EU Carbon Diplomacy: Assessing Hydrogen Security and Policy Impact in Australia and Germany

Abstract

Hydrogen is fast becoming a new international “super fuel” to accelerate global climate change ambitions. This paper has two inter-weaving themes. Contextually, it focuses on the potential impact of the EU’s new Carbon Border Adjustment Mechanism (CBAM) on fossil fuel-generated as opposed to green hydrogen imports. The CBAM, as a transnational carbon adjustment mechanism, has the potential to impact international trade in energy. It seeks both a level playing field between imports and EU internal markets (subject to ambitious EU climate change policies), and to encourage emissions reduction laggards through its “carbon diplomacy”. Countries without a price on carbon will be charged for embodied carbon in their supply chains when they export to the EU. Empirically, we focus on two hydrogen export/import case studies: Australia as a non-EU state with ambitions to export hydrogen, and Germany as an EU Member State reliant on energy imports. Energy security is central to energy trade debates but needs to be conceptualized beyond supply and demand economics to include geopolitics, just transitions and the impacts of border carbon taxes and EU carbon diplomacy. Accordingly, we apply and further develop a seven-dimension energy security-justice framework to the examples of brown, blue and green hydrogen export/import hydrogen operations, with varying carbon-intensity supply chains, in Australia and Germany. Applying the framework, we identify potential impact—risks and opportunities—associated with identified brown, blue and green hydrogen export/import projects in the two countries. This research contributes to the emerging fields of international hydrogen trade, supply chains, and international carbon diplomacy and develops a potentially useful seven-dimension energy security-justice framework for energy researchers and policy analysts.

The potential impact of EU’s carbon border adjustment mechanism (CBAM): an Australia-China relationship perspective

“…Australia is well-placed to develop new zero-emission export industries, bolstered by its significant reserves of critical minerals and promising green hydrogen production capabilities, which align with China's demand for these essential resources in its energy transition (Hancock et al. , 2021).…”

“…Officially launched on October 1, 2023, the CBAM, colloquially known as a “carbon tariff”, initially targets sectors including cement, iron, steel, aluminium, and electricity, but will expand to other significant products (Zhong and Pei, 2023). This pioneering approach extends EU's internal carbon pricing to the carbon embedded in imported carbon-intensive goods, representing a novel stride in “carbon diplomacy” (Hancock et al. , 2021).…”

“…The CBAM will likely lead to a redistribution of competitiveness among countries and regions, with a pronounced effect in emission-intensive and trade-intensive sectors (Zhong and Pei, 2023). The CBAM's potential impact on international trade, especially in energy intensive sectors, is notable, as it could affect countries without a price on carbon and push emissions reduction laggards (Hancock et al. , 2021).…”

Scenario’s for the hydrogen market and strategic options for MNEs

“…In both papers, the authors agree on the importance of international cooperation, bilateral agreements and international trade. However, according to Hancock and Wollersheim (2021), much of the hydrogen technology literature is still dominated by technical, engineering and economic (demand/supply) analysis, to the exclusion of ethics, governance, policy, politics and international trade/diplomacy. Furthermore, according to Mulder, Perey, and Moraga (2019), too little attention has been paid to the implementation of hydrogen technology into an economy.…”

Evolutionary Game Analysis of Responding to the EU’s Carbon Border Adjustment Mechanism

“…However, the implementation of the CBAM will exert significant impact on non-EU countries, especially developing countries [4][5][6]. Some trade partners of the EU, especially emerging economies, expressed concerns on the potential impact of the CBAM on their exports and competitiveness [7].…”