Trudeau-COP26-carbon

How Canada’s new carbon capture tax credit aligns (or doesn’t) with the latest climate science

Critics argue the technology is expensive and ineffective, but even the UN says it’s necessary for any hope at a zero-emissions future

In the same week the Canadian government released its latest budget with billions pledged for carbon reductions, the Intergovernmental Panel on Climate Change put out a daunting report calling for rapid decarbonization in order to avoid catastrophe. 

But are the two aligned?

The federal government’s plan is to give tax breaks for billions worth of investments in both carbon capture and storage, as well as direct carbon removal — literally sucking it out of the atmosphere — both of which are supported in the latest United Nations report.

But the panel report points to the need to quickly wean the world off of fossil fuels, with heavy investments in renewable energy and electrified utility grids in order to keep global warming from surpassing 2C above pre-industrial levels. It also lists carbon capture as one of the most expensive and least effective tools to reduce emissions and says direct air capture — which has not been proven at a large scale — will be needed to counteract any residual emissions from the energy sector.

Critics of carbon capture technology say it can prolong fossil fuel use, bolstering the industry while removing incentives to change. Other technologies — proven and cheaper — are being passed over while billions of dollars pour into carbon capture. 

The panel on climate change, however, says all technologies need to be brought to the table in order to reduce emissions. 

“[Carbon capture and storage] is this complicated space because it is a technology that can do both things — it can be just simply a mechanism for delay or it can essentially be part of our future technology mix to address climate,” Sara Hastings-Simon, director of the sustainable energy program at the University of Calgary says. “I think that means there’s a lot of nuance around what good policy looks like.”

The budget offer and the IPCC report

The policy the government did unveil offers a tax credit of 60 per cent for investments in equipment to directly capture carbon from the air, 50 per cent for investments in projects that capture and store (or use) carbon emissions and 37.5 per cent for investments in equipment for storage, transportation and use. 

Despite calls from the oil and gas industry, the incentives do not apply for enhanced oil recovery projects where carbon is captured and then pumped into older wells in order to force out more oil or gas. 

The incentives are expected to cost $2.6 billion over five years starting in 2022, then dropping to $1.5 billion per year before the rates drop again after 2030. 

The government has said it will review the incentive before 2030 to ensure environmental objectives are being met, but the incentive itself is not tied to environmental performance. 

Beyond the tax incentive, the government also extended the Canada Infrastructure Bank’s mandate to include funding of carbon capture projects, further contributing to public financing of the technology.

Not all of that money will go to oil and gas producers. The incentive is open to any industry that requires carbon capture to reduce emissions, including hard to abate sectors like cement production, but it is the oil and gas industry that has been pushing hard for the incentive. 

Industry group Canadian Association of Petroleum Producers wanted incentives that would cover costs of up to 75 per cent and the Oilsands Pathways to Net Zero, a partnership between six of the largest oilsands producers that aggressively promotes carbon capture, insisted that deploying the technology was not possible without government and industry “making significant investments together.”

The Intergovernmental Panel on Climate Change report says carbon capture will be needed for things like cement, but warns that keeping warming below 2C will require leaving “a substantial amount of fossil fuels unburned.”

This image shows the Sturgeon refinery in Alberta.
The Sturgeon refinery complex northeast of Edmonton feeds captured carbon into the Alberta Carbon Trunk Line, which whisks it hundreds of kilometres south where it’s used to force oil out of old wells. The federal tax incentives for carbon capture projects will not fund those used for enhanced oil recovery. Photo: Alberta Carbon Trunk Line

It projects stranded fossil fuel assets will amount US$1 to $4 trillion from 2015 to 2050, a number that grows if the world is serious about limiting warming even further, to below 1.5C. In order to hit those targets all existing and currently planned fossil fuel infrastructure will require some form of abatement, according to the report.

“Depending on its availability, [carbon capture and storage] could allow fossil fuels to be used longer, reducing stranded assets,” reads the report’s summary for policymakers, while stressing the need to have energy grids move swiftly toward zero-emission sources.

Julia Levin, the senior program manager for climate and energy with Environmental Defence, says that phrasing does not justify ongoing or expanded oil and gas production, which she says is what’s happening in Canada. 

