What it will take to develop the green ammonia market in Europe

As the urgency for CO2 reduction grows and demand for renewable energy sources rises, green ammonia is increasingly being acknowledged for its significant contribution in the EU’s energy transition trajectory towards decarbonization.

Utilizing domestic technological leadership in hydrogen technologies stands at the forefront of the EU's energy strategy, with the European Commission setting targets for a considerable increase of its domestic electrolyzer production infrastructure. The EU currently has limited domestic electrolyzer production capacity of 162 MW, but aims to significantly scale it up targeting 10 million tonnes of renewable hydrogen by 2030. This ambitious goal also sets a path for the future of Europe's ammonia market, which currently comprises 32 production facilities with a capacity of 17.7 million tonnes annually.

As an efficient hydrogen carrier that utilizes nitrogen (an abundant carrier molecule that comprises 78% of the air around us), or as a low-carbon fuel or feedstock helping to decarbonize the world’s most carbon intensive industries, green ammonia is viewed as a central component in the EU’s ambitions to scale renewable hydrogen and create low-carbon fuel alternatives. 

But how are these ambitions and goals translating what does this demand mean for the growth of the green ammonia market and scaling its projects?

While market projections are promising, many announced projects are in the early stages of development and struggling to reach FID, which according to DNV introduces large uncertainties to roughly 86% of forecasted production. This uncertainty is created by a series of challenges faced by the green ammonia industry, some of which are features of the current market, and others that are unintended side-effects of the solutions created to address them.

In this new series of articles, we explore the emerging market of green ammonia, and dive into the factors shaping its adoption in Europe across various industries. In this first article, we introduce a few of the most relevant policy drivers shaping the current green ammonia market and some of the regulatory challenges that policy makers and leaders in the energy industry will need to address to effectively scale green ammonia production and meet our collective goals for a decarbonized future.

Key Policy Drivers

There is already an increasing number of regulatory incentives being put in place to facilitate the adoption of e-fuels and support market demand.

Increasing pressure has been put on the ammonia industry to decarbonize existing production, with the EU Emissions Trading System (ETS II) being reformed and made more stringent to help incentivize decarbonization in the ammonia industry and help ammonia producers switch to cleaner solutions. The linear reduction factor in the EU ETS methodology implies that the EU will start phasing out free carbon allowances and allocations for energy intensive industries (including ammonia-reliant fertilizers) at a higher pace from 2026 to 2034, which will increase demand within industries currently reliant on ammonia to switch to lower-carbon alternatives.

Additionally, there is the EU’s Carbon Border Adjustment Mechanism (CBAM) which from 2026 onward will require imported carbon intensive goods to comply with EU carbon pricing, including ammonia and ammonia-based fertilizers. This mechanism will serve to protect European industries and establish a global level playing field as they make the switch to lower-carbon alternatives while also creating potential drivers for producers outside of Europe to decarbonize their products to tap into the European market.

We also see similar drivers come through in the form of industry quotas, such as the Renewable Energy Directive (RED III)’s requirement for the use of Hydrogen in industry consequentially requiring the hydrogen and fertilizer industry to replace 42% of grey chemicals with Renewable Fuels of Non-Biological Origin (RNFBO) by 2030, and 60% by 2035.  

There has also been an increase in policies that support the uptake of ammonia in new industries and use cases. The escalating pressure on the maritime industry to decarbonize by, among others, FuelEU Maritime, ETS III and the 2023 International Maritime Organization GHG strategy, consequentially pushes the industry towards low-carbon fuel alternatives, of which green ammonia is poised to be the most promising solution.

Regulatory challenges: A lot of stick, not enough carrot

Despite these various regulatory incentives being put in place, we have yet to see these translate into a meaningful level of demand. One of the reasons this may be the case is that just because certain directives have been created, their full potential cannot be realized without being translated into national law. RED III has yet to go through the national implementation process, with the deadline to translate mandates into national law being mid-2026.

Additionally, The European Hydrogen Bank may only support a small fraction of targets with the RePowerEU Plan, due small amounts available in the Hydrogen Bank mechanism, and the difficulties of coordinating large scale deployments across member states with varying levels of infrastructure and non-harmonized implementation of policies, as well as continued difficulties faced with scaling the necessary technologies in order to enable large-scale deployment.

Above all, the carrot that the EU is missing is not one that is cost-efficient and competitive. Scaling low-carbon chemicals like green ammonia still faces significant cost differentials. Mandates will ultimately need to supplement with demand-side support mechanisms (such as subsidies, grants, tax incentives etc.) support supply-side investments.

Challenges in passing stringent conditions in RED III

Some of the current conditions in RED III are posing significant challenges to produce renewable fuels of non-biological production (RFNBO) and posing particular difficulties for e-fuels competition with fossil-based alternatives. This includes green ammonia’s competition with grey and blue alternatives and respective price differentials.

Taking into account the current economic and hydrogen market developments, a more lenient and pragmatic application of the requirements for additionality, temporal, geographical correlation, and un-stackable incentives would ease the deployment of projects reliant on renewable energy (RE). By requiring additional renewable energy capacity to be added to the grid to support a given project and additionally require that RE and RFNBO production happens within the same hour, in the same bidding zones, RFNBO projects financial, operational, and administrative challenges in even getting off the ground and into production. This difficulty then directly translates into costs of renewable hydrogen in Europe being roughly three to six times higher than grey hydrogen.

For green ammonia production, which uses renewable hydrogen, compliance with RFNBO rules could add complexity and costs in proving full renewable sourcing and lifecycle emissions. This burden could limit expansion for companies already working to meet environmental standards, potentially affecting competitiveness as they navigate regulations to qualify for subsidies and credits. With roughly on 10% of green hydrogen projects currently reaching FID in Europe, addressing these barriers is vital to creating a clearer trajectory for green chemicals projects in the European market.

The Path Forward

The case for green ammonia is strong – it will have a future role to play in the energy transition, and it is likely to play a central role in decarbonization. In order for green ammonia to fulfill its role in Europe’s energy transition, policies must balance stringent environmental standards with realistic pathways for scaling production. A more supportive regulatory and financial framework will encourage industry investment, helping the green ammonia market reach its potential as a key component of Europe’s low-carbon future.