and green currently has afunding gap of USD20bn with grey hydrogen.199

Preventing bottlenecks
Support for hydrogen
distribution infrastructure
is a medium-term priority
under the EU Hydrogen
Strategy (page 22) because
initial supply and demand
are expected to be co-located. As hydrogenproduction costs fall and hydrogen use becomes
more widespread, costs related to its distribution
will play an important role.
While attention has mainly been focused on
decreasing costs and boosting supply/demand,investors’ concerns around distribution
infrastructure need to be addressed, anddistribution infrastructure undergo cost decline.
This requires a strong push from public sector toensure midstream distribution not neglected –cannot solely focus on supply and demand. Thereis a risk of hydrogen project failure as a result of alack of distribution infrastructure between supply
and demand locations: “project on project risk”.200

The EU single market provides a strong
advantage for developing a largescale
infrastructure network and a sophisticatedhydrogen economy. The recommendationsof the Strategic Forum for Important Projectsof Common European Interest (IPCEI) are to
take joint action across several MS to support
a hydrogen supply chain. The IPCEI instrument
enables State aid to address market failures forcross-border integrated hydrogen projects.
Policies related to low-carbon hydrogen
distribution need to support different methodsof transporting hydrogen. Support measuresfor hydrogen distribution will be challenging to
implement due to the complex cost differentialsof pipelines, shipping and trucking. Hydrogenpipelines represent the cheapest option for
distribution for short- and medium-term
distances.201 Pipelines can transport ten times theamount of energy carried by electricity lines andhave nearly the same CAPEX as fossil gas pipelines.
In particular, pipelines are the most cost-efficientmeans of distribution in the long term when morethan 10t/day of hydrogen are transported.202
However, in the short- to medium-term, colocation
is most competitive and will often outcompete
transport. The TEN-E PCI mechanism is well suited
to provide support to hydrogen distribution as
projects are evaluated on a case-by-case basis.
Hydrogen long-distance distribution is also highly
dependent on partnerships between countries anddeveloping common standards, tackling issues
such as safety risks, operation and liability andinternational guarantees of origin and CO2 emissions.

Spurring innovation
Establishing research anddevelopment (R&D) programmes
is one of the first steps forgovernments to support nascenttransitional technologies. R&D
programmes can be target
particular technical challenges, harnessing academic
and industrial expertise. The IEA estimates European
spending on energy R&D at USD8.5bn in 2020 and
USD8.9bn 2019,203 however, the EU’s rate of public
investment in clean energy technologies neededfor decarbonisation is the lowest of the major
economies (0.027 % of GDP in 2019).204

R&D

loans, loan guarantees or equity-type financing
of EUR7.5-75m to innovative demonstration
projects in energy transformation.205
Private investment can also drive R&D, private
equity (PE) and venture capital (VC) investments
to support early-stage projects. Green PE and VC
hold growth potential – the European Investment
Fund’s (EIF) SME, PE and VC support206 could
integrate climate impact, providing morefavourable guarantees and equity on green
projects. See page 25 for more on guarantees andsubsidies.

Recommendations to facilitatetransition to hydrogen• The Hydrogen Strategy’s roadmap envisages
large-scale deployment to begin after 2030.
Increasing this ambition will encourage
investment and encourage hard-to-abate
sectors to invest in hydrogen in the next
investment cycle.
• Uncertainty over demand, distribution, or
supply can reduce investibility of hydrogenprojects. Clusters, co-locating supply anddemand can overcome this and represent a
powerful strategy to rapidly grow the hydrogen
economy. Targeting cluster development now
rather than in the second phase of the roadmap
would help overcome transport costs.
• Large-scale installation of grid-connected
electrolysers will increase electricity demand– planned electrolysers in RED II would
consume 50% of RED II planned renewableelectricity supply growth and so hinder griddecarbonisation, unless accompanied by new
dedicated renewables installations.
• Sector transitions need to keep the whole
economy transition in mind; the emissions
reduction potential of hydrogen significantly
varies from sector to sector. To ensure rapid
emissions reductions by 2030, hydrogen use
will need to be prioritised for sectors withthe highest emissions reduction potential.

Cooperation and collaboration are crucial to
the success of R&D programmes. Collaboration
with industry allows identification of R&D
priorities, strengthening knowledge flows.
Such industrial collaboration is also seen in thedevelopment of hydrogen clusters. International
cooperation will also enhance innovation.
This will also help facilitate potential futurehydrogen trade deals, enabling the EU
Hydrogen Strategy’s trade ambitions.
An example of R&D support that can boosthydrogen investment is the EIB’s InnovFin
Energy Demo Projects initiative. This provides

Accelerating the fossil gas transition to net zero Climate Bonds Initiative24

6. Mobilising investment to meet 1.5°C
Investment in the energy transition needs rapid
scaling, involving reorientating of flows fromhigh to low carbon, and the growth of overall
energy investment. This can be facilitated bygovernment action to enable pilot projects andde-risk investments, central banks incorporatingclimate factors into monetary policy andprudential regulation, and regulators increasingclimate risk considerations.
Nascent, relatively unknown projects require
public resources to de-risk investment – as seen
in early stages of wind and solar development.210
Alongside direct public funding, governments
can establish credible long-term fiscal andregulatory frameworks, e.g., contracts fordifference, to lower the associated risks borne byinvestors. Public-private partnerships (PPPs) can
encourage private capital flows into higher risk
areas. Blended finance uses various instruments
to crowd in private capital including guarantees,
insurance, currency hedging, technical assistancegrants, first loss capital, and loan syndication.
However, such mechanisms may not be required
across all applications of these technologies ashydrogen production is beginning to be proven atscale by private actors. PPPs may hold most value
in challenging projects such as largescale hydrogentransmission networks. Feed in tariffs can help
overcome price differentials between conventional
high-carbon and green production and offer
long-term security to renewable energy producers.
Feed in tariffs were instrumental to wind and solar
scaling, however, they are increasingly replaced byinstruments which also enable competitive pricing– such as contracts for difference or auctioning.211
A key EU tool to finance towards innovativetechnologies is the Innovation fund,implementation of which is set to be brought
forward under REPowerEU to accelerate theindustrial transition away from fossil gas.

