Key points

  • The US Inflation Reduction Act (IRA) offers the policy support that clean hydrogen needs, in the form of clean-energy tax credits and other provisions encouraging the buildout of green-energy infrastructure and the use of renewable energy in the US.
  • We do not believe that hydrogen will be the solution to decarbonise all hard-to-abate sectors, but it could play a crucial role in decarbonising some areas, including steel manufacturing, heavy-duty transportation and shipping.
  • However, for broad adoption to take place across these industries, green hydrogen would need to become more cost competitive than fossil fuels, and we do not anticipate this happening before 2030. 

Green hydrogen, with its ability to generate energy with low-to-zero emissions, has been long touted as a potential alternative to fossil fuels, yet has historically failed to ignite widespread support. Despite its appeal, clean hydrogen has been expensive to produce and less efficient than other energy sources, and thus hard to reconcile from an economic standpoint. However, the US IRA—with its sizeable tax credits targeting clean hydrogen—upended that narrative, reenergising enthusiasm and unlocking investment opportunities in this space.

The IRA was one of the largest green subsidy/support packages, dwarfing other incentives and sparking debate as to whether other regions will respond similarly. The legislative package offers the policy support that clean hydrogen needs, in the form of clean-energy tax credits and other provisions encouraging the buildout of green-energy infrastructure and the use of renewable energy in the US. The IRA endorses clean-hydrogen and fuel-cell technologies, through the extension and enhancement of existing federal tax credits and the issuance of new ones. Incentives include tax credits of up to $3.00 per kilogram for green-hydrogen production, which is substantial as green hydrogen costs around $3.40 to $4.00 per kilogram to produce.1

We believe clean hydrogen could play an important role in replacing existing dirty hydrogen and holds significant potential in emerging uses like steel decarbonisation, heavy-duty road transport decarbonisation and more.

The ins and outs of hydrogen

Colourless, odourless and tasteless, hydrogen is the lightest element found on earth and the most abundant in the universe. It is also the simplest element, consisting of just one proton and one electron.2 However, because of its highly reactive properties, hydrogen is not found free in nature. Instead, it exists in compound form, combined with other elements in gases, liquids and solids. Hydrogen and oxygen atoms combine to form water (H2O), while hydrogen and carbon atoms combine to form hydrocarbons found in natural gas, coal and petroleum.3

For hydrogen to be used as an energy source, the element must be isolated—extracted from water or hydrocarbons. There are several different ways to do this, and each method yields its own benefits, potential applications and emissions levels. The ‘hydrogen rainbow’ is used to delineate production methods using colour codes, several of which are outlined below:  

  • Fossil-fuel-based hydrogen   
    • Grey hydrogen—the most prevalent and cheapest form used today—is generated from natural gas and produced via the steam methane reforming (SMR) method.
    • Brown hydrogen is made from thermal coal and produced via gasification. While cost effective, this emits the highest levels of greenhouse gases. 
    • Blue hydrogen is also primarily produced using natural gas via SMR. However, this approach also incorporates carbon capture and storage, which could reduce carbon emissions by up to 90%.    
  • Low/zero-emissions hydrogen
    • Green hydrogen is created using electrolysers—which separate hydrogen atoms from water molecules—powered by renewable sources, such as wind and solar power.  
    • Pink/red hydrogen is also generated using water electrolysis but is fuelled by nuclear energy instead of renewables.  

Currently, hydrogen is used extensively as a feedstock in many key industrial processes, particularly in the oil refining and chemical sectors. Most of the hydrogen available today is produced using fossil fuels, with less than 0.1% derived from renewable resources. The current hydrogen market produces approximately 90 million tonnes per year, generating 900 million tonnes of carbon dioxide (CO2) emissions and constituting 3% of global energy-related emissions.4

In our view, replacing grey and brown hydrogen where possible with low and zero-emissions hydrogen could be a meaningful step forward in the global charge to net-zero emissions.


