There is global recognition that carbon capture, utilization, and storage (CCUS) and carbon removal, or collectively carbon management, technologies are an imperative to decarbonizing without deindustrialization. This has been reaffirmed at this month’s “COP 30” in Belem, Brazil with discussion focusing on technologies developed and implemented in places like Europe and North America can pave the way for broader industrial decarbonization internationally.
Last Monday, Canada’s Federal Budget, dubbed “Canada Strong,” passed its final vote in the House of Commons. The budget has been framed as a response to “fundamental shifting at a speed, scale, and scope not seen since the fall of the Berlin Wall” with a fiscal plan to “make generational investments.” So, what does the budget say about carbon management and is it part of the generational investment?
Overall, this budget continues and begins to strengthen several supportive policies for carbon management brought forward over the past several years. The budget includes “Canada’s Climate Competitiveness Strategy” which refers to items that directly impact carbon management projects, particularly related to tax incentives and foreshadowing updates to carbon pricing.
First, the budget proposes extending the full credit rates of the Carbon Capture, Utilization and Storage Investment Tax Credit (CCUS ITC) by 5 years. The full rates cover eligible capital expenditures at 60% for direct air capture, 50% for point-source capture, and 37.5% for transportation, storage, and utilization. This is particularly helpful for multi-phase projects and early-stage projects looking to make a final investment decision in the near term. As CCUS projects need to acquire equipment before they can claim the tax credits, extending the full rates reduces some risks related to long-lead items needed for capture projects, like large compressors and combined heat and power units which can take several years to acquire. This change comes into force as of November 4, 2025.
Another noted change to the clean economy tax credits is an announcement that the government will be introducing legislation for the yet-to-be finalized Clean Electricity ITC in the near term. As proposed in previous budgets, the Clean Electricity ITC would include natural gas CCUS projects albeit at a lower rate (15%) than the CCUS ITC. However, Crown corporations are eligible for the Clean Electricity ITC, unlike the CCUS ITC. Budget 2025 removes challenging conditions initially introduced only for Crown corporations related to proving that ITCs would be passed on to ratepayers and public commitments to a net-zero grid in 2035, fifteen years earlier than the federal Clean Electricity Regulation’s target. Hopefully, this enables CCUS on natural gas power as an option for Crown corporations to reduce emissions.
Absent from this budget were several areas that would help to attract the aforementioned investment. Currently, the only utilization included in the CCUS ITC is the use of captured CO2 in concrete. There are many other proven and developing technologies that can productively use captured carbon, essentially turning a waste disposal system into a circular economy. CO2 Enhanced Oil Recovery (EOR) extracts remaining oil from currently inactive wells while permanently storing more than 97% of CO2. Other technologies using CO2 to produce fuels and chemicals deserve a pathway for eligibility to spur investment in projects.
Adding these utilizations to the CCUS ITC adds a non-policy-based incentive for CCUS projects and matches the government’s statements that Canada will become a “clean and conventional energy superpower.” The Knowledge Centre remains optimistic that changes to the ITC for utilizations will happen in the coming months.
Budget 2025 does not indicate a path or evaluate provinces currently developing carbon storage frameworks for CCUS. Though Manitoba has not brought forward important regulations, and Ontario’s Geologic Storage Act has not passed, both provinces have largely identified their regulatory approach to carbon storage. An indication that the provinces are on track to becoming a ‘designated jurisdiction’ in the CCUS ITC if they pass their legislations, and that investments would be retroactively eligible for the tax credits would limit uncertainty for first movers in both provinces.
Another change that the Knowledge Centre would like to see for the CCUS ITC is an increase in the value of credits for Bioenergy CCS (BECCS) projects to 60% to match the incentive for direct air capture projects. BECCS projects are considered CO2 removals, meaning they cover historical emissions and are critical to reaching any net-zero emission goal. Additionally, BECCS projects prevent emissions from landfills or forests (often via wildfires) while producing reliable electricity. There are additional costs associated with collecting large amounts of solid waste for a BECCS project – but there are added environmental benefits from a forest and waste management perspective, and an increased ITC is justified.
