The chemical industry consumes vast quantities of fossil resources, which serve as feedstock for countless products such as plastics, and it requires huge amounts of energy. As one of Europe's largest industrial sectors, it faces intense pressure to cut costs because of relatively high energy prices, and it is also one of the hardest sectors to decarbonise.
Europe's chemical industry faces structural disadvantages compared with oil- and gas-rich regions such as the United States and the Middle East.
“The sector could benefit from targeted policies that generate strong demand for green materials, and from strategies that break its dependence on fossil supply chains,” says a report by the Wuppertal Institute. The researchers note that the industry stands at “a critical crossroads, facing structural pressure from high energy and feedstock costs alongside urgent demands to shift towards a circular economy and climate neutrality”.
Germany's national programme
Representatives of Germany's chemical industry announced earlier this year that the sector faces “possibly its worst crisis since the post-war period”. The state has launched the Chemicals Agenda 2045 programme to help the struggling sector, focusing on lowering energy prices and also including a “carbon action plan” for rolling out carbon capture and storage or utilisation (CCS/CCU).
The report examines the sector's competitiveness and the circular-economy measures that could provide the much-needed stimulus. Transforming speciality chemicals, a category spanning roughly 75,000 products, is a particularly difficult challenge. Although speciality chemicals remain a competitive strength for Europe, they are technically very hard to recycle, and their production depends almost entirely on integrated fossil supply chains. Targeted investment in research and development is therefore needed to decouple speciality chemicals from fossil feedstocks – this would secure the chemical industry's competitiveness in a decarbonised economy.
Researchers point out that Europe's chemical industry has historically offset the disadvantage of high energy and feedstock costs through deeper integration and industrial synergy in so-called Verbund clusters. This is a form of cooperation in which one company's waste becomes another company's feedstock, particularly common in Germany. These clusters are critical for the speciality chemicals that underpin Europe's competitiveness.
Large-scale funding needed
Substantial new investment is needed to further boost productivity, which is currently held back by high investment risk and geopolitical uncertainty. The Wuppertal Institute report calls on governments to implement policies aimed at attracting the necessary capital by providing “market-creating instruments that generate predictable, large-scale demand for green materials”.
Such policies would allow markets “to value both the physical properties of the chemicals produced and the environmental and sustainability aspects associated with their production”. The report stresses that Europe's single market “provides the critical mass needed to sustain the early, costly stages of industrial transformation and allows first movers to gain global experience”
Germany's Chemieagenda 2045 and CCS/CCU technologies are two interlinked factors currently shaping the survival and transformation strategy of Europe's heavy industry. Both approaches aim to balance urgent decarbonisation with maintaining global competitiveness.
Germany's Chemieagenda 2045
This national strategy was presented to rescue Germany's chemical sector from its worst downturn on record, triggered by high energy prices and pressure from external markets.
The programme has several strands. First, energy costs need to be cut – lower industrial electricity prices and tax relief would prevent production from relocating outside Europe. The second strand is hydrogen infrastructure – accelerated access to cheap green hydrogen and renewable energy needed to replace fossil feedstocks. The next strand is cutting red tape. The German government is actively pushing to simplify EU-wide chemicals regulation, such as REACH and PFAS restrictions, to encourage innovation. A very important strand of the programme is building a market for green materials, along with introducing policy instruments that artificially generate large-scale demand for climate-neutral chemical products.
The role of CCS and CCU technologies in chemistry
The chemical industry is one of the hardest sectors to decarbonise, because carbon there is not only an energy source but also a core building block of products – plastics, mineral fertilisers, pharmaceuticals – which is why two different approaches to carbon management are being introduced. Carbon capture and storage (CCS) and carbon capture and utilisation (CCU) technologies play a decisive role in transforming the chemical industry, since carbon in this sector serves not only as an energy source but also as an integral component of the products themselves. As this is one of the hardest sectors to decarbonise anywhere in the world, both technological approaches help tackle the emissions problem from two different angles.
Carbon capture and storage – CCS
CCS technology focuses on capturing carbon dioxide directly from large plants and permanently isolating it from the atmosphere. Some chemical-industry processes generate emissions directly from the chemical reactions themselves, such as ammonia and hydrogen production. In these cases, emissions cannot be avoided simply by switching to green electricity. CCS allows the CO2 generated to be captured, liquefied and transported by pipeline or ship to secure underground storage sites, such as depleted gas fields or deep saline formations, most commonly in the North Sea region. This method serves as an immediate solution for reducing overall atmospheric pollution while the sector is still unable, during this transition period, to abandon fossil feedstocks entirely.
