Issue link: https://digital.shearman.com/i/1425143
2 8 Future Developments The EC is expected to publish two long- awaited Delegated Acts by the end of 2021 to clarify important aspects of the regulatory regime for RED II-compliant green hydrogen. These are expected to: • specify the criteria for determining when electricity taken from the grid to power hydrogen production can be counted as renewable for the purposes of meeting RED II hydrogen production requirements; and • define the GHG emissions benchmarks and calculation methodology for assessing whether green hydrogen achieves the required 70 percent emissions reduction compared to the relevant fossil fuel comparator under RED II. The existing RED II includes strict sustainability criteria for green hydrogen production, such as demonstrating the additionality of renewable electricity used and imposing conditions on use of existing grids. Extending these requirements to hydrogen used in industry creates opportunities for non- European hydrogen producers to export green hydrogen to Europe, provided their projects are structured appropriately and subject to transport costs. This is because the additionality and grid-related requirements may be easier to satisfy in places outside Europe with lower local renewable electricity demand, abundant land, looser planning restrictions and reliable combinations of renewable resources such as sun, wind, hydro and geothermal power. EUROPEAN EMISSIONS TRADING SYSTEM ("ETS") Proposals The EC's policy proposals aim to gradually strengthen the cost of GHG emissions under the ETS (e.g., by reducing the overall supply of allowances in the system and gradually reducing the number of free allowances that grant industrial installations a certain quantity of untaxed emissions) and expand its scope. In particular: • all hydrogen production (regardless of the technology used) will be included in the ETS, which, in theory, makes all hydrogen production eligible for free allowances from 2026; • the EU's Innovation Fund will be expanded and a carbon contract for difference ("CCfD") introduced, which is intended to incentivize investment in innovative climate-friendly technologies by paying investors a fixed price for GHG emissions reductions at a higher rate than the current price levels in the ETS; and • the extension of the ETS to cover a greater share of emissions from maritime transport may incentivize the uptake of hydrogen-based fuels in the shipping industry. Future Developments The EC proposes revising the methodologies for calculating free allocation benchmarks to incentivize decarbonization (these have already been set for 2021-25). From 2026, green hydrogen producers may be able to claim free allowances under INSIGHTS 04 Hydrogen Economy: Roadmap of European Regulatory Developments