Reducing CO2 as part of Canada’s efforts to address climate change and meet climate target commitments (i.e. Paris Agreement targets by 2030, net zero by 2050) remains a top policy focus. For certain critical industrial processes, however, such as oil and gas production, cement and steel manufacturing, and thermal generation of electricity, materially reducing or eliminating emissions is technically difficult or prohibitively expensive. Canada, along with other nations, is looking to Carbon Capture and Sequestration (CCS) and Carbon Capture Use and Storage (CCUS) as a primary means of reducing CO2 emissions. CCS/CCUS systems prevent CO2 from entering the atmosphere by capturing it at its source, using the captured CO2 if possible (in the case of CCUS), and then, importantly, permanently injecting and storing the remaining CO2 deep in the underground pore space.
In 2023, CCUS/CCS dominated the headlines in Canada due to significant regulatory, policy and project announcements, and due to the controversy over whether CCUS/CCS is a panacea for reducing CO2 emissions, or a dangerous distraction from achieving global emissions reductions targets.
In some jurisdictions, such as Alberta, the regulatory regimes regarding CCUS/CCS have been long established and have already supported significant CCUS/CCS projects (such as Shell’s Quest facility and the Alberta Carbon Trunk Line), and accordingly we witnessed the continued implementation and refinement of those existing regulatory regimes in 2023.
For example, Alberta’s Mines and Minerals Act and Carbon Sequestration Tenure Regulation have for many years addressed the pore ownership, injection, and long term liability and stewardship issues necessary to support CCS/CCUS projects, including the ability for the minister to enter into agreements to evaluate reservoirs for carbon sequestration, and agreements to grant rights to inject captured CO2 into reservoirs for sequestration, as well as setting out detailed requirements for monitoring, measurement and verification. Unlike many jurisdictions, this regulatory regime provides certainty as to the pore ownership, and post closure liability risks associated with CCUS/CCS projects. In 2023, therefore, we witnessed the Alberta government continue to refine and exercise these regulatory rights (rather than design them from scratch). For example, the Alberta government continued the competitive process that it had commenced prior to 2023, to issue carbon sequestration rights to enable the development of carbon storage hubs, eventually selecting more than 25 proposals for further evaluation. In addition to the exercise and refinement of the regulatory process, we also witnessed the continued development of many proposed projects (there are currently more than a dozen CCUS projects under construction or in the planning stages), perhaps most significantly the $16 Billion Pathways Alliance project. Finally, in early 2023 the Alberta government continued to incentivize CCUS projects in the province by making significant changes to its Technology, Innovation and Emission Reduction (TIER) regulation (its carbon pricing and emissions reduction program) which facilitates participation by proponents and participants of CCS projects. These amendments created new “Sequestration Credits” (credits which can be created by conversion of registered emissions offsets that were created from the geological sequestration of CO2) which can be used to satisfy compliance obligations under both TIER and federal Clean Fuel Regulations (a dual use of the credits).The amendments also established “Capture Recognition Tonnes” (deductions created by a conversion of Sequestration Credits that can be used to reduce net emissions and thus reduce emission reduction obligations under TIER). These amendments demonstrated Alberta’s support of CCUS/CCS projects by creating customized credits and deductions for compliance with TIER. In summary, in 2023 Alberta continued to exercise its established regulatory regime and to develop additional regulatory incentives to facilitate current and proposed CCUS/CCS projects.
In other jurisdictions, such as B.C. and Ontario, the regulatory regimes regarding CCUS/CCS are less developed. Rather than refine an existing regulatory regime, or develop further incentives to facilitate existing CCUS/CCS projects, therefore, these jurisdictions focused on establishing or adapting the regulatory regime to contemplate CCUS/CCS projects. For example, in late 2022 the BC government amended the Petroleum and Natural Gas Act to clarify the BC regulatory tenure for storage or disposal of CO2 and confirmed that storage of CO2 related to petroleum and natural gas operations can be achieved through a petroleum and natural gas lease, while sequestration of CO2 from other sources (not solely from related petroleum and natural gas operations) can be achieved through a storage reservoir license. These amendments adapted the existing regulatory regime to allow for CCUS/CCS rather than develop a customized system. Similarly, in April 2023 the Ontario government removed a provision in the Oil, Gas, and Salt Resources Act which prohibited injection of CO2 for purposes of sequestration, and introduced new rules to develop CCS pilot projects, thereby taking the first steps toward establishing a CCUS/CCS regulatory framework. It remains to be seen whether Ontario will establish a customized regulatory regime for CCUS/CCS.
