Fiscal Policies for Addressing Barriers

To the extent that the market penetration of hydrogen technologies is limited by the set of barriers described in the preceding section, governments can implement fiscal policies targeted at those barriers and facilitate market penetration. There are a host of policies available to governments in this regard, including:

Not all of these policies will be equally suited for addressing the specific barriers associated with hydrogen technologies. Indeed, some policies may be too general to explicitly address hydrogen barriers, other policies may be politically unfeasible, and still other policies may not provide sufficient incentive to increase market penetration. To identify the most promising set of fiscal policies for facilitating hydrogen technology market penetration, the above list of policies was evaluated according to the following set of criteria:

1. Administrative Requirements – We provide a brief description of what would be required from an administrative perspective to implement the particular policy. We consider whether it would simply be an extension of an existing program, whether the systems needed to support the policy are already in place (for example in the case of eco-logos), or whether the policy would require monitoring and reporting that are not currently established.

2. Incentive Effect – Policies are evaluated according to whether they provide a direct incentive to hydrogen technologies or whether they apply more broadly, for example to any capital investments or all energy-efficient technologies. In the case of the latter, the incentive effect would be indirect as opposed to direct. Policies are also evaluated according to their ability to provide an ongoing incentive to invest in hydrogen technologies, as opposed to a one-time investment.

3. Ability to Address Hydrogen/Fuel Cell Barrier – Here we consider whether the policy is explicitly targeted at a known barrier associated with hydrogen (and fuel cell) technologies or whether it applies more broadly to various technologies.

4. Likely Environmental Effectiveness – Some policies will have a greater impact on environmental conditions than others. To evaluate the environmental effectiveness of particular policies, we provide a brief description of the potential scale of impact the policy could have on environmental conditions.

5. Cost Effectiveness – Here we provide a brief description of the potential cost of the policy from a government and/or industry perspective. We identify cases where costs may be prohibitive or where they may be justifiable.

6. Political Feasibility – The objective for this criterion is to provide a sense of the federal government’s stance on the particular policy. We note cases where precedents exist, where the type of policy is under consideration, or where the government has stated that it will not be pursuing the particular policy.¹⁵

The details of this policy evaluation are presented in the table below (in no particular order), and the results of this analysis are summarized in a table at the end of this section (Table 7).

Table 6: Fiscal Policy Evaluation

POLICY OPTION: Greenhouse Gas Cap and Trade

Description: This measure would establish an overall cap on greenhouse gas emissions and allocate emission allowances among emitting entities. The allowances could then be traded such that the total emissions remain at or below the specified cap. Entities would be encouraged to invest in emission reducing activities and technologies to the extent that such investments are more economical than the value of the emission allowances.

Administrative Requirements: The administrative requirements depend on the scope of the trading scheme – i.e., just large industrial emitters or all emitters, and could be substantial.

Incentive Effect: Depending on design, this type of policy can provide incentive to invest in energy-efficient and renewable energy technologies. Such a system will not guarantee investment in hydrogen technologies as emission reductions can be achieved in a number of different ways, some of which will certainly be cheaper than hydrogen and fuel cell investments.

Addresses Hydrogen/Fuel Cell Barrier: While this type of policy will encourage investments in technologies and processes that reduce greenhouse gas emissions, it will not explicitly address an existing barrier associated with hydrogen fuel or fuel cell technologies.

Likely Environmental Effectiveness: The environmental effectiveness of this policy depends on the scope of the program as well as the level at which the total greenhouse gas emissions for those participating in the trading program are capped. The impact on emissions could be significant.

Cost Effectiveness: Cap and trade programs are considered to be cost effective in that only those emission reductions that are most cost effective (i.e. cheaper than the cost of buying an allowance) are realized.

Political Feasibility: The federal government in Canada is currently considering a cap and trade program as a means to reduce greenhouse gas emissions. The political feasibility of such a program depends largely on the design and scope of the program.

POLICY OPTION: Eco Labeling

Description: Eco labels identify or specify environmental attributes for goods and services. Such labels are intended to provide guidance to consumers so that they can make more informed investment decisions.