Hydrogen is a versatile energy source that can serve as both a fuel and a storage solution for electricity, with the potential to deliver near-zero greenhouse gas emissions. When hydrogen is combusted, water and oxygen are its only by-products, contributing to cleaner emissions at the point of use. When combined in a fuel cell with oxygen, hydrogen generates electricity through an electrochemical reaction, emitting only water in the process. Hydrogen fuel cells can be used as back-up clean-power sources for critical facilities, including hospitals, manufacturing plants, data centres and military bases, and could replace the highly emission-intensive alternatives like diesel. Hydrogen has a high energy content per unit of mass—approximately 2.6 times that of gasoline and about 2.3 times that of natural gas. It can release a vast amount of energy without adding much weight to the products it fuels, and less of it is needed to power work.


One of the main limitations of clean hydrogen is the energy loss that occurs at every step, from electrolysis—the conversion of electricity to hydrogen—to the storage, transportation and conversion of hydrogen back into electricity through fuel cells. Within the lifecycle of hydrogen energy, there is a 20-30% energy loss in electrolysis, 10% in transportation and storage, and 25-35% from conversion back from electricity to hydrogen, making it less efficient and more costly than other energy sources.

In its ambient form, hydrogen is a highly flammable gas and carries the risk of spontaneously combusting if not handled properly. However, its lighter-than-air properties somewhat mitigate that risk, as it can disperse quickly in open air. With hydrogen’s low density, it requires significant space for storage and energy for liquefaction, which further complicates handling, transport and distribution. Hydrogen production is also water intensive, and largescale hydrogen production plants could consume substantial amounts of fresh water in their respective localities.

Additionally, the adoption of clean hydrogen faces considerable hurdles owing to the need for new production, transportation and storage infrastructure, which would take a great deal of time and effort to develop. The substantial investment required would increase the overall cost of hydrogen compared to more established fossil-fuel sources.

Hard-to-abate sectors

With hydrogen’s limitations as an energy source, electrification may always be the better option, when available, as it is the more energy-efficient alternative. However, with the increasing focus on achieving net-zero emissions both by countries and companies, we believe clean hydrogen could be a key long-term decarbonisation solution for several hard-to-abate industries.

Steel manufacturing

The steel industry, which emits around 3.6 billion tonnes of CO2 annually, contributes approximately 7% to 9% of total global greenhouse-gas emissions.5

The iron-creation step accounts for 90% of the greenhouse gases generated in steel manufacturing. Green hydrogen could play a critical role in replacing the role of coal in this step. Through a process called direct reduction of iron (DRI), hydrogen can be used to diffuse inside solid iron-ore pellets to remove oxygen and reduce the mineral substance. Using this method, solid direct-reduced iron (i.e., sponge iron) is produced and then melted in an electric arc furnace to generate steel. The DRI process has been in existence for many years, and some steel made today is produced via this method. However, this steel is typically created using natural gas, releasing carbon emissions that could be avoided using clean hydrogen.

In our view, green hydrogen could be a viable solution for decarbonising the steel industry; however, there would be challenges to this transition. Shifting to the DRI process using green hydrogen would require a commitment of time and resources, as a large part of the infrastructure would need to be rebuilt. Direct reduction shafts would need to replace existing blast furnaces, and these greenfield projects, developed entirely from scratch, would inevitably leave behind stranded assets. There would also be supply constraints, as currently only 4% of the seaborne iron-ore market meets DR standards.6

Currently, most companies actively incorporating green steel into their future processes are in the electric-vehicle (EV) market. For EVs, green hydrogen could provide very low emissions, in addition to zero embedded emissions if the hydrogen were used in steel production. Also, transitioning to green steel should only add approximately 2% to 3% to the cost of the vehicles.7

Heavy-duty transport

Commercial vehicles contribute to around 40% of all transportation-related emissions, emitting almost 2.6 billion tonnes of CO2 in 2021 (3% of all global carbon emissions).8 In our view, green hydrogen could lighten the carbon footprint in niche areas of this sector.  

Battery-electric vehicles (BEVs) have gained momentum in the trucking industry, particularly in cases where trucks carry lighter loads and travel shorter distances. However, while BEVs have many advantages, they also require a significant amount of time to recharge, have limited range and add a substantial amount of weight to the vehicles they power. Fuel-cell trucks could be suitable for niche applications, such as travelling regular long-haul roads where BEV-charging stations are impractical or where locations are remote and lack grid infrastructure. Hydrogen trucks may also be a practical option for industries such as forestry or binding that require heavy loads, faster refuelling times and multi-day truck journeys.

