Higher carbon prices to drive hydrogen demand post-2025: Bank of America

Hydrogen can offer additional demand-side abatement for carbon as it replaces fossil fuels over the next decade in power generation and other industrial uses, but it is likely to come from higher carbon prices rather than production subsidies, Bank of America said in a research note Oct. 12.

The bank cited the EU's plan to reduce demand for emission credits across several different sectors by raising carbon prices, ultimately leading to replacement of fossil fuels with hydrogen and other fuels. The plan, outlined in the EU Green Deal, would require policy support, but would not materialize until 2025 or beyond, BofA said.

"This could be achieved by either subsidizing hydrogen production, which would be bearish emission prices as it reduces demand for emission credits, or it could be done by reducing carbon credit supply to drive up carbon prices to make hydrogen competitive with fossil fuels," the bank said. "These are two very different carbon price outcomes."

Decarbonization efforts were leading toward an emphasis on driving carbon prices higher, the bank noted. After falling to Eur15/st in mid-March, EU ETS carbon prices rebounded quickly on tighter European climate policy signals and were seen at Eur26/st Oct. 12.

"We do think, however, that the EU is very determined to support higher carbon prices and [the coronavirus] has only intensified this drive," it said.

The EU has moved to increase the carbon reduction target to 60% by 2030 from 1990 levels, up from its previous target of 40%. By June 2021, it hopes to have extended the EU ETS to new sectors, including transportation, and introduced a steeper emissions reduction trajectory after 2025.

BofA estimates that global CO2 emissions will drop 5.2% in 2020 for the first annual decline in a decade, but that they will rise in 2021 and beyond unless climate policies are scaled up significantly.

BofA projected EU carbon prices will trade above Eur30/t by 2021 and reach Eur40 by 2024, it said.

Other non-ETS incentives also needed

Other non-ETS measure also could encourage hydrogen deployment in Europe, according to Jeff Berman, director, emissions and clean energy analytics for S&P Global Platts Analytics. Citing experience with wind and solar energy in Europe over the last 10-15 years, Berman noted a range of incentives including government tenders, feed-in tariffs, assistance with transmission, and others played a role alongside EU ETS and EUA prices.

"There is a very real possibility of a similar range of non-ETS measures to encourage hydrogen in Europe," Berman said. "This would mean that the financing 'gap' that EUAs need to fill for hydrogen – which could also act as a price-setting mechanism for EUAs in a tight EU ETS market – would be much lower than what the theoretical abatement cost from hydrogen would suggest."