New tax credit for investments in clean hydrogen production

The federal government announced a refundable tax credit for investments in clean hydrogen production in Tuesday’s budget.

The Clean Hydrogen Investment Tax Credit will offer tax incentives for hydrogen production, with credits ranging from 15 – 40% based on the lifecycle carbon intensity of the hydrogen. Maximum tax credits under the program include:

  • a 40% credit when expected life cycle emissions from the production of clean hydrogen are less than 0.75 kg of carbon dioxide equivalent (CO2e) per kg of hydrogen produced
  • a 25% tax credit when emissions are between 0.75 – 2 kg of CO2e per kg of hydrogen produced
  • a 15% tax credit when emissions are between 2 – 4 kg of CO2e per kg of hydrogen produced

Hydrogen production with a carbon intensity greater than 4 kg of CO2e per kg of hydrogen produced is not eligible for the tax credit.

Greater credits available for better working conditions

To qualify for the maximum tax credit in each category, a company must meet certain labour conditions for work that is performed on or after October 1, 2023. Specifically, an organization must:

  • pay employees the prevailing wage in your jurisdiction (based on union compensation, applicable collective bargaining agreements or corresponding labour agreements)
  • ensure that at least 10% of your tradesperson hours are worked by registered apprentices in the Red Seal trades

Organizations that do not meet these requirements can still claim tax credits through the program, but not at the maximum rate.

The promise of hydrogen

Hydrogen could play a crucial role in achieving Canada’s ambitious net zero targets. It produces only oxygen and water as byproducts when burned as a fuel to produce electricity – and the carbon emissions from hydrogen production can be sequestered or captured for another use. Natural Resources Canada estimates hydrogen could provide up to 30% of the country’s end-use energy by 2050.

Work is already underway to create the infrastructure needed to produce hydrogen at scale. Air Products Canada Ltd. is working on a $1.6-billion net-zero hydrogen production and liquefaction facility in Edmonton that is expected to come online next year. ATCO and Suncor have partnered on a project in Alberta that will produce more than 300,000 tons of hydrogen per year.

With the introduction of the clean hydrogen tax credit, together with carbon pricing measures and other government and industry initiatives, we expect investments in hydrogen technology to ramp up significantly in the years ahead. If you have questions about applying for the tax credit or would like to learn more about our experience in clean energy, contact a member of our Energy team.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.