In the hours and days after Finance Minister Chrystia Freeland unveiled a budget that promised $7.1 billion in subsidies for carbon capture and storage (CCUS) technology, one of the most intriguing questions was whether the government was finally calling the fossil industry’s bluff on emission reductions—whether or not it meant to.
“CCUS technologies are an important tool for reducing emissions in high-emitting sectors where other pathways to reduce emissions may be limited or unavailable,” the budget states. “Examples of industries where CCUS has helped to reduce emissions include oil and gas, chemical production, and electricity generation.”
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Unexplained in the budget, and unaddressed in the deep disappointment from many climate and energy organizations, is whether the tax credit sets up the ultimate “put up or shut up” challenge for the fossil industry.
Calling the Industry’s Bet
“For more than a decade, the oilpatch has pitched a particular solution to its problem of being the largest source of carbon emissions in the country—to bury them,” writes CBC business reporter Kyle Bakx. “As the need for the world to act on climate change grows, and the pressure on the oilpatch mounts, the industry has increasingly pushed for more government support to develop, construct and scale up carbon capture and storage.”
Now, for better or worse, Ottawa is coming to the table. “Attached to the funding, though, comes a stiff warning from the federal government for the sector not to drag its feet but, instead, to turn talk into action and deliver on its promises—and quickly,” with a subsidy that scales up through this decade but is cut in half from 2030 on.
“It’s as if Ottawa just called the industry’s bet,” Bakx writes.
“It’s about jump-starting a critical technology and getting the development going at scale to hit our targets for 2030,” said S&P Global Vice President Kevin Birn.
The theory is that an earlier, higher subsidy, combined with a carbon price that steadily rises to C$170 per tonne over this decade, will be enough to “light a fire under the oilpatch,” Bakx says. But there are a few details that might shift that picture:
• The subsidy excludes CCUS for use in enhanced oil recovery (EOR), a technique that involves injecting captured carbon into depleted wells to extract even more oil. As recently as January 2021, 81% of carbon captured worldwide had been put to that use. Some Alberta fossils aren’t at all pleased to see EOR left out of the tax credit, Bakx says.
• When Cenovus CEO Alex Pourbaix and Suncor Energy CEO Mark Little first kicked off the lobby campaign for the tax credit, they said it would cost about $75 billion to decarbonize tar sands/oil sands production by 2050 (with no mention of the 80% or more of emissions that occur after their product reaches its end user). They were looking to taxpayers to cover about $50 billion of that total.
• In the end, they got $7.1 billion rather than $50 billion, a 2030 target date rather than 2050, and a 37.5 to 50% share of total investment rather than the 65 to 75% they were demanding.
None of which addresses legitimate, evidence-based concerns about whether any subsidy at all was needed or justified. But with the tax credit now a reality, the question is whether fossils will deliver.
Ottawa Comes to the Table
“We have been hearing for a long time about the oil and gas sector’s capacity for innovation and the extent to which CCUS could put them on a trajectory toward procuring a clean and competitive barrel,” said Polaris Strategy Principal Dan Woynillowicz. “It always came with the caveat that we need the government to help because it’s going to be expensive,” and that the industry would need certainty about a steadily-rising carbon price to boost project economics.
So “it’s very clear that in order to be able to say to the sector, ‘show us what you’ve got’, the government did need to say it would cap their emissions and give them a schedule for reducing them,” he told The Energy Mix. And then, with those elements in place, “you’ve said you need some assistance on that, so we’re willing to put some skin in the game.”
But only to a point. “The outlook from Ottawa is that the oil and gas sector is flush, it is sitting on capital, and it’s got high profits rolling in, and that’s not going to suddenly disappear,” Woynillowicz added. So “it’s time for the sector itself to ante up and put some money towards this. I’ll be curious to see in the coming weeks, months, and years what actually unfolds… Obviously, the next most critical thing is for the federal government to ensure it has a strong stick to accompany the carrot they’ve just offered the sector,” in the form of a serious emissions cap that works.
But Julia Levin, senior climate and energy program manager at Environmental Defence Canada, sees both more and less in the announcement—more potential support for the industry than anyone is acknowledging, and less extensive emission reductions than officials are promising. Between the federal Emissions Reduction Plan, the budget, and the decision to approve the Bay du Nord oil and gas megaproject off the Newfoundland coast, “what we’re really hearing from the government is this notion that the only thing that matters is slight, incremental reductions to production emissions, completely negating any responsibility for the emissions that come when the oil and gas is burned,” she said.
