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Europe’s strategic autonomy hinges on decarbonization of its energy supply : seven key ideas in the Trump II era

Hydrogen production from renewable, low-carbon electricity is set to not only play a key role in the success of the Union’s energy, climate and industrial policies, but also to be a tool for energy and food security in a broken world. Without large-scale adoption of renewable hydrogen, it seems impossible to progress towards real energy and food security that are in line with our climate ambitions. The emergence of a Union-wide hydrogen economy could make this vision a reality.

As Mario Draghi’s report on future competitiveness reminds us, Europe is facing an unprecedented competitiveness challenge on three fronts: The Union does not know how to be simple, fast and efficient in its industrial and energy policies.

The following article takes stock of the European policies sketched out in the previous mandate, and proposes seven ways to improve them so that they are simpler, stronger and more effective. While they can be considered as more or less direct adaptations of the Draghi report‘s major recommendations, they should be considered above all in light of the strong message from the United States in favor of simplicity — not simplism — as well as stronger leadership, which is not synonymous with authoritarianism.

Europe no longer has the time for refinement, nor the means to accommodate the economic forces at play. Regulations can no longer be founded on compromises that create complexity and confusion: we must make the firm decision to opt for simplicity in order to map out an investment-friendly decarbonization path that is easy to understand — rather than creating a jungle of regulatory regimes and a profusion of support mechanisms. As for governance, it must aim for speed above all else. High achievers must be supported, and low achievers penalized, according to rules that are predictable, transparent and non-discriminatory. This is the only way to make the rules effective.

Developing true planning on the European scale

With hydrogen, a new energy vector is being introduced for the first time in an integrated European approach from the outset, rather than by connecting and coordinating national markets; the hydrogen economy is therefore in itself an important element in the pursuit of European economic integration. It can contribute to energy security by broadening access to green energies as well as strengthening our food sovereignty by bringing fertilizer production back to the domestic market or to “friendly” countries. This vision was at the heart of the European Commission’s achievements for the period 2019-2024 — from the Union’s 2020 hydrogen strategy to the major overhaul of European energy and climate legislation through the Fit for 55 package of measures.

The Draghi report highlights the importance of integrated governance to meet the challenge of competitiveness: the hydrogen economy now needs to be planned at the Union level and thought through within the framework of the single market. As the world’s foremost energy importer, Europe can set the pace in the transition from fossil fuels to clean energies by displaying a unified front on these new energies. Given the current geopolitical context, we must fast-track any action that broadens access to renewable and replaceable energies — hydrogen being one of the main vectors for this.

Seven proposals

1 — Commit to the gradual phase-out of fossil hydrogen production

Simple, clear signals are needed to trigger investment

The Draghi report states that the gradual transition to hydrogen and green fuels in industry should take place when it is cost-effective to do so.

The strategic LNG import infrastructure — which is still expanding — may have to be converted in the future to accommodate the new fuels of the energy transition. Its financing should therefore be subject to an option value that considers a scenario of repurposing. We go even further by saying that we should also plan for a gradual phase-out of fossil fuel applications such as “grey” hydrogen produced from natural gas, by using the opportunities Europe has in the North Sea and the Mediterranean to deploy carbon capture and storage solutions where appropriate — or by planning and supporting the switch to green hydrogen. A clear commitment by the Union to ban all new fossil hydrogen production capacity within the Union, and a planned phase-out of residual fossil hydrogen production within a reasonable timeframe, would provide a real jump-start for the sector. Although COP29 would have been the ideal setting to send this message, we must now bank on Brazil and COP30.

The gas market, the electricity market, and clean energies are strongly related. This is why, in order to optimize the repurposing of existing infrastructure, network development must be approached in an integrated manner.

