Europe’s gas price crisis, fuelled by Russia’s war on Ukraine, has challenged the economics of blue hydrogen projects. By 2036, however, we expect blue hydrogen to be the most competitive technology from a range of non-EU sources, including the US and Australia.

The cost effect of the CBAM on blue hydrogen will be relatively minor, at less than 20 US cents per kilogram, as CCUS can trap over 90% of carbon emitted from point sources. The cost of capturing carbon from hydrogen plants is also relatively competitive and is likely to drop below US$50/tonne in the next decade.

In the 2040s, as technology matures and renewable power becomes less expensive, the LCOH for green hydrogen is likely to continue to decrease and become as competitive as that for blue.

In the ammonia market, gigawatt-scale projects targeting exports from leading renewable energy producers (Australia, Norway and the Middle East) will emerge by the 2030s, driving a major shift in trade flows. Markets such as the EU, which are targeting decarbonisation and depend on ammonia imports, will eventually push for low-carbon domestic supply. However, there will be a transition period in which the EU is likely to remain dependent on imports and will buy low-carbon ammonia from the most competitive suppliers, such as the US.

The CBAM could have unintended consequences in some sectors including fertilisers, and lead to a political backlash. Fertiliser demand is very price-sensitive. In 2022, when soaring natural gas prices drove up the cost of fertilisers, farmers reduced their use, hitting crop yields and reducing food supply. Similarly, the CBAM could unintentionally lead to higher domestic food prices, unless the EU puts in place the right safeguards or incentives to invest in new, more advanced decarbonisation technologies for hydrogen production. For example, the EU could emulate the US Inflation Reduction Act’s 45V production tax credit to give a significant boost to low-carbon hydrogen production.