Administrative Requirements: To be truly legitimate, eco labels should be verified for compliance with strict ecological and performance criteria by independent, registered bodies. Third-party verification is already required for the Energy Star energy efficiency label in Canada, so extending such a program to other goods should be administratively straightforward.

Incentive Effect: While an eco labeling program does not provide an ongoing incentive to purchase or invest in hydrogen technologies, this type of program does provide the opportunity to distinguish these technologies from their competition.

Addresses Hydrogen/Fuel Cell Barrier: This program would not explicitly address any of the barriers identified above.

Likely Environmental Effectiveness: Unless a program such as this is used on combination with other programs, which reinforce environmental objectives, it is unlikely that such a program would have a significant effect on environmental conditions.

Cost Effectiveness: The costs associated with such a program should not be prohibitive, although third party verification will increase costs.

Political Feasibility: Based on experience with existing eco-logo programs in Canada (for example the Environmental Choice EcoLogo, the Green Leaf program and the Energy Star label), assigning such a rating to hydrogen technologies should be politically feasible.

POLICY OPTION: Renewable Portfolio Standard

Description: A renewable portfolio standard (RPS) ensures that a minimum amount of renewable energy is included in the portfolio of electricity resources serving a region.

Administrative Requirements: An RPS requires that compliance be tracked and verified. This entails the use of certification to demonstrate correspondence between sales and renewable energy generation.

Incentive Effect: An RPS would not provide a direct or ongoing incentive to invest in hydrogen technologies because the standard would specify production of energy from renewable sources, not the use of particular technologies (i.e., hydrogen technologies). Furthermore, energy from hydrogen would only be covered by an RPS to the extent that the hydrogen came from a renewable source (i.e. wind power).

Addresses Hydrogen/Fuel Cell Barrier: This policy would not explicitly address a barrier associated with hydrogen fuel and fuel cell technologies.

Likely Environmental Effectiveness: The impact on environmental conditions will depend on whether the renewable energy is displacing energy that is associated with high environmental impacts. It will also be directly correlated with the level of standard (i.e. the amount of energy that must come from renewable sources) established by the RPS.

Cost Effectiveness: Because an RPS forces the use of renewable technologies, which may be relatively more expensive than conventional technologies, it can be costly. The extent of the cost will depend on the level of the standard.

Political Feasibility: Renewable Portfolio Standards have not been implemented in Canada on a significant scale but momentum is gaining and they are becoming more politically feasible. RPSs are under consideration in Nova Scotia and British Columbia. BC Hydro has committed to supply 10% of new demand from green electricity sources, targeting 800 GWh of electricity supply in 2003. Ontario recently announced that it will introduce an RPS to require generators in Ontario to secure an additional 1% of their electricity needs for eight years from wind, solar, hydro and biomass energy sources, starting in 2006.

POLICY OPTION: Investment Tax Credit

Description: Investment tax credits (ITC) are awarded for a portion of eligible costs associated with investments in specified technologies and/or activities. Such credits usually amount to 20% to 40% of eligible investment costs16 .

Administrative Requirements: Because such policies are already in place in Canada (for example the Canadian Renewable Conservation Expenses program), implementing complementary policies, targeted at hydrogen technologies, should not result in significant administrative requirements.

Incentive Effect: Investment tax credits provide ongoing and direct incentive to invest in eligible technologies. To the extent that hydrogen technologies qualified for such an incentive, an increase in the use of such technologies would be likely.

Addresses Hydrogen/Fuel Cell Barrier: Such a policy could be designed to explicitly address cost barriers associated with hydrogen and fuel cells.

Likely Environmental Effectiveness: To the extent that the investment tax credit is sufficiently large and market penetration of hydrogen and fuel cells ensues, environmental improvements would likely be realized.

Cost Effectiveness: The cost of the program would depend on the size of the credit required to overcome existing barriers and facilitate market penetration and could be substantial.

Political Feasibility: Because such policies already exist in Canada, for example the Canadian Renewable and Conservation Expenses program and the Renewable Energy Deployment Initiative, implementing such a policy targeted at hydrogen technologies should be politically feasible.

POLICY OPTION: Producer Tax Credit

Description: Producer tax credits (PTC) are awarded to energy producers according to the amount of energy produced. Such credits are usually based on the number of kilowatt-hours (kWh) of electricity produced from renewable sources (for example, 1.5 cents/kWh of electricity from wind power).