De-risking investment
Guarantees are importantenablers of nascenttechnologies such as greenhydrogen production. They
address the investment riskof first-movers and encourage
private sector investment.212 Guarantees canbe fiscally efficient as they mobilise additional
investment, therefore, having a far greater
impact than direct investment and result in lower
balance sheet liability than direct subsidies.
Green guarantees and subsidies will all needalignment with the EU Taxonomy to ensure they
are supporting robust green investments.
Guarantees can mobilise massive investments,
provide convening support to platforms
orchestrating value-chain collaborations andde-risk demonstration funding, for example, theInvestEU Fund, 30% of which must support climate
investments which aims to mobilise over EUR372bn
of public and private investment through an EU
budget guarantee of EUR26.2bn.213 75% of theguarantee will be implemented by the EIB, which
has already committed to becoming the EU’s
Climate Bank and to raise climate financing from
25% to 50%.214 This has raised concerns over thevalue of providing guarantees to the EIB, andwhether these will create additionality, given
the experience of the Juncker Plan, i.e. whether
the EIB would have funded the guaranteedprojects anyway.215 Further specifying minimum
allocations of the Fund to innovative climate
investments will ensure greater additionality.
Subsidies also mobilise private investment. In
2019, renewables received EUR78bn in subsidies.
It is important that subsidies target those sectors
for which there is the greatest need to improve
investibility, such as hydrogen. Many different
EU subsidy schemes are available to hydrogenprojects, however, EU-level subsidy schemes willoften require MS supporting schemes to ensure
their accessibility.216 Establishing clear phase-out
dates for subsidies also ensures that schemes
do not stifle competitiveness and innovation –private investment has been proven to step inonce subsidies are phased out.217

Improving renewable energy
competitiveness
Carbon contracts fordifference (CCfDs) provide low
carbon electricity generatorswith revenue certainty, withthe producer paid a subsidy
to cover the cost differencewith conventional electricity production. This
improves the cost competitiveness of renewableenergy production.
Unlike feed in tariffs, CCfDs are auctioned toensure competitive pricing. However, dependingon their scope, their contribution to scaling
innovative technologies may be limited if they
are technology agnostic. In this case, auctions
may be dominated by mature technologies,
limiting the support available to novel
technologies such as hydrogen.218 For this reason,
the UK Government is consulting on a separate
CCfD scheme for hydrogen.219
The REPowerEU communication declared
the Commission’s intention to bring forward
the implementation of the Innovation Fundto support industrial switch to electrificationand hydrogen, including through an EU-wide
scheme for CCfDs.220 CCfDs also come under the
new EU state aid guidelines. The guidelines willallow governments to support clean technology
with CCfDs.

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

The UK CCfD scheme for low carbon electricity
generation provides an example to the EU fordevelopment of a hydrogen CCfD scheme. The
scheme establishes a 15-year period of payments
based on the difference between the production
cost of low-carbon energy and average market
energy prices. This provides direct protection
to developers from volatile wholesale prices, acritical issue when considering projects with highupfront costs and long lifetimes. Additionally,
they protect consumers from paying a premium
to suppliers when electricity prices are high, andso can contribute to the Just Transition. The
competitive nature of the programme means thestrike price (i.e., the agreed price on the contractfor difference) decrease over time; reflecting
and incentivising decreasing technology costs.
The scheme is funded by a levy on electricity
suppliers (the Supplier Obligation), and so
provides an additional transition incentive.221
Technology agnostic CCfDs may not contribute toscaling innovative technologies. Sector-specifichydrogen CCfD programmes could help rapidly
grow the industry in those sectors for whichhydrogen is the most viable decarbonisation
method, without providing blanket support
which could create inefficiencies. An EU-wide
low-carbon hydrogen CCfD programme could
promote the transition of existing hydrogenproduction, and support green ammonia andsynthetic fuel deployment.222 Alignment with
EU hydrogen standards and regulations such as
the Taxonomy and RED II can ease deployment.
Additionality requirements can protect
renewable electricity expansion. Sector-specific
CCfDs can also help target hydrogen deployment
to those areas where it will be most needed for
decarbonisation. Germany is already planningpilot CCfDs to promote green hydrogen in thehard-to-abate sectors of steel and chemicals.223

