New U.S. incentives for carbon capture put Canada at risk of being left behind

Climate package offers higher tax credit to cover nearly two-thirds of project's costs

Canada was first with significant incentives for systems that would keep carbon from entering the atmosphere, but the United States now has the size advantage, and oilpatch leaders with capital to invest in green technology have noticed.

The Biden administration's new climate package has been celebrated around the world as a game-changer in the fight to reverse climate change. In Canada, much of the attention has focused on new subsidies for electric vehicles that are made primarily with parts from North America, a lifesaver for Ontario's automobile industry and a new source of hope for miners who own claims on the minerals that will be needed for the batteries.

But there's more to the Inflation Reduction Act (IRA) than EVS. Washington intends to throw money at virtually every idea that has a reasonable shot at helping the U.S. get to net-zero, including costly carbon capture, utilization and storage (CCUS) projects, a favourite of Canada's oil majors, who argue the technology must be part of any realistic shift to carbon neutrality, even though no one has yet proved it works at scale.

The U.S. is prepared to roll the dice. Previously, carbon emitters in America could access a production tax credit known as 45Q, which provided US$50 per metric tonne of carbon dioxide that was captured and permanently stored. Now, under the IRA, that credit's value has increased to US$85 — an upgrade that could cover nearly two-thirds of a project's total capital and operating costs, according to a Bank of Montreal analysis.

By contrast, the 50-per-cent Canadian investment tax credit (ITC), unveiled in the last federal budget, likely covers less than 25 per cent of total projected costs for facilities sanctioned by 2030. Some of the oil and gas industry's biggest companies have called on Alberta to supplement the federal subsidy, and the United Conservative government has alluded to the possibility of providing for an offset in royalties payable by companies for the capital costs associated with carbon capture projects.

The head of Entropy Inc., the Calgary-based carbon capture and storage subsidiary of Advantage Energy Ltd., said the U.S. production credit is superior to Canada's incentives for CCUS projects. Michael Belenkie said that even though Entropy is sitting on a trove of potential projects in development in Canada, it will ultimately opt for the U.S. if that's where it can get the greatest return.

“We will not invest material amounts of our financing in Canada unless they fix this problem,” Belenkie said.

Belenkie and others said the biggest problem with Canada's investment tax credit isn't necessarily its size, but that it doesn't shield investors from potential changes in future carbon prices. The 45Q, on the other hand, provides a guaranteed price for carbon offsets generated by eligible projects over a 12year period, effectively derisking large investments in CCUS.

One of the largest carbon capture projects proposed in Canada is a massive CO2 transportation line and storage hub planned for northern Alberta by members of the Pathways Alliance, a group of six big oil companies that are responsible for about 95 per cent of production in the oilsands.

The group — Canadian Natural Resources Ltd., Cenovus Energy Inc., Conocophillips Canada, Imperial Oil Ltd., Meg Energy Corp. and Suncor Energy Inc. — has been lobbying the government for support to achieve its goal of reaching net zero by 2050, largely through large-scale deployment of CCUS.

The Bank of Montreal analysis found that Canada's tax incentive would cover less than 15 per cent of the full Pathways Alliance plan.

Mark Cameron, vice-president of external relations for the Pathways Alliance, said two Pathways members (Imperial and Conocophillips) are subsidiaries of American owners, while two others (Cenovus and Suncor) own U.S. assets. “When companies are looking at where they invest in decarbonization across their own portfolios, they're going to prioritize where the best returns are,” he said. “There's definitely a risk that Canada will get left behind in the race to decarbonize by the United States.”

Further help for the sector's efforts to decarbonize could eventually come from Alberta, which has signalled it intends to introduce new incentives for CCUS projects. The government has been distracted by infighting within the governing party, another reason the U.S. is looking more attractive.

Many experts say the key to unlocking large investments in carbon capture will require that governments provide assurance around the future value of carbon credits. Federal regulations currently call for an escalating carbon tax from the current $50 per tonne, to $170 per tonne by 2030. But companies investing in decarbonization face the risk that political policies could change, or that trade in credits for carbon offsets doesn't work efficiently.

One potential solution that is gaining traction in Ottawa is the creation of so-called carbon contracts-for-differences, which would oblige the government to guarantee a future price, or pay the difference if the market price falls short.

During a visit to Calgary for meetings with the energy industry this week, Natural Resources Minister Jonathan Wilkinson hinted the Canadian government may be prepared to respond to the new U.S. incentives for carbon capture with augmentations to Canada's carbon regime.

The American 45Q tax credit isn't universally popular, especially with some environmentalists. Canadian groups such as Environmental Defence have also campaigned against public financing for carbon capture use in the fossil fuels sector, arguing that it will prolong the country's reliance on oil and gas. Environmental Defence and others have also cast doubt on the ability of carbon capture technologies to effectively reduce emissions.