Administrative Requirements: A precedent has been set with the introduction of the Wind Power Production Incentive. This initiative can inform production incentives for additional energy sources and can form the basis for expanding the incentive program.

Incentive Effect: Producer tax credits provide an ongoing and direct incentive to invest in the production of certain types of energy. By linking a producer tax credit to energy produced from hydrogen, such a policy would provide a direct and ongoing incentive to invest in hydrogen technologies.

Addresses Hydrogen/Fuel Cell Barrier: Such a policy could be targeted specifically at cost barriers associated using hydrogen technologies (fuel cells) to create energy.

Likely Environmental Effectiveness: The environmental effectiveness will depend on the relative reduction in emissions from conventional technologies as the market penetration of hydrogen technologies increases as a result of this policy. In the case where fuel cells are used to generate electricity from natural gas, the increased efficiency of the fuel cell will lead to improved environmental conditions 17.

Cost Effectiveness: The cost of this program will be determined by the gap between conventional fuels and hydrogen and therefore the magnitude of the credit that is needed to overcome this barrier.

Political Feasibility: Due to the precedent set with the Wind Power Production Incentive (WPPI), implementing a hydrogen or energy from hydrogen production incentive may be politically feasible.

POLICY OPTION: Accelerated Capital Cost Allowance

Description: Certain investments qualify for accelerated capital cost allowances (ACCA). These allowances specify the rate at which the cost of the investment can be claimed as a deduction for tax purposes over time. Investments in hydrogen technologies currently qualify for a capital cost allowance of 30%. Increasing this allowance rate would provide additional incentive to invest in hydrogen technologies.

Administrative Requirements: Because these technologies already receive an allowance of 30%, the administrative requirements with extending the rate would not be significant.

Incentive Effect: An increased capital cost allowance for hydrogen technologies would provide a direct and ongoing incentive to invest in these technologies.

Addresses Hydrogen/Fuel Cell Barrier: An increased ACCA would help address cost barriers associated with hydrogen technologies.

Likely Environmental Effectiveness: To have a significant effect on environmental conditions, the ACCA for hydrogen technologies would have to increase substantially. Otherwise, hydrogen technologies would not gain a competitive edge on competing technologies and market penetration of these technologies would not be enough to impact environmental conditions.

Cost Effectiveness: Increasing the ACCA for hydrogen technologies should not result in significantly increased costs.

Political Feasibility: Precedents have been set with increasing the ACCA in Canada. For example, the December 2001 budget increased the upper limit on the size of small hydroelectric projects that qualify for a 30% Capital Cost Allowance to a maximum annual rated generating capacity of 50 MW from the previous limit of 15 MW. Given precedents such as this, increasing the ACCA for hydrogen technologies should be politically feasible.

POLICY OPTION: Research and Development

Description: Governments make funds available to support research and development (R and D) of new and innovative technologies. The purpose of such programs is often to gain technological experience and to drive down often high, prohibitive, initial costs of relatively new technologies.

Administrative Requirements: Research and development programs are very common in Canada and relatively easy to administer.

Incentive Effect: A research and development program that was designed to explicitly target hydrogen technologies would help to reduce costs and provide an incentive to invest in such technologies.

Addresses Hydrogen/Fuel Cell Barrier: Such a program could be designed to target specific barriers currently preventing market penetration of hydrogen technologies.

Likely Environmental Effectiveness: Research and development programs do not result in immediate improvements in environmental conditions. Rather, overtime as costs are reduced and market penetration increases, environmental improvements ensue.

Cost Effectiveness: Depending on the scale of such programs, costs can be substantial.

Political Feasibility: There are numerous examples of the federal government dedicating funds to support research and development related to hydrogen technologies in Canada. Specific examples include support for the National Research Centre's Fuel Cell Program and the Transportation Energy Technology Program. Given this experience, it appears that supporting hydrogen technologies through research and development programs is politically feasible.

POLICY OPTION: Procurement

Description: Procurement policies secure support for a set of technologies or goods in the form of guaranteed purchases of those goods or technologies. In many cases, government entities will secure the particular goods for their own use or consumption, often at a premium price. In doing so, they increase commercialization of new and innovative technologies and prices decline over time.

