Carbon Capture Tax Credit Consultation Process Underway

Authors: Deron Kuski, K.C., Jodi Wildeman, K.C., Bennet Misskey, Andrew Konopelny

The 2021 Federal Budget announced much anticipated tax credits for carbon capture, utilization and storage projects (CCUS, often referred to as CCS).

The budget outlines the following key aspects of the CCUS tax incentives:

  • Budget 2021 proposes to introduce an investment tax credit for capital invested in CCUS projects, with the goal of reducing emissions by at least 15 megatonnes of CO2 annually. This measure will come into effect in 2022.
  • The Government will move quickly with a 90-day consultation period with stakeholders on the design of the investment tax credit, after which it will announce more details—including the rate of the incentive.
  • It is not intended that the investment tax credit be available for Enhanced Oil Recovery projects. The Government intends to make the credit available for direct air capture projects.
  • Budget 2021 also proposes to provide $319 million over seven years starting in 2021-2022 – with $1.5 million in remaining amortization – to Natural Resources Canada to support research, development, and demonstrations that would improve the commercial viability of carbon capture, utilization, and storage technologies.

The United States Federal Government has already implemented a production tax credit for CCUS projects, known as the 45Q. The 45Q currently provides a credit valued at 22.66 US per tonne (increasing to 50/T by 2026) for captured carbon stored underground, with reduced credits for captured carbon used for enhanced oil recovery or other uses.

The CCS Knowledge Center in Regina previously published a white paper entitled “Incentivizing Large-Scale CCS in Canada,” which outlined three potential policy approaches to incentivize continued investment in CCS projects in Canada:

  • Option 1: a refundable capital tax credit provided in advance of construction of CCS facilities to the company who will be capturing their emissions
  • Option 2: a tax credit focused on expenditures during the study and design phase of a CCS project that would allow certainty for investment and offset capital costs of construction
  • Option 3: a production tax credit, similar to that of the 45Q CCS incentive in the United States, to address competitiveness issues

The white paper identified the key difference between a refundable capital tax credit and a production tax credit – namely that a refundable capital tax credit addresses the capital-intensive cost of bringing a CCS facility online.

The CCS Knowledge Center also recently unveiled a key messages document for the consultation process. The consultation document provides various recommendations for the tax credit, including:

  • the tax credit should go to those laying out carbon capture capital as eligible expenses
  • outlay capital for projects should be eligible as of the budget release date (April 19, 2021), with a cap of December 31, 2029
  • the credit should be structured as a refundable capital tax credit

MLT Aikins eagerly awaits the outcome of the 90-day consultation period and the establishment of the CCUS investment tax credit, which should spur significant investment and opportunities for development of CCUS projects, particularly in Western Canada.

MLT Aikins has significant experience in carbon capture, utilization and storage projects and advised on the first power station in the world to successfully use carbon capture and storage technology on a commercial scale. If your organization is considering a CCS project or looking for more information, please contact us.