The Government of Canada tabled Budget 2021 on April 19. In her opening remarks, Deputy Prime Minister and Minister of Finance, Chrystia Freeland, said “This budget is about . . . meeting the urgent needs of today, and about building for long-term . . . It’s a plan that embraces this moment of global transformation to a green, clean economy."i With over $17 billion allocated for green recovery, the economics of building back better are a large component of the spending priorities of the current government.
This is the first Canadian budget that specifically mentions carbon capture, utilization, and storage (CCUS/CCS) and should be applauded. With CCUS/CCS being a critical part of getting to net-zero, it is appropriate that Canada is putting forward dollars for this technology to help reach its newly announced, target of 40-45% below 2005 levels by 2030 (announced by Prime Minister Justin Trudeau at the Earth Day United States Leaders’ Summit on Climate Change).
With much effort by industry, organizations, and governments to see a tax incentive for CCUS/CCS in the budget, its presence is welcome. The International CCS Knowledge Centre’s (Knowledge Centre) White Paper on Incentivizing Large-Scale CCS in Canada, in partnership with RSM Canada, put forward recommendations for the investment tax credit that we see reflected in the budget. This being said, tax incentives are not the only recommendation for advancing CCUS/CCS, nor are they suitable for all companies.
This article pulls into focus the sections of Budget 2021 that are appropriate to apply to CCUS/CCS, and also notes some areas that may be worthy of focus during the 90-day consultation period the government has outlined for CCUS/CCS tax incentives.
The Knowledge Centre is preparing a CCUS/CCS in the Budget – Consultation Document for Canadian Industry which will serve as a source to help inform consultations during the 90-day timeframe. It is based on conversations with industry players, governments, and the application of the Knowledge Centre’s own expertise. Common messages and associated facts will be provided. Please fill out our SURVEY to have your input incorporated. Stay tuned in early May 2021 for the release of the Consultation Document.
CCUS / CCS in the Budget
The race to reach net-zero and fight the effects of climate change and reduce the harmful effects of greenhouse gasses (GHGs) in the atmosphere requires every Canadian and Canadian industry to make a change. Budget 2021 identifies CCUS/CCS as an important tool for reducing emissions in high emitting sectors.
Here is what Budget 2021 says about CCUS/CCS:
Fighting climate change, and reaching net-zero, requires Canadians and Canadian industry to reduce the harmful greenhouse gases in the atmosphere in as many ways as possible. CCUS is an important tool for reducing emissions in high emitting sectors. It uses advanced technologies to capture carbon dioxide emissions from fuel combustion, industrial processes, or directly from the air. The captured carbon can then be stored deep underground or used to create new and innovative products. CCUS is the only currently available technology with the potential to generate negative emissions.
Canada currently captures 4 megatonnes of carbon every year, but we have the technical and geological capacity to capture and store much more. We have the right building blocks in place, including infrastructure such as the Alberta Carbon Trunk Line, and innovative companies like CarbonCure in Nova Scotia, which developed a technology to inject captured carbon into concrete, making it stronger and less polluting. Alberta and Saskatchewan have the greatest near-term potential to become global leaders in CCUS by creating new ‘hubs’ where carbon from high-emitting facilities can be efficiently captured, transported, stored, or used.
Tax Incentive for CCUS / CCS
Government policy and incentives can be effective tools at addressing challenges facing investment in, and up take of, CCS. Often, the effectiveness of production tax credits is based on its design reflecting the underlying economics of CCUS/CCS projects and interaction with geographic and industrial factors. Theoretically, the outcome would be better projects given market forces would dictate the projects that progress. Tying the tax credit to the capture of CO2 and applying the credit to a wide variety of end users reflects the variability in potential CCS projects.
Here is what Budget 2021 says about CCUS / CCS tax incentives:
Canadian innovators and engineers have developed some of the leading global technologies for CCUS technologies that are in demand as more countries take action to fight climate change. The government intends to take significant action to support and accelerate the adoption of these technologies. By providing incentives to adopt CCUS technologies, the proposed measure will be an important element in Canada’s plan to achieve net-zero emissions by 2050. This important new element of Canada’s tax system is also intended to accelerate the growth of new businesses and jobs related to carbon capture.
- Budget 2021 proposes to introduce an investment tax credit for capital invested in CCUS projects with the goal of reducing emissions by at least 15 megatonnes of CO2 annually. This measure will come into effect in 2022.
The government will move quickly with a 90-day consultation period with stakeholders on the design of the investment tax credit, after which it will announce more details—including the rate of the incentive. It is not intended that the investment tax credit be available for Enhanced Oil Recovery projects. The government intends to make the credit available for direct air capture projects. The government will be seeking input from all industrial subsectors (e.g. oil sands, refining, cement, fertilizer, power generation, direct air capture, etc.), recognizing that various subsectors face different challenges in adopting CCUS. The tax credit will also support hydrogen production. During the consultation, the government will consider how equivalent tax support could be provided to producers of green hydrogen. The consultation will include key provincial governments, encouraging them to create complementary measures for CCUS projects in their jurisdictions.
Following consultations, the government intends to introduce legislation at the earliest opportunity to implement the investment tax credit. The government will also analyze how the tax system can be used to further support the commercialization and deployment of breakthrough technologies that may be critical to creating our net-zero future.
