“Clean” Hydrogen: Tax Credit or Freebie for the Oil Industry?

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<p class=Voices are being raised to demand a clearer and more restrictive definition of “clean hydrogen” in order to prevent public funds from financing solutions deemed costly and less reliable.

A worker walks past facilities at the Air Products hydrogen production plant in Edmonton, Alberta. The federal and provincial governments are funding the company's decarbonization efforts.

Researchers and civil society groups are concerned that a future federal tax credit for the production of “clean hydrogen” will become a wrongful subsidy to the fossil fuel industry.

< p class="e-p">In the economic statement presented in November 2022, the federal government announced a component intended to structure the energy transition in the country. To support projects promoting the production of so-called clean hydrogen, the Trudeau government is currently working on a refundable tax credit for investments in this area.

Any project that would meet specific requirements, which the federal government has yet to determine, could obtain this tax credit of at least 40% on investments made as of the date of the tabling of the 2023 budget. The federal government intends to phase out this measure after 2030.

According to the government, developing the clean hydrogen industry is a strategic priority for Canada that could both generate economic benefits and enable the country to achieve carbon neutrality by 2050.

The Department of Finance says it wants the new tax credit to be available to a range of clean hydrogen production streams.

Ottawa has held consultations from December 1, 2022 to January 6, 2023 to establish what the credit eligibility criteria will be.

Clean hydrogen is seen as an alternative to fossil fuels that could, for example, be used to power various means of transport or heat buildings. It is used in certain industrial processes, particularly in the production of fertilizers.

Made from renewable resources, thanks to the electrolysis of water, it then takes the name green hydrogen.

Canadian Prime Minister Justin Trudeau during a visit to the facilities of the Hydrogen Research Institute of the University of Quebec at Trois-Rivières (UQTR), January 18, 2023.

When produced from natural gas by steam reforming (steam reforming), which is the most common method, it is called gray hydrogen. Like brown hydrogen and black hydrogen, which come from lignite and anthracite (coal), respectively, gray hydrogen comes from hydrocarbons.

Production from fossil fuels releases carbon dioxide (CO2) emissions into the atmosphere. If steps are added to the production chain to capture and sequester carbon, then it is called blue hydrogen.

In its Canadian Hydrogen Strategy, released in 2020, Ottawa considers hydrogen produced using these carbon capture, storage and utilization (CCUS) technologies to be clean. /p>

In 2020, hydrogen production globally resulted in emissions of 900 million tonnes of CO2, according to the International Energy Agency.

In a letter sent to the federal Ministers of Finance, Natural Resources, Environment and Climate Change and Innovation, Science and Industry, 55 civil society organizations, including Greenpeace Canada, Environmental Defense Canada and Équiterre, and 110 academics called on the government to clarify the definition of clean hydrogen.

They fear that the tax credit will be used to finance hydrogen projects that help to perpetuate the use of fossil fuels. The only viable hydrogen that is truly produced at near zero emissions is that from water, using renewable energy, they argue.

“If the goal of accelerating clean hydrogen production is to avoid exacerbating the climate crisis, the definition must be consistent with the carbon neutrality goal of the Paris Agreement by 2050.”

—Excerpt from letter

Although the CUSC makes it possible to reduce emissions, blue hydrogen is produced using fossil fuels, and should therefore not be defined as clean, according to the signatories.

An ill-conceived tax credit would, they argue, subsidize technologies incompatible with Canada's climate commitments and divert funds away from funding more cost-effective and reliable solutions.

In a brief filed with the federal government during the consultations, the Hydrogen Science Coalition, which brings together researchers and engineers, proposed to define clean hydrogen in terms of the CO2 emissions produced. Green and blue hydrogen projects could then be eligible for the tax credit.

A threshold should however be respected, namely no more than one kilogram of CO2 equivalent per kilogram of hydrogen.

The production of one kilogram of gray hydrogen results in emissions of approximately 9 kg of CO2 equivalent.

Under the Biden administration's Inflation Reduction Act, the United States has established carbon intensity levels that determine which clean hydrogen projects qualify for a tax credit, i.e. those that generate less than 4 kg of CO2 equivalent per kilogram of hydrogen.

The coalition, which therefore proposes a more restrictive threshold, recalls that emissions should be calculated across the entire blue hydrogen cycle. It would then be necessary to take into account the fugitive emissions of methane or those resulting from the considerable contribution of energy that this production requires.

The reality is that the technologies Carbon capture and sequestration are only applied in a handful of projects in the country, explains Johanne Whitmore, principal researcher at the Chair of Energy Sector Management at HEC Montréal and co-author of the Hydrogen Science Coalition's brief.

I studied [the measures for the deployment of these technologies] 20 years ago, with companies and the Alberta government, she continues. And to date, we have no conclusive results.

On November 6, 2015, Shell's Quest CSS project was launched in Fort Saskatchewan, Alberta to capture and store tonnes of CO2 emitted by Shell's Scotford oil sands upgrader. This is one of seven such projects implemented in Canada. (File photo)

A recent report by the International Institute for Sustainable Development (IISD) noted that the seven CCUS projects underway in Canada – including five in the petroleum sector and gas – had captured 0.5% of national emissions and did not take into account emissions from downstream uses.

Ongoing projects in the oil and gas sector in Canada capture approximately 2.7 million tonnes of CO2 equivalent per year […] which represents 2.6% reductions needed for the sector to contribute equitably to the national 2030 goal of a 40-45% reduction in emissions from 2005 levels, the study quoted.

Results at home and around the world make CCUS a poor strategy for decarbonizing oil and gas production, according to IISD.

In light of these findings, Johanne Whitmore believes that it is up to the major oil and gas companies to finance the production of blue hydrogen. If Exxon and Shell want to put their money in there, let them. They made record profits in 2022, she recalls.

“The current projects show us that we are not there, that there is still work to be done. I think we win by having a responsible approach with the money of Canadians. »

— Johanne Whitmore, Principal Researcher at the Chair of Energy Sector Management at HEC Montréal

Carbon capture technology specialist Louis Fradette points out, however, that new generations of CCUS are being developed. According to him, these will make it possible to remedy the main “barrier to the adoption of these technologies”, namely the high energy cost associated with these installations.

The particularity [of the new generations] is that they reduce by a factor of 5, or even a factor of 10, energy consumption, assures Mr. Fradette, who leads the Valorisation Carbone Québec project at Polytechnique Montréal. Capture costs are also much more affordable, he adds.

He specifies that these new generations are still far from the sizes required to make major contributions, but that they will have the capacity, in the long term, to operate on a large scale in factories like Ciment McInnis, l' one of the biggest industrial polluters in Quebec.

The world's fourth-largest producer of natural gas, Canada relies on the vast natural gas and oil reserves of Alberta, Saskatchewan, British Columbia and its Atlantic provinces to develop its hydrogen.

The government estimates that “clean” energy could potentially provide up to 30% of Canada's end-use energy by 2050. An estimate that raises eyebrows Johanne Whitmore.

The models that estimate the scenarios most likely to contribute to the achievement of carbon neutrality do not go in this direction, according to the researcher. When you take hydrogen and compare it with all the options, it doesn't stand out! she says. It is overpriced and inefficient. From an economic and technical point of view, it does not even compete with other more efficient alternatives.

Questioned on the next steps, the cabinet of the minister of Finance, Chrystia Freeland, did not want to reveal a timetable. Details of the investment tax credit design will be announced in due course.

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