Hydrogen is often seen as a key element in the global energy transition, offering a cleaner alternative to fossil fuels—in particular for difficult-to-decarbonize sectors such as heavy-duty transportation and steel and cement manufacturing. But turning hydrogen into a globally traded commodity requires more than just production.

According to new research from UBC Sauder School of Business, hydrogen's commercial success hinges critically on innovation, strategic government policies, and long-term contracts to ensure cost-effective production and scalable trade.

The work is published in the Journal of Environmental Economics and Management.

The study developed an international trade model to examine factors that would make hydrogen producers competitive on the global scale, such as transportation costs, government policies and technological advances.

"Hydrogen has tremendous potential to reshape energy markets," said Dr. Werner Antweiler, associate professor at the UBC Sauder School of Business and co-author of the study. "But making it profitable requires coordinated efforts across governments, industries and markets to reduce costs and build the infrastructure for trade."

Lowering production costs

Hydrogen's commercial viability depends heavily on reducing production costs, particularly for green hydrogen, which is produced from renewable energy sources like wind and solar. While green hydrogen is the cleanest option, it's currently the most expensive compared to blue hydrogen (produced from natural gas with carbon capture) and turquoise hydrogen (produced by splitting methane).

"We're seeing progress with cheaper solar power, but we also need breakthroughs in electrolyzers to make green hydrogen viable at scale," said Dr. Antweiler.

Government policies: Innovation and building hydrogen infrastructure

Transportation is another major challenge. Hydrogen is costly to move.

"Hydrogen can be transported in two ways: using converted natural gas pipelines or liquefying it, either by cooling it like natural gas or converting it into ammonia for shipment by tanker," said Dr. Antweiler.

Instead of just subsidizing production, governments will need to invest in infrastructure—pipelines, export terminals and storage facilities—to support cost-effective hydrogen trade.

"Hydrogen producers want to focus on production, not building export facilities. There's a lot of development needed outside the hydrogen industry itself," noted Dr. Antweiler.

Government policies would also need to prioritize innovation. Countries investing in research and development for cheaper electrolyzers or methane pyrolysis for turquoise hydrogen will gain a competitive edge in the emerging market.

"Innovation is the real game-changer. There's significant potential for hydrogen to transition from locally interesting to globally traded as these technologies develop," said Dr. Antweiler.

Long-term contracts: Ensuring market stability

A key finding was the importance of long-term contracts in the hydrogen market, where capital-intensive production plants require long-term certainty. These contracts stabilize prices and ensure reliable demand, providing security for both producers and buyers.

"Hydrogen won't operate like the spot market for oil and gas," said Dr. Antweiler. "Developers need guarantees of customers for years to come, which is why long-term contracts are crucial."

However, these contracts also carry risks. A country might commit to blue hydrogen today, only to find that green hydrogen becomes cheaper later. Balancing stability with flexibility will be key to the hydrogen market's long-term success.

A two-way trade future: Exporting and importing hydrogen

The study found that hydrogen trade is likely to involve both exporting and importing, unlike oil markets where countries typically do one or the other. Many countries have the potential to produce hydrogen with renewable energy, while the supply of fossil fuels is concentrated in a handful of large producer countries.

"Hydrogen trade could evolve into a system where countries both buy and sell," explained Dr. Antweiler. "As demand increases, nations will need to secure supply from multiple sources, making hydrogen a flexible, globally traded commodity."

Dr. Antweiler noted that major energy companies in Europe and the Middle East are already investing billions in hydrogen infrastructure as they prepare for a future where hydrogen plays a central role in energy markets beyond fossil fuels.

More information: Werner Antweiler et al, The emerging international trade in hydrogen: Environmental policies, innovation, and trade dynamics, Journal of Environmental Economics and Management (2024). DOI: 10.1016/j.jeem.2024.103035