It is important to note what the budget left out of this section. Primarily, it left out how much money will go towards these incentives. The 90-day consultation period will help to define that value. Secondly, this tax incentive specifically excludes enhanced oil recovery (EOR) projects. This of course is of great concern given that three out of four of Canada’s current large-scale CCUS/CCS projects store CO2 using the EOR process. The Weyburn-Midale field in Saskatchewan alone has stored over 35Mt of CO2 through EOR practises to date.
Advancing CCUS / CCS Technologies
Canada is a leader in CCUS/CCS, but investment is needed to support research and development that will help to advance the technology, lower its cost, and make sure Canada stays ahead.
Here is what Budget 2021 says about advancing CCUS/CCS technologies:
Canada is a leader in CCUS, with domestic projects that have already captured and stored millions of tonnes of CO2. Building on this Canadian advantage is integral to achieving our net-zero goals. But investment is needed to support research and development that will help to advance the technology, lower its costs, and make sure Canada stays ahead of the curve in the global market for CCUS.
- Budget 2021 proposes to provide $319 million over seven years, starting in 2021-22, with $1.5 million in remaining amortization, to Natural Resources Canada to support research, development, and demonstrations that would improve the commercial viability of carbon capture, utilization, and storage technologies.
Taken together, these proposed measures related to CCUS will help Canada achieve net-zero emissions by 2050, and position Canada as a leader in supplying cleaner energy and innovative new technologies around the world.
The proposed $319 million over seven years is an average of only $45.6 million dollars a year. This support may help advance new research and development initiatives but allocating these dollars for demonstrations may not be enough of a boost to bridge the gap from concept to operation.
Additionally, and importantly, what is also left missing is access to dollars to support upfront evaluation, feasibility, planning, and front-end engineering and design (FEED) activities that inform the final investment decisions for deployable large-scale projects. As noted in the Incentives White Paper, “such early studies are not research or conceptual, but part of the pathway to deploying a capital project which provides certainty for larger investment.”
Beyond specific mention of CCUS/CCS, there may be other avenues that CCUS/CCS projects may find dollars in the budget. Budget 2021 looks at decarbonizing large emitters, transforming key sectors and accelerating the adoption of clean technology across the economy. The net-zero accelerator is meant to attract the large-scale investments needed to achieve net-zero by 2050.
Here is what the Budget 2021 says:
The Net Zero Accelerator, launched in the government’s strengthened climate plan last December, will help build and secure Canada’s clean industrial advantage. By investing in decarbonizing large emitters, transforming key sectors— from steel and aluminum to cement—and accelerating the adoption of clean technology across the economy – for example, the auto and aerospace sectors – the Net Zero Accelerator will spur Canada’s shift to innovative net-zero technologies and attract the large-scale investments needed to meet our goal of net-zero by 2050. It will also help Canadian firms grow and create the jobs of our low-carbon future.
- Budget 2021 proposes to provide $5 billion over seven years (cash basis), starting in 2021-22, to the Net Zero Accelerator. Building on the support for the Net Zero Accelerator announced in the strengthened climate plan, this funding would allow the government to provide up to $8 billion of support for projects that will help reduce domestic greenhouse gas emissions across the Canadian economy.
A Healthy Environment for a Healthy Economy 161 The Net Zero Accelerator works to cut pollution, spur clean technology innovations, attract major investments, create good middle-class jobs, and foster development of key supply chains to ensure Canadian industries and workers can use their low-carbon advantage to compete and win. This is an important component of the total investment in the Strategic Innovation Fund proposed in Chapter 4.
Propelling Clean Tech Projects and Zero-Emission Technology
While Canada is a global leader in clean technology, many counties around the globe such as the United Kingdom and Norway have been pushing forward. To see greater investment to act quickly to achieve our ambitious targets, Budget 2021 provides dollars to help drive private investment to push projects to the next level.
To do this, Budget 2021 says:
While the Canadian clean technology sector is a global leader in clean tech innovation (11 companies were named to the Cleantech Group’s 2021 Global Cleantech 100 list, more than any other country after the United States), it lags in commercial scale-up, export and industry adoption. Canadian companies frequently report facing challenges in scaling up in Canada’s small domestic market and accessing sufficient patient growth capital. Transformative clean technology projects, particularly large ones, often require investment at a scale and time horizon outside of the scope of traditional project financing.
- To support large-scale clean technology projects, Budget 2021 proposes to make up to $1 billion available on a cash basis, over five years, starting in 2021-22, to help draw in private sector investment for these projects.
These resources would fuel the growth of innovative Canadian companies, create jobs for highly skilled workers, and bring important environmental and climate solutions to the world.
Room to Grow
Budget 2021 has a strong focus on putting families and the environment first. Many of the proposed initiatives aim to create jobs and strengthen sectors to see Canadians well positioned and competitive as we build, a cleaner future. It encourages businesses to shift to not only reducing its direct emissions but adopting the use of cleaner sources throughout its supply chain. The government has put a real investment towards green technology, including $54.8 million over two years for forest-based bio-economic solution. It also includes the creation of federal Green Bond for a greener market portfolio for investors.
Ultimately, the government will move quickly with a 90-day consultation period with stakeholders on the design of the investment tax credit, after which it will announce more details – including the rate of the incentive. On the plus side, such a tight window may mean companies can get dollars sooner. Hopefully, enhancements during this period will provide a greater certainty, increase value, and reduce risk in projects, which can act to leverage greater private investment, increase future deployment, and perhaps most critically, aim to reduce even more emissions.
i Government of Canada. (April 2021). Federal Budget 2021. www.budget.gc.ca/2021/report-rapport/intro-en.html