The Canadian government is stepping back from a pledge that taxpayer subsidies won’t support carbon capture, utilization and storage (CCUS) projects that help fossil producers extract more oil from older, depleted wells.
It isn’t clear whether the detailed rules for the CCUS tax credit, originally released in late October by the Department of Finance, will give fossil companies the level of public funding they’ve been demanding before investing in the technology they say they need to decarbonize their operations—as long as the companies play by the rules laid out in the draft legislation.
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But at least one expert observer said lax reporting and monitoring will make it too easy for CCUS operators to claim bigger subsidies while diverting most of their captured carbon to Enhanced Oil Recovery (EOR), a standard but controversial industry practice that pumps captured CO2 into older oil wells to extend their operating life and increase their climate impact.
As recently as 2021, 81% of the CO2 captured by CCUS projects world-wide was being sold to oil companies for EOR.
The detailed federal announcement comes as a BloombergNEF analyst reports a “50% growth spurt” in announced CCUS projects around the world, driven by the same kind of government largesse that has drawn intense criticism in Canada.
Lax Enforcement Enables More Oil Extraction?
When Finance Minister Chrystia Freeland introduced the CCUS tax credit in April, 2022, it was with the caveat that EOR projects would be ineligible for funding. Now, under her department’s draft amendments to the Income Tax Act, the credit will be open to any project where at least 10% of the captured carbon is sent to permanent underground storage, leaving the lion’s share available for use in EOR.
The tax credit is retroactive to January 1, 2022.
But the catch is that the federal tax subsidy is only meant to cover the share of the captured carbon that is permanently stored. So the federal payments drop off quickly if very much of that carbon is diverted to EOR.
A federal spokesperson couldn’t immediately say whether the conditional subsidy laid out in the draft legislation would give CCUS proponents the level of taxpayer funding they say they need to approve new projects—or whether those projects would make financial sense without maximizing EOR revenue as well as government tax support. But last year, the six oilsands companies that make up the Pathways Alliance made it clear they were holding out for richer subsidies before investing $16.5 billion in a massive, new CCS facility.
Under the new rules, that project would qualify for a 50% subsidy if it were completed this decade, but only 1/10 that amount, or $825 million, if 90% of its output were dedicated to EOR. (All assuming that the project came in on time and on budget, which is generally not a good bet with CCUS projects.)
Julia Levin, associate director, national climate at Environmental Defence Canada, told CBC the Finance Canada provisions amount to “essentially subsidizing oil production” and represent “a huge rollback from what was initially promised when the tax credit was first announced.” If the government’s ultimate goal is to reduce emissions, she added, the credit should have been structured so that “no projects that will sell their carbon for more oil production will get federal dollars.”
Jason MacLean, an adjunct professor at the University of Saskatchewan, said it was hard to see how the tax credit would encourage “projects whose genuine goal is to maximize permanent geological storage.” He added that “in our present context, where the imperative to phase out fossil fuel production as soon as possible has never been greater or clearer, this carveout and its associated percentages are astonishingly regressive.”
In a separate email, MacLean said the design of the tax credit, with project reporting scheduled long after the funding is delivered, would make it easy for companies to game the system.
“The tax benefit calculation is based on anticipatory, forward-looking plans subject to what looks to me to be a pretty lax, after-the-fact, and discretionary monitoring mechanism,” he told The Energy Mix. He warned of the “far more likely scenario of much higher [carbon capture promises] that in reality end up being much lower, as in planning to capture 80%, but in reality only geologically capturing five or 10%, and the planned-but-not-permanently-captured carbon is emitted or used for EOR.”
He added that, “putting together the nature of the provision and the reality of government monitoring, this seems like the more likely and highly regressive scenario.”
The Global ‘Growth Spurt’
The BloombergNEF analysis, published November 9, shows announced CCUS projects around the world—not projects that have been financed, designed, built, or brought online—increasing from 280 to 420 million tonnes of carbon capture capacity per year since last year’s inventory. It’s based on the projects the global industry says it can get in place by 2035, and if they all made it to the finish line and worked as they were supposed to (unlike past attempts), they would account for 1.1% of the climate pollution countries produce today.
That, in. turn, is a tiny fraction of the 43 to 45% emissions reduction that climate science demands by 2030 to give humanity reasonable odds of holding average global heating to 1.5°C.
The BNEF analysis shows announced CCUS capacity growing at a compound rate of 18% per year, with the United States holding 40% of the market on the strength of its controversial and largely ineffective 45Q tax credit, followed by the United Kingdom at 16% and Canada at 12%. It cites transportation and storage as “a major bottleneck for carbon capture deployment.” While “several governments and the private sector are pushing to commercialize these assets to address this challenge,” it states, “policies like the EU’s Net Zero Industry Act fail to acknowledge the high costs associated with building storage,” and the U.S. has denied a number of transport and storage permits over the last half-year.
BNEF also sees the emphasis on carbon capture gradually shifting from oil, gas, and coal into other hard-to-abate industries like cement, steel, and aluminum.
In a Zoom interview, analyst Brenna Casey declined to share detailed numbers from a proprietary BNEF database, but said many of the announced projects that made up the 50% increase were considered viable based on government funding. One of them, the troubled Petra Nova project in Texas, had been “recommercialized” based on rejuvenated U.S. government tax credits, she said.
But “everything in this report is a proposed project,” she said. “It’s not a forecast. It’s just where we see the market at.”
Casey added that “we’re pretty bullish on CCUS because we see nearly 75% of aluminum capacity, 50% of steel, 50% of cement, we see so much capacity now covered by net-zero goals.” For industries with high process emissions like cement and petrochemicals, “CCUS is going to be one of the main drivers of this deep decarbonization,” she said.
David Schlissel, a Massachusetts-based consultant associated with the Institute for Energy Economics and Financial Analysis (IEEFA), said the published version of the BNEF report made it hard to assess the details. “The most important factor is that, first, it’s all announced projects,” he said, with “no idea whether any of them have been funded, the extent to which they’ve been funded, and whether they’ve been approved.” There’s “no way of knowing what’s going to happen,” when “we’ve seen the number of projects just recently being cancelled.”
Schlissel said CCUS subsidies in the U.S., Canada, and around the world are taking the wrong approach given the small scale at which the technology has been tested so far.
“I’m in favour of doing a slow step-up in size,” he said, to determine whether carbon capture can some day deliver as promised. But in Canada and the U.S., “what’s being done is to implement these things, spend a huge amount of money on them, and when we spend billions on these projects and they don’t work as well as claimed., do you think anybody’s going to shut them down? That’s the unanswered question.”
Meanwhile, those projects will extend the life of fossil fuel infrastructure that in Canada will only capture about 20% of the carbon in a barrel of oil, when “we need to reduce emissions now, and the world has the technologies to do that,” Schlissel added. “Energy efficiency. Renewables. Battery storage. We have it. And we have to do it now.”