For several reasons, including uncertainty regarding federal and provincial climate policy and international trade, and delays in passing legislation, the CCUS ITC and other Clean Economy Tax Credits have not been utilized as projected in previous budgets. Budget 2025 lists $22 million in projected expenditures across all of the tax credits for 2024-25. Total clean economy tax credits are projected to peak in 2028-29 at $7.2 billion, which indicates that the government expects major private investment in CCUS over the coming years.
To encourage the capital investment needed to take advantage of the CCUS ITC, there need to be clear incentives for operating CCUS projects. As it stands, Canada has 10 different industrial carbon pricing systems alongside sector-specific emission reduction regulations for clean fuels and clean electricity. This policy pancake stack represents very different opportunities for CCUS between industrial sectors, processes, and geographies.
To bring more clarity to emission reduction projects, the Budget acknowledges that “carbon markets are not functioning as well as they should be,” and commits to:
- Developing a post-2030 carbon pricing trajectory. It is currently set to rise by $15 per year to $170 in 2030. Canada says that it is aiming to get pan-Canadian agreement on this trajectory.
- Fixing the federal backstop. The backstop theoretically is applied to provinces that aren’t deemed equivalent with the federal system (but has not been applied in any provinces yet). At the same time Canada is engaging with provinces to harmonize or link pricing systems.
- Maintain Canada’s approach to add pricing certainty through carbon contracts for differences through the Canada Growth Fund.
The budget is not explicit about what the goals are or how they are going to get there, but it is clear they are looking to gain consent and partnership with provinces and territories related to climate policies. Alberta, which has Canada’s largest emission pricing system has indicated that they are close to reaching an MOU with Canada on energy and environmental policy, which could be announced before the end of the month. The approach to focus on strengthening carbon markets, providing a longer-term outlook on price and building national consensus is positive for carbon management investments and is reflected by other changes announced in the budget chapter.
The budget announces that Canada is looking to reach long-term agreements with provinces as related to proposed changes to the Canadian Environmental Protection Act, the enabling act of the Clean Electricity Regulation. Much of Canada needs more power generation energy for data storage, a growing population, and to maintain reliability and affordability, finding solutions that balance emission reduction and existing grids is a major challenge. Though scant on details, this may indicate the pursuit of compromises under the Clean Electricity Regulation for Alberta and Saskatchewan, which have more fossil-fuel based grids than other provinces.
The budget also includes updates to the greenwashing legislation which have had the unintended consequence of limiting organizations pursuit of reducing emissions. Since the passing of the greenwashing provisions, companies with successful CCUS projects or Canadian developed technology have been essentially mute. This is a major challenge for building support for Canadian leadership and entrepreneurship in carbon management.
The final two major items impacting carbon management investment are related to more global capital tax investments. Implementing a plan introduced a year ago, Canada is expanding eligibility to the Scientific Research and Experimental Development (SR&ED) tax credit. SR&ED is a federal incentive program that allows companies to claim tax credits or refunds for eligible R&D expenditures incurred in Canada, helping to offset costs and accelerate innovation. Canada is broadening eligibility to include capital expenditures and Canadian public corporations, increasing overall investment thresholds, and enabling the program to directly support capital purchases. These enhancements strengthen support for carbon management technology development by improving access to early-stage funding and de-risking deployment-scale innovation. As the sector works to drive down costs through technological advancement, the updated SR&ED framework represents a meaningful step forward in attracting capital, accelerating commercialization, and anchoring innovation within Canada.
Finally, Canada is reinstating the accelerated investment incentive, which provides a much higher first-year write-off for a wide variety of capital investments, including CCUS-specific Capital Cost Allowance (CCA) classes (57 to 60). This change, while not entirely new, is positive for carbon management investments.
There are several details to determine over the coming months, as it seems like we are at a crossroads in carbon management. The Knowledge Centre will be watching for:
- Intergovernmental agreements related to carbon pricing systems,
- The inclusion of carbon management projects as part of Canada’s Major Projects Office,
- Details on the federal approach to the carbon pricing benchmark and backstop,
- The finalization of provincial carbon storage regulatory frameworks in Ontario, Manitoba, and Quebec, and
- Updates to the CCUS ITC related to all kinds of utilizations and other clean economy tax credits.