Facilitating financial innovation
Financial innovation is intrinsic
to any financial system but
suffered an important setbackin the aftermath of the 2007
global financial crisis. The
subprime mortgage market in
the US and emergence of complex financial products
were a catalyst for deep market disruptions andthe bankruptcy of major financial institutions.224
However, financial innovations such as the CCfDs
outlined above have helped overcome financing
challenges of the energy transition, namely
long-term investment horizons and associateduncertainty. Supportive frameworks for the creationof new financial mechanisms could complement
the existing set of financial mechanisms currently
used to finance transition activities.
Regulatory compliance requirements can25

prevent financial players, especially smaller
ones, from innovation. Therefore, many
regulators are establishing so-called regulatory
sandboxes that allow financial products to betested in a controlled environment, exempt
from compliance with regulatory requirements.
Complying with such regulatory frameworkis the biggest barrier to entry for financial
services providers. Once these are tested, andif successful, they shall be launched on to
the market and required to comply with theregulatory framework in place. Many European
countries have established their Sandboxes,225
but the UK’s Financial Conduct Authority is apioneer in promoting innovation in finance tosupport the transition to net zero through its
Green Fintech Challenge226 and Digital Sandbox.227
Securitisation was also seen as contributing to
the GFC. The EU securitisation market has notrecovered since despite the issues lying with theUS, not the EU, market. The European Banking
Authority has issued recommendations topromote sustainability in the EU securitisation
market to foster transparency and credibility andsupport its sound development.228 Institutional
investor demand for securitized solar assets(asset-backed securities) is growing,229
and therefore, a sound framework for the
securitization of hydrogen-related assets could
help securing additional financing to the sector.
Other financial innovations can be applied to
the financing of the transition of the gas sector,
such as sector-specific exchange-traded funds(ETFs). LGIM issued its USD500m L&G Hydrogen
Economy UCITS ETF in 2021 to allow investors
to gain exposure to this sector.230 ESG ETFs are
growing in popularity.231 ESG funds have recently
been targeted by climate activists to exclude
gas-related stocks due to the war in Ukraine andfollowing the proposed Taxonomy Delegated Act
including nuclear and gas.232
The European Investment Bank’s InnovFin
Advisory service guides Research and Innovation
projects to improve their access to financing. The
InnovFin Advisory has advisory agreements withmajor industry representatives such as Hydrogen
Europe, the Hydrogen Council and France
Hydrogène, to promote innovative financial
schemes to fund large-scale hydrogen projects.233
The InnovFin Advisory helped H2 Mobility
Deutschland, a consortium and supported by theGerman Transport Ministry, to design a financing
model to maintain and expand a network of 100
hydrogen refuelling stations in Germany. The
Advisory Hub identified several public-private
partnership options that could be used to financethe project, ensuring public funds are invested
efficiently in the project.234
The EIB also provides via its NER 300 Advisory
programme235 advice to early-stage innovative
low-carbon projects which are preparedfor commercial roll-out. This will increasechances of receiving financing from EIB andother EU programmes, namely the European
Commission’s Innovation Fund236, whicharticulates the European Commission’s financing
strategy for climate action. This Fund is financed
by EU ETS income. Its first Large Projects
call amounted a total of EUR1bn awarded
to a total of 7 projects. The second, totalling
EUR1.5bn,237 and received 138 applications
amounting to EUR12.1bn, mainly from Spain,
France and Germany, 25 of which were related
to hydrogen.238 This oversubscription will require
careful prioritisation by impact. It also suggests
the Commission significantly increases theavailable funding in future calls since clean
technology investment is a key lever for the EU toachieve its climate objectives. An additional callof EUR100m for small-scale projects with capitalcosts under EUR7.5m will be launched in 2022. As
the Innovation Fund is funded by ETS revenues,
a faster phase out of free permits would permit
raising the total financing available to develop
much-needed technological innovation.239

Encouraging green
public procurement
Government procurement canplay a significant role in energy
sector transition. Not only
does it account for a significant
portion of emissions but
long-term offtake agreements
generate demand security. This can ensure
investor confidence on returns and price stability.
While public procurement provides greater
opportunities in the steel and concrete
transitions, given the large share of demand frompublic buildings and infrastructure, there are still
opportunities to transition energy demand.240
Given current uncertainty over demand forhydrogen, and a need to stimulate both supply
and demand to grow the sector and procurement
could help stimulate the hydrogen economy.
Public bus and train fleets could provide captive
recurring demand, when electrification is notpossible. Hydrogen-powered trains are plannedin Germany241 and Italy242 to replace diesel trains
on long train lines where electrification would
entail higher costs. These can also boost local
industry and establish hydrogen clusters, such as
in the Italian case.
The EU has published voluntary GPP criteria so as
to facilitate the inclusion of green requirementsin public tenders.243 These voluntary criteria
could be gradually replaced with mandatory
criteria, embedding preferential spending acrossministerial budgets, ensuring climate policies
are realised in all sectors of the economy.
Ministries could be obliged to incorporate
climate considerations into cost assessments or
to allocate a certain portion of budgets to low
carbon solutions. Given the large purchasing
power of governments, such policies can not only

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

send a market signal but also make a significant
contribution to sustainability targets. These criteria
can also be aligned with the EU Taxonomy criteria,
ensuring consistency of green investment.
Targeting of such spending to less mature green
technologies can also act as a “demand-pull”
driver, driving down their cost, as seen with solar
and wind installations.244 Green procurement
policies (GPPs) can be used to stimulate local
economies. GPPs can also improve economic
stability, insulating government spending fromexternal shocks such as volatility in oil prices.
GPPs could also enable decarbonisationof heating. District heating, whereby many
individual houses are centrally heated by one
source, is one solution to replacing gas boilers.
A GPP for the heat supply agreement could
establish an offtake agreement with a renewableelectricity supplier. This could also help stimulate
the local economy as the district heating system
would require installation and operation of heatgeneration and transmission infrastructure. Sucha scheme would also align housing policies
with the proposed extension of the EU ETS todomestic fuel providers from 2026 and revision of
the Energy Taxation Directive to align heating fueltax rates with climate policies.245

