A single tax incentive has the potential to reduce Canadian greenhouse gas emissions, improve the competitiveness of several of the country’s industries, achieve cross-partisan consensus and bolster national unity.
That, at least, is the case being made for the federal government to follow the U.S. lead by introducing a Canadian version of the “45Q” production tax credit, which rewards investment – especially by heavy-emitting industries – in carbon capture, storage and utilization (CCUS).
In recent months, a coalition of environmentalists and companies from hard-to-decarbonize sectors – including oil-and-gas – has pushed for such a measure to be in the coming federal budget. They believe they’ve found a receptive audience within Justin Trudeau’s cabinet, including Environment Minister Jonathan Wilkinson and Natural Resources Minister Seamus O’Regan.
“It’s the sexiest tax credit in the land right now,” says coalition leader Ed Whittingham, a former chief executive officer of the clean-energy think-tank Pembina Institute.
Mr. Whittingham says scarcely anyone in Ottawa has told his group a credit for CCUS “is a bad idea or that we shouldn’t do it,” but he acknowledges one very notable exception, also cited by others engaged in this issue.
The federal Finance ministry is highly skeptical of narrow-targeted tax credits of this sort. So advocates of a Canadian version of the 45Q will have to persuade Finance Minister Chrystia Freeland and deputy minister Michael Sabia to reject advice from their own bureaucrats. And that places the policy at the nexus of broader debate about how prescriptively the tax system should be used to encourage clean-technology investment.
The argument for this particular measure is fairly compelling. Although views are mixed among environmentalists, some of whom worry CCUS could be a lifeline for fossil fuels, it may be necessary for that industry and others, from steel to fertilizer, that will be around for the foreseeable future and have limited ways to reduce their emissions. Without it, Mr. Trudeau’s promised path to net-zero emissions by mid-century will be even tougher.
The challenge is that technologies to capture carbon dioxide, then bury it or convert it into other products, have very high upfront costs, and will do so until there’s greater adoption. So for companies to feel they can afford the investment, governments may have to make it less risky.
That’s what the United States is doing with the 45Q, which gives future revenue certainty through tax credits for every tonne of carbon stored or used. Dozens of CCUS projects have entered development since the tax credit took its current form in 2018, and that investment could accelerate after an extension of the policy in a pre-Christmas stimulus package.
Hence the competitiveness angle. It’s harder for Canada, which despite an early start on the technology has only a handful of CCUS projects, to attract investment when its neighbour is offering more incentive. Meanwhile, the ability of carbon-intensive Canadian sectors to compete in a decarbonizing world could be affected by whether they’re behind or ahead of the curve on capturing their emissions.
The national unity argument flows from there. Trying to convince the rest of the world Canadian oil and gas is environmentally competitive with fossil fuels from elsewhere, Jason Kenney’s Alberta government has been alongside the coalition lobbying for a 45Q equivalent. That makes it the rare federal emissions-reduction policy that could conceivably reduce that province’s (and Saskatchewan’s) sense of alienation.
As for potential cross-partisanship, the federal Conservatives have already signalled support for the policy through a private member’s bill that Calgary MP Greg McLean tabled in December. That’s important, because one of the arguments for this sort of tax credit is that, unlike with the rising national carbon price (which in theory should similarly encourage CCUS), investors might be able to make decisions without worrying the ground will shift with a change in government.
None of that, however, necessarily negates Finance’s concern that so-called boutique tax credits, aimed at rewarding specific activities, are fundamentally bad policy. If government is to provide subsidies, officials would prefer to use grants or other expenditures, not the tax system.
That opposition is based on a view that the credits complicate the system, cause administrative headaches and are difficult to unwind. Finance also typically doesn’t like the fact that future costs from tax credits are difficult to project, since they’re contingent on uptake.
Advocates are optimistic Ms. Freeland will push back against that mentality, with an eye to competitiveness with the United States and other jurisdictions that have fewer qualms. And that Mr. Sabia – an atypical bureaucrat who is known to be seized with the clean-economy transition, and mentioned carbon capture as a Canadian leadership opportunity in a Globe and Mail interview after his appointment as deputy minister – will do likewise.
Even if that does mean more openness toward tax credits, one specifically for CCUS is not guaranteed.
Federal Liberals have indicated they are aware it’s impractical to create credits for each technology with strong emissions-reduction potential. So they might prefer a broader reach.
That could mean expanding the 45Q model to somehow include production of other means of reducing industrial emissions, such as hydrogen. It also could mean measures less targeted to specific technology that other clean-economy advocates have proposed – such as investor tax credits, or expansion of capital-cost allowances.
Even if Ottawa does want to target carbon capture, a production credit is not its only option. Beth Hardy, vice-president of the Regina-based International CCS Knowledge Centre, said in an interview that while her organization would welcome any such measure, it believes tax credits to offset upfront capital costs would have more value. She’s concerned the government will borrow the U.S. policy because it has momentum, not because it best addresses Canadian needs.
But the first federal budget in two years is fast approaching. The Liberals will be eager to show they’re keeping pace with a new climate-focused U.S. administration. So momentum, around what’s being presented as a ready-made lever to help with competitiveness and plenty else, could be pretty powerful.
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