In its autumn economic statement released in early November, the Canadian government announced preliminary plans for refundable tax credits for low-carbon hydrogen production in the country, as well as for clean technologies including zero-emissions vehicles for mining or construction and their refuelling infrastructure.

To learn whether these tax incentives are comparable with what the US government is offering hydrogen producers south of the border through the recently passed Inflation Reduction Act (IRA), as well as the potential impact for hydrogen-powered vehicles in the off-road market, Hydrogen Economist interviewed David Layzell, director of the Canadian Energy Systems Analysis Research (CESAR) Initiative at the University of Calgary, and energy systems architect with The Transition Accelerator, a pan-Canadian charity developing strategies to achieve an economic energy transition in the country.

Is a refundable tax credit of 40pc of capital costs for green hydrogen production in Canada competitive with what the US government is offering through the IRA?

Layzell: On its own, the Canadian tax credit for capital cost investment is not competitive with US government benefits that are tied to green hydrogen production. In large part, that is because the capital cost of the electrolysers that are needed to split water and generate hydrogen accounts for only 15-45pc of the total cost of hydrogen production. Typically, the cost of zero emission electricity—and the need for it to be available most of the time—is the much larger problem. As an incentive for green hydrogen production, not just the capital cost as with the Canadian credit, the US system gives significantly more support.

To incentivise the production and use of green hydrogen as a transportation fuel, the federal government could help to cover the cost of moving the renewable electricity to where it is needed at fuelling stations—essentially cover the incremental cost of grid distribution. This could reduce the cost of green hydrogen production by $2/kg or more. The cost of transporting hydrogen by truck is very high, and such an incentive would help to level the playing field compared to the centralised production of blue hydrogen that needs to be compressed, liquefied and transported to the fuelling station.

The federal government has yet to decide the maximum tax credit for blue hydrogen production projects in Canada. What level is necessary to maintain competitiveness of Canadian blue hydrogen projects compared to US ones and why?

Layzell: The tax credits being offered for carbon capture and storage (CCS) in the USA are larger than what is being offered in Canada, and CCS is essential for the production of blue hydrogen from natural gas. However, the two countries differ in the approach they are using to encourage the oil and gas sector to decarbonise. 

In the USA, there are few disincentives for companies to lower GHG emissions, such as carbon taxes, sector emission ceilings—only taxpayer incentives and subsidies to do better. So the USA seems to offer all ‘carrots’ and few ‘sticks’.

Canada certainly has its share of subsidies, but Canada has also started to expose a small part of industrial emissions to carbon taxes, and they promise that these will rise. They have also capped oil sands emissions. This provides a disincentive to keep emitting. That combined with the CCS tax credit in Canada, although smaller than those offered in the USA, and other special incentives should achieve the objective. 

I personally like the idea of using both ‘carrots’ and ‘sticks’ to encourage decarbonisation, especially for companies that have very high profit margins.

The Federal government also proposed a similar tax credit for up to 30pc of capital costs for clean technologies, including “non-road zero-emissions vehicles” for mining or construction and required refuelling infrastructure. Is this enough to kick-start significant investment in heavy-duty hydrogen-powered vehicles for mining and construction in Canada?

Layzell: I think the devil is in the details here, and I don’t know the details. Certainly, hydrogen vehicles are more expensive than the incumbents and the tax credit will help with that. But the hydrogen supply is also more expensive, especially in the early stages of a hydrogen economy when we don’t have the scale of supply and demand.

This sounds like a good programme but on its own it does not provide a system level solution, so it may not be enough to get an off-road industry going.

---

Author: Vincent Lauerman