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

As the landscapes in the world’s energy industries and investments shift, renewable ammonia is still seen as offering a potentially massive contribution in the EU’s energy transition – and in it's trajectory towards a secure and diversified energy future.  

Even in a changing energy landscape, utilizing domestic technological leadership still stands at the forefront of the EU's energy strategy. The recent publishing of the EU’s Clean Industrial Deal marks a clear commitment to turn the decarbonization of Europe’s most energy-intensive industries into an opportunity for growth – and nowhere is this more relevant than in the field of renewable hydrogen technologies and hydrogen's derivatives.  

In the field of hydrogen electrolysis, the EU currently has a limited domestic production capacity of 162 MW, but aims to significantly scale this 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 using nitrogen — an abundant molecule making up 78% of our atmosphere — renewable ammonia (also known as ‘green ammonia’) serves as both a low-carbon fuel and feedstock. It is considered a key component of the EU’s efforts to scale renewable hydrogen and create viable low-carbon fuel alternatives. 

But are these ambitions and goals translating into growth for the renewable ammonia market and scaling EU projects? 

A promising outlook, but major hurdles remain 

While market projections are promising, many announced projects are in the early stages of development and struggling to reach final investment decision (FID), which introduces large uncertainties to a majority of forecasted production. This uncertainty is created by a series of challenges faced by the renewable 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 article, we examine the key policy drivers and regulatory challenges that must be addressed to effectively scale renewable ammonia production and meet shared decarbonization goals.  

Key policy drivers  

Carbon pricing mechanisms 

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. 

Meanwhile, the EU’s Carbon Border Adjustment Mechanism (CBAM), set to take effect in 2026, 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. 

Demand sided mandates 

Additional drivers are emerging through industry quotas. Under the Renewable Energy Directive (RED III), the hydrogen and fertilizer sectors must replace 42% of grey chemicals with Renewable Fuels of Non-Biological Origin (RFNBO) by 2030, increasing to 60% by 2035. 

Policies are also promoting renewable ammonia in new sectors, particularly shipping. Regulatory pressure on the maritime industry to decarbonize — through measures like FuelEU Maritime, ETS III, and the 2023 International Maritime Organization GHG strategy — is positioning renewable ammonia as one of the most promising low-carbon fuel alternatives.  

Regulatory challenges: A lot of stick, not enough carrot  

Despite these various regulatory incentives being put in place, demand has yet to reach meaningful levels. One reason may be 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 renewable 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 RED III’s current conditions are creating significant hurdles for RFNBO production and making it difficult for e-fuels to compete with fossil-based alternatives. This is especially true for renewable ammonia, which faces steep price differentials compared to conventional and low-carbon ammonia.  

Considering 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 renewable ammonia producers, complying with RFNBO rules adds further complexity and costs, particularly 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 only 10% of renewable hydrogen projects currently reaching FID in Europe, addressing these barriers is vital to creating a clearer trajectory for renewable chemicals projects in the European market. 

The Path Forward 

The case for renewable 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 renewable ammonia to fulfill its role in Europe’s energy transition, policies must balance environmental standards with realistic pathways for scaling production. A more supportive regulatory and financial framework will encourage industry investment, helping the renewable ammonia market reach its potential as a key component of Europe’s low-carbon future.