Implementing the European Hydrogen Backbone (EHB)

The implementation of the Union’s hydrogen backbone is an essential component of large-scale hydrogen production in the Union. Most of the current recipients of the Hydrogen Bank’s calls for proposals rely heavily on the EHB to supply end-users (as is the case, for example, with the Spanish projects). Furthermore, in the current context where more and more voices are being raised in the electricity sector concerning the increase in negative pricing hours, access to a dedicated hydrogen grid is essential to unlock load-following electricity consumption modes by electrolyzers, absorbing “surplus” renewables during peak solar/wind hours. As the Draghi report emphasizes, the availability of dedicated infrastructure will make it possible to produce hydrogen in places where renewables are abundant and cheap, and to create a fluid, competitive market for industrial consumers and their decarbonization. This will enable better use to be made of European assets in an economy that is becoming fundamentally asset-based, meaning that as much as possible must be extracted to reduce the cost of using installed assets.

2 — Provide Union-wide guarantees and risk-sharing rules to implement the hydrogen backbone

The implementation of the backbone faces a number of challenges.

The first challenge is the risk in terms of volume and timing of activation. No framework currently clarifies the conditions under which hydrogen producers or potential consumers are compensated if the Hydrogen Transmission Network Operator (HTNO) connects them late, nor the financial model for initiating infrastructure without immediately contracted quantities. The financial risks are enormous: in the long term, they will be made clear by network rules and European legislation, but in the meantime, the European Union should provide an “infrastructure availability guarantee” to cover this risk, based on a subset of criteria and within an accepted delay, after which the HTNO would remain solely liable. This guarantee could come from a specific EIB instrument, cross-guaranteed by Union-level resources.

These proposals are similar to those put forward for the electricity grid in the Draghi report.

Because of their long amortization and naturally monopolistic nature, these networks require long-term debt financing mechanisms. Together with the EIB and the Hydrogen Bank — whose mandate should be extended and strengthened to include other new energies — the Commission must develop financial instruments that mobilize private capital for investment in networks in order to limit the impact of costs on final consumers and public budgets. For example, Mario Draghi is proposing public guarantees to reduce the risk of long-term loans for private investors and address the refinancing risks associated with the long economic life of grid assets.

Beyond the pioneering role of the Important Projects of Common European Interest (IPCEI) process, implemented jointly with Member States under the aegis of the Commission, the latter has successfully deployed important financing tools at the Union level through the European Hydrogen Bank (H2B) and the ETS Innovation Fund; these have had a positive impact on the development of large-scale decarbonization projects focused on low-carbon hydrogen. A European funding initiative for these new energies, particularly their European infrastructure, would be consistent with our objectives — and up to the task. It would take into account the need to leverage the European space and avoid further strain on member state budgets, which are heavily constrained by the socio-economic challenges facing our continent. The same approach will quickly become necessary with regard to defense issues. The approach of assertive industrial protectionism on the one hand, and of maximum openness to foreign capital and public financial windfalls in the United States to strengthen the American economy on the other, as well as China’s extreme competitiveness, which is partially supported by Beijing’s public funds, are all messages for Europe to react as quickly as possible in its budgetary and monetary policy. Member states and the Union must act as quickly as possible, while at the same time demanding a high level of responsiveness on the part of economic players in the implementation of European policies. This calls for regulations designed to have a direct and major financial impact: helping those who are making progress, and penalizing those who balk.

Building on the success of the large-scale Hydrogen Bank

In April 2024, the European Commission awarded its pilot Hydrogen Bank auction to seven European renewable hydrogen projects, representing 720 million euros of investment. The development of this instrument, as a common financing tool, is an important step in the Union’s energy-climate policy. The H2B bank has had a significant positive impact in creating widespread interest in renewable, low-carbon hydrogen. The next necessary step is to build on the experience gained and deploy the instrument at scale — in other words, beyond the nearly €2 billion in support pledged.

3 — A Hydrogen Bank with a budget of €40 billion to implement large-scale support measures

The main challenge is to develop the instrument to a level in line with the Union’s ambition. Assuming that all projects awarded in the pilot auction come online, H2B would support the production of 0.15 Mt H2/year, or 0.75% of the RePowerEU target — 1.5% of the Union’s domestic production target. Assuming that only 20% of the Union’s domestic production target for 2030 (10 Mt/year) is achieved with H2B support, and that the instrument covers, on average, a price difference of €2/kg over 10 years, the H2B needs a budget of around €40 billion over its lifetime.

