Carbon Pricing for Green Hydrogen Adoption: Insights from a Firm-Production Model

It asks: at what carbon price does green hydrogen become cost-competitive with incumbent fossil energy sources? To answer this, the paper develops a firm-level production model that endogenises energy substitution decisions and derives closed-form carbon price thresholds for hydrogen competitiveness relative to natural gas, oil, and non-renewable electricity.

Calibrated to industrial data from Luxembourg, the results show that the required carbon prices are substantially higher than current and projected levels (ranging from approximately €191/tCO₂ to €2884/tCO₂ under baseline assumptions). Even under favourable substitution scenarios, thresholds remain well above observed carbon prices, suggesting that carbon pricing alone is unlikely to drive large-scale green hydrogen adoption without complementary policy measures.