RED III Implementation: Europe’s hydrogen mandate hits a compliance crisis

The third Renewable Energy Directive (RED III) is a cornerstone of Europe's decarbonisation strategy. Central to the European Green Deal, it was designed to deliver emissions reductions while strengthening energy security following Russia's invasion of Ukraine. The Directive raises the EU's renewable energy share target to 42.5% by 2030 – up from 32% under RED II – and introduces new requirements for renewable fuels of non-biological origin (RFNBO): fuels generated by non-bioenergy renewable sources, expected to largely come in the form of green hydrogen. By 2030, 42% of industrial hydrogen consumption and 1% of energy supplied to the transport sector must be RFNBO-compliant.

RED III entered into force in November 2023, followed by an 18-month window for member states to transpose the directive into national laws. However, by the end of this window in May 2025, only Denmark has completed its transposition, with the EC in July launching infringement proceedings against all other member states that had missed the deadline.

At the same time, the low-carbon hydrogen market is scaling slower than hoped, highlighting the significant challenge the EC faces in meeting RED III ambitions. Current EU production capacity for green hydrogen is around 78,000 tonnes per annum. The directive requires 2.9 million tonnes per annum of RFNBO hydrogen by 2030, necessitating around €71 billion in capital expenditure. Based on current trajectories, Wood Mackenzie expects the bloc to fall 0.6 million tonnes short of targets.

Transport and industry follow different trajectories

Delays in transposing RED III mandates into national law are already stalling investment decisions and undermining market confidence. Transport targets have seen more activity as ten member states have proposed targets, but progress on industry targets has been very limited.

For transport targets, the refinery route is emerging as the favoured compliance pathway. Under this approach, RFNBO used in refineries to produce transport fuels can count towards transport targets. However, not all refineries have secured RFNBO supply or the necessary infrastructure. Most transport-related targets are also backed up by penalties that have been set above the cost of RFNBO production, sending a strong financial signal to fuel suppliers to comply with mandates. These targets, and associated penalties have been the primary driver of green hydrogen investment in the EU over the last two years.

In contrast, industry penalties remain underdeveloped, and member states have yet to show how they intend to promote the adoption of industrial RFNBO. Multiple analyses now anticipate the EU will move away from the 42% RFNBO requirement for 2030, reflecting slow national uptake and growing acceptance that the 42% target is unachievable. Italy is one of the few markets that has set an industry target and plans to earmark EU emissions trading system revenues from 2026 to support progress towards RED III targets. Closing both transport and industry gaps would require €366 million by 2030, equivalent to 56% of first-quarter 2025 ETS revenue, though specific allocations have not been disclosed.

Member State approaches vary significantly

In addition to uneven rates of progress, RFNBO quota implementation is shaping up differently across the EU, with member states adopting a range of approaches. France, for example, has proposed a transport quota for "low-carbon" hydrogen from 2026, which can be met with both RFNBO and non-RFNBO low-carbon hydrogen, with explicit RFNBO quotas starting in 2030. Germany has been bolder, introducing RFNBO quotas in transport as early as 2026 at 0.1%, and increasing to 1.5% in 2030, and 12% by 2040. Subsequent draft revisions, currently progressing through the German parliament, go even further by proposing higher targets that would apply exclusively to the road transport sector.

Italy finalised its transposition in January 2026 with some of the EU's strictest compliance terms. The decree sets a €4,000 penalty per missing RFNBO certificate for transport fuel suppliers which could be the highest in Europe if all markets apply the same energy content for RFNBO certificates. Italy also opted to exclude multipliers from the RFNBO transport quota, a measure that inflates a unit of RFNBO’s contribution to targets and which most member states have applied to ease the compliance burden. This is despite Italy’s project landscape being substantially less mature compared to leading markets like Germany and Spain. The exclusion of multipliers widens Italy's shortfall in meeting the 1% transport target from 81% to 93% by 2030. Wood Mackenzie analysis shows this could cost €1.5 billion if unaddressed.

Infrastructure and enforcement challenges

The current pace of midstream infrastructure rollout will constrain opportunities for hydrogen trade and offtake in the early 2030s, potentially hindering adoption. While subsidisation will play a role in stimulating demand, it will entail substantial costs to governments, especially in markets with higher production costs.

The consequences of non-compliance with RED III remain unclear. While the directive sets ambitious targets, it does not specify consequences for member states that fail to meet them. Enforcement may come through corrective measures, flexibility mechanisms, or infringement procedures but this ambiguity around enforcement weakens the directive's influence and deters investment. Most transport-related penalties announced so far create clear financial signals, while industry penalties remain underdeveloped. Greater clarity is needed to provide the policy certainty required for large-scale investment.

Critical decision window

Project viability depends on multiple interconnected factors including transposition timing, infrastructure rollout, and subsidy availability. As infringement proceedings advance through 2026 and 2027, member states will refine their frameworks. The interaction between incentives, penalties and flexibility mechanisms will determine whether RED III's targets translate into bankable demand signals.

To maximise impact, the Commission must establish a clearer and more robust penalty system that removes doubt and provides the certainty needed to trigger large-scale investment. Delivering RED III will be a significant challenge – the question is whether the next 24 months produce sufficient regulatory coherence to mobilise the capital required to narrow the gap between current trajectories and 2030 targets.