The EU comission has proposed a target of 20Mt of green hydrogen use per year in the EU, half of it being imported, the other half produced domestically. It also proposes additionality rules which should ensure that green hydrogen is low-carbon. We show here that this rules are ineffective in potential export regions, increasing CO 2emissions there. Furthermore, CO 2emission reductions in the EU are likely low, due to the European Emission Trading Scheme. In total, this implies that the hydrogen tar- gets can increase global CO 2emissions quite significantly. We therefore propose an adaptation of the rules for green hydrogen production. The EU Commission has devised the RePower EU plan which, among other targets, aims to increase domestic production and imports of green hydrogen [1]. The plan was released soon after the Russian invasion of Ukraine that caused price spikes on all markets for energy commodities and significantly increased the risk of supply disruptions. As outlined in the plan, the EU aims at diversify- ing energy supply away from Russian gas, and build up a green hydrogen sector which is assumed to be important for the full decarbonization of the energy sys- tem in the long-term. Supporting the RePower EU plan, the commission is also proposing rules to ensure that the electricity used for production of hydrogen in electrolyzers comes from renewable sources, the so called ”additionality” rules [2]. However, the commission proposal does not fully incorporate the impact of the European flagship CO 2emission reduction instrument, the European Emis- sion Trading Scheme (ETS), on hydrogen production and consumption and vice versa. Furthermore, the additionality rules are not able to ensure that green hydrogen is produced in a carbon neutral way in non-EU exporting countries. We show here that therefore a signficant overhaul of the associated rules will be required. 1 In detail, the EU plans to increase green hydrogen supply to 20Mt/year (660TWh/year) in the year 2030 [1]. Half of the quantity is planned to be pro- duced in the EU and abroad, respectively, using green or low-carbon electricity for electrolysis. Furthermore, the commission is developing ”additionality” rules to ensure that electricity used for hydrogen production comes from new renew- able sources. They will apply to European as well as Non-European hydrogen producers. We show here, that these rules are not effective in guaranteeing emis- sion reductions in production regions. Since global CO 2emissions may increase due to the policy, at least in the short-term, we propose potential changes in reg- ulation that will maximize the synergies between hydrogen production targets and CO 2emission reduction targets. 1 Limited additionality from additionality rules The European Commission proposal requires that any electricity used to pro- duce green hydrogen has to come from new, additional renewable electricity generation to allow for carbon-neutral hydrogen production. In this context, the commission has proposed rules1, which define under which circumstances hydrogen can be considered to be ”green”: (a) if the hydrogen-producing instal- lation draws renewable power directly from renewable generation facilities, while no power comes from the public grid, (b) if the facility is located in a bidding zone where the share of renewables is above 90%, (c) if the electricity used for generating hydrogen would otherwise have been curtailed, or (d) if the facility enters in power purchase agreements with renewable electricity generators [2]2. However, condition (b) will not ensure that no fossil fuel emissions are as- sociated with green hydrogen production, simply because even in a system that hosts 90% renewables, the marginal generation can still be fully fossil. Further- more, an increase in utilization of renewables in the zone may decrease exports of electricity, increasing marginal emissions elsewhere in the system. At the same moment, conditions (a) and (d) rely on the proof of the expansion of re- newable capacities. While these rule can ensure that the produced hydrogen relies on new green power generation, it cannot guarantee that the expansion of low-carbon power generation capacities for hydrogen production does not com- pete with the expansion for other purposes, such as grid decarbonization. In that case, emission savings can be lower than under a baseline without hydrogen production, unless other policies which enforce emission reductions are in place (see section 2). The reasons is that there may simply be insufficient resources in terms of workforce, capital, or land that can be mobilized in the short period of time until 2030 to expand both renewables for hydrogen production and for other 1The rules are still under heavy discussion, we rely here on the latest proposal from the 10th of February 2023 [2] 2The regulation is much more detailed and, e.g., stresses that hydrogen is only considered ”green” when using public grid electricity if electrolyzers are turned on when renewable ca- pacities generate. Hourly matching, however, is going to be likely postponed to 2030. The implications of different matching schemes are discussed in detail by Zeyen et al. [3]. 