Australia must support hydrogen production and impose barriers on dirty products produced with high emitting fuels, but steer away from magical thinking surrounding the gas, the Grattan ­Institute has warned.

In a report published on Sunday, the Grattan Institute has called on the federal government to back hydrogen production but be realistic about its uses. The analysis from the think tank says incentivising the production of hydrogen could cost between $600m to $2bn a year.

Grattan Institute energy and climate change program director Tony Wood said hydrogen was not the only solution to the climate transition.

“We need to dial down the hype about hydrogen – it’s now clear it will not be the sole clean fuel in a net-zero world,” Mr Wood said.

Across seven recommendations, the Melbourne-based institute calls on the government to be strategic about where hydrogen is used and incentivise its use for some industries while appreciating it was not a comparable ­replacement for fossil fuels in all circumstances.

The report finds Australia has the potential to be a hydrogen superpower as the country also has the resources and space to be a renewable energy heavyweight.

But the report warns hydrogen faces a “green premium”, with many materials cheaper to produce using fossil fuels.

The report calls on the government to close the cost gap, by ­ensuring cheap access to renewable energy which could be used to generate hydrogen, put in place barriers to goods from high-­carbon polluting countries and support the production of hydrogen for select industries.

The Grattan Institute calls on the government to back hydrogen production through a ­contracts-for-difference scheme that would underwrite the risk of producing the gas.

The report notes a scheme that underwrote the replacement of all existing ammonia, alumina, and iron facilities in Australia would cost between $11.6bn and $36.8bn over an 18-year period.

Sydney’s WestConnex tunnels system, which connected the M4 and M8 motorways cost almost $20bn to build.

Ammonia, alumina, and iron production are key industries identified by the report for hydrogen to be used.

The report also warns governments must “get serious” about hydrogen and avoid subsidising its use in inefficient areas.

“For many applications, ­hydrogen is currently a second-best option, and future technological and economic developments could make hydrogen more or less competitive as a tool to decarbonise,” it notes.

“Using hydrogen for heating and cooking in homes and commercial buildings is unrealistic.”

The report also warns against subsidising hydro­gen export, warning the costs on both sides of the trade were enormous.

“If such a buyer were to appear – one who wanted to buy ­Australian-produced hydrogen for export, and was willing to underwrite the capital for the supply chain – then Australia should welcome that investment,” the ­report note.

“But if governments are seeking the best return for effort, they should not go chasing after liquid hydrogen exports at the expense of domestic uses that could build a viable industry.”

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