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A Shell employee walks past the company's Quest Carbon Capture and Storage facility in Fort Saskatchewan, Alta., on Oct. 7.TODD KOROL/Reuters

In its 2021 budget, the federal government dangled an economic carrot for carbon capture, utilization and storage: a tax credit, slated to come into play in 2022.

The hope in the energy sector is that Canada’s new tax credit will be modelled on a similar long-running program in the United States, called 45Q. But with consultations done and the tax credit under development, something continues to trouble the fossil-fuel industry and oil-producing provinces – Ottawa says the tax credit will exclude projects intended for enhanced oil recovery.

Carbon capture, utilization and storage (CCUS) facilities force carbon-dioxide emissions deep into the ground to keep them out of the atmosphere. The technology can be used in various major industrial sectors, including fossil-fuel production, power generation and manufacturing.

The captured carbon dioxide can be stored safely underground, but it can also be used for enhanced oil recovery (EOR), a process in which it’s injected into mature oil wells to boost production. That’s how 16 of the 21 large-scale CCUS projects in operation in 2020 used the captured carbon, according to the International Energy Agency, a Paris-based organization that advises industrialized nations on energy policy.

But it’s a thorny issue.

Environmental groups rail against EOR, saying that it will prolong the use of oil at a time when the world needs to quit its fossil-fuel habit.

Energy companies and governments in oil-producing jurisdictions such as Alberta and Saskatchewan, however, argue that excluding EOR will fail to incentivize the large-scale use of carbon capture needed to lower the emissions of Canada’s most heavily polluting sector.

The chief executive of Cenovus Energy Inc., Alex Pourbaix, said at a recent investor day that “if the goal of any CCUS plan is to sequester the most amount of CO2 at the lowest cost, then I would really encourage everybody to think very hard about including EOR” in the tax credit, much like the United States does.

There’s a lot riding on Canada’s new CCUS tax credit, says Alberta Energy Minister Sonya Savage. If Ottawa doesn’t provide benefits similar to those in the States, “we’ll never get to net zero in this country,” she said in a recent interview.

“There’s no possible path to it without carbon capture. There’s no ability to pursue projects that are in the billions of dollars without competitive support from the government.”

Alberta is ‘on solid ground with oil and gas,’ province’s Energy Minister Sonya Savage says

Sean McCoy, an assistant professor at the University of Calgary who specializes in CCUS, says while there are legitimate reasons to use a program such as 45Q to help hedge risks and hasten the CCUS learning curve, “you also need to have a stick,” like a carbon tax.

“You can’t just do this all on the back of tax credits,” he said in an interview.

The IEA contends that CCUS will be a key part of the world’s transition to net-zero carbon emissions. That’s because it’s flexible. It can be used to retrofit existing power and industrial plants, tackle emissions in sectors in which other technology options are limited, such as cement production, or combined with direct air capture, which removes carbon dioxide from the atmosphere.

Samantha McCulloch is the head of the IEA’s CCUS unit. In a November analysis, she wrote that while carbon capture still faces challenges, “there’s a growing recognition that CCUS is necessary to meet national, regional and even corporate net-zero goals.”

On average, she said, the world has added less than three million tonnes of carbon capture capacity each year since 2010. While annual capacity is now more than 40 million tonnes, it needs to increase to 1.6 billion tonnes in 2030 to align with a pathway to net zero by 2050.

Dr. McCoy says CCUS isn’t a climate change panacea so much as one part of a broader set of actions needed to address emissions (for example, replacing fossil fuels with renewables in some industrial processes, rather than applying CCUS).

“There’s a lot of messaging that if we just do this, it will fix everything,” he said. “And I think that’s an oversimplification.”

Global interest in CCUS enjoyed something of a renaissance in 2021, with more than 100 new facilities announced around the world.

Similar bouts of enthusiasm for the technology, however, have fallen flat in the past, generally owing to its high cost and a dearth of economic incentives.

But with more global focus on reducing emissions to meet climate-change targets, and governments ratcheting up the economic sticks and carrots to make CCUS technology a more-attractive proposition, experts think that this time, the push for it will survive.

Even now, the renewed interest after years of declining investment has global-carbon-capture capacity on track to quadruple in the coming years.

In Alberta alone, a flurry of CCUS announcements this year included a new facility at Shell Canada Ltd.’s Scotford refinery complex, as well as partnerships between Suncor Energy Inc. and Atco Ltd. for a CCUS and hydrogen facility, and Pembina Pipeline Corp. and TC Energy Corp. for a carbon transportation and sequestration system. Several projects also shared in $100-million from a provincial grant program.

Western Canada has been at the forefront of Canada’s carbon capture efforts for decades.

The first commercial-scale CCUS facility applied to oil-sands operations was just outside Edmonton: Shell’s Quest project, which retrofitted an upgrader that processes crude from the oil sands. It has captured more than five million tonnes of CO2 since it came online in 2015.