Adopting clean hydrogen in this space would pose its challenges. For instance, widespread use of hydrogen for trucking would require the development of an extensive pipeline network, which would take a long time to complete and require multiple large users if it were to be viable. This infrastructure buildout would considerably increase the price of hydrogen at the pump. Additionally, the energy loss that occurs in converting clean hydrogen to electricity in a fuel-cell EV is approximately 75%.9

We believe that fuel-cell truck adoption would require strong policy support and could likely remain case and location specific. In our view, BEVs—with their more concrete cost and technology trajectory, high and expanding model availability and early movement in high-power charging—may often be better candidates for decarbonising commercial vehicles. However, factors such as geography, logistics, road infrastructure and population centres would also play a role in whether BEVs or fuel-cell vehicles command a higher market share.

Notably, adoption by major players has been slow. However, markets across the world are beginning to subsidise fuel-cell commercial vehicles. 

Shipping industry

Currently, 96% of all shipping fuels are made from heavy oil. Accordingly, the shipping industry emits around 1 billion tonnes of CO2 per year, accounting for almost 3% of total global carbon emissions.10 The International Maritime Organization has set a 50% carbon-emission reduction target for the shipping industry by 2050. Additionally, the average lifetime of a large ship is 20 to 25 years, underscoring the level of urgency needed to develop sustainable shipping alternatives. For shipping companies to achieve net-zero emissions by 2050, new technologies would need to be deployed between 2025 and 2030 to replace large ships by 2030. Shipping companies are exploring methanol and ammonia—both derived from hydrogen—as potential decarbonisation options for large-scale marine shipping.

Ammonia, a compound of nitrogen and hydrogen, is a zero-carbon fuel that can be stored as a liquid and is easier to handle than both liquified natural gas (LNG)—the industry’s primary alternative fuel—and hydrogen. However, ammonia is also very toxic, and most vessels currently do not have the provisions required to store it.

Methanol can be produced using fossil fuels or renewable-energy sources. Renewable methanol can be generated using biomass as a feedstock or by combining captured CO2 with green hydrogen. It is easily stored onboard ships in standard fuel tanks and requires less storage volume than LNG for the same energy content. Compared to conventional fuels, incorporating biomethanol and green methanol could cut CO2 emissions by up to 95% and nitrogen-oxide emissions by up to 80%. However, renewable methanol remains expensive.

With hydrogen’s low density, it is unlikely to be used as a fuel directly, as it would take up too much space within a cargo ship, reduce available tonnage and curb profitability. However, fuels derived from hydrogen, particularly methanol, are expected to play a key role in decarbonising the shipping industry.


In our view, hydrogen is not likely to be a panacea in the world’s quest for net-zero emissions. However, we believe that clean hydrogen could play a pivotal role in decarbonising several hard-to-abate sectors, including steel manufacturing, heavy duty transportation and shipping. Stationary power-fuel cells could also have applications in limited areas where continuous power is required, replacing emission-intensive alternatives like diesel. However, for broad adoption to take place across these industries, clean hydrogen would need to become more cost competitive than fossil fuels, and we do not anticipate this happening before 2030. 

[1] Office of Energy Efficiency and Renewable Energy. As of November 2023.

[2] National Library of Medicine. As of November 2023.

[3] US Energy Information Administration. Updated 23 June 2023.

[4] International Energy Agency (IEA), Hydrogen Europe and Bernstein Private Wealth Management. As of October 2023.

[5] World Steel Association. 23 September 2022.

[6] Morgan Stanley Research. As of October 2023.

[7] Bloomberg New Energy Finance (BNEF). As of October 2023.

[8] BNEF. As of October 2023.           

[9] Bernstein Private Wealth Management. As of October 2023.

[10] International Maritime Organization. As of October 2023.


Brock Campbell

Brock Campbell

Head of global equity research

Amit Khandelwal

Amit Khandelwal

Responsible investment analyst


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