Hydrogen fuel cell vehicle (H-2 FCV) trials are taking place in a number of cities around the world. In Italy, Milan and Turin are the first to have demonstration projects involving hydrogen-fuelled vehicles, in part to satisfy increasing consumer demand for improved environmental performance. The Italian transport plan specifically highlights the potential for FCVs to enter into the marketplace from around 2005. A scenario for FCV penetration into Italy, developed using projected costs for FCV and hydrogen fuel, suggests that by 2015, 2 million Italian cars could be powered by fuel cells. By 2030, 60% of the parc could be FCVs. To develop an infrastructure to supply these vehicles, a variety of options is considered. Large-scale steam reforming, on-site reforming and electrolysis options are analysed, with hydrogen delivered both in liquid and gaseous form. Assuming mature technologies, with over 10,000 units produced, on-site steam reforming provides the most economic hydrogen supply to the consumer, at US$ 2.6/kg. However, in the early stages of the infrastructure development there is a clear opportunity for on-site electrolysis and for production of hydrogen at centralised facilities, with delivery in the form of liquid hydrogen. This enables additional flexibility, as the hydrogen may also be used for fuel refining or for local power generation. In the current Italian context, energy companies could have a significant role to play in developing a hydrogen infrastructure. The use of hydrogen FCVs can substantially reduce emissions of regulated pollutants and greenhouse gases. Using externality costs for regulated pollutants, it is estimated that the use of hydrogen fuel cell buses in place of 5% of diesel buses in Milan could avoid US$ 2 million per year in health costs. The addition of even very low externality costs to fuel prices makes the use of untaxed hydrogen in buses and cars, which is slightly more expensive for the motorist than untaxed gasoline or diesel, competitive on a social cost basis.