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Industrial carbon pricing is crucial for deploying carbon capture

CCUS projects can help Canada reach net zero, and well-designed carbon pricing will help build more of them

Last month, Canada enacted a long-awaited investment tax credit that will cover up to half the capital costs of carbon capture, utilization and storage (CCUS). Canada’s climate plans—and global research about reaching net zero—are banking on this technology to play an important role in decarbonizing industrial operations.

In theory, CCUS refers to a versatile suite of technologies that can capture streams of carbon dioxide from industrial processes. In practice, CCUS projects have been expensive to install and operate, and many have fallen short of their promised performance.

As Canada’s new tax credit suggests, public policy plays a crucial role in reconciling the promise and the challenges of CCUS. This Insight examines how Canada might use CCUS, and how climate policy—especially industrial carbon pricing—can help ensure that this technology can live up to its potential.

CCUS is both a safe bet and a wild card

CCUS is one branch of the broader category of carbon capture technologies, and it refers specifically to projects that capture and store emissions from point sources—sites that discharge greenhouse gasses—rather than capturing carbon from the atmosphere.

Even then, CCUS encompasses many types of projects. They can be distinguished between what the Canadian Climate Institute calls safe bets—projects that can be more easily scaled and counted upon—and wild cards—projects that could deliver significant emissions reductions, but whose viability is uncertain. To reach net zero, Canada will need some combination of both.

In general, safe-bet CCUS projects are the ones that rely on highly concentrated streams of carbon dioxide. Cement plants, oil refineries, and some chemical facilities all produce concentrated streams of CO2 that can be more easily captured.

Wild-card CCUS projects are those that can capture CO2 at low concentrations, like from the natural gas boilers used in various industries, including electricity generation and oil sands production. There are many more of these sources, but capturing their emissions will be more costly.

Canada has many CCUS projects in the pipeline

Canada is well placed to deploy CCUS. The country has industries that are looking to use the technology, ideal geology for carbon storage, and—in the case of oil and gas—facilities that are already linked by pipelines that can transport CO2. Canada also has a head start. It already has operational CCUS facilities with a combined capture capacity of about four megatonnes annually, coming mainly from electricity generation, bitumen upgrading and refining, and fertilizer production.

But government and industry climate plans depend on the country deploying many more CCUS projects in the years to come. Federal projections estimate that the country will roughly quadruple its capture capacity to 16 Mt by 2030. And in its net zero scenarios, the Canada Energy Regulator projects that Canada could have between 60 and 80 Mt of carbon capture by 2050.

According to a database compiled by the International Energy Agency (Figure 1), existing projects could put Canada on track to meet government projections—if those projects are followed through. IEA data shows that, with its current pipeline of proposed projects, Canada could install up to 26 Mt of CCUS capacity by 2030, of which 12 Mt would be captured by the Pathways Alliance oil sands project. The database also includes projects in sectors that do not currently use CCUS but where it could play an important role, such as the Heidelberg and Exshaw cement projects, both planning on capturing 1 Mt of CO2 per year.

But the database also illustrates how much uncertainty surrounds those projections. Very few are already under construction. And at least some of the projects in the database have already been cancelled due to uncertainty about their economic viability, while others are at a very early planning stage. 

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Industrial carbon pricing can help close the certainty gap for CCUS projects

CCUS projects—even those that count as safe bets—face a range of uncertainties. 

The projects are technically challenging to build and operate, requiring dedicated capture, transport, and storage infrastructure. There are still relatively few large-scale examples of CCUS, and many of them have fallen short of their intended capture rates.

But perhaps the biggest problem for the long-term is the high cost of the projects. CCUS projects are capital-intensive to construct and resource-intensive to operate, and they capture a gas that has little commercial value (unless it is injected into the ground to extract oil, but that limits the utility of CCUS in reducing emissions).

Climate policy therefore plays an important role in creating the appropriate incentives for CCUS. 

There are some reasons for governments to turn to subsidies like the recent federal tax credit, the Net Zero Accelerator Initiative, and Alberta’s Carbon Capture Incentive Program, which provides grants for CCUS, funded by carbon pricing revenues. Not only is CCUS expected to deliver some big emissions reductions; the country’s storage potential and technological expertise are potentially bankable. And because there are generous tax credits available for carbon capture in the United States, direct supports could help Canada compete for investment in CCUS.

But the most important measure is industrial carbon pricing. Industrial carbon pricing systems put a cost on emissions while enabling emissions-reducing projects to earn credits that they can sell to emitters for cash. In this way, carbon pricing can provide CCUS projects with revenue streams that make them viable—diminishing the need for subsidies.

For industrial carbon pricing to be an effective incentive for CCUS, the carbon pricing systems themselves must function as intended. And some industrial carbon pricing systems in Canada are at risk of interacting with other climate policies in ways that make them less effective.

Previous research from 440 Megatonnes has shown that some climate policies could create an imbalance in the credit markets created by industrial carbon pricing systems. When the supply of credits in these markets exceeds the demand, the price of credits falls—putting the revenue for emissions-reducing projects (like CCUS) in jeopardy.

To incentivize CCUS cost-effectively, carbon prices must be certain

Policymakers have different options to make sure that carbon pricing works as intended. Regulators can set more stringent standards for large emitters. Supporting policy instruments, like contracts for difference that guarantee the value of carbon credits, can also help give project proponents the certainty they need to proceed. Research shows that these fixes can backstop the value of carbon credits and help the country deploy more CCUS. There are practical examples, too. Up to three megatonnes of carbon capture projects in the oil sands and other hard to abate industries are already backstopped by contracts between the proponents and the federal Canada Growth Fund that guarantee a fixed price of carbon.

If carbon pricing systems are stringent enough for credits to trade at $170 per tonne, they will significantly increase CCUS deployment—and deliver more emissions reductions overall.

Figure 2 illustrates that, if carbon pricing systems are stringent enough for credits to trade at $170 per tonne (what we call a binding carbon price), they will significantly increase CCUS deployment. In the analysis shown below, a binding price leads to as much as 56 per cent more capture capacity in 2030, compared to a non-binding price that doesn’t reach $170 per tonne. (Unlike the IEA data, which is based on a list of all the projects proposed in Canada to date, this figure shows projections based on the impact of current and proposed climate policies). The fixes to carbon pricing don’t only result in more CCUS: they also deliver more emissions reductions overall.

Research consistently shows that if CCUS is going to play a meaningful role in meeting Canada’s climate targets, then the country will need more projects to move from concept to completion. Climate policy will play a crucial role in getting those projects across the hurdles that they face.

The challenge for governments is to ensure that policies are providing coherent, cost-effective incentives. Carbon pricing is the best tool Canada has for this job. Other policies can be effective complements in supporting CCUS, but carbon pricing is the foundation. That foundation just needs to be well designed to deliver its full potential.

By tightening its carbon pricing systems, Canada will not only ensure the better functioning of a crucial climate policy—it can also help to close the certainty gap that faces a potential key technology on the path to net zero.

Ross Linden-Fraser is a Senior Research Associate with the Canadian Climate Institute. Arthur Zhang is a Research Associate with the Canadian Climate Institute.