2 purposes. About 1200 TWh of electricity are necessary to produce 20 Mt of hy- drogen, once efficiency losses from electrolyzers and transport are incorporated3. To put this into context: this is about 2.7 times the annual global expansion of solar PV and wind power generation in the year 2021 [4], i.e., a very signifi- cant volume globally. However, limits in the expansion rates of renewables are already hit today: for instance, in Germany, quantities demanded were higher than quantities offered in all auctions of open-field solar PV and onshore wind in 2022 [5]. More generally, a study of solar PV and wind power growth rates showed that observed and projected growth rates in renewable energies are in- sufficient to reach 1.5 °C targets [6]. Therefore, using renewable capacities to produce hydrogen may directly compete with decarbonizing power generation and electrification, potentially increasing emissions. In the following, we explain in more detail how green hydrogen production can increase CO 2emissions in the production region compared to a baseline scenario. For that purpose, we introduce an additionality factor ( β), which measures the share of renewable electricity in total renewable electricity needed to produce hydrogen which is installed additionally to an alternative baseline. We assume a non-EU country (see Figure 1) has built no renewable electricity generation at all so far and relies solely on coal power, producing 2000 TWh of electricity at 1 tCO2MWh−1. The country starts, in 2023, building renew- ables to produce hydrogen and export it to the EU. The hydrogen producer will acquire sufficient PPAs to certify the produced hydrogen as green. However, re- newable electricity generation would not be additional to domestic production, if otherwise the country would have used the same renewable generation ca- pacities to decarbonize, e.g., electricity generation in the country. In this case, β= 0. Consequently, this lack of domestic decarbonization due to hydrogen exports can be interpreted as additional emissions caused by the EU hydrogen policy. Full additionality, in contrast, would occur if the country builds the renewable generation necessary for hydrogen production on top of the baseline expansion, shown as β= 1 in Figure 1. Low additionality of β= 0 may occur if the expansion of renewable genera- tion capacity in a particular country is bounded from above by Cper year due to institutional and technical constraints. The country initially plans to expand all ofCto decarbonize its power sector. In that case, if an investor decides to build a hydrogen production facility, there would be no additionality, i.e., β= 0, asCis a fixed upper bound. In contrast, full additionality, i.e., β= 1, is for instance possible, if the expansion of low-carbon energies in a country is mainly constrained by capital or technology availability, and if these constraints can be relaxed, e.g., by foreign investments into hydrogen production. Furthermore, if grid restrictions limit the expansion of renewable electricity, stand-alone elec- tricity generation to produce hydrogen may be less constrained than generation facilities used to decarbonize fossil fuel power generation on the grid, implying thatβ >0. The effect of low additionality on emissions can be substantial: if instead of 3Assuming an electrolyzer efficiency of 70% and transportation losses of 20% 3 Additional CO2 emissions due to hydrogen export (Mt CO2)CO2 emissions from electricity generation (Mt CO2)Renewable electricity generation (TWh) 2024 2026 2028 20302024 2026 2028 20302024 2026 2028 2030050010001500 75010001250150017502000 0100200300 YearScenario Baseline Hydrogen export, ß = 0 Hydrogen export, ß = 1Figure 1: Renewable electricity generation in an imaginary exporting region, as- sociated CO 2emissions from electricity generation and additional CO 2emissions due to hydrogen exports. Additionality βis the share of electricity generation required for hydrogen production which is built additionally to the baseline. producing hydrogen, coal power was replaced by renewable electricity, additional CO2emissions caused by imported hydrogen at no additionality reach over 60% of the total EU CO 2emission target for 2030 (see Figure 2). If electricity generation is already very clean in the exporting region and an additional unit of renewable electricity will substitute only 0.5 units of gas power generation4, additional emissions would be at around 5% of the 2030 EU emission target at an additionality of β= 0. Of course, if the exporting country has a stringent target on CO 2emissions, similar as in the ETS, additional hydrogen production will not increase CO 2emissions – we discuss this effect in more detail in the next section. 