Forcing steel and fertiliser manufacturers to use hydrogen before it becomes cost-competitive risks pushing investment out of Europe, Philipp Tschinke, head of Salzgitter AG’s Brussels office, warned at an event hosted by Euractiv.
The European Commission is set to publish its Industrial Accelerator Act (IAA) on 10 December. It’s a legislative proposal that could create green lead markets and introduce criteria to strengthen demand for EU-made clean products and deliver a clean European supply for energy-intensive sectors.
Creating this demand could be essential if Europe is to decarbonise its industries while remaining competitive. Experts believe current policies, such as the CBAM and EU ETS are unnecessarily complicated and still fail to create the necessary demand.
Investing in decarbonisation
“In my view, we first have to kickstart investments into low-carbon technology and in parallel, build out the hydrogen economy in Europe,” Tschinke said at Euractiv’s hybrid conference on green lead markets, supported by Hydrogen Europe, on 18 November.
Tschinke said companies won’t invest in decarbonisation if the market doesn’t reward sustainable products.
He warned that prematurely mandating supplier-side quotas would hurt producers, as fellow panellists suggested sector-specific quotas could spread costs along the entire value chain.
Bruegel affiliate fellow Ben McWilliams argued that green lead markets could offer a solution by shaping the future of industries, ensuring that investment companies make now go into green business models and green value chains.
A new report by PwC commissioned by Hydrogen Europe defined a lead market as one that would incentivise at least 20% of the overall European supply and demand for clean hydrogen. It found that the EU’s current policies aren’t enough to sustain a healthy, clean hydrogen market. It also noted that while targeted public procurement could help, its effects could be limited.
“We have the technical solutions already in place, but we don’t have the demand for such green products. So, the core idea of lead markets is to reduce the overall cost, and to accelerate the adoption of [hydrogen] through a scaled market introduction,” PwC Germany energy law director Matthias Stephan said.
The report and discussion centred on the steel and fertiliser sectors since they are among Europe’s largest industrial sources of greenhouse gas emissions.
Don’t break the bank
Stephan highlighted that quota-based regulatory models for the steel sector could prove effective in establishing lead markets for clean hydrogen in the EU.
For fertilisers, levy-financed contracts for difference (CfD) could fund subsidies for fertiliser producers who incur additional costs for cleaner technologies.
“Lead markets can help to achieve the climate and hydrogen targets. The additional cost seems to be quite low and reasonable, and the success depends on a strong EU-wide legislation and close cooperation between all stakeholders,” Stephan said.
Asked whether it should be the manufacturers or users who should pay any green premiums in a value chain, Vibeke Rasmussen, SVP for product management and certification at Yara Clean Ammonia, said since decarbonisation affects everyone, its cost must be distributed across the value chain.
“That’s why lead markets are so important to have, especially at the initial stage of the transition, to bridge this gap until sustainable products become cheaper than conventional products,” Tschinke said. “So that’s actually our definition of lead markets: that you need these incentives for demand in this initial phase of the transition until there’s the cost parity.”
Risk import reliance
Geopolitics were also brought up in the debate with Tschinke saying Europe should keep complete industrial value chains to build up its hydrogen economy to enable the production of key components of lower-carbon steel, such as direct reduced iron (DRI), rather than solely relying on imports.
“Fifteen, twenty years ago all the consultancies in the world suggested to us to open a steel plant in Russia. Now we are a bit smarter, I think,” Tschinke said. “So, importing DRI is also a question of resilience. Yes, you can import it, but under the geopolitical environment we are living, you can never be sure whether these imports are reliable or not.”
McWilliams predicted the topic of green defence spending will feature more prominently in the coming years, with a key question being how niches can be carved out in this space.
Also speaking on the panel, MEP Paulo Cunha (EPP) remarked that Russia’s war against Ukraine is exacerbating the difficulty the EU faces in achieving its climate targets.
However, he highlighted that the EU should continue setting these targets while also being realistic about what it will take to achieve them. He said the value of democracy should be factored in as part of the value chain, since respecting human rights and protecting the rule of law are costly endeavours.
“We are competing with countries without those priorities,” Cunha said.
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