Administrative Requirements: Administrative requirements related to procurement programs are relatively minor.

Incentive Effect: While procurement programs do not provide an ongoing incentive to invest in particular technologies, they do guarantee a specified level of investment and, in doing so, provide security to manufacturers that a portion of their goods will be supported.

Addressed Existing Barrier: A procurement program would help overcome existing barriers by providing opportunities for fuel cell and hydrogen technologies to be used in 'real life' settings. Lessons learned through such a program can help overcome technological barriers while at the same time lead to a reduction in costs.

Likely Environmental Effectiveness: The environmental impact of a procurement program focused on hydrogen technologies depends on the level of commitment towards the goods and is likely to be minimal in the short term.

Cost Effectiveness: Such policies can be costly depending on the level of commitment that is made towards the technologies.

Political Feasibility: Procurement programs are politically feasible and provide opportunities for governments to take on leadership roles in facilitating market penetration of new and innovative technologies. Procurement policies in Canada currently support a number of renewable energy initiatives. For example, the Government of Canada Action Plan 2000 on Climate Change announced a commitment to purchase 20% of federal electricity requirements from emerging renewable energy sources.

POLICY OPTION: Information and Education

Description: Information and education programs are often introduced to overcome barriers related to public confidence and understanding. Such policies are needed to increase knowledge and awareness of new and cutting-edge technologies and to provide consumers with the tools they need to make informed investment decisions.

Administrative Requirements: Administrative requirements related to information and education programs depend largely on the design and scope of the particular program. Implementing a program that is targeted at a particular group (for example, energy producers) will be much less administratively onerous than implementing a program that is targeted more broadly at all industrial users, for example.

Incentive Effect: Information and education programs would not provide an ongoing incentive to invest in hydrogen technologies. However, by increasing understanding and awareness of such technologies, they can lead, indirectly, to increased market penetration of the target technologies.

Addresses Hydrogen/Fuel Cell Barrier: An information and education program related to hydrogen technologies targeted at financial institutions or potential investors could help to overcome barriers associated with accessing financing and capital investments.

Likely Environmental Effectiveness: Without the support of complimentary policies targeted at hydrogen technologies, an information and education program is unlikely on it own to have a significant impact on environmental conditions.

Cost Effectiveness: Depending on the scope of such policies, they can be relatively inexpensive to administer.

Political Feasibility: Information and education programs are considered low risk and tend to be politically feasible.

POLICY OPTION: Grants

Description: Grants can be awarded for investments in particular technologies and can help overcome competitiveness gaps between new and innovative technologies and less expensive conventional technologies.

Administrative Requirements: Depending on the scope of a grant program, such an initiative can be relatively easy to administer. A grant program targeted at a particular set of technologies (for example hydrogen technologies) would not be excessively onerous.

Incentive Effect: Grant programs can provide direct and ongoing incentives to invest in particular technologies.

Addresses Hydrogen/Fuel Cell Barrier: Such policies can be designed to explicitly address barriers associated with hydrogen technologies.

Likely Environmental Effectiveness: To the extent that the use of the technologies that receive the grants result in emission reductions, improvements in environmental conditions can be expected.

Cost Effectiveness: Grant programs can be costly depending on the magnitude of the barrier that needs to be overcome in order to achieve market penetration.

Political Feasibility: The federal government has used grant programs to encourage hydrogen and fuel cell developments in Canada in the past. For example, Fuel Cells Canada received $980,000 in 2000 to identify, coordinate and present fuel cell demonstration projects for further consideration and funding. Given this and other examples, additional grants to support hydrogen technologies seem politically feasible.

POLICY OPTION: Carbon Tax

Description: A carbon tax is levied on fossil fuels according to their relative carbon content (in the form of $/tonne of CO2 equivalent). In this way, fuels with relatively higher carbon content become relatively more expensive and their consumption is thus discouraged.

Administrative Requirements: The administrative requirements for implementing a carbon tax in Canada could be substantial. To minimize costs, it would be useful to use a tax framework already in place in Canada, such as that which exists for excise fuel taxes.