“So there is a role for oil and gas companies to invest their own money into some of these projects that have a longer lifeline,” she says.

“But subsidizing isn’t the right approach.”

Mark Jaccard, a professor of sustainable energy at Simon Fraser University and an author with the Intergovernmental Panel on Climate Change, says he’s in favour of the tax credit and says it is “arrogant” to suggest one means of reducing emissions should be prioritized over any other, and it should be up to each region of the world to determine the best path forward. 

“I wrote a book 20 years ago, and nothing in that book has been refuted. It basically said that human beings should remember what the objective is, which is to not wreck the planet because of climate change related to CO2 in the atmosphere,” he says. 

“The objective wasn’t to have a 100 per cent nuclear future, or a 100 per cent renewable future or a 100 per cent fossil fuels with carbon capture future. The goal is to have zero emissions from our energy system.”

Levin, like many critics of carbon capture, points to the fact that it only captures the emissions from extraction and production, not the 85 to 90 per cent of total emissions that come further down the chain from combustion in things like personal vehicles. 

She calls carbon capture a “greenwashing tactic” to delay ramping down production and consumption of fossil fuels and argues the government should have brought in a hard cap on emissions and left companies to figure out how to comply with the regulations.

Hastings-Simon wonders why the government decided to offer a tax credit for one specific technology. She argues certainty about future carbon pricing and government assurances for the value of those credits would level the playing field. 

“If I tell you I’m going to reduce emissions and they’re gonna be worth $170 a year in 2030, and I have a government contract that tells me that — I mean, that’s a very standard kind of revenue stream that, in principle, the finance sector should be able to use today,” she says. 

“And it allows all of the technologies to compete on a more even playing field for emissions reductions, which I think is better policy.”

The UN climate report argues all strategies have to be brought to bear on rising carbon emissions — including natural sinks such as planting trees — but it also shows that in the energy sector, as well as broader industrial applications, carbon capture is among the most expensive and least effective technologies to reduce emissions. In the energy sector, the use of renewables is far cheaper and orders of magnitude more effective. 

A wind energy worker services a turbine.  The latest IPCC report from the UN calls for a rapid move to more renewable energy.
The latest report from the UN calls for a rapid move to more renewable energy. Photo: Dennis Schroder / National Renewable Energy Laboratory

Levin points to change already taking place in some industrial corners, including steel factories in Ontario moving to electric furnaces.

Jaccard says he prefers to look at how much energy could be produced from renewables and the relative cost compared to the same energy production from fossil fuels, rendered net zero through carbon capture. In that light, he says what’s most effective depends on where and for what it’s being used.

He argues the tax incentive is not putting all of Canada’s fiscal eggs in one climate change basket, but represents an appropriate investment compared to other technologies in terms of what it can achieve. 

Subsidies and lost opportunities for carbon emission reductions

The climate panel report is not a policy prescriptive document, it does not tell governments what to do or how to specifically rein in their own emissions, but the suggestions are abundant. 

Beyond carbon capture, technology and phasing out fossil fuels, the report also calls for the removal of subsidies for the oil and gas sector. 

“Removing fossil fuel subsidies would reduce emissions, improve public revenue and macroeconomic performance, and yield other environmental and sustainable development benefits,” reads the summary for policymakers.

“Fossil fuel subsidy removal is projected by various studies to reduce global CO2 emissions by one to four per cent, and [greenhouse gas] emissions by up to 10 per cent by 2030, varying across regions.”

That is a significantly higher percentage than current rates of reduction through carbon capture. The International Energy Agency says emissions reduction targets cannot be met without employing the technology, estimating 7.6 gigatonnes of carbon would have to be captured annually around the world to achieve net-zero emissions. 

According to Natural Resources Canada, that’s 190 times more capturing than what’s currently taking place. 

What exactly constitutes a subsidy is hotly debated. Is a public loan with favourable terms a subsidy? Is a tax credit?

Environmental Defence tallied up all the support for the oil and gas industry in 2021 and concluded the sector received $8.69 billion in financial support from the federal government alone. That included financing, reduced taxes, the Canada Emergency Wage Subsidy and direct funding. 

The figure is significantly lower than the $18 billion Environmental Defence counted in 2020, but the organization says the figure is likely an underestimate and does not account for provincial contributions.