There’s also the Alberta Carbon Trunk Line, a 240-kilometre pipeline that carries CO2 captured from the Sturgeon Refinery and the Nutrien Redwater fertilizer plant to EOR projects in central Alberta.

But it was next door in Saskatchewan where, more than 20 years ago, one of the world’s first large-scale CCUS efforts launched near the southeastern city of Weyburn. It and an adjacent project in Midale involve capturing carbon-dioxide emissions from a coal-gasification facility in North Dakota, compressing the gas to a liquid, and transporting it via a 320-kilometre pipeline to the Weyburn-Midale fields for use in enhanced oil recovery.

Keep trundling south on Highway 39 in this pocket of Saskatchewan, and the first power station in the world to successfully use carbon-capture technology emerges from the prairie: Boundary Dam.

When the facility opened in 2014, it was hailed as proof that emissions produced by burning coal for electricity could be successfully captured, then stored underground or used in EOR. U.S. Senator and 2016 presidential hopeful Lindsey Graham even visited the site in 2015 with some of his colleagues as part of a brief Canadian tour of emissions-lowering technologies.

On a hot August afternoon, standing alongside then Saskatchewan premier Brad Wall, Mr. Graham told media Boundary Dam could help fight climate change. When you add in EOR, he said, it paints a powerful economic picture.

Boundary Dam, however, had some issues.

Construction was delayed, and it blew past initial 2011 cost estimates of $1.2-billion to around $1.5-billion. Then, in 2015, data showed the plant was capturing less than half of the emissions it was supposed to and required extensive repairs. SaskPower, the Crown corporation that runs the facility, also shelled out millions of dollars in penalties after it failed to deliver a contracted amount of CO2 to Cenovus Energy Inc. for use in EOR.

Howard Matthews, SaskPower’s vice-president of power production, acknowledges the facility had some teething problems, but said that operations have since steadied.

“There’s always room for improvement,” he said. “But it’s been running reasonably reliably here for quite some time.”

Boundary Dam’s towering maze of pipes and equipment is usually bone-jarringly loud. But walking through the CCUS facility this summer was an eerily quiet experience, after equipment failure left it idle. For four months, it was either completely offline or operating at less than 10 per cent capacity. Still, the facility has captured close to 4.2-million tonnes of pollution since 2014.

Another sector where carbon capture stands help lower emissions is hydrogen production – a fuel gaining traction as a low-carbon option, as it emits only water vapour when burned.

However, there’s disagreement about just how climate friendly it is. While so-called green hydrogen is made from water electrolysis using renewable electricity, blue hydrogen (the kind being pursued in Alberta) is made from natural gas, with the carbon emissions captured via CCUS.

One study released in August concluded that emissions from blue hydrogen production make it no cleaner than coal. But an international study released in December found that blue hydrogen can actually play a positive role in the energy transition.

Joule Bergerson, an associate professor at the University of Calgary and Canada Research Chair in Energy Technology Assessment, worked on the most-recent study. If producers operate with the latest, state-of-the-art CCUS technology and manage methane along the supply chain so it’s not leaking into the atmosphere, she said, blue hydrogen can be a low-carbon solution.

“You can’t paint all hydrogen with one colour saying that it’s either good or it’s bad – it depends on how you implement it. And we really need to pay attention to those factors as we plan to implement it, in order to ensure that it’s on the low-carbon side,” she said.

Carbon capture also presents an opportunity to lower emissions in Ontario’s steel and cement production industries.

The IEA believes CCUS could reduce emissions from steel, cement and chemical production by up to two-thirds, and University of Waterloo professor Maurice Dusseault says there’s already an appetite among steel manufacturers in the province to utilize the technology.

“They understand that grumbling and digging in your heels and everything like that, well, it’s not going to work,” he said, because they’re still going to be charged $170 per tonne for emissions by 2030 under the federal government’s carbon tax.

But there’s a wrinkle: Where does the captured carbon go? Compared with Alberta, Ontario doesn’t have much pore space – the geological formations needed to store captured carbon. Plus, the desire to ship CO2 west via pipeline to use in EOR is practically nil, Prof. Dusseault said.

The province must therefore figure out how to use its limited pore space “judiciously and carefully” to help heavy industry transition to a low-carbon future over the next 15 years, he said.

Alberta and Ontario have different jurisdictions, geology, sources of carbon dioxide and industries. “The only thing in common is that we all want to find a way to capture, transport and sequester that is straightforward, secure and not prohibitively costly. I mean, that’s what we all want,” he said.

Ms. McCulloch with the IEA is optimistic that unprecedented momentum in CCUS in 2021 means it may finally be shrugging off its underwhelming track record.

“If net zero is to remain within reach, CCUS cannot spend another decade sitting on the side lines of climate mitigation efforts,” she said.

“Governments, industry and investors alike have a collective role and interest in ensuring this is the decade that CCUS delivers.”

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