Initiating globalhydrogen trade
Estimates predict that the
global hydrogen market willreach USD 2.5 trillion by midcentury.246 The EU’s hydrogenstrategy anticipates substantial
imports of green hydrogenwith 40 GW of the 82 GW planned electrolysers
located in the EU Neighbourhood,247 REPowerEU
is set to increase this. North Africa’s highrenewables potential means it could provide costcompetitive green hydrogen to Europe. Similarly,
eastern and southern Europe may also be able
to build hydrogen export markets. The Hydrogen
Strategy suggests the EU actively promote
new opportunities for cooperation on cleanhydrogen such as agreements with European
Neighbourhood. There is a danger posed byoverreliance on expected imports. For example,
the 40 GW of electrolysers envisaged in the EU
Neighbourhood would require 77 GW RE capacity
but the 2021 capacity in Ukraine and North Africa
was 22 GW.248
REPowerEU plans pilot projects on renewablehydrogen production and transport in the EUneighbourhood, starting with a Mediterranean
Green Hydrogen Partnership. Hydrogen imports
from the EU Neighbourhood also pose a risk thatexports cannibalise much of these countries’
RE expansion, limiting their own transitions,particularly given some countries’ current low
RE penetration and largely untapped renewablepotentials. Green hydrogen production for26

the European market would likely provide
companies with the highest economic returns on
their electricity. This would substantially slow thetransition of the local electricity grid away fromfossil-based generation. High demand for hydrogenfrom the developed world has the potential
to exacerbate low-income countries’ resource
curse. Trade agreements for hydrogen, or indeed
renewable electricity will need caveats beyond the
RE additionality requirements suggested for the
EU that ensure contribution to local transition.
Carbon pricing and the CBAM have been seen
as limiting international trade. A green window
offers an opportunity to compensate for CBAM
trade curtailments. A green window would
entail reducing tariffs on environmentallyfriendly goods and services and products thatare produced using green processes, such as
low-carbon hydrogen: “zero tariffs on zerocarbon”. Green hydrogen has been suggested
as a potential transatlantic trade flow from the
US.249 There is potential for the launching ofinternational shipping routes – utilising lessons
from the growth of the global LNG market.250

Reorienting investment flows
The European Central Bank
(ECB) presented an Action
Plan to include climate changeelements in its monetary
policy strategy as part ofthe monetary policy generalreview251 and is committed to develop new
experimental indicators covering green financial
products and the carbon footprint of financial
institutions. The ECB will follow-up in 2022 withstep-by-step enhancements of such indicators.252
ECB has analysed the integration of climate riskin the European banking sector, covering 112
directly supervised banks with combined assets
of EUR24tn, and concluded that none wereclose to meeting its expectations on climate
and environmental risks253 and called on themto address their shortcomings. In some cases,banks will receive a qualitative requirement as
part of the Supervisory Review and Evaluation
Process (SREP). The ECB will gradually integrate
climate and environmental risk into its SREP
methodology. This will eventually influence Pillar
2 capital requirements. The ECB will need tocontinue pushing for the integration of climate
risk in European banks’ balance sheets.
Prudential regulation can ensure financial
resilience to transition risks. Inefficient investment
decisions in the gas sector have important
implications in the financial system: Central banksneed to address the risk of stranded assets posedby investments in fossil gas infrastructure fromfinancial institutions which could potentiallyjeopardise the whole financial system’s stability.254
In this sense, prudential adjustments can be madeso as to preference green lending or discourage

lending to assets liable to climate risk. Risk
weighting of assets can be made more sensitive
to climate risk, for example, People’s Bank of China(PBOC) gives banks a higher macroprudential
assessment score if they hold a high number ofgreen assets.255 Whilst there are concerns overthe impact of adjusting risk weighting on bankstability, green supporting factors can overcome
the higher risk weights often on green assets
given their longer payback periods but require
greater risk sensitivity provided by taxonomy anddisclosure requirements.256
Basel III’s Countercyclical Capital Buffer (CCyB)
is a powerful macroprudential tool which aims
to protect the banking sector from periods ofexcess aggregate credit growth that have often
been associated with the build-up of systemwide risk.257 A countercyclical carbon capital
buffer could be implemented, acting similarly
to the CCyB to give climate-sensitive resilience
to banks or setting exposure restrictions forcertain assets or sectors.258
Central banks can vary capital requirements
according to an FI’s climate risk exposure. Capital
buffers would be set higher for those with greater
exposure to unsustainable activities because theseFIs would be at greater risk of default. Finance
Watch has proposed a “one-for-one” capitalrequirement rule for the financing of new fossil
fuels: that for each euro/dollar that finances new
fossil fuels projects, banks and insurers have a euro/
dollar of their own funds held liable for potential
losses. Conversely, capital requirements could be
discounted according to an FI’s green lending. In
2019 the Hungarian central bank, Magyar Nemzeti
Bank (MNB), did so, announcing a preferential
capital requirement against balance sheet exposure
to energy-efficient housing loans.259 The discountreflected the reduced risk of default on green
mortgages.260 Similarly, Lebanon’s CB, Banque duLiban, differentiates reserve requirement ratios
according to the amount of bank lending flowing to
renewable energy and energy efficiency projects.261
The ECB has carried out a 30-year economywide stress test, the results of which showed
concentration of climate-related risks in certain
regions, sectors and companies.262 This informs
CB and wider EU policy. Communication of
the stress test results can also aid the real
economy – for example, in all sectors, a lack oftransition increased the risk of default. MS CBs
could carry out stress testing to identify national
vulnerabilities. These could be focused on theenergy transition in CBs with lower capacity forstress testing. Energy transition stress tests could
follow the example of De Nederschlande Bank
(DNB), whose 2018 stress test showed that a
disruptive energy transition would have a greater
impact on financial institutions, with losses
mitigated by early transition policies.263
Monetary Policy can be adjusted to include
assets’ climate risk. The ECB’s quantitative easing

