By Tom McCaffery and Denaige McDonnell, September 3, 2024
Following the June 21, 2024, finalization of the Carbon Capture, Utilization, and Storage (CCUS) Investment Tax Credit (ITC), does Canada finally have the right policy framework in place to accelerate carbon capture projects? The CCUS ITC policy, originally announced in 2021, is a key part of Canada’s ambitious plan to reduce greenhouse gas emissions and reach its climate goals. The policy offers attractive tax credits to new projects and to expansions of existing CCUS facilities that meet specific criteria. The ITC is available through 2030, after which it gradually phases out until it ends completely in 2040.
Recent project announcements from Shell, which has plans for two major CCUS projects, one of them with ATCO EnPower, as well as Strathcona Resources, and Methanex, have been early indicators that the Canadian government may have finally put the right pieces in place.
Does this mean that other companies and governments are ready to make final investment decisions (FID) on dozens of other projects? It is wise to be cautious rather than overly enthusiastic in the early announcement phase. History has shown that the attrition rate for CCUS endeavours is high. Capital Power’s CCS project offers a recent example of this vulnerability. Before the ITC was finalized, this project was shut down for its lack of economic viability – even although it was technically feasible.
A majority of Canadians are concerned about the environment (63 per cent), but even more are worried about the nation’s economy (88 per cent). Carbon capture is a critical tool that will help Canada reach its net-zero goals while also establishing the country’s energy security and economic stability. Carbon capture cannot alone ensure that Canada will achieve its goal of reducing national greenhouse gas emissions by 40 to 45 per cent relative to 2005 levels by 2030, but there is no credible scenario to reach net-zero without it.
Canada, a global leader in heavy industry with production accounting for 35 to 50 per cent of GDP in its largest provinces, is on the forefront of clean technology and economic growth. Our economy relies on heavy industrial sectors, and many firms see CCUS as a critical technology to achieve both environmental and economic goals.
Effective implementation of CCUS will require robust collaboration between government and industry. Decarbonizing sectors like cement, manufacturing, construction, building materials, chemicals, and electricity is great news for Canadian industrial workers. Achieving a green transition in heavy industry will solidify prosperous future by securing millions of jobs across the country.
The Canadian government has staked its claim as a “first mover” in the carbon sector and has enabled early market entry points by a growing number of companies, including Entropy, Svante, Rain Cage, and Carbon Engineering. Canada’s Carbon Management Strategy outlines a plan to further bolster innovation, advance policies and regulations, and attract investment and opportunity. Some provinces have also begun to support carbon capture projects. Alberta has the Carbon Capture Incentive Program, and Saskatchewan has the Carbon Capture and Storage Initiative. However, thus far these incentives have only led to a handful of announcements.
Further, the United States is attracting investment dollars away from Canadian projects. Since the announcement of the Inflation Reduction Act in the US in 2022, major industrial players have found opportunities to invest in clean technologies to be more attractive in the United States than in this country. In 2023 alone, investors committed $239 billion worldwide to clean technology investments, up a staggering 38 per cent. According to Wood Mackenzie, half of the $80 billion dollars in funds committed to CCUS projects are invested in the US (50 percent), followed by the UK (33 per cent), and Canada (10 per cent).
These and other indicators weaken Canada’s first-mover claims and show that as a nation, we must get better at competing with world players. Our industry players are not investing in technology, and this is a problem. With many clean technologies being new and first-of-kind it is important to remember that most businesses prefer to be second, third, or even later adopters, as they often prioritize observing market outcomes and minimizing risks before committing to new strategies or technologies. Although this slow adoption strategy may be prudent, at the end of the day, to be a first-moving nation in carbon capture, we need to have first moving players, not late adopters.
The Pathways Alliance, as an example, does have the financial wherewithal to invest early. Pathways is a collaboration of major Canadian oil sands companies that seeks to address climate change by deploying advanced technologies like CCUS. The companies involved work together to try to significantly reduce emissions, support Canada’s climate goals, and drive technological innovation. Each of the companies that are represented by Pathways likely have different issues to overcome. Time will tell if the ITCs are the final link in the chain that will lead to FID for these firms.
Industry and government have held comprehensive conversations about how to work together to solve issues and progress the development of carbon capture and other major projects focused on sustainability. For the past five years, hundreds of industry roundtables and conferences have identified core issues, and these issues will not all be solved by ITCs alone. As we’ll discuss in more depth below, industry needs policy consistency, regulatory certainty, and favourable economics. In response, the Canadian government has developed hundreds of policies, programs, and tools like the ITC and Carbon Contracts for Difference (CCfD). Minister of Finance Chrystia Freeland and Minister of Energy and Natural Resources Jonathan Wilkinson recently insisted that since the federal government has met industry’s requirements, it is time for businesses to “get shovels in the ground.”
The recent CCUS ITC announcements may bring about a groundswell of project news, but we are not sure that ITCs and CCfDs will create the tsunami of FID announcements that politicians expect. Efficient policy, regulatory certainty, and economic viability are complex issues and we need to create a common and defined definition for each issue.