Incentive Effect: Such a policy would provide a direct and ongoing incentive to purchase low carbon fuel but would not provide a direct incentive to invest in hydrogen technologies. Such technologies would likely benefit indirectly from a carbon tax.

Addresses Hydrogen/Fuel Cell Barrier: This policy would not explicitly address a barrier associated with hydrogen technologies but would indirectly make hydrogen technologies more competitive with conventional technologies.

Likely Environmental Effectiveness: The impact on greenhouse gas emissions could be substantial and will be driven by the level of the tax that is imposed.

Cost Effectiveness: Environmental taxes, such as carbon taxes, are seen as being cost effective in that investments in emission reductions will be realized only to the extent that they are cheaper than the carbon tax itself. Thus, only the most economical emission reduction investments occur.

Political Feasibility: A carbon tax is currently not politically feasible in Canada although several European countries have implemented carbon taxes as a means to reduce emissions and strive towards commitments established in the Kyoto Protocol.

POLICY OPTION: Reduction or Elimination of Capital Taxes

Description: The federal government as well as most provincial governments levy capital taxes on investments in capital goods. Such taxes could be reduced or eliminated at the federal level.

Administrative Requirements: Reducing or eliminating this tax would not be administratively difficult. However, if it was only capital investments in fuel cell and hydrogen technologies that were eligible for the reduced or eliminated capital tax, the administrative requirements become much more onerous.

Incentive Effect: Reducing or eliminating the federal capital tax would encourage investment in capital goods in general. It would not be explicitly targeted at hydrogen technologies and would thus not provide a strong incentive to invest in these technologies relative to other competing technologies. A reduced or eliminated capital tax for which only investments in fuel cell and hydrogen technologies were eligible, would provide a direct incentive to hydrogen investments.

Addresses Hydrogen/Fuel Cell Barrier: This policy would help to overcome some of the financial barriers associated with investments in hydrogen technologies.

Likely Environmental Effectiveness: Because such a policy would not target capital investments in renewable or energy efficient technologies in particular, it would not lead to improved environmental conditions. Indeed, the removal or elimination of the capital tax is likely to prompt investments in conventional technologies as well and could therefore result in an increase in greenhouse gas emissions and a decline in environmental conditions. A reduction in the tax for only hydrogen or renewable investments would have a positive impact on environmental conditions.

Cost Effectiveness: Reducing or eliminating the federal capital tax would mean a reduction or the elimination of a stable source of funds for the federal government.

Political Feasibility: While some provinces have reduced or eliminated their capital taxes (Alberta and British Columbia) there are not any indications that the federal government plans to do the same. There are no precedents in Canada of a reduced capital tax for particular types of investments, such reductions have only occurred for all investments. To target particular types of capital investments, an accelerated capital cost allowance is the more common fiscal policy tool.

POLICY OPTION: Consumer Tax Credit

Description: Consumer tax credits are offered to individuals that undertake investments in certain goods or activities. In the context of hydrogen technologies, consumer tax credits could be offered for investments in fuel cell vehicles or fuel cells for residences or commercial establishments.

Administrative Requirements: Examples of such credits already exist in Canada and such a policy would be relatively easy to administer.

Incentive Effect: The policy would provide a direct and on-going incentive to invest in eligible technologies.

Addresses Hydrogen/Fuel Cell Barrier: This policy would explicitly address economic barriers associated with investing in hydrogen technologies (fuel cells).

Likely Environmental Effectiveness: To the extent that this policy is successful in addressing economic barriers, investments in hydrogen technologies would be realized and environmental improvements achieved.

Cost Effectiveness: Costs associated with this policy should be justifiable for a period of time until hydrogen technologies achieve minimum levels of production and the costs of these new and innovative technologies declines.

Political Feasibility: A consumer tax credit can come in several forms including an exemption from sales tax, a credit against income tax or a rebate on taxes paid. Precedents of such taxes in Canada are numerous. For example, in British Columbia, the purchase of materials and equipment used to conserve energy is exempt from the sales tax. Alternatively fueled vehicles, including fuel cell vehicles, in British Columbia and Ontario currently qualify for tax concessions.

