The Emerging Hydrogen Economy Why Japan and Germany Are Betting Billions on a Fuel That Does Not Yet Exist at Scale

Expert Comment — Global Programme

2026 07 07

HHydrogen has been called the fuel of the future for decades, but the future has always remained just out of reach. That may finally be changing. Japan and Germany have committed over $30 billion each to hydrogen development. South Korea, the European Union, and the United States have launched major hydrogen initiatives. The logic is compelling: hydrogen can be produced from renewable energy, stored for long periods, and used in applications where batteries are impractical, including heavy industry, shipping, aviation, and power generation. The question is whether the technology and economics can scale to make hydrogen a meaningful part of the global energy system.

The fundamental challenge for hydrogen is production cost. Green hydrogen, produced through electrolysis using renewable energy, currently costs between $4 and $6 per kilogram. Grey hydrogen, produced from natural gas without carbon capture, costs around $1.50 per kilogram. For hydrogen to be competitive with fossil fuels in most applications, the cost of green hydrogen needs to fall to below $2 per kilogram. The International Energy Agency projects that this could be achieved by 2030, but the trajectory depends on continued cost reductions in electrolysis technology, falling renewable energy prices, and the development of scale in hydrogen production and distribution infrastructure.

The infrastructure required for a hydrogen economy is enormous. Hydrogen must be produced, compressed or liquefied, stored, transported, and distributed. Each stage of the value chain requires infrastructure that does not currently exist at scale. Hydrogen pipelines, storage facilities, refuelling stations, and end use equipment all need to be built. The cost of building a hydrogen infrastructure is estimated at over $1 trillion globally. The coordination challenge of building production and consumption infrastructure simultaneously is one of the most difficult aspects of the hydrogen transition.

Hydrogen is the lightest element and the most energy dense fuel by weight, but its low density creates significant storage and transport challenges. To be stored and transported efficiently, hydrogen must be compressed to 700 times atmospheric pressure or liquefied at minus 253 degrees Celsius. Both processes consume a significant portion of the energy contained in the hydrogen itself, typically 15 to 20 per cent for compression and 30 to 40 per cent for liquefaction. The energy cost of handling hydrogen reduces the overall efficiency of the hydrogen value chain and increases the cost of delivered hydrogen to end users. Research into solid state hydrogen storage and chemical carriers such as ammonia and liquid organic hydrogen carriers may offer solutions. But these technologies are at an early stage of development.

Hydrogen faces competition from direct electrification in many of its potential applications. Electric vehicles are more efficient than hydrogen fuel cell vehicles, converting over 80 per cent of input energy into motion compared to around 40 per cent for hydrogen. Heat pumps are more efficient than hydrogen boilers for heating buildings. Battery storage is becoming cheaper than hydrogen storage for short duration applications. The economic case for hydrogen is strongest in applications where direct electrification is difficult or impossible: heavy industry, long distance shipping, aviation, and seasonal energy storage. The hydrogen economy will develop alongside the electrification economy, not in competition with it. The balance between the two will vary by sector, region, and application.

Government policy is essential for the development of the hydrogen economy. Japan was an early leader, launching the world’s first national hydrogen strategy in 2017. Germany followed with its own strategy in 2020. The European Union’s Hydrogen Strategy targets 40 gigawatts of electrolyser capacity by 2030. The United States Inflation Reduction Act includes a production tax credit for clean hydrogen of up to $3 per kilogram. South Korea, China, and Australia have also launched major hydrogen initiatives. The diversity of policy approaches reflects different national circumstances and priorities. Japan and South Korea focus on hydrogen import infrastructure because they have limited renewable energy resources. Germany and the EU emphasise domestic production from renewable energy. Australia positions itself as a future hydrogen exporter. The coordination of these different approaches will be essential for the development of global hydrogen markets.

Not all hydrogen is created equal in environmental terms. Green hydrogen, produced through electrolysis using renewable energy, is carbon neutral. Blue hydrogen, produced from natural gas with carbon capture and storage, has a larger carbon footprint but can be produced at lower cost. Grey hydrogen, produced from natural gas without carbon capture, is the most common form today and has a significant carbon footprint. The environmental credentials of hydrogen depend on how it is produced. The development of certification schemes and guarantees of origin will be essential to ensure that hydrogen delivers its promised environmental benefits. Without robust certification, there is a risk that hydrogen production will rely on fossil fuels and undermine the environmental case for the hydrogen economy.

A global hydrogen economy would have significant geopolitical implications. Countries with abundant renewable energy resources, such as Australia, Chile, Morocco, and Saudi Arabia, could become hydrogen exporters, reshaping global energy trade patterns. Countries that depend on fossil fuel exports, such as Russia and the Gulf states, could face declining revenues as hydrogen replaces natural gas and oil in some applications. The hydrogen economy could create new patterns of energy interdependence and new sources of geopolitical leverage. The geopolitics of hydrogen will be different from the geopolitics of oil and gas, but energy will remain a source of strategic competition and cooperation.

Heavy industry is one of the most promising applications for hydrogen. Steel production, cement manufacturing, and chemical processing all require high temperature heat that is difficult to provide through direct electrification. The steel industry alone accounts for approximately 8 per cent of global carbon emissions. Hydrogen based steelmaking, in which hydrogen replaces coke as the reducing agent in the blast furnace, could eliminate most of these emissions. Several demonstration projects are underway in Europe and Asia, but the commercial deployment of hydrogen steelmaking faces significant economic challenges. The cost of green hydrogen must fall significantly, and the infrastructure for hydrogen supply must be developed before hydrogen steelmaking can compete with conventional production methods. The transition of heavy industry to hydrogen is a multidecade process that will require sustained policy support and investment.

The development of a global hydrogen economy requires international cooperation on standards, certification, and infrastructure. Common standards for hydrogen quality, safety, and measurement are essential for the development of hydrogen trade. Certification schemes for the carbon intensity of hydrogen production are needed to ensure that hydrogen delivers its promised environmental benefits. The development of hydrogen infrastructure, including pipelines, storage facilities, and ports, requires coordination across national borders. The International Partnership for Hydrogen and Fuel Cells in the Economy and the Hydrogen Council provide forums for international cooperation, but the scale of coordination required goes beyond what these organisations can currently deliver. The development of a global hydrogen economy will require a level of international cooperation that has historically been difficult to achieve in the energy sector.

The hydrogen economy offers significant economic development opportunities for countries with abundant renewable energy resources. Australia, Chile, Morocco, and Saudi Arabia are positioning themselves as future hydrogen exporters, hoping to replicate the economic benefits that fossil fuel exports have provided to other countries. The development of a hydrogen export industry requires massive investment in renewable energy capacity, electrolysis facilities, and hydrogen transport infrastructure. The economic returns from hydrogen exports could be substantial, but the investment requirements are enormous and the timeline is uncertain. The development of hydrogen economies in developing countries could also provide access to clean energy and support sustainable development, but only if the benefits are shared broadly and the risks are managed carefully.

The development of hydrogen infrastructure faces challenges of public perception and social acceptance. Hydrogen is a flammable gas that requires careful handling. Public concerns about safety could delay or prevent the development of hydrogen infrastructure, particularly in densely populated areas. The experience of other energy technologies, including nuclear power and carbon capture and storage, demonstrates that public acceptance is essential for the deployment of new energy infrastructure. The hydrogen industry must engage with communities, address safety concerns, and demonstrate that hydrogen can be produced, stored, and transported safely. The development of public trust is as important as the development of technical capability for the hydrogen economy.