On April 19, 2021 the Government of Canada tabled its first budget in two years, entitled A Recovery Plan for Jobs, Growth and Resilience (the "Budget"). Among other things, the Budget aims to incentivize the "green transformation" through new tax measures, including for zero emissions technology manufacturing, carbon capture, utilization and storage, and green hydrogen. The Budget sets aside in excess of $17 billion in new direct spending and tax relief measures to decarbonize heavy industry and build a greener economy.
For the purposes of this blog, we will focus on earmarked spending and incentives that are expected to support the development of Canada's hydrogen industry.
On December 16, 2020, the government released its Hydrogen Strategy for Canada (the "Hydrogen Strategy"). We previously posted an overview and commentary which you can access here. Given that the Hydrogen Strategy did not include any additional investment beyond the $1.5 billion that had already been announced for the low carbon fuels investment fund, the Budget was eagerly anticipated by industry players as a potential source of needed support.
As mentioned in our previous blog post, compared with some international counterparts and potential competitors, Canada is lagging behind in both public and private investment to develop its hydrogen economy. The government is now accelerating the support for hydrogen. As Finance Minister Chrystia Freeland said in her speech to the House of Commons "we can lead, or we can be left behind".
It is an open question as to whether the measures announced in the Budget will be sufficient to stimulate investment and growth as Canada plays catch-up, but there are a number of key investments (outlined below) that are expected to move the industry in the right direction. In reviewing these proposals it is worth noting that the Budget is paying considerable attention to an industry and initiatives that have been overlooked or discounted in previous years. It is also clear that the federal government is relying on incumbents and encouraging entrants from the private sector to deliver on the Hydrogen Strategy while still addressing - and trying to leverage - regional differences.
The Three (Main) Colours of Hydrogen
Hydrogen can be sourced from techniques that can be broadly categorized by three colours.
Grey hydrogen is derived from fossil fuels (primarily natural gas); it is currently the main method of production, and most of the produced hydrogen is consumed at the same location (eg. at an oil refinery or gas processing facility).
Blue hydrogen is also derived from fossil fuels, but includes any number of carbon capture, storage and sequestration technologies to reduce carbon emissions by up to 90%.
Green hydrogen is derived from water using electrolysis, an electricity-powered process that breaks down water into its constituent hydrogen and oxygen molecules. The electricity used must be from renewable (e.g. wind or solar) or other zero-emission sources, such as nuclear, in order to be considered truly green.
Hydrogen Highlights from the Budget
There are a number of hydrogen-specific aspects of the Budget, but arguably the greatest support will come from measures earmarked for the net zero transition generally, including the Net Zero Accelerator, and an expansion of tax incentives targeted at clean technologies.
The following is a summary of the direct spending and incentives included in the Budget that are expected to impact the hydrogen industry:
- Additional $5 billion for Net Zero Accelerator. The Strategic Innovation Fund's Net Zero Accelerator, is set to receive a further investment of $5 billion dollars over the next seven years on top of the initial $3 billion dollars in funding that was allocated at its launch, for a total of $8 billion dollars.
- $1 billion Investment for Clean Tech Projects. Given that transformative clean technology projects often require investment at a scale and time horizon outside of the scope of traditional project financing, the Budget proposes to make up to $1 billion available on a cash basis, over five years, starting in 2021-22, to help attract private sector investment for clean tech projects.
- Tax Reduction for Zero-Emission Technology. To support the growth of clean technology manufacturing in Canada, the Budget proposes to reduce by 50 per cent the general corporate and small business income tax rates for businesses that manufacture zero-emission technologies. Production of green hydrogen has been expressly highlighted by the Budget as a zero-emission technology.
- Accelerating Investment in Clean Energy Technologies. For a number of years Canada has successfully encouraged investment in specific capital equipment through accelerated depreciation for tax purposes. The Budget demonstrates significant support for the hydrogen industry by proposing to expand the list of eligible equipment to include equipment used in manufacturing hydrogen-powered vehicles, manufacturing of equipment used for the production of hydrogen by electrolysis of water, hydrogen production by electrolysis of water, and hydrogen refueling stations.
- $56.1 million for Fueling Standards. To support the domestic demand side of the industry the Budget earmarks $56.1 million over five years, starting in 2021-22, for Measurement Canada to develop and implement, in coordination with international partners such as the United States, a set of codes and standards for retail zero-emission vehicles charging stations and clean fueling stations.
- Tax Incentive for Carbon Capture, Utilization and Storage ("CCUS"). Carbon capture initiatives have been largely unnoticed in Canada except to be occasionally maligned for cost or efficiency. That has changed as the Budget devotes considerable ink to the sector. The main thrust is a proposal to introduce an investment tax credit for capital invested in CCUS projects with the goal of reducing emissions by at least 15 megatonnes of CO2 annually. This measure is intended to come into effect in 2022. Following the approval of the Budget, the government intends to commence a 90 day consultation period with stakeholders, after which it will announce the details of the program including the rate of the incentive. Notably, the investment tax credit is not available for enhanced oil recovery projects. The government intends to make the credit available for direct air capture projects and will be seeking input from all industrial subsectors (e.g. oil sands, refining, cement, fertilizer, power generation, direct air capture, etc.), recognizing that various subsectors face different challenges in adopting CCUS. The tax credit will also support the creation of blue hydrogen production using CCUS technologies. During the consultation, the government will also consider how equivalent tax support could be provided to producers of green hydrogen. It is also noteworthy that the Budget does not differentiate between carbon capture and storage, versus carbon capture, use, and storage, which imposes a separate and added question for government and businesses as to the various existing and potential industrial applications of captured CO2.
- $319 million to Advance CCUS Technologies. The Budget proposes to provide $319 million over seven years, starting in 2021-22, to Natural Resources Canada (NRCAN) to support research, development, and demonstrations that would improve the commercial viability of CCUS technologies.
- Supporting the Production and Use of Clean Fuels. On top of the $1.5 billion investment in a Low-carbon and Zero-emission Fuels Fund announced on December 11, 2020, the Budget also proposes to provide $67.4 million over seven years, starting in 2021-22, for Measurement Canada to ensure that commercial transactions of low-carbon fuels are measured accurately just as they are for conventional fuels.
Key Hydrogen Takeaways
While the emphasis in the budget may appear tilted toward green rather than blue hydrogen, when the overall federal approach as set out in the Hydrogen Strategy is accounted for, it seems clear that the government is taking an 'all of the above' approach recognizing the relative strengths of Canada's different regions in different forms of hydrogen production. For instance, as referenced above, any good news for the CCUS industry is likely to benefit blue hydrogen production, which will rely on the deployment of carbon capture in order to scale up rapidly.
The Hydrogen Strategy, and now the Budget, represent a step forward in the development of Canada's hydrogen economy. Several challenges persist, however, including the need to make hydrogen cost-competitive with other energy sources in the near-term. It remains to be seen whether the Budget can practically help industry achieve cost competitiveness in the energy transition to a low carbon economy.
We're Here to Help
Our team at McCarthy Tétrault LLP continues to closely follow the development of Canada's hydrogen industry and will monitor the CCUS tax incentive consultation process and provide updates as they become available. If you would like more information about the Budget and what it could mean for your business, we would be happy to speak with you.
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