Canada is to introduce a new tax credit of up to 40% for hydrogen production, as part of an effort to bring the country’s incentive regime in line with the generous H2 subsidies available over the border in the United States.

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The autumn economic statement, announced by Canada’s department of finance yesterday (Thursday), pledges to introduce the regime in spring 2023, and run it until at least 2030.

The announcement comes few months after the US signed its game-changing Inflation Reduction Act into law, which provided a tax credit of up to $3/kg for green hydrogen production, effectively making renewable hydrogen the cheapest form of hydrogen globally.

The Canadian model plans to mirror the US regime by making the tax credits scalable dependent on a range of factors, including carbon intensity and labour conditions. An upcoming public consultation will determine a carbon-intensity system that is appropriate for Canada, as well as the level of support for each hydrogen production pathway, including green hydrogen produced from renewable energy and blue H2 made with fossil gas and carbon capture and storage.

“While the IRA will undoubtedly accelerate the ongoing transition to a net-zero North American economy, it also offers enormous financial supports to firms that locate their production in the United States—from electric vehicle battery production, to hydrogen, to biofuels, and beyond,” Canada’s department of finance said in its economic statement. “Without new measures to keep pace with the IRA, Canada risks being left behind.”

Industry actors across continents have been warning their governments that the US tax credits will draw investors away from other countries, and European politicians have called out the tax bill as “discriminatory” while trying to speed up EU’s own legislation for renewable hydrogen.

In addition to hydrogen incentives, Canada’s finance minister Chrystia Freeland introduced tax credits of up to 30% for renewable electricity systems, energy storage systems and industrial electric vehicles.

“The green transition is the most significant economic transformation since the Industrial Revolution”, Freeland said in a comment, adding that the budget proposals are “down payment on the work that lies ahead to respond to the Inflation Reduction Act”.

The Canadian government also revealed new details on the Clean Growth Fund announced last spring, now saying that the fund will be launched by the end of this year with a C$15bn ($11bn) in start-up capital. The fund aims to use a contract for difference (CfD) mechanism to attract private investment in CCS, among other technologies.

In August, German Chancellor Olaf Scholz and Canada’s prime minister Justin Trudeau agreed to forge a “hydrogen alliance” to build a transatlantic supply chain for green H2 and its derivatives. During Scholz’s visit to Canada, German energy buyers signed several hydrogen and ammonia purchase deals with prospective hydrogen producers on Canada’s east coast, which plan to develop facilities powered by the region’s wind resources, neglected up until now, and its abundant hydropower resources.

Among the deals was a non-binding agreement by German energy giant Uniper to buy 500,000 tonnes of green ammonia from 2025 from new developer EverWind Fuels, which is planning to build a plant in Nova Scotia.

EverWind Fuels applauded the new Canadian tax credits. “The refundable nature of the tax credit enables private capital to be recycled to further stimulate project development, creating a virtuous cycle for green energy investment and supporting the establishment of a Canadian green energy economy”, said EverWind Fuels' chief executive Trent Vichie, adding that “Canada required a swift, ambitious, and effective response to the recent US Inflation Reduction Act and Minister Freeland has delivered.”