Investment tax credit for carbon capture is Budget 2022’s big-ticket climate item

By Natasha Bulowski, Canada’s National Observer Local Journalism Initiative Reporter

 

The single biggest climate item in Budget 2022 is the controversial carbon capture investment tax credit, followed by funding for electric vehicles and charging infrastructure.

The carbon capture utilization and storage (CCUS) investment tax credit is expected to cost $2.6 billion over five years and will be available for projects that permanently store captured carbon dioxide (CO2) in concrete or inject it into rock formations deep underground. The budget says enhanced oil recovery — using captured carbon to extract more oil — is not an eligible use of captured CO2.

The move is a “political compromise,” said David Macdonald, a senior economist with the Canadian Centre for Policy Alternatives (CCPA).

“At the same time as (the federal government is) trying to move towards a zero-carbon future, they’re trying to go full steam ahead on oil and gas development,” said Macdonald. “You can’t do both… You can make political compromises, but you can’t make compromises with the climate.”

Up until 2030, the investment credit rates are set at 60 per cent for direct air capture technology, which sucks carbon dioxide out of the air, 50 per cent for other CCUS projects, including the capture of emissions from oil and gas production and hard-to-decarbonize industries like steel, and 37.5 per cent for storage, transportation and use. To encourage industry to act immediately, these rates will fall by 50 per cent in 2031.

The tax credit was created to reduce emissions by 15 megatonnes by 2030 based on financial modelling from CCUS projects. It will cost just under $1.5 billion in its fifth year and then an estimated $1.5 billion per year until 2030.

Over 30,000 Canadians and more than 400 academics oppose the tax credit and have sent letters calling on the federal government and Finance Minister Chrystia Freeland to scrap it.

Macdonald says the oil and gas sector needs to be wound down in the long term, not made more energy-efficient, as the federal government plans.

“I’m not sure how much the sector needs a tax break,” said MacDonald. “The sector made $22 billion in 2021.”

The federal government has levied a surtax against banks making record pandemic profits, but oil and gas companies escaped unscathed, despite raking in big profits from high oil prices, he said.

“This is a time for companies to reinvest, not with public money, but with their own money, to get off of oil and gas,” said Macdonald. “And that’s not what this will do, unfortunately.”

Ahead of the budget’s release, a senior government official speaking on background about the budget said Ottawa is “looking forward to working with relevant provinces, certainly Alberta, as they step up to strengthen these incentives, because it’s good for them.”

The federal government “expect(s) industry to do their share,” the official added.

“It is the right time to do this, and they have the profits to do it now, and we expect them to do it.”

The budget notes the expectation that “relevant provinces” — like Alberta — will “further strengthen financial incentives to accelerate the adoption of CCUS technologies.” But Macdonald notes provinces are not compelled to create any financial incentives.

Instead of using a tax credit to get companies to develop this technology, the government could simply regulate it and achieve the same goal without using public funds, Macdonald said.

The government’s new climate plan calls on the oil and gas sector to slash its greenhouse gas emissions by 31 per cent relative to 2005 levels by the end of the decade. CCUS is expected to contribute 13 per cent of those reductions.

Trying to meet these targets using an investment tax credit relies on doing “complex calculations in the hopes (it) will be sufficient,” whereas a regulatory approach is more predictable because it is set in advance and companies are forced to comply, said Macdonald.

The Intergovernmental Panel on Climate Change’s (IPCC) recent report found CCUS is one of the least effective and most expensive options available to reduce emissions through 2030.

Despite federal and provincial governments providing an estimated $5.8 billion for CCUS projects since 2000, they only capture 0.05 per cent of Canada’s greenhouse gas emissions, or around 3.55 million tonnes of carbon per year, according to a new report by Environmental Defence.

The budget includes very little spending to accelerate or improve the energy efficiency of buildings and homes, despite this being one of the most cost-effective ways to reduce greenhouse gas emissions, said Macdonald.

“Some of the programs that are the most efficient, we’re skipping, and the programs that are the least efficient, we’re putting the most money in, which is the opposite of what we should be doing now,” he said.

Another big-ticket item that is less cost-effective than energy efficiency measures but better than the CCUS tax credit is the federal commitment to expand electric vehicle incentives and charging infrastructure, he added.

The budget proposes $1.7 billion over five years to extend incentives for the zero-emissions vehicle program, $547.5 million over four years for Transport Canada to launch a new purchase incentive program for medium- and heavy-duty zero-emissions vehicles, and investments in charging infrastructure, $500 million of which comes from the Canada Infrastructure Bank for large-scale urban and commercial charging.

However, “(there) doesn’t appear to be anything new on just transition” away from fossil fuels, said Macdonald.

The budget reiterates a previous commitment for a $2-billion “Futures Fund” for Alberta, Saskatchewan and Newfoundland and Labrador to “support local and regional economic diversification” and develop clean energy opportunities in the coming decade, but no update on the allocation of those funds was provided.

The budget also proposes broadening the role of the Canada Infrastructure Bank to invest in private sector-led infrastructure projects — such as small modular reactors, clean fuel production, hydrogen production, transportation and distribution and CCUS — to help transition to a low-carbon economy.

Macdonald says this is “potentially an actual positive use for the Canada Infrastructure Bank, which really hasn’t managed to get much of its funding out the door and (has) been very limited in terms of what it’s been able to do.”

A proposed $2.2 billion over seven years would also expand the Low Carbon Economy Fund, which helps provinces and territories reduce emissions and create jobs for communities by supporting the installation of technologies like wind power, solar power and electric heating in buildings.

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