Green hydrogen is experiencing a strong push from different directions. This report lays out principles for a sustainable approach to expanding the production and use of the energy carrier, in line with sustainable development goals and the Paris Agreement. 

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Global equity and sustainable development of countries is at the core of the Paris Agreement, yet inequalities between wealthy and poor countries, as well as among individuals within countries continue to increase. Inequality poses a significant challenge to achieving the goals of the agreement. This inequality is very obvious in matters related to the energy transition, for example the speed of renewable energy additions or access to electricity. A Paris-compatible transition must counter this reality and ensure the equitable participation of all in a zero-emission future.  

To meet the goals of the Paris Agreement, strong shifts in the energy sectors are essential. These changes entail the sharp decline of global fossil fuel production and consumption, with “no need for investment in new fossil fuel supply”, according to the IEA . The global demand for fossil fuel decreases in a 1.5°C compatible pathway and fossil fuel exporting developing countries will need to find alternative sources of income. At the same time, access to modern energy still needs to be provided and enhanced in many countries to support livelihoods and economic development. In this context, building economic resilience and forming an equitable transition that positively impacts development is a core challenge that development finance institutions can support. 

Green hydrogen is emerging as a possible transition solution and pushed strongly by some countries in both the Global North and South. This briefing seeks to provide a balanced view on the opportunities and challenges of green hydrogen in the context of sustainable development in the Global South and the mitigation goals of the Paris Agreement.  

Key recommendations are:  

• Build up renewable energy infrastructure as a no-regret measure. Energy demand is drastically increasing in developing countries, and electricity supply must be improved for reliable and affordable access to services. The production of green hydrogen requires additional renewable electricity. At the same time, the 1.5°C limit requires a fast decarbonisation of the power sector. At least 1.5 TW per year need to be installed by 2030, up from 2 TW cumulatively in place today. To fully benefit from the uptake of renewable energy technologies, it is critical that developing countries have the possibility to participate in the supply chain of those technologies, rather than purely rely on imports of the technologies and international expertise to construct and maintain the installations. International cooperation and finance can help increase the local content for renewable energy, through enabling access to technologies and building up local supply chains. Defining how this can best done on a case-by-case basis, and how the integration in local supply chains could be financed should be a priority. 

• Integrate electrolysers and additional RE capacities in national grids where possible. Electrolysers can technically be run at times when RE supply exceeds electricity demand, and hydrogen turbines in combination with storage can be used as a tool to balance variable renewables. Planning additional RE capacities, electrolysers and grid connections jointly to facilitate a high share of renewables in the grid can support the energy transition in the country and enhance electrification and local energy access. The production of green hydrogen would be an additional effect. Compared to an isolated electrolyser and RE system without grid connect, the full load hours of the electrolysers would decrease, and with it the return on investment. International finance could fill this gap in income compared to a profit-optimised electrolyser for the benefit of an efficient overall system and development goals.  

• Make domestic green hydrogen available for industrial development in the Global South. Where the continuation or raise of industries such as for example steel or fertiliser production or mining with heavy-duty transport needs are part of countries’ development strategies, the use of green hydrogen will be critical for international competitiveness: In the light of emerging carbon border adjustment mechanisms, industrial goods produced via zero-emissions processes will have a competitive advantage over high-emissive production. The availability of green hydrogen will be essential for those countries, and should be prioritised over exports. Development finance providers should work with the countries to understand potential domestic hydrogen demand and prioritise this before exports.  

• Export green hydrogen to other countries. Where a country can produce green hydrogen that is competitive on a global market, the export of the fuel can generate income, diversify export structures and support the decarbonisation of the importing countries. Importing countries will need strong policies to ensure the sustainability of green hydrogen, covering a positive impact on the development objectives and the decarbonisation of the country of origin. Countries might also strategically use exports in the near future to incentivise the development of production capacities, even at times where green hydrogen is not yet competitive domestically, with the objective to later expand the production to cover the emerging domestic demand. Equitable agreements with importing countries are important to allow a shift towards domestic production once needed. Countries could use for example channels like the Just Energy Transition Partnerships to negotiate such agreements.  

This document intends to serve as a starting point to guide public development finance institutions and policy makers in setting priorities for climate finance related to green hydrogen. It is the first output under this stream of research and will be complemented with various case studies and concrete suggestions for integrating our considerations in existing processes at Multilateral Development Banks (MDBs) over the next year. MDBs are the focus of the research project under which this report was developed, and through their thought leadership, a clear mandate and commitment to align their portfolios with the Paris Agreement and their close connection to the countries, MDBs have multiple entry points to support a sustainable transition, also in the context of green hydrogen.