Almost five months after first announcing its hydrogen tax credit plans, Canada has finally unveiled the details of the scheme, as part of its annual national budget.
The Clean Hydrogen Investment Tax Credit (CHITC) — designed to prevent the country being left behind by the generous US H2 tax credits announced in July last year — will reimburse green and blue hydrogen developers up to 40% of their taxes on purchasing and installing “eligible equipment”, although levels of support will vary according to expected lifecycle greenhouse gas emissions.
Projects with less than 0.75kg of carbon dioxide-equivalent (CO2e) per kilogram of hydrogen produced will receive the full 40% rate.
Those with an emissions intensity of 0.75kg CO2e/kgH2, but less than 2kg CO2e/kgH2 will get a 25% rebate, while projects with 2-4kg CO2e/kgH2 will earn 15%.
Schemes with emissions higher than 4kg CO2e/kgH2 will get nothing.
Like the US tax credits, certain labour requirements will also need to be met — if they are not, the tax credit will be reduced by ten percentage points. These include “ensuring that wages paid are at the prevailing level, and that apprenticeship training opportunities are being created”.
“The government will consult with labour unions and other stakeholders to refine these labour requirements in the months to come,” the budget document explains.
Lifecycle emissions will be based on the government’s Fuel Life Cycle Assessment Model on a “cradle-to-gate” basis, which in the case of blue hydrogen made from fossil gas (with carbon capture and storage [CCS]) would include upstream methane emissions.
Any carbon captured in the production of blue hydrogen would have to be permanently stored — any CO2 that is used for enhanced oil recovery or any other process “would be treated as if it were released into the atmosphere”.
Renewable energy from the electricity grid will be eligible for use in green hydrogen projects if bought via power-purchase agreements or similar instruments, although “exact rules and requirements for these instruments would be provided at a later date”. This postpones difficult decisions on additionality and temporal correlation that have caused the EU to repeatedly delay its Delegated Act defining green hydrogen.
Verification of each project’s carbon intensity would be based on an initial front-end engineering design study, and then be reassessed during operation by an independent third party.
“Details of this process, including the length of the assessment period and the mechanics of how CH [clean hydrogen] Tax Credit amounts will be recovered, would be provided at a later date,” says a supplementary budget document.
The CHITC will also offer a 15% tax credit on equipment that converts clean hydrogen into ammonia.
Businesses will only be able to claim one of several new tax credits in the budget, which are available for CCS, clean electricity, clean technologies, and clean technology manufacturing.
“However, multiple tax credits could be available for the same project, if the project includes different types of eligible property,” the supplementary document explains.
Manufacturers of electrolysers, hydrogen refuelling systems, batteries, wind turbines, solar panels made in Canada will be able to benefit from the Investment Tax Credit for Clean Technology Manufacturing, which amounts to a 30% tax rebate on manufacturing costs.
The clean hydrogen tax credits come into force immediately, or as the supplementary budget document puts it: “This measure would apply to property that is acquired and that becomes available for use on or after Budget Day [28 March 2023].”
At the moment, only green and blue hydrogen will be eligible for tax credits, although the budget states that “going forward, the government will continue to review eligibility for other low-carbon hydrogen production pathways”.
The CHITC is expected to cost a total of C$5.46bn ($4.02bn) from now until 2028, and C$12.1bn between 2028 and 2034-35, when it will end.
The budget document also states that the government will consult on developing Carbon Contracts for Difference schemes that would further subsidise clean hydrogen in the future (see panel below).
Under a Carbon Contracts for Difference (CCfD) scheme, end users would be paid a guaranteed amount by governments for avoiding CO2 emissions.
This is likely to offer a subsidy representing “the difference between a ‘strike price’ reflecting the cost of producing hydrogen and a ‘reference price’ reflecting the market value of hydrogen”.
Essentially, this would enable green hydrogen to be available to the market at the same price as grey hydrogen produced from unabated methane.