In 2023, therefore, jurisdictions in which the CCUS regulatory framework is more established tended to focus on refining and exercising these regulatory frameworks in order to induce CCUS investment, whereas other jurisdictions took preliminary steps to permit or advance the regulatory framework for CCUS/CCS projects.
In 2023 we saw the further progression of tax incentives and grants designed to facilitate development of CCUS/CCS projects. However, many remain frustrated by the lack of details and tepid pace of the progress over the course of 2023.
In August of 2023, the federal Department of Finance released its long anticipated revised draft legislation for the CCUS investment tax credit (ITC) (originally released in August 2022), which will provide a refundable investment tax credit of up to 60 per cent on the acquisition of eligible clean technology property used to capture carbon dioxide, and 37.5 per cent of qualified carbon transportation, storage or usage equipment.
At the end of November 2023, the Alberta government also announced its Carbon Capture Incentive Program (CCIP) which builds on the CCUS ITC by providing a grant of up to 12 per cent of eligible capital costs of incorporating CCUS technology into an applicant’s operations. The details of the CCIP are still being determined and are subject to the passage of the CCUS ITC and related operating supports. While anxiously anticipated, we expect further details of the CCIP to be announced in Q1 2024 See our additional comments here.
While the initial progress on the CCUS ITCs and the CCIP in 2023 provided welcomed financial support to CCUS/CCS project proponents, there remains a lack of long-term certainty on the cost of carbon emissions which continues to impact CCUS/CCS investments. In essence, CCUS/CCS project proponents remain concerned that the value of avoided carbon price payments and/or the value of earned carbon credit revenues may plunge due to market or government actions, thereby reducing the expected financial return of the CCUS/CCS investment. In its 2022 Fall Economic Statement, the federal government had announced its intention to introduce “carbon contracts for difference” to backstop the future federal carbon prices, and to de-risk an important variable for CCUS/CCS projects, amongst other clean growth projects. It reiterated that plan in its 2023 Fall Economic Statement. The 2023 Fall Economic Statement announced that the Canada Growth Fund would be the principal federal entity issuing “carbon contracts for difference” and that the fund would allocate up to $7 billion of its current $15 billion in capital to such contracts and offtake agreements, although it remains unclear how much of this capital would be available for carbon contracts for difference or with respect to CCUS/CCS projects specifically. Accordingly, while the concept of a carbon price support scheme remained in consideration in 2023, the level of commitment, implications, and application to CCUS/CCS projects specifically, remains uncertain.
Significant CCUS project announcements dominated the headlines in 2023. Perhaps most prominently, the Pathways Alliance, a $16 Billion CCS project promoted by Canada’s six largest oilsands producers, which includes a massive pipeline to transport carbon from approximately 20 carbon capture facilities at oilsands sites to an underground storage hub near Cold Lake, Alberta, continued to advance the feasibility, engineering and design, subsurface evaluation, and regulatory approvals preparation work. In addition, Enbridge continued to advance its Wabamun Carbon Hub which would support CCS projects by Capital Power and by Lehigh Cement, and Heidelberg Materials continued to advance its CCS project on a cement plant in Edmonton. In addition, at the commencement of 2023, Air Liquide approved its Hydrogen Production facility near Edmonton, which includes the capture of three million tonnes of CO2 per year, and near the end of 2023, Dow Chemicals approved its $6.5 Billion ethylene cracker facility with associated CCS facilities. We anticipate further announcements on the advancement of the Alberta carbon hub projects and various other CCS/CCUS proposals in 2024.