The Blue Hydrogen Imperative: Navigating Costs, Emissions, and Regulations

Hydrogen can be termed as blue hydrogen when produced from natural gas(or sometimes coal) through steam methane reforming (SMR) or auto-thermal reforming (ATR), and resulting CO₂ emissions are captured and stored rather than released into the atmosphere. The CO₂ is stored underground using carbon capture and storage (CCS) technology.

As a result, blue hydrogen is sometimes considered carbon-neutral, since its emissions are prevented from entering the atmosphere. Blue hydrogen can bridge existing infrastructure with low-carbon goals and can be considered as a transitional fuel before we can shift completely towards green hydrogen.

Why Blue Hydrogen?

Across the globe, industries are undergoing pressure to tackle sustainability challenges. As anthropogenic emissions have already led to a global temperature rise of approximately 1.58°C above pre-industrial levels.

In response, a significant number of countries are taking action. By the end of 2023, nearly 145 nations had either announced or were considering net-zero targets, together accounting for around 90% of global emissions.

But hitting these goals means we cannot just focus on one part of the puzzle. To keep the temperature rise in check, emissions from both energy production and energy utilization need to be significantly reduced. Energy efficiency, electrification, and renewable energy sources have the potential to deliver approximately 70% of the emissions reductions required. However, hydrogen will play a critical role in decarbonizing sectors where alternative solutions remain either underdeveloped or economically unviable. On the demand side, hydrogen demand keeps growing, but remains concentrated in traditional applications. Ammonia production, Petroleum Refining, and Methanol Production combined account for ~90% of current hydrogen demand.  Novel applications in heavy industry and long-distance transport account for less than 0.1% of hydrogen demand, whereas Net Zero Emissions (NZE) Scenarios require hydrogen to fulfill 40% of these applications by 2030.

As of 2023, global hydrogen production reached approximately 97 million tonnes. The vast majority of this—over 99%—was derived from fossil fuels, primarily through processes like steam methane reforming (SMR) and coal gasification, commonly referred to as “grey hydrogen.” Low-emissions hydrogen, including both “blue” and “green” hydrogen, constituted less than 1% of total production. 

The major issues for low-carbon hydrogen production are related to cost and scalability. According to the Oxford Institute of Energy Studies (OIES), the average cost of producing hydrogen through methane reforming ranges between $1.5 and $1.8 per kilogram, influenced by natural gas prices. When carbon capture, utilization, and storage (CCUS) technologies are incorporated, the cost rises to between $2.1 and $2.4 per kilogram. In contrast, green hydrogen production—using electrolysis powered by renewable energy—costs significantly more, typically between $3.3 and $6.5 per kilogram, depending on the price of clean electricity and the electrolyser technology employed.

While deployment and scalability issues remain unsolved in “green” hydrogen production, “blue” hydrogen production is gaining traction due to relatively more straightforward deployment and lower cost of production.

US Regulatory Push for Blue Hydrogen

The United States and the European Union are both actively promoting the growth of the hydrogen economy. Seen as a potential game-changer, hydrogen and its related fuels offer a promising solution for cutting emissions in sectors that are notoriously difficult to decarbonize, playing a key role in the broader push toward achieving net-zero goals.

At present, nearly 95% of hydrogen produced in the United States comes from steam methane reforming using natural gas, while a much smaller portion, ~04%, is generated through coal gasification. The abundance of gas reservoirs in the United States makes it a preferred hydrogen production route.

On the other hand, currently, steam methane reforming accounts for 68.4% of the total hydrogen production in Europe. The European Union, via its REPowerEU Strategy, aims to produce 10 million metric tons of low-carbon hydrogen domestically and import an additional 10 million metric tons by 2030, totaling 20 million metric tons. However, the strategy primarily prioritizes the production and import of Renewable (Green) hydrogen, and excludes blue hydrogen from incentives and targets.

Contrary to Europe, the United States’ approach, particularly under the Inflation Reduction Act (IRA), is characterized by a ‘Technology-neutral Framework’ that incentivizes hydrogen production based on its carbon intensity, rather than the specific production method. The Clean Hydrogen Production Tax Credit (45V) provision of the IRA offers up to $3 per kilogram of hydrogen produced, with the amount varying according to the lifecycle greenhouse gas emissions of the hydrogen. By focusing on emissions intensity, the U.S. allows for a broader range of hydrogen production technologies to benefit from incentives, including blue, green, and other hydrogen production methods.