Accelerating the fossil gas transition to net zero Climate Bonds Initiative(QE) programme has benefitted all corporatebond issuers, especially larger corporates, andgenerally contributed to lower yields. Currently,
the ECB’s bond purchases are driven by the‘market neutrality’ principle: the composition of
corporate sector purchase programme (CSPP)
holdings is generally intended to reflect theexisting eligible bond market structure. The ECB
applies this approach by ensuring its purchases
mirror the eligible CSPP bond universe bycountry, sector, and rating group.
However, this principle disproportionately
favours carbon intensive sectors, particularly
the fossil fuel sector, as it relies on backwardslooking metrics.264 According to Reclaim
Finance, the ECB has likely bought about
EUR15.3bn of fossil fuel bonds and EUr80bn
bonds from carbon-intensive activities with its
COVID-19 QE expansion.
ECB increased the number of Shell, Total Energies,
Repsol, Eni and OMV bonds by 16.2% from April
2020 to September 2020. Some Total and Shellbonds held by the ECB will not be repaid before
2040 and 2039 respectively, while Repsol, OMV
and Eni bonds mature in 2033, 2034 and 2031. This
discredits the ECB’s July 2021 climate roadmap.265
These companies are all diverging from transition
pathways. None has ceased exploration or new
production approvals or announced credible
production reduction plans. Notably, Shell,
Total, Repsol and Eni are aggressively betting on
LNG with 20 new LNG terminal projects, despite
the IEA stressing that such projects are risky
and unnecessary.266 Carbon Tracker found thatplanned fossil fuel capex exceeds the IEA’s STEPS
scenario that drives global warming to 2.7°C by
an average 65.6%267
Green QE is currently being considered bycentral bankers across the globe. Negative
screening is one of the most common
sustainable portfolio management tools
used by central banks and is used chiefly in
CB’s equity holdings.268 For example, in 2019
Sweden’s Riksbank applied climate riskweightings to a portion of its SEK500bn foreignexchange reserves. This resulted in it excluding
bonds issued by the highly fossil fuel-exposed
provinces of Alberta, Canada and Queensland
and Western Australia.269 Riksbank also applied
exclusion criteria to its corporate bond purchaseprogramme, requiring bond issuers comply withsustainability standards to be eligible for the QE
programme.270 The Bank of England published
how it will green its Corporate Bond Purchase
Scheme (CBPS) to account for the climate impactof the issuers of the bonds held, targeting a
25% reduction in the weighted average carbon
intensity of the CBPS portfolio by 2025, and fullnet zero alignment by 2050.271 Exclusion of assets
with high climate-risks from asset purchases canalso help to reduce the risk to the central bank’sbalance sheet.272

27

Negative effects on credit flow to corporationsin hard to abate sectors suggest that central
banks could look at incorporating transitionlabelled bonds in their corporate bond purchaseprogrammes. Central bank intervention could
also push for financing of transition specificallyand not just “green” activities.
The energy transition poses a financial risk
due to the impact of energy prices on inflation.
Following the 2021/22 winter energy priceshocks, the ECB has raised the possibility of theenergy transition causing prolonged inflationof energy prices. The possibility of the energy
transition causing energy prices to impact
consumer price inflation was one factor in its
decision to reduce the pace of asset purchases.273
The ECB can consider, in order to provide afurther boost to the green bond market, runninga permanent QE programme holding exclusively
green and other labelled bonds alone, even once
current expansive monetary policies are halted.274

Recommendations to mobilise
investment to meet 1.5°C• Guarantees and subsidies can de-risk clean
energy investments but if not targeted canbe absorbed by more mature technologies.
Requiring a certain level of allocation tonascent technologies can ensure they facilitate
those projects which are most in need ofinvestment. Carbon contracts for difference
represent a powerful tool to grow renewables
and hydrogen production.
• Financial innovation is limited by theregulatory environment. The EU could consider
establishing regulatory sandboxes to facilitate
financial innovation.
• The EU has green public procurement criteria,
but these are currently voluntary. Establishinga timeline for introduction of mandatory
criteria in line with the EU Green Deal would
enable the embedding of preferential spendingin ministerial budgets. Aligning green public
procurement standards with the EU Taxonomy
criteria will ensure consistency of green public
investment.
• To compensate for CBAM trade curtailments,
trade negotiations can be used to establish
green windows; preferential trade agreements
on green goods such as low-carbon hydrogenand ammonia.
• The ECB has recognised that traditional asset
purchase along market neutrality principles
overly favours fossil fuel assets. Prioritisinggreen assets in the corporate bond purchaseprogramme will address this imbalance.
• Given the importance of bank lending inthis sector, the ECB could increase reserve
requirements according to carbon intensity oflending, encouraging origination of green debt.