Policy complexity: Environment and Climate Change Canada (ECCC) alone has introduced over 140 climate policies. The Canada Revenue Agency (CRA), Natural Resources Canada (NRCan), Innovation, Science and Economic Development Canada (ISED), and other departments have also released numerous policies, strategies, roadmaps, and programs to address climate change. For industry participants, this creates a complex web of regulations that must be navigated and complied with. The task of understanding, implementing, and monitoring these policies can be overwhelming and burdensome for organizations of all sizes. Furthermore, the government’s approach to policy advancement means that tools designed to support carbon capture, utilization, and storage (CCUS) can also present significant challenges due to unclear expectations and overlapping responsibilities.
Regulatory certainty: Consistency and clarity is crucial for businesses needing to make the best decisions possible. In heavy industrial sectors there has traditionally been extensive regulation. With several government departments developing hundreds of new policies, regulations need to evolve and yet be accessible and efficient for all companies to comply. Complexity of regulations can pose a barrier for small organizations who do not have the specialized resources of more established firms. SMEs generally do not have the benefit of lobbyists and access to subject matter experts needed to navigate the regulatory environment. Canada’s environmental outcomes require all firms to adopt and deploy clean technologies. If major firms are struggling to make FID, then smaller industrial firms will surely be in a worse position.
It is important to understand that the majority of clean technology projects are major industrial projects, meaning they are subject to the oversight of slow-moving federal and provincial regulatory processes, including the federal Impact Assessment Act and provincial environmental assessment acts. The impact assessment process can take over four years to approve a project and even after that, a company must demonstrate that it is in compliance for the duration of the project. Very few projects can remain economically viable for such a long period. This is why the Canadian government established the Clean Growth Hub, which helps companies efficiently and effectively navigate regulatory and other programs supporting clean technology adoption. While the Hub has successfully supported 2,000 companies in navigating regulatory and other clean technology adoption programs, its resources are limited. With 1.3 million companies in Canada potentially benefiting from the Hub’s specialized services, even if just 10 per cent sought support, the Hub would struggle to meet the demand.
Economics: Economics is a key component of any decision industry makes; if the economics are favourable, it will help a company decide to proceed with a project. If Canada is to achieve net zero by 2050, many industries will need to be heavily invested in clean technologies. However, StatsCan data indicate that GDP growth is stagnant and while that may not mean every company involved in heavy industry is losing money, it does indicate that some climate investments may not be affordable. Pathways Alliance estimates the cost of CCUS projects at $12 billion to $16.5 billion. Given the high cost of investment and slow regulatory approval process, it is unlikely that recent earnings strength and bolstered government policy support will be enough to create a deluge of project approvals. TD predicts that the strength in recent earnings will be short-lived, and that companies view carbon capture technology as pure cost.
There are reasons other than economic ones on which industry will base its decisions. For instance, rigorous environmental, social, and governance (ESG) reporting is important. Investment in CCUS may attract investors looking for a strong ESG commitment, enhance brand image, increase customer loyalty, attract talent, and a host of other benefits that ultimately lead to better bottom lines. However, ESG reporting, and investor sentiment will differ for each company. This may explain why industry players, like Shell, are choosing to green-light their projects now. Perhaps we’ve only seen the first of many announcement waves, but it’s more than likely that we are still missing key elements in our quest to get companies to make regular FID decisions on carbon capture and other clean technologies.
To achieve the FID surge that government ministers are hoping for will require insight on commercialization barriers and strategic action to overcome them. A 2023 study by Emissions Reduction Alberta titled Barriers to Commercialization dug into the issues and focused on 24 solutions that will help Canada move faster toward FIDs. Those solutions fall into three categories:
- Canada needs to be the First of a Kind (FOAK) capital of the world. We need to provide incentives and rewards to companies for being the first to deploy a technology, and we need to create systems within government that allow for faster integration of these technologies into industrial processes.
- The Canadian government needs a Policy and Program Centre of Excellence to address contemporary challenges effectively. Rather than continually introducing new policies, the focus should be on refining and streamlining existing processes. It is crucial to eliminate the bureaucratic barriers that hinder innovation and investment by ensuring clear and coordinated policy implementation across departments and governing bodies.
- To lead in decarbonization, industry must embrace a learning-by-doing approach, recognizing that this hands-on strategy is crucial for accelerating the adoption of clean technologies. Deploying new technologies is inherently complex and often involves trial and error. While it may seem daunting, especially for smaller or newer players due to the long-term investment required, this proactive learning mindset is essential. Industry needs to move beyond fragmented innovation and adopt a more cohesive approach to technology deployment. At the same time, it is important for industry to remain transparent about the level of support it seeks from taxpayers and ensure that its requests align with realistic expectations.
While it is too soon to declare victory on clean tech adoption in Canada, momentum is building, and there is optimism within industry and government that more project announcements will be made in the coming months. The formalization of the ITCs gave industry greater clarity on how they function, which has alleviated some concerns over regulatory certainty and provided more confidence for project investments. Still, before CCUS can be implemented at any scale, there are complex issues related to government policy, international relations, and industry adoption that require more attention. For Canada to truly be an international leader in clean technology, government officials will need to do more than spark hope and issue tax credits. They will need to take a critical look at internal governance and then act to create efficient pathways for investment, and develop accessible information, tools, and resources that organizations of all sizes can use as they look to decarbonize their operations.
Tom McCaffery, M.B.A., is the CEO and managing director of Two River Advisory and former executive director of policy and engagement for Emissions Reduction Alberta.
Denaige McDonnell, Ph.D., is an accomplished business management strategist and CEO of People Risk Management, specializing in organizational systems, culture, and psychological safety.
