On carbon capture, federal budget delivers promise, if not funds
Once deemed too expensive, carbon capture and storage is now seen as crucial to meeting world's climate goals
It was expected to be the federal budget that made a big commitment to carbon capture and storage (CCS), and its twin, carbon capture utilization and storage (CCUS). But Monday's budget didn't exactly open the wallet for either of these options.
Instead, there was a commitment to consultation and modest investment pledges.
However, if you dig deeper, there is reason for optimism in Canada's carbon capture industry – there's just a bit of work to be done to get there, including cooperation between provincial and federal players. That's important to keep in mind, because there is no reaching our climate goals without CCS and CCUS – in Canada, or anywhere else on the planet.
Once deemed too expensive, both carbon capture options – in which emissions are captured and either permanently stored underground or used in another industrial process – are now seen as critical tools to meet the world's climate targets as prices on carbon have been set and critical infrastructure has been built.
And according to the International Energy Agency, the world has a long way to go. We are only at five per cent of the 800 million tonnes (MT) of carbon dioxide that must be annually captured and sequestered by 2030 if we are to meet those goals.
In Canada, it's Alberta and Saskatchewan where all the capture and sequestration activity takes place.
While the budget documents pegged current sequestration activity at four MT, it's actually closer to 4.8 MT and it all takes place in these two provinces. That's almost one-third of the goal of annually capturing 15 MT. More important is that the transportation capacity of the Alberta Carbon Trunk Line is 14.6 MT/year, making the argument for allocating funding to Alberta even more compelling.
Disappointment in Alberta
That might explain the disappointment when the federal budget didn't exactly put a lot of cash on the table for CCS and CCUS projects, especially after Alberta had asked for $30 billion in funding over 10 years.
Alberta's energy minister, Sonya Savage, was clear in voicing her disappointment.
"In order to capitalize on the opportunity that CCUS presents – and maintain our leadership position – Alberta, and our industry require the federal government to be at the table…. Simply put, the federal government needs to provide concrete incentives to spur the development of CCUS projects which will create significant environmental and economic benefits," Savage said in a statement Monday evening.
What was tabled on Monday was the promise to introduce an investment tax credit for capital invested in CCUS projects in 2022, following a 90 day consultation period with stakeholders.
Not exactly concrete – but it's promising – if done properly.
This tax credit will presumably mirror the highly successful 45Q tax credit that has been in place in the U.S. since 2008 and instrumental in attracting billions of dollars in private capital to CCUS and CCS projects.
The 45Q currently provides a credit valued at $22.66 US per tonne stored underground, rising to $50/T by 2026. If the carbon is used for enhanced oil recovery (EOR) or to produce green hydrogen, the value of the credit is capped out at $35/T. There are close to 40 projects planned or underway in the U.S. taking advantage of the credit, with the potential to annually capture 40MT.
Adding to the investment incentive is the ability to stack credits from other states, which makes the economics even more attractive for companies and investors. This is also possible in Canada.
The prospect of having a "made in Canada" 45Q has been raised with federal ministers in recent years because of the certainty it provides for companies, innovators and investors. If this is indeed the result of the consultation process, it would be a very important investment signal not just for domestic players, but also to the global companies still active in Canada's energy sector and ESG (environmental, social and governance) investors.
Could some of the budget's $5 billion in green loans also go towards CCS and CCUS? Possibly. Will the Infrastructure Bank be a player in funding these projects? That's not out of the question, either. The point is, if the federal government really wants to develop a robust hydrogen economy – irrespective of whether it's green, blue or purple – it rests on having a solid CCS foundation.
That said, the fact the investment tax credit will not be able to be used for CCUS projects involving enhanced oil recovery is bound to cause a fair bit of friction.
That's because the projects operated by Whitecap Resources in Saskatchewan and Enhance Energy in Alberta, capture carbon for use in EOR operations and represent close to 70 per cent of what is annually sequestered in Canada. The question becomes – do these projects become grandfathered in under the new budget, and if not, how will they be treated?
One can understand why applying the tax credit to an EOR operation could be problematic from the government's standpoint; rightly or wrongly, it will be seen as a subsidy to the energy sector to produce oil.
But what about looking at it from this perspective?
Big win for economy and environment
Using captured carbon emissions produces a barrel of oil with a lower carbon footprint, and the captured carbon is permanently sequestered. Over time, it's not out of the question that all barrels recovered by EOR, using captured emissions and combined with other offsets – including carbon pricing – can be carbon neutral. In fact, it's already happened. Last January, Occidental Petroleum delivered a carbon neutral cargo of crude oil to Reliance Industries in India.
Most important in all this, is that governments – federal and provincial – must not be in the business of picking winners and losers. That is why a 45Q-type of investment tax credit makes the most sense. It allows for solutions to be market-driven as companies and investors assess associated risk and make the appropriate decisions.
There is no doubt the Alberta government would have preferred to see more dollars come into the province. But that could happen anyway with a 45Q tax credit, layered on to the province's TIER (Technology Innovation and Emissions Reduction) program, and coordinated with elements of the federal Clean Fuel Standard.
These three levers together could make CCUS just as competitive in Alberta as it is in the U.S., and that would indeed be a big win – for the economy and the environment.
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- An earlier version of this opinion piece referred to $500 billion in green loans. In fact, the proposed investment in the Net Zero Accelerator is $5 billion.Apr 20, 2021 4:19 PM MT