Accelerating the fossil gas transition to net zero Climate Bonds Initiative28

7. Conclusions
The fossil gas value chain stretches acrossmuch of the economy; used domestically andindustrially. The fossil gas and wider energy
transition will result in a reshaping of the global
economy. The transition will be met by manydifferent activities, from demand reduction
to electrification to hydrogen use. Therefore,transition policies will need to be equally wideranging, while also providing direction andcertainty for investment.

NO NEWILSS

GAS INFRAS

R
UCTU ETRFO

The transition is also complicated by thewide range of actors in the sector, with strong
vested interests, often backed by powerfullobbying capabilities. The success of the fossil
gas transition relies on strong policy support.
Policymakers not only set out the conditions
required for a net-zero energy sector but also
play a major role in determining which pathways
are taken. The Climate Bonds Standards for fossil
gas and hydrogen (still in development) and thispolicy package provide science-based guidanceon what constitutes a truly 1.5°C-aligned fossil
gas sector transition.

The most important role of policy in this process
is to provide investment clarity, certainty
and direction. Policies must be coherent
and aligned, to encourage rapid reductionof fossil gas demand, facilitate investment in
the transformation of fossil gas companies
and assets, and enable scaling of nascenttechnologies.

against decarbonisation strategies which mayhinder rapid decarbonisation or threaten the Just
Transition. For example, switching to marginallymore efficient combustion technologies may lockin years of future emissions, while gas blending
may land consumers with the cost of developinghydrogen networks despite not being thebeneficiaries of them.

Transition of the fossil gas sector requires
business model transformation, renewableelectricity expansion, energy efficiency gains,and development of a low-carbon hydrogen
economy. Policymaking will need to allow
flexibility over the means by which targets are
implemented so as to allow for implementationof the most cost-effective technology for eachcontext. However, there is also a need forstrategic policy to prevent bottlenecks andenable the reshaping of supply and demand thatthe net-zero energy system requires. Policies willneed to scale production and create demand,
whilst ensuring strategic application of what
will be a limited resource and including careful
additionality requirements to prevent electrolysis
from cannibalising large swathes of renewableelectricity capacity

Large capital flows are required for thistransition, including an increase in overall energy
spending. Policymakers can prevent this fromdiscouraging action; while costs of transition
are high, these are dwarfed by the cost ofinaction.275 There is large investor appetite for
Paris-aligned investments, but existing energy
sector investment is dominated by fossil fuels.
The challenge is largely in redirecting capital
flows, and in ensuring strategic investments tocreate a reliable and comprehensive renewableenergy system to replace the fossil-dominatedenergy system.

The policy toolbox for this transition is therefore
wide-ranging; including economy-wide standards
and regulation, sector-specific support such as
contracts for difference and strategic legislationsuch as TEN-E. Policies can also safeguard

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

While gas will continue to play a role in theenergy mix up to 2050, that does not imply thatit should qualify as a “transitional activity”.276
Attempts to define unabated fossil gas power
as green/transitional will create confusion,
possibly endangering investment in other green
projects.277 The transition of the fossil gas sector
must also not hinder the transition of othersectors. A holistic approach to transition, as set
out in this policy package, will ensure wholeeconomy emissions reductions.

29

Appendices
Appendix I: Financing trends

Figure 8. Annual global fossil gas sector bond issuance303• There is high demand for green bonds

Unlabelled• The fossil gas sector needs investment totransition its operations to align with Fit for 55
and Climate goals

GreenTransition/SLB30
25• Clear finance criteria setting out investment
standards to transition fossil gas are needed to
guide issuers and investors

20

USD34.79bn bonds were issued in the fossil
gas sector in 2020, of which USD5.44bn weregreen bonds (less than 2% of total green bondissuance). With green bond appetite still outpacing
supply, this market and the nascent transition/
sustainability-linked bond market holds highpotential to fund the sector’s green transition if
clear Paris-aligned criteria are maintained.

15

USD Billions

10
5
0
2014

Global energy investment is set to rise to USD1.9tn
in 2021, a 10% rise on 2020, bringing investment
back to pre-pandemic levels. However, investment
trends are changing, with investment composition
shifting away from traditional fuel production andtowards power and end usage, see Figure 9: Global
Energy Investment. Upstream oil and gas supply
has seen a significant drop on 2019 investment,
whilst renewable power has seen a steadyincrease, see figure 5. The IEA attributes the 2021
upswing to both a cyclical response to recovery
and a structural shift in capital flows towards
cleaner technologies.278

2015

2016

2017

2018

2019

2020

2021

Q1
20222

Figure 9. Global Energy Investment304
Buildings

Industry

Transport

Power generation

Energy infrastructure

Fuel production

2000

1500

Investment in renewables account for 70% new
power generation investment, with investment
thriving in markets with well-established supply
chains and regulatory frameworks that provide
cash flow visibility.279 Whilst this change ininvestment patterns signals the energy transition
is indeed underway, this transition requires
acceleration. Policy is required to both ensure asmooth and just transition, but also ensure thetransition follows the steep emissions decline
required to meet the 1.5-degree target.