President Trump, after taking office on 20th January 2025, declared a ‘National Energy Emergency’ to boost production of fossil fuels. Further, the Trump administration has recently passed a bill to start from the beginning of 2026; however, the administration has maintained support for section 45Q, which provides tax credits for carbon capture and sequestration. With policies that support fossil fuel production and offer strong incentives for carbon capture and storage, the United States provides a highly conducive environment for the growth of blue hydrogen.

Current Challenges with Blue Hydrogen Production

Despite its potential to drive decarbonization, blue hydrogen faces critical hurdles and challenges that must be addressed to unlock its viability as a sustainable energy solution. The key current challenges are with blue hydrogen production:

Fossil Fuels Involvement: The reliance of blue hydrogen production on natural gas, a fossil-based, non-renewable resource, perpetuates dependence on extractive industries. This dependence can slow down the shift to cleaner, fully decarbonized options. On top of that, natural gas prices are often unpredictable, influenced by global politics and market shifts, which adds uncertainty to the cost of producing blue hydrogen.

Cost of Production: The prominent production processes involved in blue hydrogen, i.e., Steam methane reforming and Auto-thermal reforming, are capital-intensive, due to the need for specialized high-temperature and high-pressure equipment, advanced catalysts, and complex safety systems. SMR’s cost drivers include reactors, catalysts, and energy consumption, while ATR’s higher capital requirements stem from cryogenic air separation units and oxygen-based reaction systems. Both processes require significant investment in feedstock pretreatment, carbon capture infrastructure, and multiple reactor trains for large-scale production.

Carbon Capture Efficiency and Cost: Carbon capture efficiency and cost present significant challenges for blue hydrogen production. While advanced carbon capture technologies can achieve CO₂ capture efficiencies of up to 95%, the actual performance of existing facilities often falls short. IEEFA estimates that projects like Air Products’ Louisiana plant could cost taxpayers billions with marginal net GHG reduction, due to low utilization rates and high incremental costs. Meanwhile, NETL data show that state-of-the-art capture systems achieve 90–95% CO₂ removal but for $40–$60 per tonne captured, driving hydrogen costs above $2/kg.

Methane Leakage and Environmental Concerns: Methane leakage poses a significant challenge to the environmental viability of blue hydrogen production. Despite capturing CO₂ emissions during hydrogen production, the process relies on natural gas, which can result in methane emissions throughout its supply chain. Methane is a potent greenhouse gas, with a 20-year Global Warming Potential (GWP) 83 times that of CO₂. A study highlighted that methane emissions from blue hydrogen projects could total approximately 3.85 million tons over their lifecycle, equating to the annual emissions of about 1.28 million cars. Further, another study from Stanford University and Cornell University disclosed that fugitive methane emissions from blue hydrogen production can be higher than those from gray hydrogen due to the increased use of natural gas to power CCS operations. Consequently, the overall greenhouse gas emissions from blue hydrogen may only be 9% to 12% lower than those of gray hydrogen, far less than the anticipated reductions. Such methane emissions can significantly offset the climate benefits achieved through CO₂ capture, undermining the low-carbon credentials of blue hydrogen.

Innovations Addressing Blue Hydrogen’s Challenges

As blue hydrogen gains traction as a low-carbon energy source, several innovations are emerging to overcome its environmental and technical hurdles. Some of these key innovations are:

Biogenic Methane Reforming: To reduce blue hydrogen’s dependence on natural gas, industry players are exploring biogenic methane as an alternative feedstock. Colorado-based startup RenewH2 has developed a process to reform biogenic methane for blue hydrogen production. The company aims to harness Wyoming’s largest biogenic methane source to produce hydrogen, thereby decreasing reliance on non-renewable fossil fuels.