The Draghi report supports the need to develop instruments such as the European Hydrogen Bank and Contracts for Difference (CfD), a mechanism to cover the cost delta between fossil and low-carbon hydrogen production. It calls for the simplification, acceleration, and standardization of subsidy allocation mechanisms through the adoption of common instruments. The report also suggests that ETS resources could be further mobilized to finance such instruments, including ETS2 resources ¹ : we strongly support this approach, in complement to private capital. In the same vein, the European Bank could also contribute to greater financing of investment needs for the conversion of fossil-intensive process industries, as a complement to national policies, in order to secure their continued presence in the European space for decades to come. This is a matter of jobs, competitiveness, and energy and industrial sovereignty.

Stabilizing expectations and information on successive auction rounds must be transparent and available well in advance to facilitate investment planning.

Innovative financing strategies: towards an EU climate savings plan

Financing the hydrogen strategy and, more generally, the Union’s climate ambitions, while also preserving our competitiveness, will require massive investment on a scale not seen since the post-war period — or even since the first industrial revolution — as evidenced by the figure of 800 billion euros mentioned at the start of the Draghi report. Public resources, whether from the Union or member states, will not be enough. Let’s make no mistake: deploying investments in a low-carbon economy as quickly as possible also serves the continent’s sovereignty and security, not only with regard to energy, but also for its strategic sectors – steel for defense, fertilizers for food.

4 — Implementing a climate-conscious monetary policy

The Union’s taxonomy has provided a normative framework for the labeling of green and brown investments.

It is now up to the Union to provide clear economic incentives to deploy green investments, beyond investor preferences and ESG choices. Given the transition’s capital-intensive nature, it is essential to make every effort as quickly as possible to differentiate the cost of capital between green and brown investments.

A climate-conscious monetary policy — whether it favors green assets through quantitative easing or through double rates, as some in the economic community are suggesting — will prove necessary: the Commission has a role to play in encouraging the ECB to take the first steps and confirm its clear stance in favor of a green monetary policy. As the Draghi report suggests, a favorable adjustment of capital requirements for green assets would also be a key incentive for the transition.

5 — A European directive on green savings

At the same time, the aggregate savings rate of EU households has reached a record high.

Putting private households’ capital to work to finance the transition is therefore an obvious solution. Long-term savings — life insurance, pension plans — are the ideal vehicle for financing the infrastructure that will enable the transition due to their long maturity and desired risk profile: if the Union fails to achieve a competitive transition to net zero, there will be little left of Europe’s productive economy.

The Draghi report suggests that the Union must better channel household savings into productive investment through long-term savings products such as pensions.

One solution could be to roll out a European green savings directive, which would establish a unified framework for EU green savings products, with low consumer liquidity, long maturity — investing only in funds categorized under art. 9 of the Sustainable Finance Disclosure Regulation — and in taxonomy-compliant assets within the EU.

These products would represent a category of resources that could be prioritized in future updates of the Union’s prudential requirements framework, as they would be intrinsically climate-resilient and contribute to mitigating climate change. This would be a natural extension of the ECB’s efforts to ensure that climate risk is better taken into account in supervisory and regulatory efforts. They would be earmarked for investments within European territory, or in favor of European players, to ensure that European savings serve European strategic interests first and foremost.

Member states should be incentivized to offer tax and legal advantages to these products, building on existing tax regimes for life insurance or long-term savings in certain member states. Of course, imposing tax deductions or exemptions on member states would require unanimous agreement in the Council, but we could envision reserving certain Union resources for investments in member states that adopt them — for example, the EHB, the Innovation Fund, the CEF — in line with a philosophy of additionality — with Union resources mobilized where private capital is most urged to invest in the transition. We could also envision that a portion of the fiscal cost borne thereby by member states for measures in favor of green savings be deducted from their contributions to the EU budget — or deducted from their deficit targets under the Stability and Growth Pact.