Carbon capture and utilisation – CCU
CCU technology treats captured carbon not as waste to be buried, but as a valuable resource and feedstock for creating new products. Everyday products such as plastics, synthetic fabrics, detergents and pharmaceuticals are essentially built from carbon molecules, and CCU allows that carbon to be sourced directly from emissions. By combining captured CO2 with green hydrogen, manufacturers can synthesise methanol, e-fuels such as sustainable aviation fuel (SAF), and various polymers. This creates a closed carbon loop: carbon that would otherwise end up in the atmosphere stays locked in materials, and the industry no longer needs to extract oil or natural gas.
Synergy and challenges of the two technologies
In practice, the two technologies complement each other. CCS delivers fast, large-scale emission reductions in the short term, while CCU lays the groundwork for a long-term circular economy. The main obstacle to their wider rollout is the high cost and the large amounts of green electricity and hydrogen that CCU processes require. New legal frameworks and financial support instruments are being developed at both German and EU level to help chemical clusters integrate these technologies into everyday production and make green materials commercially competitive.
Why is green hydrogen irreplaceable?
Green hydrogen matters because it is the only element that can simultaneously serve as a clean energy carrier and as a chemical feedstock to replace fossil resources. Without it, the chemical industry cannot physically reach climate neutrality.
Replacing fossil carbon in products – the basis of CCU
To produce plastics, synthetic materials, pharmaceuticals or e-fuels without oil and gas, captured carbon dioxide must be converted into usable hydrocarbons. That is not possible without hydrogen. Only by combining it with green hydrogen is it possible to synthesise methanol and other base materials, from which all modern chemical products are then “built”.
Decarbonising ammonia and mineral fertilisers
Ammonia – NH₃ – is one of the most widely produced chemical compounds in the world, used in the manufacture of agricultural mineral fertilisers. Hydrogen for ammonia synthesis is currently sourced from natural gas – so-called “grey hydrogen” – which generates huge greenhouse gas emissions. Replacing it with green hydrogen, produced from water using green electricity, makes the entire ammonia and food-production chain fully clean.
Providing high-temperature heat
Chemical processes and reactions often require extremely high temperatures – above 1,000°C – which ordinary industrial electrification with heating elements cannot efficiently deliver. Green hydrogen can be burned in special furnaces to reach these high temperatures, leaving no emissions behind other than pure water vapour.
Integration into industrial clusters
As mentioned in the report on Verbund clusters, chemical plants operate in close synergy. Green hydrogen serves as a universal “currency” within these clusters: it can be produced centrally on site and then distributed – part used as fuel, part as feedstock for material synthesis, and the surplus stored to keep plants running when the sun is not shining or the wind is not blowing.
Challenges in deployment
Widespread deployment of green hydrogen is currently held back by a combination of economic, infrastructure and logistical challenges, the main obstacle being its high production cost compared with fossil alternatives. Although producing green hydrogen is technologically entirely feasible, the sector faces “real-world” barriers that slow down investment decisions.
The cost gap
The biggest obstacle is the stark price gap between green and conventional (grey) hydrogen. Without substantial subsidies, green hydrogen currently cannot compete on the open market, where the production cost of green hydrogen ranges between EUR3.00 and EUR5.15/kg. In Europe, once logistics and delivery are added, the final industrial price can reach more than USD6/kg. Conventional (grey) hydrogen made from natural gas costs around EUR1.30-2.15/kg. For industries to switch to green hydrogen voluntarily, its price would need to fall to around the EUR1.70/kg threshold. At present that is achieved only in regions with exceptionally cheap solar power, such as the Middle East or Chile, but not in Europe.
Energy shortages and efficiency
Producing green hydrogen requires enormous quantities of renewable electricity. New wind and solar farms are needed to “feed” industrial-scale electrolysers. That same “green power” is also needed for electrifying cities and charging electric vehicles. The problem is that the efficiency of the hydrogen production chain (electrolysis, compression, transport and reconversion) is comparatively low – around 50-60% of the original energy is lost along the way. By comparison, lithium-ion battery efficiency is around 90%.
Infrastructure and logistics bottlenecks
A commercial ecosystem for moving hydrogen simply does not yet exist physically, and serious transport difficulties remain. Hydrogen is the lightest and smallest element in the universe. To transport it, it must either be compressed to enormous pressure – up to 700 bar – or liquefied at an extreme -253°C, both of which demand huge amounts of energy and expensive specialised tanks. Existing natural gas networks are also unsuited to carrying pure hydrogen without modification, because hydrogen molecules can cause metal to crack, or “embrittle”. The European Hydrogen Backbone, for instance, is still only at an early stage of development.
Uncertain demand and project delays
Because green hydrogen is expensive, buyers are reluctant to sign binding long-term purchase contracts. Without guaranteed buyers, banks and investors refuse to finance production projects worth billions. The result is a global pattern in which companies loudly announce projects, yet fewer than 10% of all announced projects actually reach construction and a final investment decision. Many large energy majors have recently scaled back or shelved their plans.