Reduced Cost Production Technologies: Reducing the levelized cost of hydrogen (LCOH) is critically important to scale blue hydrogen technology and to mitigate the cost issues associated with current production technologies. To address cost issues, players are developing reduced-cost production technologies. The oil and gas giant Shell has developed the Shell Blue Hydrogen Process (SBHP) to significantly enhance the affordability of greenfield projects for blue hydrogen production. The technology combines Shell’s proprietary gas partial oxidation (SGP) technology with ADIP ULTRA solvent technology. SGP technology is an oxygen-based system with direct firing in a refractory-lined reactor. Unlike auto-thermal reforming (ATR), the partial oxidation reaction in SGP does not require steam as a reactant. Instead, high-pressure steam is generated using waste heat from the reaction, which meets the steam demand of the SBHP process and some internal power consumers. This eliminates the need for feed gas pretreatment, simplifying the process line-up. Furthermore, SGP technology is a non-catalytic, direct-fired system that is robust against feed contaminants such as sulfur, enabling it to accommodate a wide range of natural gas qualities and providing refiners with greater feed flexibility. Shell’s blue hydrogen process can reduce the levelized cost of hydrogen by 22% compared to the best offerings on the market today.

Enhanced Carbon Capture Efficiency with Reduced Cost: To address the challenges of low carbon capture efficiency and high costs associated with existing blue hydrogen technologies, specific technologies have been developed. Players such as Johnson Matthey and Shell have developed low-cost, highly efficient technologies for blue hydrogen production. Johnson Matthey LCH™ technology enables the capture of up to 99% CO2 generated during hydrogen production. At the same time, Shell’s SBHP Process captures the same amount of CO2 at a reduced cost of capture.

Novel Production Technologies: To tackle the cost and efficiency challenges associated with reforming and post-combustion carbon capture in blue hydrogen production, industry players are developing innovative technologies. One such advancement is the integration of electromagnetic hydrogen production with pre-combustion carbon capture. A notable example is Levidian’s LOOP technology—a modular system that uses electromagnetic waves to ionize methane into plasma. This process enables the separation of hydrogen and carbon without requiring water or generating additional CO₂. The carbon is captured pre-combustion and converted into graphene, offering both material innovation and reduced CO₂ emissions. These emerging technologies deliver dual benefits: cost savings through enhanced modularity and lower system complexity, alongside the creation of valuable by-products.

Mitigation of Methane Leakage: As methane leakage may occur throughout the supply chain for blue hydrogen production, multiple solutions to cater to specific leakage detection and mitigation are being developed. For continuous monitoring of methane, players like SeekOps have developed an aerial platform to fly complex SMR and ATR plant geometries, rapidly detecting, localizing, and quantifying leaks down to a few standard cubic feet per hour. Similarly, Draeger has developed optical gas imaging-based sensor technology for detecting fugitive methane from various sources across the blue hydrogen supply chain.

Key Industrial Developments

Chevron’s Project in Port Arthur, Texas, USA

• Planning a $5 billion blue hydrogen + ammonia facility (Project Labrador). Construction is planned for 2027, with commercial operations projected for 2032.
• The project aims to leverage tax incentives (45V) and HyVelocity Hub funding
• The company has submitted the necessary filings for tax abatements to support the construction of this plant

INPEX Corporation (Japan, Niigata Prefecture)

• On June 2, 2025, commissioning commenced for its integrated blue hydrogen + ammonia production & utilization demonstration project in Kashiwazaki City, Niigata Prefecture, Japan.
• Natural gas is being introduced, and CO₂ will be stored in depleted gas reservoirs via CCUS. Production will supply local electricity and some ammonia. Demo operations are expected in fall 2025.

HydrogenXT secures $900 million debt and equity financing deal.

• Signed US $900 million definitive Term Sheet with Kell Kapital Partners Limited (KKP) to build 10 blue hydrogen production + dispensing facilities along the U.S. West Coast (California, Oregon, Washington) & North Dakota.
• HydrogenXT is financing its first 10 localized blue hydrogen hubs through a mix of senior debt and strategic equity. These hubs will integrate zero-carbon-intensity SMR production with on-site compression, storage, and dispensing (CSD), while also providing clean power for AI facilities, data centers, distribution hubs, and grid support.

Conclusion

Blue hydrogen presents a pragmatic pathway to decarbonize hard-to-abate sectors, offering a lower-carbon alternative to traditional hydrogen production while leveraging existing fossil fuel infrastructure. Despite valid concerns around cost, methane leakage, and carbon capture efficiency, ongoing innovations in production technologies, feedstock diversification, and emissions monitoring are rapidly improving its viability. While green hydrogen remains the long-term ideal, blue hydrogen can serve as a vital transitional solution—bridging the gap between today’s fossil fuel dependence and tomorrow’s clean energy systems. To fully unlock its potential, balanced regulations, sustained investments, and continued technological advancement will be imperative.