With various other technology accelerators and growth funds in the budget that could also be available to CCUS proponents, “this tax credit is just one element of a much greater envelope of public taxpayer dollars going to technology that is not going to help with the climate crisis,” she added.
Making Money Hand Over Fist
The expectation on companies to deliver on their promises is coming from inside the oilpatch, as well.
“My opinion is that the federal government has called the oil and gas industry on their foot-dragging,” said Common Ground Energy Corporation President Maggie Hanna. Ottawa’s emissions reduction target for the fossil sector—31% from 2005 levels, 42% from 2019—“is what oil and gas should have been doing anyway,” she added. “They weren’t able to do it because of low oil prices,” but “now they’re making money hand over fist. A lot of that money is going to corporately acceptable uses like share buybacks and shareholder dividends.” But the CCUS investment is “totally doable”, as part of a wider plan that includes reining in methane emissions, zero-venting/zero-flaring laws, and in Hanna’s view, rapid adoption of small modular nuclear reactors (SMRs) and auto thermal reformer technology for hydrogen production.
She cited a Pembina Institute backgrounder last month that calculated 33 megatonnes of potential emission reductions from methane controls, 18 Mt. from electrification, 15 Mt. from CCUS, 14 Mt. from other savings in the tar sands/oil sands, and 23 Mt. from other measures, adding up to nearly a 54% drop from the industry’s 2019 emissions, or 64% from 2005.
Woynillowicz and Jan Gorski, director of the Pembina’s oil and gas program, said CCUS technology is closer to liftoff than many analyses suggest. “Not all projects have had the same level of success,” Gorski said, but troubled projects like the Boundary Dam CCS plant in Saskatchewan have “helped untangle some of these technical challenges, and now we’re at a point where we can start scaling these technologies.”
The other reality, Woynillowicz said, is that “we don’t have another option” that would keep the industry operating at the level its proponents assume and expect.
“There isn’t anybody in the Alberta government or the opposition in Alberta who is proposing to ramp down oil and gas production to meet Canada’s 2030 Paris target,” and the federal government “can’t directly dictate what happens with production. That’s squarely not their jurisdiction under the constitution. So with the most significant source of emissions we’ve got in the country in the oil and gas sector, I sure hope carbon capture works, and there’s no better time than the present to put that in place and test it.”
‘Some Very Difficult Conversations’
If the industry can’t deliver, he added, “that will precipitate some very difficult conversations about the future of that sector. If CCUS isn’t going to work, then the runway for that sector is far shorter than anybody has been considering when they’ve thought about CCUS as a solution to decarbonize production.”
But with Ottawa staring down its own, legislated 2030 emissions reduction target and explicitly pushing the industry to step up, it remains to be seen whether fossils will commit the dollars, and whether the technology will deliver on deadline.
“Carbon capture is not like going over to the hardware store to get a new faucet,” said David Schlissel, director of resource planning at the Institute for Energy Economics and Financial Analysis (IEEFA). “You don’t just go and attach it to your plant. You’ve got to do the design work, and you’ve just made that plant more complicated by adding carbon capture to it. So they’ll have to figure out how this thing works, and it won’t be simple to get things up and running.”
If fossil companies miss the deadline, “it’s simple,” Schlissel added. “They’ll say it took longer than they expected to get the carbon capture plants up,” and “every new technology has a break-in period.” But 2030 will still be looming, the initial wave of the CCUS tax credit will have run its course, and investors may have less patience for the technology if it’s failing to address the mounting climate impacts that they can see across their portfolios.
Jason Maclean, assistant professor in the University of New Brunswick Faculty of Law, said the government’s trajectory on the CCUS tax credit was clear when Freeland’s department refused to even meet with the more than 400 climate scientists and other academics signed a January, 2022 letter urging the government to pick a different pathway. He said the budget announcement betrayed a degree of regulatory capture and lack of independent expertise that Ottawa could have solved by engaging with the academics.
“What’s crystalizing for me is the urgent imperative to bring these systemic failings to the attention of as many Canadians as possible,” he told The Mix. “Because the only thing that will work now is to transform this captured, technocratic process that isn’t transparent, that isn’t accessible, and turn it into a broad-based, democratic demand for successful, credible, science-based policy.”
Even if the goal or the effect of the new subsidy is to shine a light on a false solution, “it’s still sad and terribly depressing as a telltale sign of a completely captured government,” Maclean added. “It would mean they’re more worried about what ought to be a sunsetting industry than every other thing that should be guiding their decision.”