read the EXECUTIVE SUMMARY (Executive Summary) of Document # 125 INNOVATION AND INDUSTRIAL POLICIES FOR GREEN HYDROGEN:

Executive summary:

The recent commitments to carbon neutrality by 2050 have put the spotlight on the critical role that hydrogen can play to achieve net-zero targets. Production of hydrogen from water and renewable electricity through electrolysis (green hydrogen) can contribute to reducing emissions through four channels. First, hydrogen is already a feedstock for a number of chemical products and green hydrogen can make this production carbon-neutral. Second, hydrogen is a promising alternative to fossil fuels for high-temperature industrial processes in hard-to-abate sectors such as steel production. Third, hydrogen is necessary for the development of fuel-cell vehicles and can also, in specific circumstances, reduce emissions in the built environment by replacing natural gas. Finally, hydrogen can be used to store energy produced from intermittent sources, thereby supporting the supply of low-cost renewable electricity. Most net-zero emission scenarios agree that hydrogen will play a pivotal role in decarbonisation at the 2050 horizon. However, in 2021, the production of green hydrogen is still about 3 times more expensive than grey hydrogen (made out of natural gas through steam reforming), even under the most favourable conditions. Major cost reductions - and the rapid deployment that they would induce - are realistic in the next 10-20 years, but will crucially depend on massive improvements in the cost of electrolysers (through R&D and large-scale demonstration projects) and on the availability of large volumes of cheap renewable electricity. These investments, in turn, depend on ambitious public policies. Against this backdrop, a number of countries have published National Hydrogen Strategies, which contain ambitious hydrogen production targets at the 2030 horizon. These targets are a significant improvement with respect to today's virtually inexistent green hydrogen production, but are still far from the necessary deployment at the 2050 horizon. Some longer-term objectives (until 2050) could provide more certainty to investors. Moreover, these targets mostly rely more on financial support for the deployment of new large electrolysers than on direct support for innovation. Between 2008 and 2019, several countries increased public RD&D spending on hydrogen, but others cut public spending on RD&D by more than half. The focus of public support at the deployment stage transpires in firms' recent filings of intellectual property rights: while patenting activity on hydrogen production technologies is growing at a very slow pace, the number of hydrogen trademarks recently took off, suggesting that companies are focusing on commercialization rather than on innovation, and anticipate a growing hydrogen market pulled by government subsidies. Even if some countries perform better (Denmark, Germany and Austria appear as the countries with the highest specialisation in hydrogen patents for the period 2015-19), the global stability in the number of hydrogen patents casts doubt on the capacity to develop the hydrogen-related technologies and to achieve the cost reductions that are needed to make green hydrogen competitive. In addition, the share of young firms in hydrogen patents is declining. However, young firms are found to produce on average more radically novel hydrogen innovations than established firms. In this context, countries willing to support hydrogen should follow these five policy priorities: Ensure greater support for R&D in green hydrogen and demonstration projects. Targeted R&D support instruments are required, as horizontal R&D support cannot stimulate innovation in technologies characterised by significant uncertainty. Large-scale demonstration projects are also needed to reduce costs through INNOVATION AND INDUSTRIAL POLICIES FOR GREEN HYDROGEN 5 OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS OECD 2022 economies of scale, economies of scope and learning-by-doing. Financial instruments (including public loans or guarantees and government venture capital) could efficiently de-risk demonstration projects and crowd in private money. Ensuring that knowledge can flow across firms and that newcomers can benefit from publicly funded R&D and demonstration projects is particularly important as the hydrogen sector is singularly concentrated. Ensuring sound competition and low barriers to entry is therefore another essential element of green hydrogen industrial policies. Cooperation and coordination between countries is also needed to favour knowledge diffusion. Ensure a sufficient supply of renewable energy where possible, and encourage the creation of an international hydrogen market. Making green hydrogen competitive will require a significant decrease in the cost and a significant increase in the supply of renewable electricity. Countries endowed with low renewable energy resources should therefore consider importing green hydrogen from countries with abundant renewable energy. Agreeing on common international standards would reduce investors' uncertainty and facilitate the creation of such an international market for hydrogen. Establish clear carbon price trajectories to provide investors with the right incentives. Adequate carbon pricing would make green hydrogen more competitive, contribute to a cost-efficient decarbonisation, and could provide revenue to finance R&D support to green hydrogen. Deployment subsidies might be needed, on top of carbon pricing, to cover the price difference with fossil fuelbased alternatives in the medium run, but a combination of strong R&D support and clear carbon pricing trajectories could well be sufficient. Carbon Contracts-forDifference (CCfD), which are experimented in Germany and consists in forwardcontracts on the price of abated greenhouse gases, can decrease uncertainty for investors. Reduce uncertainties for investors through regulatory action and standardisation. Strong government signals are required regarding the potential role of green hydrogen, infrastructure investments - often a pre-requisite for the adoption of hydrogen - and regulatory standards (e.g. on guarantees of origin, hydrogen purity, equipment specifications, blending into the gas grid). Low-carbon hydrogen certificates similar to the ones currently in place on the renewable energy market could be introduced. Consider blue hydrogen as an interim solution to facilitate the transition to green hydrogen. Blue hydrogen (produced from natural gas with carbon capture) should be considered only as a short-term option. On the one hand, blue hydrogen may help the transition from fossil fuels to green hydrogen by decarbonising the existing production of grey hydrogen, by facilitating the emergence of a growing hydrogen market and by decarbonising early on some industrial sectors, as well as transportation. On the other hand, blue hydrogen suffers from important drawbacks as it is not completely carbon neutral, it may compete with green hydrogen, and carbon storage requires affordable and secure storage options. All in all, the case for supporting blue hydrogen will depend on country and industry characteristics.

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