Promoting hydrogen through supporting consumers or producers? An international welfare economic analysis

This paper examines the international welfare effects of two types of hydrogen-support policies: subsidies for green electrolysis-hydrogen production and subsidies for hydrogen consumption. Using a short-term partial equilibrium model of the integrated electricity and hydrogen markets in seven Western European countries, we find that, in this short-term framework under given generation capacities and an existing carbon-pricing regime, hydrogen-consumption subsidies reduce domestic emissions but may increase emissions abroad, while green-electrolysis subsidies raise emissions both domestically and internationally due to higher electricity demand. Both policies benefit hydrogen users, but increase electricity prices, harming electricity users. Overall, both policies and, in particular, production support for electrolyzers, negatively affect welfare in the short term, though some countries may gain from trade. In scenarios with higher gas and carbon prices, hydrogen subsidies, especially for power-to-gas producers, can improve overall welfare in the short term.Key policy insightsThe short-term effectiveness and efficiency of national hydrogen policies depend on the degree of integration and interaction between international electricity and hydrogen markets.In the short term and under constrained renewable capacity, subsidizing hydrogen consumers effectively reduces domestic emissions while the economic benefits remain mainly domestic, but it may raise emissions elsewhere.Even in a situation of strongly internationally integrated markets, domestic general consumption support results in a lower loss of welfare than technology-constrained production support in the short term.