USD Billions (2019)

1000

500

0
2017

2018

2019

2020

2021E

Figure 10. Global energy supply investment by sector305
500

300
200
100

Accelerating the fossil gas transition to net zero Climate Bonds Initiative

E
21

19

20

E

20

20

20

21

20

NuclearOil and gas
Fuel supply

20

19

20

E
21

Fossil fuel
power

20

19

20

20

20

E

Renewable
power

20

20

21

20

19

20

E

Low-carbon
fuels

20

19

21

20

20

20

E

Coal supply

20

21

20

20

19

Mid/
downstream

20

E

20

21

20

20

19

20

E

Upstream

20

21

20

20

20

20

0

19

USD Billions (2019)

400

Electricity
networks andbattery storage

Electricity
30Appendix II: Cost of greenhydrogen technologies
While the cost of electrolysers has fallen 60%
since 2010,280 it is currently USD800/kW. As thetechnology matures and scaling introduces
cost efficiencies, the cost is expected to decline
significantly and could be USD200/kW in 2030
and USD100/kW in 2050.281 Higher capacity
factors will also reduce cost, as the CAPEX isdistributed over more operating hours.282 Givenhigh electrolyser costs, low-cost electricity isneeded (USD20/MWh) to bring green hydrogencomparable with grey.283• Levelized cost of storage (LCOS) of hydrogen insalt caverns is estimated to be between EUR6 /MWhH2 (monthly cycling) and EUR26 /MWhH2(biannual cycling), in rock caverns EUR19 /MWhH2 (monthly cycling) and EUR104 /MWhH2(biannual cycling), and depleted gas fields
EUR51-76 /MWhH2• Levelized cost of transmission (LCOT)
of hydrogen from retrofitting fossil gas
infrastructure is estimated at EUR3.7m/
MWhH2/600km, LCOT of new infrastructure
estimates vary from EUR4.6-45m/
MWhH2/600km• Levelized cost of distribution: in new
infrastructure EUR0.05-1.61 /MWhH2/km,
refurbished EUR0.11 /MWhH2/km, and by truck
EUR0.54-2.46 /MWhH2/km284
Scale-up will be the biggest driver of cost
reduction. 90% of cost reduction for nontransport applications are from scaling up
supply chain, 70% cost reduction for transportapplications are from scale-up of end-use
equipment. Scaling can target critical tipping
points, e.g., 70 GW electrolyser capacity.285
Electrolyser manufacturer Nel is targeting
green hydrogen production costs of USD1.5/
kg (competitive with grey) by 2025. The German
industrial conglomerate Siemens also targets
USD1.5/kg green hydrogen production by2025 based on large-scale commercial
projects in operation. Adani in India is targeting
USD1/kg in 2022.286

Appendix III: EU Stakeholders• At EU level, the European Commission is
responsible for drawing up proposals for EU
legislation and for implementing the decisionsof European Parliament and Council. The
European Commission’s Directorate Generalsof Industry, Environment, Energy, Climate andFinancial Services produce legislation that
directly impacts the gas industry and market.
• Fossil gas industry players and associations
are powerful stakeholders, with strong vested
interest in the continued expansion of the fossil
gas sector and so have put a lot of resources
into labelling it as transitional. However, theseplayers also hold valuable resources for thegas transition, with some already significantly
diversifying their business into renewables andgreen hydrogen to capture the opportunities of
the transition.
• Hydrogen associations are working topromote the role of green hydrogen in thetransition, with support from the European
Commission, as are research bodies and nongovernmental organisations.
• Environmental NGOs, active both at national
and EU level, are pushing for a quick transition
to net zero societies and the removal of fossil
gas from the energy mix of EU Member States.
Industry stakeholders represent a powerful lobby
in favour of the status quo calling for continued
or even expanded use of fossil gas, rebranded as“sustainable, natural or decarbonised gas”. Thesetactics are bearing fruit in Europe with increasing
confusion over the sustainability of gas and therisks of asset stranding, runaway climate change,
continued energy insecurity and energy poverty
all successfully obfuscated by fossil fuel lobbyists.

Fossil gas industry stakeholders
Eurogas represents European fossil gas
wholesale, retail and distribution sectors. It
promotes fossil, renewable and decarbonised or
low-emissions gas287 as part of the transition.288
Gas Infrastructure Europe is the gas
infrastructure operators’ industry association,envisaging new gas infrastructure development
as the backbone of the 2050 energy system.289
Both are part of GasNaturally, a partnership ofeight associations representing the European
fossil gas value chain. GasNaturally promotes
the use of fossil gas as part of the energy
transition, claiming its role in transitioning awayfrom coal and balancing the energy grid.290 It
also strongly promotes CCS and blue hydrogenproduction for transition.
Europe’s biggest gas transmission system
operators (TSOs) are Enagás (Spain), Fluxys(Belgium), GRTgaz (France) and Snam (Italy),
together owning more than half the EU’s LNG
terminals and over 100,000km of pipeline291 TSOs
see gas sector transition as a case of replacing
fossil gas with hydrogen and/or biogas, so as
to minimise changes to their business models.
For example, Snam aims to be net zero carbon
by 2040 (scope 1 and 2 emissions),292 transport
entirely decarbonised gas (blue/green hydrogenand biomethane) and is testing hydrogen
blending in fossil gas supplies.293

energy share in 2020, using green bonds andloans to fund the green transformation and buildout of green energy. It is also planning renewablehydrogen projects centred on industrial centres
such as the Dutch-Flemish North Sea Port cluster,partnering with industry to create regionalhydrogen economies.294
Enel plans to increase its green hydrogencapacity to over 2 GW by 2030, developing aseries of projects for the production of greenhydrogen by installing electrolysers poweredby renewable energy and located nearconsumption sites. Enel sees green hydrogenas the only sustainable hydrogen and promotes
its use for hard to abate sectors rather than griddecarbonisation.295

