Green with Envy? Hydrogen production in a carbon-constrained world

Hydrogen is widely recognized as a key component of a decarbonized global energy system, serving as both a fuel source and an energy storage medium. While current hydrogen production relies almost entirely on emissions-intensive processes, two low-emissions production pathways – natural-gas-derived production combined with carbon capture and storage and electrolysis using carbon-free electricity – are poised to change the global supply mix. Our study assesses the financial conditions under which natural-gas-based hydrogen production combined with carbon capture and storage would be available at a cost lower than hydrogen produced through electrolysis, and the degree to which these conditions are likely to arise in a transition to a net-zero world. We also assess the degree to which emissions reduction policies, namely carbon pricing and carbon capture and storage tax credits, affect the relative costs of hydrogen production derived from different pathways. We show that while carbon pricing can improve the relative cost of both green and blue hydrogen production compared with unabated grey hydrogen, targeted tax credits favouring either blue or green hydrogen explicitly may increase emissions and/or increase the costs of the energy transition.