4If the power system is already very clean, an additional unit of renewable electricity may not completely substitute fossil generation. It may be partly curtailed – or partly cycled through a short or long-term storage at total cycle efficiency as low as 50%. Thus, the marginal CO2emission reduction can be low. 4 0204060 0.00 0.25 0.50 0.75 1.00 Additionality (ß)CO2 emissions (% of EU 2030 CO2 emission goal)Alternative use of renewable electricity in exporting country Coal power Gas power 100% Gas power 50%Figure 2: Additional emissions in exporting countries for different alternative uses of low carbon electricity and different values of real additionality. Note: Gas power 50% indicates that one unit of renewable electricity substitutes only 0.5 units of gas power. 2 Hydrogen targets and the EU ETS Requiring that hydrogen is produced from additional renewable electricity should guarantee its carbon-neutrality. In the last section, we have shown that the EU additionality rules are not effective in guaranteeing additional renewable elec- tricity generation and therefore carbon-neutrality. However, in regions where a strict cap on CO 2emissions is implemented with the help of an ETS, by design, introducing hydrogen production to the system cannot increase CO 2emissions. An ETS will, however, also imply that there will be no additional emission sav- ings due to hydrogen consumption, as long as the hydrogen is used in sectors covered by the ETS – the so called waterbed effect [7]: emission reductions by one policy or sector allow to increase emissions in other sectors. This applies to short-term emission savings. In the long-term, the implementation of hydrogen targets may allow to decrease the emission cap in the ETS faster in subsequent trading periods due to technological learning set off by the policy (see section 3). The EU has implemented an ETS. However, the theoretical results discussed above do not necessarily hold due to two particularities of the EU system: first, not all sectors where hydrogen can be consumed are currently covered by the ETS. And second, the EU has implemented a market stability reserve (MSR), which has, at least temporarily, ’punctured the water-bed’ [7] and implies some flexibility in terms of total reductions of CO 2emissions: due to the MSR, cu- 5 mulative emission reductions in 2030 can be below the agreed final target value. The interaction of the hydrogen targets with the MSR, and with sectors not covered by the ETS are complex. They will depend on the exact design of the ETS-II, which will cover transportation and buildings from 2027 on, but is expected to have a price cap [8], and on the rules for the MSR, even post 2030. A thorough assessment is beyond the scope of this comment, but we briefly discuss potential interactions: (a) if the implementation of the hydrogen targets increasesCO2allowance prices in the ETS, CO2emissions in the EU will likely go up, because higher prices imply a lower potential of canceling allowances in the MSR, and they may cause potential leakage effects to sectors covered by the ETS-II, which has a price cap5. (b) Lower prices will imply the opposite. Imported hydrogen will strictly lower prices in the ETS, as it will increase the supply of low-carbon options, pushing the supply curve of emission reductions to the right. The impacts of domestically produced hydrogen are complex, as hydrogen production will make mitigation for other sectors more expensive (due to increased use of renewable electricity), while the produced hydrogen can lower emissions. As the overall efficiency of hydrogen in reducing CO 2emissions in the short-term is lower than direct electrification, we expect an increase of emission allowances prices from domestic hydrogen production (see section 3). This has important policy implications we discuss in the last section. 3 Short and long-term policy impacts on miti- gation cost We have shown so far that the EU hydrogen strategy most likely will increase CO2emissions in exporting countries, at least in the short-term, and that im- pacts within the EU are complex. Most scenarios in the recent 6thAssessment Report by the IPCC [9] show lower hydrogen production volumes in the EU and in particular lower hydrogen exports from other regions (Figure 3), indicating that the hydrogen production targets are inefficient. While domestic produc- tion picks up quickly within the EU after 2030 at least in the most stringent mitigation scenarios, exports from the rest of the world (ROW) remain low un- til 2040. The simple reason for the ineffectiveness is that alternative uses of renewable electricity, in particular substitution of fossil power generation, save significantly more emissions than the hydrogen route (see Figure 4) – and that hydrogen production and use needs additional equipment, such as electrolyzers, hydrogen storage and hydrogen transportation equipment. As long as the power system in the EU hosts significant amounts of fossil power generation which can be substituted by renewables, the use of green hydrogen will therefore be more costly to achieve the same decarbonization effect. 