POLICY OPTION: Pilot or Demonstration Projects

Description: Through pilot or demonstration projects, governments ensure that certain technologies are developed and tested in real world circumstances by assuming a portion of the costs and risks associated with the development and implementation of particular technologies.

Administrative Requirements: The administrative requirements of such a program are not onerous although governments do have to decide what technologies are most worthy of investment.

Incentive Effect: Such programs provide incentive for developers to invest in those technologies that are targeted by pilot or demonstration projects. The scope of the project may be narrow or broad and will have a direct impact on the level of incentive provided.

Addresses Hydrogen/Fuel Cell Barrier: Such programs help address cost barriers for the particular technologies that are chosen as worthy of investment. The information gained through pilot projects can help to reduce costs and make technological improvements.

Likely Environmental Effectiveness: Because only a limited number of technologies are covered by pilot or demonstration projects, they do not generally have a significant effect on environmental conditions.

Cost Effectiveness: Because pilot programs focus on getting particular technologies to an implementation stage, they do not generally require ongoing, long-term funding and are thus not cost prohibitive.

Political Feasibility: Examples of such projects are numerous in Canada, including government support for Vancouver's fuel cell transit bus demonstration project.

The National Round Table on the Environment and the Economy is particularly interested in how barriers that limit (1) demand for hydrogen technologies and (2) infrastructure for hydrogen technologies can be addressed using fiscal policy. At the same time, the NRTEE’s ultimate objective is to develop recommendations on fiscal instruments that can be presented to the Government of Canada. Given these considerations and to refine the substantial set of policies presented above, weight was given to three key evaluative criteria.

Specifically, taking into account the incentive effect of the particular policy (i.e., does the policy provide a direct incentive to hydrogen technologies specifically), the ability of the policy to explicitly address a barrier that currently restricts hydrogen development, and political feasibility, the comprehensive list of policies was scoped to a manageable set of policies that will be considered further. This exercise was undertaken recognizing that all of the policies that were chosen for additional consideration met the environmental effectiveness criterion and would thus lead to a reduction in greenhouse gas emissions should technology penetration occur.

Note that this policy evaluation is focused on the barriers that currently exist and the ability of particular policies to address those barriers immediately and facilitate hydrogen development over the study period. The evaluation does not try to account for or anticipate the various barriers that may or may not arise over the next 20 years.

Table 7: Policy Evaluation Summary

POLICY	INCENTIVE EFFECT FOR HYDROGEN AND FUEL CELLS	HYDROGEN AND/OR FUEL CELL BARRIER ADDRESSED	POLITICAL FEASIBILITY
GHG Cap and Trade	Indirect	Not explicitly	Under consideration
Eco label	Indirect	Not explicitly	Existing precedents
RPS	Indirect and limited	Not explicitly	Under consideration
ITC	Direct	Explicitly	Existing precedents
PTC	Direct	Explicitly	Existing precedents
ACCA	Direct	Explicitly	Existing precedents
R and D	Direct	Explicitly	Existing precedents
Procurement	Indirect	Explicitly	Existing precedents
Info and Education	Indirect	Explicitly	Existing precedents
Grants	Direct	Explicitly	Existing precedents
Carbon Tax	Indirect	Not explicitly	Not currently
Red/Elim. Capital Tax18	Indirect	Explicitly	Existing precedents
Consumer Tax Credit	Direct	Explicitly	Existing precedents
Pilot Projects	Direct	Explicitly	Existing precedents

The summary table above demonstrates that of the list of policies that can be used to facilitate market penetration of hydrogen technologies, seven of these policies (shaded) can be designed to provide a direct incentive to hydrogen technologies, while at the same time explicitly address an existing barrier. In addition, for each of these seven policies, precedents have already been set with similar policies in Canada – an indication that such policies, targeted at hydrogen technologies, may be politically feasible.

These seven policies ¹⁹will guide the economic analysis modelling exercise. Specifically, we will employ the Energy 2020 model to simulate a set of fiscal policy scenarios that will represent some combination of the above policies and evaluate the impact of those scenarios on carbon emissions among other factors. The outcome of this modelling exercise will give us a sense of the level of technology penetration that occurs under specific levels of government support both targeted at the production of hydrogen and the purchase of hydrogen technologies. In the section below, we provide a brief description of the Energy 2020 model.

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