Hydrogen economy stakeholders
The Renewable Hydrogen Coalition aim to
position Europe as the global leader in greenhydrogen, providing proposals for the scaling
up and market uptake of green hydrogen. They
promote green hydrogen over other forms to
avoid carbon lock-in and GHG emissions ofblue, as well as to balance the European energy
system and use excess renewable electricity.296
Pureplay hydrogen companies are often smallscale chemical feedstock specialists, but larger
companies include Air products in France,
targeting hydrogen mobility297 and DH2 Energy
which aims to scale hydrogen production toreach competitivity with fossil fuels in industry,
power generation, heat etc.298
The European Clean Hydrogen Alliance is
one of the key initiatives of the EU Hydrogen
Strategy for a climate neutral Europe, launched
in July 2020 to support its hydrogen production
and deployment ambitions. It is building up apipeline of investment projects along the green
and blue hydrogen value chain.299 Over 1500
stakeholders have joined since the Alliance’s
launch and over 1000 projects submitted. The
project pipeline was unveiled in November 2021.
It includes over 750 projects from all parts of thevalue chain.

Major gas companies in Europe including Shell,
Exxon and Total promote fossil gas as a transition
fuel, whereas others are already focussing ontransition to other fuel sources. Orsted is an
example of an oil and gas major transitioning
to producing solely renewable energy, targetingcarbon neutrality by 2025. It reached a 90% green

Accelerating the fossil gas transition to net zero Climate Bonds Initiative31

Institutional stakeholders
The European Commission holds energy
policies as a core competency, with several
Directorate-Generals and Commissioners
involved with them. The new executive structure
defined by President Ursula von der Leyen
is based on a hierarchy of nationally elected
Commissioners grouped in areas under control
of one of the five Executive Vice-Presidents.
The European Parliament is responsible
for passing law initiated by the European
Commission. The work of the Parliament isprepared in parliamentary committees. The
committees impacting on the gas industry andmarket are: ENVI - Environment, Public Healthand Food Safety300, the ITRE - Industry, Researchand Energy301, the IMCO _ - Internal Market andConsumer Protection and ECON - Economic andMonetary Affairs302.
The European Council defines the EU’s overall
political direction and priorities, headed by the
27 Heads of EU Member States. The Council of
Ministers is negotiating EU legislations with the
EU Parliament. The Permanent Representationsof each Member State accompany Ministers at
the negotiation meetings. Communicating withthe 27 Permanent Representations

Table 3: Political Structure of the European Commission’s DGs andExecutive Vice-Presidencies involved in energy policies
Commission Vice President Frans Timmermans responsible for delivering the European Green Deal
Reporting toTimmermans

F. Timmermans

Climate

DG CLIMA

S. Kyriakides

Health & Food

DG SANTE

A. Valean

Transport

DG MOVE

K. Simson

EnergyDG ENERV. Sinkevicius

Environment

DG ENVI

J. Wojciechowski

Agriculture

DG AGRI

E. Ferreira

Cohesion &Reforms

DG REGIO

Vice President Valdis Dombrovskis responsible for delivering an Economy that Works for People
Reporting to
Dombrovskis

V. Dombrovskis

Trade

DG TRADE

N. Schmit

Jobs

DG EMPL

P. Gentiloni

EconomyDG TAXUD

E. Ferreira

Cohesion &Reforms

DG REGIO

M. McGuinness

Financial Services

DG FISMA

Accelerating the fossil gas transition to net zero Climate Bonds Initiative32

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Accelerating the fossil gas transition to net zero Climate Bonds Initiative

187. For exemplar projects and archetypes see https://www.energytransitions.org/publications/making-clean-hydrogen-possible/ pg. 68
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276. https://www.euractiv.com/section/energy-environment/opinion/
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281 Energy Transitions Commission. 2021, Making the Hydrogen
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286. https://www.adani.com/blogs/green-hydrogen-holds-strongpromise-for-india-energy-self-reliance287. By decarbonised or low-emissions gas they mean biogas andfossil gas with CC(U)S https://nra.acer.europa.eu/en/Gas/Pages/
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288. https://eurogas.org/policy-priorities/
289. https://www.gie.eu/
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291. https://corporateeurope.org/en/2019/09/who-owns-all-pipelines
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293. https://www.snam.it/en/index.html
294. https://orsted.com/en/our-business/renewable-hydrogen295. https://www.enel.com/company/stories/green-hydrogenopportunities
296. https://renewableh2.eu/why-renewable-hydrogen/297. https://www.airproducts.co.uk/gases/hydrogen#/298. https://www.dh2energy.com/green-hydrogen299. https://ec.europa.eu/growth/system/files/2021-11/ECH2A%20
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300. https://www.europarl.europa.eu/committees/en/envi/home/highlights
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302. Ibid.
303. Source: Bloomberg, *total issuance as of 1/12/2021
304. Source: International Energy Agency (2021), World Energy
Investment 2021, IEA, Paris305. Source: International Energy Agency (2021), World Energy
Investment 2021, IEA, Paris

Accelerating the fossil gas transition to net zero Climate Bonds Initiative35

Prepared by Climate Bonds Initiative.
Author: Lily Burge
Acknowledgements: Simon Buckle, Paul Fennel, Rachel Hemingway, Sean
Kidney, Vangelis Papakonstantinou, Fabio Passaro
Design: Godfrey Design, Joel Milsted
Suggested Citation: Burge L., Accelerating the fossil gas transition
to net zero, Climate Bonds Initiative 2022

© Published by Climate Bonds Initiative, May 2022
www.climatebonds.net

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