“So if you start adding up all the cash envelopes for the oil and gas companies, it starts to be a big piece of what they would have had to pay themselves being transferred onto taxpayers —  beyond just the tax credit,” Levin says.

That sort of public support, now bolstered by the new incentives in the budget, comes at a time when the oil and gas sector is flush with cash. At a recent Calgary Chamber of Commerce event, Kent Ferguson, co-head of global energy for RBC Capital Markets, said the sector is sitting on approximately $75 billion in cash from the recent price surges and years of cost cutting. 

That money, however, is largely being spent on share buybacks and dividends for investors.

The Canadian Renewable Energy Association estimates that through realizing the organization’s own 2050 net-zero scenario, Canada could attract $8 billion in private industry investments.  

The federal government says it has invested $15 billion to reduce emissions from the electrical grid since 2016 and the budget includes approximately $877 million in spending on electricity grid improvements between now and 2030, including money for research into small modular nuclear reactors.

The federal government announced in its latest budget that it will start looking at tax incentives for net-zero technologies, but that process is in its early stages and it’s not clear what will be included as eligible. 

Jaccard, for one, doesn’t see any problem with tax incentives going to industry. 

“Climate change is an urgent threat,” he says. “We’re not in a position anymore to be slowing things down because we want one kind of path to zero emissions and these guys in this region want a different path to zero emissions.”

What’s to come for carbon capture technology

The government hopes the tax incentives will be enough to spur a boom in carbon capture projects, many of which are already being planned. The goal is to reduce up to 15 megatonnes of carbon from entering the atmosphere each year. 

Much of that will happen in Alberta and Saskatchewan, where the oil and gas industry is dominant.

Jaccard argues that regionalism, and its effects on human psychology, is a factor that is often overlooked in this debate. 

“In the past we were stupid and we just sort of said: you have no place in a zero-emission future. And you did quite predictably, what any intelligent person could have expected, which is you said, ‘Screw you, I don’t believe the science, or I’m going to do a lot of ads about why we have to have this pipeline or this oilsands expansion.”

He argues getting places like Alberta to buy into the need to get to net zero is necessary and if carbon capture is the means to achieve that, all the better.

One thing that is known is that reaching the government’s targets will be expensive, and although carbon capture technology is often lumped together as one thing, there are various means of capturing carbon for different types of emissions — some proven and some not.

The results won’t be known until the investments are made.

Levin says she doesn’t trust the technologies will achieve their targets and notes the incentive is not based on performance despite the promised review before 2030. She also doesn’t trust that companies won’t turn around and start selling their captured carbon for enhanced oil recovery once the cheques are signed. 

The federal government has also said it wants to see provinces chip in their own funding for carbon capture projects. Alberta has already started evaluating project proposals for storage space in the province and has indicated strong support for the technology.

Hastings-Simon says she’s taking a wait and see approach.

“A number of industries are asking for this. They got the tax credit, now are they going to start making those investments? What’s going to happen?”

Updated April 21, 2022, at 2:15 p.m. MT: This article was updated to clarify that the Canadian Renewable Energy Association estimates Canada could attract $8 billion in private wind and solar investments by achieving net-zero ambitions. The association was not calling for federal government investments of $8 billion per year in wind and solar.

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Hey there keener,
Thanks for being an avid reader of our in-depth journalism, which is read by millions and made possible thanks to more than 4,200 readers just like you.

The Narwhal's growing team is hitting the ground running in 2022 to tell stories about the natural world that go beyond doom-and-gloom headlines — and we need your support.

Our model of independent, non-profit journalism means we can pour resources into doing the kind of environmental reporting you won’t find anywhere else in Canada, from investigations that hold elected officials accountable to deep dives showcasing the real people enacting real climate solutions.

There’s no advertising or paywall on our website (we believe our stories should be free for all to read), which means we count on our readers to give whatever they can afford each month to keep The Narwhal’s lights on.

The amazing thing? Our faith is being rewarded. We hired seven new staff over the past year and won a boatload of awards for our features, our photography and our investigative reporting.

With your help, we’ll be able to do so much more in 2022. If you believe in the power of independent journalism, join our pod by becoming a Narwhal today. (P.S. Did you know we’re able to issue charitable tax receipts?)

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