The Case for Recalibrating Europe’s Hydrogen Strategy

To meet climate goals, the European Union has sought to scale both the production and consumption of renewable hydrogen — a cornerstone of its strategy to decarbonize industry and heavy transport. According to the IEA’s Hydrogen Production Database, current production levels stand at just 0.02 million tonnes per year (Mtpa), highlighting the slow progress toward meeting the targets set by the Renewable Energy Directive (RED III). This shortfall underscores the urgent need for a delivery-focused approach to accelerate domestic production and secure stable international supply chains to meet additional demand.

Driven by sector-specific mandates under RED III, demand for renewable hydrogen in the EU is expected to increase significantly over the next 5 years. We modeled two scenarios to understand how this could materialize:

1. Baseline Scenario – Assumes full implementation of RED III mandates.[1]
2. Accelerated Transition Scenario (ATS) – Envisions greater sectoral ambition, including voluntary demand beyond mandates.

As shown in Exhibit 1, total demand is projected to range between 3.7 Mtpa and 7.0 Mtpa by 2030, through the combination of mandated demand across existing consumption within industry, transportation, and potential demand if realized under the Accelerated Transition Scenario.

RED III mandates are expected to drive demand between 2.2 Mtpa and 2.8 Mtpa, far below the EU Hydrogen Strategy’s 10 Mtpa target. As the industry mandate is applied to existing users of hydrogen, this demand is expected to be driven by ammonia production, chemicals, and refinery processes. However, despite refineries consuming the greatest amount of hydrogen out of all sectors, hydrogen accounting methodologies impact how much of this consumption is subject to RED III’s renewable fuel of non-biologic origin (RFNBO) mandates.

Currently, most hydrogen produced in refineries is derived from byproduct gases and used for conventional transport fuels which reduces the volume of enforceable demand under RFNBO mandates. With the current methodology, refinery consumption subject to mandates by 2030 is estimated to be approximately 0.8 Mtpa, although this volume could be expanded due to the individual transposition of RED III by Member States. As an example, Belgium is considering the inclusion of hydrogen use in the processing of conventional transport fuels (known as the ‘refinery route’) as a vector to accelerate its hydrogen industry. However, it is important to note that mandates applied in this fashion will count toward transportation targets and will not affect the volume of industry consumption mandated.

The role of shipping and steel as additional demand

Looking beyond mandates, additional demand — driven primarily by the steel and maritime sectors — is expected to range from 1.5 Mtpa to 4.2 Mtpa.

While falling underneath the European Commission’s definition of industry, steelmaking currently uses a negligible amount of hydrogen, meaning the majority of production is not required to transition to RFNBOs. However, steelmaking has emerged as a significant demand driver among new uses for hydrogen, since steel has few options to decarbonize[2]. This transition is further accelerated by surging demand for certified green steel from automakers, construction firms, and industrial buyers aiming to meet strict sustainability targets. In addition to the overall CO₂ abatement potential, it is likely the desire to shift to hydrogen steel is also brought about by concerns of industrial competitiveness, with hydrogen-steel providing relief from growing ETS carbon prices for conventional steelmaking and the phase-out of free allowances by 2034. The EU has also shown an appetite to fund hydrogen-steel, allocating some of the largest grants under the Innovation Fund to these projects.[3] It is imperative that policymakers further incentivize the use of renewable hydrogen within low-carbon steelmaking, as many companies are considering the use of unabated natural gas in the interim, which could undermine real climate benefits while prolonging reliance on imported fossil fuels.

Similarly, aside from hydrogen derivatives, the maritime sector has few scalable alternatives for decarbonization. The International Maritime Organization (IMO) is actively working to reduce greenhouse gas (GHG) emissions from shipping, targeting net-zero emissions by 2050. One of its proposed measures includes a global carbon levy and a fuel standard, requiring at least 5% — and striving for 10% — of the energy used by international shipping to come from renewable fuels and sources by 2030. Domestically, maritime activities were recently included under the ETS, and the EU passed the FuelEU legislation implementing decarbonization targets for the sector. If implemented fully, these policies will significantly influence renewable hydrogen’s uptake, driving additional demand outside of RED III.