Implementing the energy transition

The Draghi report also highlights the challenge of implementation and the responsibility of member states.

Most EU Member States have failed to meet their 2020 targets for the use of renewable energies in transport, and to date none have formally adopted in full the main directives passed during the previous term, notably RED 2 and 3 — the second and third directives on renewable energies. The next term should endeavor to ensure that these directives are implemented as quickly as possible and, to this end, should aim to simplify the rules to facilitate their adoption.

This situation, which adds to the incomprehensibility of RED 3 rules given their immense complexity, signals the failure of European regulatory policy in terms of simplicity, the ability to implement quickly and, above all, the effectiveness of implementation, whether as an incentive or a deterrent.

The need for European change on this subject is urgent, and must happen now, lest we risk paralyzing our continent under the weight of standards that are not only incomprehensible to the general public, but even divisive and alienating to experts — and, in any case, incomprehensible to investors. The transition is more a matter of concrete projects than of subtly defined objectives set out in directives and regulations; in order to succeed, political choices need to be directly and simply translated into investors’ financial models. Yet today, we spend more time on these subjects than on the actual implementation of projects, investments and activities that are tangible for Europeans. This situation is the starkest illustration of how disconnected our political and regulatory world is from the livelihoods of Europe’s citizens and businesses.

Turning Fit for 55 objectives into projects and investments

At the heart of the Fit for 55 package’s political design lies a two-fold combination of measures based on the one hand, on the gradual implementation of a carbon pricing instrument throughout the European economy and on improving its resistance to carbon leakage and on the other hand, on sectoral mandates aimed at incorporating renewable energies into final energy consumption. These mandates are a key driving force behind the development of hydrogen, without which large-scale adoption is not possible, given that the carbon pricing signal is not enough to trigger investment in the sectors that are hardest to decarbonize ² .

6 — Make renewable fuels of non-organic origin (RFNBO) and renewable energy mandates a reality for projects and investments by clarifying the scope and conditions of implementation and ensuring uniform application throughout the Union.

Regulatory demand hasn’t materialized — yet — because regulations aren’t — yet — effective.

One of the main reasons why offtakers are cautious about committing to long-term quantities is largely due to the uncertain nature of regulatory requirements and associated penalties caused by the lack of adoption or the incorrect or incomplete adoption of regulatory requirements — particularly those in the Renewable Energy Directive, but which also affect, to some extent, RefuelEU aviation and FuelEU marine. This situation has led to hydrogen projects being developed primarily for refineries, rather than for the wide range of hard-to-decarbonize sectors that will prove necessary.

The Commission has a fundamental role to play in meeting these challenges.

— Firstly, by clarifying the scope of mandates and steering member states towards placing responsibility on economic operators rather than individual member states, while at the same time leveraging the Carbon Border Adjustment Mechanism (CBAM) infrastructure to ensure adequate protection against “mandate leakage”, particularly in the context of articles 22a/22b.

— Secondly, by ensuring that the adoption framework is uniform across member states and as clear as possible for investors, so that economic signals share a common, well-integrated structure on the EU market. In his report, Mario Draghi proposes minimizing the cost of adoption for member states, as well as strengthening the role of the Single Market Enforcement Body (SMET) in order to avoid incorrect adoption.

— Thirdly, building on this uniform adoption, by promoting the emergence of a transparent, fluid and efficient European market for “RFNBO incorporation certificates”, rather than the current disjointed system of national certificates which, in most cases, does not allow easy circulation of incorporated renewable content across intra-European borders. This approach is in line with the Draghi Report’s recommendation that financing tools — subsidies, credits, taxation, free allowances — be coordinated and deployed throughout the single market.

