Don’t let hydrogen tax credit become a fossil fuel subsidy, academics, civil society groups tell Ottawa

The federal government plans to introduce a tax credit for clean hydrogen investments in Budget 2023, but academics and some civil society groups say there’s a risk it could end up subsidizing fossil fuels if it’s not done right.

Hydrogen made from renewable energy — like wind and solar — could help Canada reduce its greenhouse gas emissions in sectors that can’t be electrified, like cement and steel production and maritime shipping, according to a letter 110 academics and 55 civil society groups penned to federal ministers.

But if projects that use natural gas and carbon capture technology to produce hydrogen are eligible for the investment tax credit, fossil fuel use and infrastructure will get locked in and jeopardize the country’s emission reduction goals, it says.

The letter was sent to Finance Minister Chrystia Freeland, Natural Resources Minister Jonathan Wilkinson, Environment Minister Steven Guilbeault and Innovation, Science and Economic Development Minister François-Philippe Champagne on Feb. 8.

The federal government is in the midst of developing the refundable tax credit, which would be available for any investments made starting the day Budget 2023 is released this spring. The tax credit will be phased out by 2030.

To avoid turning the hydrogen tax credit into a new fossil fuel subsidy, the letter recommends barring any form of hydrogen made using fossil fuels from receiving the credit.

Hydrogen is often colour-coded depending on how it is produced. When it's made from renewable energy, it's known as green hydrogen. When it's made from fossil fuels, it's grey, and when it's produced from fossil fuels with carbon capture, it's dubbed blue. The federal government’s hydrogen strategy doesn’t distinguish between green and blue; instead, it uses the term “clean” hydrogen.

For this reason, Environmental Defence, one of the civil society groups involved with the letter, is urging Ottawa to pick an emissions intensity limit — which would determine what types of hydrogen projects are eligible for the credit — that excludes fossil fuel-made hydrogen with or without carbon capture technology.

“We are seeing hydrogen being put forward as this climate panacea, and it's really dangerous,” said Julia Levin, national climate program manager with Environmental Defence. “It's another false illusion. It's another distraction.”

Companies also should not be able to pair the hydrogen credit with Ottawa’s investment tax credit for carbon capture, utilization and storage, the academics and civil society groups maintain, pointing to the latter’s general underperformance and inability to address issues like methane leakage.

Projects that do not have free, prior and informed consent from Indigenous communities should also be ineligible, the letter states. Additionally, it says all projects receiving the tax credit must be responsible for and deal with any harmful impacts on communities.

The letter also warns against blending hydrogen into the natural gas grid to heat homes and buildings. Canada’s hydrogen strategy says doing so will reduce emissions in the short term, while an analysis of dozens of studies found using hydrogen for domestic heating is more expensive, less efficient and more resource-intensive and has larger environmental impacts than alternatives like heat pumps.

Hydrogen cycles through the atmosphere faster than CO2 but over a 20-year period, it has 33 times more warming potential than an equal amount of CO2, according to a 2022 study by the U.K. government.

While hydrogen does not emit carbon dioxide (CO2) when burned, it does emit nitrogen oxide, a pollutant with detrimental effects on human health, particularly the respiratory system.

Natasha Bulowski / Local Journalism Initiative / Canada’s National Observer