Complementing domestic supply with imports

While domestic production is expected to scale this decade, hydrogen trade will play an essential role in closing short- to medium-term supply gaps, enabling early decarbonization, and positioning the EU as a lead market in the global hydrogen landscape. Despite ongoing project development, the current European hydrogen project pipeline is unlikely to solely meet anticipated demand. As illustrated for the Accelerated Transition Scenario in Exhibit 2, the projected supply-demand gap in 2030 is estimated to range between 1.9 Mtpa and 4.3 Mtpa, given the current trajectory of project completion. This highlights a significant shortfall that could delay climate-aligned progress and hinder industrial adoption.

However, there is also a plausible scenario where domestic supply could scale to meet RED III 2030 mandated volumes. With projected domestic hydrogen supply reaching a maximum of 2.7 Mtpa and RED III mandates requiring between 2.2 and 2.8 Mtpa, production could theoretically cover the lower end of mandated demand. Even if this scenario materializes, significant uncertainties remain, including the volatility of electricity prices and timeline to build continental hydrogen pipelines. Moreover, any disruption in project execution, infrastructure bottlenecks, or unforeseen regulatory challenges could push the EU into a supply deficit, necessitating imports to fill the gap. If domestic production does scale effectively while demand remains at the lower end of projections, Europe may be able to achieve self-sufficiency to meet regulatory requirements. However, this achievement comes with limited flexibility to support voluntary demand beyond mandates. Implementation of the recently released Clean Industrial Deal’s supply and demand-side oriented actions should increase the attractiveness of domestic production. In either scenario, enabling increased supply will require increased disbursement of funds, explored later in section 4.

Given high domestic hydrogen production costs and competition for renewable electricity across the bloc, strategic imports can provide a practical and cost-effective solution to meet the EU’s scaling demand for green fuels and feedstocks. Finished hydrogen derivatives (e.g., fertilizers, synthetic sustainable aviation fuels [eSAFs], e-ammonia, e-methanol, and hydrogen-produced direct reduced iron [DRI]) are more likely to meet this demand given the high cost and commercial immaturity of cracking. Balancing cost-effective imports with domestic industrialization is key: in the case of DRI, imported green iron can complement the growth of EU green steel while enabling flexibility for domestic growth and economic transitions. In parallel to imported derivatives, intra-EU trade from regions with ideal renewable energy conditions can serve to fill supply gaps in high-demand regions, with the objective to ensure a steady and affordable supply for Europe’s heavy industry and transport sectors.

Planning hydrogen infrastructure around key demand centers

As shown in Exhibit 3, RED III-mandated demand is concentrated in Northwest Europe, particularly in Germany, the Netherlands, France, and Belgium; countries with strong industrial bases that will rely heavily on hydrogen to decarbonize heavy industry and transportation sectors. Meanwhile, additional hydrogen demand is expected to emerge primarily from the steel and maritime sectors, placing countries with large steelmaking industries and key maritime bunkering hubs at the forefront of additional demand growth.

Not all these demand centers will be collocated with optimal renewable electricity resources, necessitating a considered approach to the distribution and transportation of hydrogen derivatives across the continent. A robust infrastructure network is essential for integrating imported hydrogen into Europe’s domestic supply chain. Investments in import terminals, pipelines, and storage facilities, will be key enablers for hydrogen distribution across sectors and geographies, ensuring that supply reaches offtakers efficiently. Intra-European trade will also play a pivotal role, allowing cost-advantaged production hubs —such as the Iberian Peninsula and Nordic regions — to transport hydrogen to high-demand industrial centers in Northwest Europe. By accelerating these infrastructure investments, the EU can the create foundations of a stable and resilient hydrogen market, which will in turn enhance economic competitiveness and secure pathways to long-term industrial decarbonization.