International trade flows of green hydrogen are nascent and face significant challenges in scaling up. Innovative financial instruments are essential to mitigate risk, bridge the cost gap, mobilise private finance, and support the market ramp-up of green hydrogen and derivatives.

Hydrogen production poses several opportunities and risks for producing countries. Robust environmental and social safeguards, along with energy and resource efficiency guidelines, are essential to mitigate harm and capture benefits.

H2Global is a trade-oriented mechanism designed to foster a global green hydrogen market. So far, H2Global has undertaken one pilot tender funded by a single donor, the German Federal Ministry for Economic Affairs and Climate Action (BMWK). This study aims to assess the extent to which the design of the H2Global mechanism and the BMWK pilot tender address key risks and opportunities associated with hydrogen production. This study is part of a two-part series investigating auction mechanisms supporting hydrogen development. The corresponding paper in the series analyses the German Klimaschutzverträge (KSV).

Key findings and recommendations

• No minimum standards

The H2Global mechanism does not set minimum standards for tenders; instead, it remains adaptable to the objectives of tender funders. While the BMWK pilot tender sets more ambitious product standards in some cases than required by European Union (EU) regulations, the level of ambition of future tenders will depend on funders. This introduces variability in the H2Global mechanism’s impact on global climate and sustainable development goals.

Hintco, a subsidiary of the H2Global Foundation and facilitator of the Mechanism, should lead by example and develop more robust guidance on sustainability requirements to prevent such variability. In the absence of minimum standards from Hintco, net importing governments funding H2Global tenders must outline ambitious import sustainability requirements. The H2Global Foundation could also focus its engagement with stakeholders and knowledge generation on expanding the international standards discussion to include environmental and social dimensions.

• Focus on renewables’ additionality and correlation but overlooks surplus sharing benefits

The BMWK pilot tender incorporates environmental and social sustainability through renewable electricity sourcing requirements outlined in the hydrogen purchase agreement (HPA). These align with EU regulations on additionality, temporal correlation, and geographical correlation, ensuring electricity used in hydrogen production is sourced from new renewable installations or meets strict grid-based criteria. While these measures avoid overburdening existing renewable electricity infrastructure, there is a missed opportunity to incentivise projects to share surplus electricity to enhance local energy access or support domestic decarbonisation. Due to the lack of minimum standards, future tenders catering to non-EU buyers could adopt weaker standards for additionality.

We call on future funders to go beyond the do-no-harm principle and focus on generating local benefits.

• Water sustainability safeguards lack consideration of competing uses

The BMWK pilot tender includes sustainability requirements prohibiting the use of groundwater or water intended for human consumption in dry regions, with sellers required to provide detailed documentation and independent verification. However, safeguards do not fully address competing water demands, such as water for industrial or agricultural use, potentially creating competition with local needs. There is no requirement to ensure the additionality of water treatment facilities or desalination plants, further risking the prioritisation of infrastructure for hydrogen production over improving local water access.

We urge future funders to integrate checks for competing resource use and surplus-sharing mechanisms into their tenders' sustainability requirements.

• Land use safeguards leave loopholes on competing uses and responsible siting

The BMWK pilot tender includes land use safeguards requiring sellers to avoid high-biodiversity areas, endangered species habitats, carbon pools, and recognised cultural heritage sites. However, its focus on globally recognised classifications may overlook locally significant or sacred sites. The tender also lacks measures addressing competing land uses, such as agricultural or pastoral activities, and preventing project siting at locations with ongoing land disputes.

In addition to integrating checks for competing use, we call on future funders to consider access-sharing arrangements or compensation mechanisms to mitigate impacts on local communities and to develop a complaint mechanism.

• Local value creation measures lack sustainable economic impact

The BMWK pilot tender incorporates provisions for local value creation measures, including skill development and community infrastructure investments. However, unclear job allocation guidelines and a limited scope for required infrastructure investments reduce the potential for sustainable local economic benefits. Further, the export-focused design of the H2Global mechanism prioritises low-value-added commodities and inherently limits opportunities for downstream industrial value capture.

We urge future funders to increase ambition to generate sustainable economic value addition, for example, by requiring local sourcing of a proportion of value chain components (where feasible), mandating investments in project-related infrastructure that supports surplus sharing, and allocating portions of contracts for domestic buyers to foster higher value-added industries.

This work was funded by Deutsche Umwelthilfe.