5e.g. electrification of transportation and buildings may be lower if prices in the ETS are higher, as higher power prices are a consequence of higher ETS prices. In contrast, continued use of fossil fuels in transportation and buildings may be possible in ETS-II due to the implementation of a price cap and an associated release of emission allowances 6 EU − domestic hydrogen production (electrolysis) ROW − hydrogen exports 2025 2030 2035 2040 2025 2030 2035 2040010203040 PeriodHydrogen volumes (Mt/year) IPCC ScenariosLimit warning to 1.5°C Limit warning to 2°CEuropean hydrogen goalFigure 3: Annual domestic hydrogen production in the EU and annual hydrogen exports in the Rest of the World (ROW) in the scenarios from the 6thIPCC Assessment Report [9], compared to annual EU domestic hydrogen production and hydrogen import targets in 2030. This does not necessarily imply that the hydrogen targets should be abol- ished all together. Technology specific support policies for green hydrogen pro- duction may be necessary to benefit from the positive externality of technolog- ical learning [10], [11]: i.e. the currently larger costs and CO 2emissions may be offset by rapid technological cost decreases, contributing to lower transition costs and to a higher transition speed to a carbon-neutral economy after 2030. The effect and the cost-effectiveness will depend on the impacts of technological learning on overall costs of the technology. 4 Update rules to maximize CO 2-emission re- ductions We have shown that the EU hydrogen targets can increase global CO 2emissions, at least in the short-term, as the additionality rules are ineffective in enforcing the use of additional renewable energy capacities. As the hydrogen targets may still be required to ensure long-term least cost decarbonization, we recommend to update rules to also minimize short term emissions. First, the additionality rules for green hydrogen production should be dropped. They are complex, hard to monitor and will not necessarily contribute to in- creasing the expansion of renewable electricity above baseline. Second, as a consequence imports of green hydrogen should only be possible 7 0.000.250.500.751.00 Aviation Grey hydrogen Gas power 50% Steel Gas power 100% Coal powerEmission reduction ( tCO2MWhelectricity−1) Use of renewable electricity Hydrogen Substitution fossil power generationFigure 4: Reductions in CO 2emission for potential hydrogen uses and direct use of electricity for substituting fossil fuel power generation. Note: Gas power 50% indicates that one unit of renewable electricity substitutes only 0.5 units of gas power (due to intermittency of renewables). from regions, where an ETS is in place – or strict, binding CO 2emission caps are enforced by other means. This will ensure that additional emissions from the exports of hydrogen to Europe are limited6. This will make the additionality rules in the comission’s proposal obsolete, but limits potential exporters to either small countries or ones which will unlikely export large quantities of hydrogen as they face significant climate change mitigation challenges themselves7. The establishment of a hydrogen trading union could nevertheless be the seed for a climate club as suggested by Nordhaus[13], comparable to how the European Community for Steel and Coal served as the institutional foundation of the EU. Third, the EU Comission should evaluate on a regular basis if the hydrogen production targets threaten overall CO 2emission reduction targets by 2030. This may happen if subsidized hydrogen production uses so much of the poten- tial low-carbon electricity generation expansion, that other sectors are unable to reduce emissions sufficiently. In that case, emission certificate prices may increase to a politically infeasible level, risking the release of additional certifi- cates from the market reserve or even an increase in the CO 2emission cap. This should be avoided by all means. The most effective way within the EU would 6There still could be leakage by a change in trade flows between the exporting country and third countries, though. 7According to De Clara et al.[12], the following countries have established ETS: China, Kazahstan, Korea, Mexico, UK, Switzerland, New Zealand, some states in Canada, some states in the US. 8 be to suspend the expansion of domestic hydrogen production for some time. Fourth, the feasibility of the speed of the expansion of green hydrogen at comparable high rates in decarbonization scenarios has been questioned [14]8. Furthermore, the benefits of the policy depend on the scale of potential techno- logical learning. A thorough assessment of the feasibility and of the costs and benefits of the policy should therefore be conducted, before implementing the hydrogen targets. Acknowledgments. We gratefully acknowledge support from the European Research Council (reFUEL ERC-2017-STG 758149).