— Fourthly, by stimulating demand for renewable and low-carbon products in other EU policy areas. For example, the Common Agricultural Policy could, in its next fiscal year, grant incentives to farmers who opt for renewable and low-carbon fertilizers, and vehicle or building standards could require an increasing share of low-carbon steel use. In this respect, the Draghi report does not propose sectoral implementation, but seeks to stimulate demand for green products by encouraging transparency through the setting of European standards for labeling, measuring, and communicating the carbon footprint of products.

Ensuring the effectiveness of European CO2 standards in road transport

The Union has rightfully imposed highly ambitious CO2 standards, particularly for trucks and buses, and set minimum requirements for electric vehicle recharging and hydrogen refueling through the Alternative Fuels Infrastructure Regulation (AFIR) ³ .

7 — Send a clear message on CO2 targets for vehicles and implement a Europe-wide battery/hydrogen infrastructure with a pay-as-you-go system.

Currently, there are fears that the targets set for trucks and buses will not be met, as manufacturers seem to be betting on a revised target. A few concerning facts support this portrayal: (i) there are virtually no zero-emission trucks on the road; (ii) battery-powered truck models are beginning to exist, but at a very high price; (iii) H2 truck models are being developed and introduced, but manufacturers have stated that they will not be on the market before 2027 (small series) or 2029-30 (high volume) due to the lack of infrastructure; (iv) the success of CEF/AFIR conceals the lack of a real deployment strategy coordinated by member states, vehicle manufacturers, and infrastructure operators.

Crucially, the Draghi report omits the role of hydrogen in mobility, particularly in heavy transport. It focuses on electric vehicles, while excluding hydrogen-powered trucks and buses, as well as hydrogen refueling infrastructure, which is nonetheless necessary to decarbonize road transport and relieve the considerable pressure now weighing on the strengthening of electricity grids, the cost of which is estimated at over 500 billion euros, and the time it will take to implement will struggle to meet the EU’s ambitions.

It is possible to implement public-private partnership (PPP) models and build a coalition of investors if there is an investment model with guarantees accompanying risk-taking put in place by the public authorities. Both the CO2 and AFIR standards are subject to a revision clause set for December 31, 2026: in other words, 24 months of rumors ⁴ about a possible downward revision of CO2 standards and AFIR targets for the heating, ventilation and cooling sector could be enough to paralyze investment. The Commission can provide clarification to avoid this. At the same time, there is a need to coordinate an accelerated deployment of infrastructure. If the Union is to maintain its targets as it should, it needs very rapid and ambitious implementation of battery/H2 infrastructure. This can only be achieved through a much more coordinated approach. The Commission should give this issue political priority, as its success is essential to the success of CO2 emission standards.

The challenges of the hydrogen economy are therefore highly representative of the entire European predicament, which possesses the world’s most comprehensive vision of transition policies but suffers from the most tenuous capacity to implement them due to the complexity of governance and the inability to develop a vertical decision-making process that is absolutely critical when time is of the essence. Power sets itself apart by the speed with which it can be projected, and we must clarify governance and the decision-making process to set the necessary pace. Now is not the time for technical squabbles about climate policies, which are beyond the grasp of many people because their tangible benefits are so distant and diffuse.

The challenges of energy, food, and defense security are extremely tangible components of climate policy. Geopolitical urgency will require Europe to speed up its implementation – to everyone’s benefit. At the same time, it is not impossible that European governance will have to undergo a thorough overhaul; this is essential to give Europe the means for truly integrated policy in key areas of its security.

1. European Central Bank, “Obstacles to the greening of energy-intensive industries”, September 17, 2024.
2. Michael Grubb, Rutger-Jan Lange, Nicolas Cerkez, Ida Sognnaes, Claudia Wieners, Pablo Salas, Dynamic determinants of optimal global climate policy, Structural Change and Economic Dynamics, Volume 71, 2024.
3. On this basis, together with Hy24, we designed our fund to invest massively in H2 refueling infrastructures (HRS) and H2 fleets. Hy24 has made two notable investments in these areas: a refueling infrastructure network in Germany (H2 Mobility) and an integrated business model — vehicles, infrastructure and services managed by HysetCo — in France.
4. Covid period update.