CALGARY — Heavy polluters received a major financial boost last April when the federal government introduced a new carbon-capture tax credit, which will allow companies to write off at least 50 per cent of the cost to build new sequestration facilities. The highly anticipated program is expected to cost $7.1 billion between now and 2030. 

But oil-sands companies, for their part, are calling for more. The industry has been in negotiations with government officials for a range of additional supports that they argue will make their carbon-capture projects viable, from direct funding arrangements to market controls that would guarantee the price polluters receive when selling their carbon offsets.

Their efforts to secure more financial aid comes as heavy oil producers, under the newly formed Pathways Alliance (formerly the Oil Sands Pathways to Net Zero Alliance), lay out plans to build a massive $13-billion carbon sequestration hub in northern Alberta. Pathways is made up of six companies—Suncor Energy, Canadian Natural Resources, Cenovus Energy, Imperial Oil, ConocoPhillips and MEG Energy—accounting for 95 per cent of Canada’s oil sands production.

The industry’s call for more support points to additional costs taxpayers could be asked to shoulder in order to incentivize carbon capture, utilization and storage (CCUS) technology, which is expected to provide a large portion of the emissions reductions needed to reach Ottawa’s climate targets. Oil sands executives have estimated it will cost $75 billion to reach its net-zero goals by 2050, with carbon capture making up roughly half of the projected cuts. 

Chief among the proposals are so-called “carbon contracts for differences” (CCFDs), in which the government would effectively guarantee the price heavy polluters can sell their carbon offset credits on the open market. 

Mark Cameron, a senior advisor to Pathways who has been in discussions with federal officials about the introduction of CCFDs, said the mechanism would be vital in ensuring the private sector can achieve predictable revenue after CCUS projects are built. The federal tax credit, despite its size, only covers the initial CCUS construction costs, he said. 

“For these projects to be economically viable, there has to be support on the capital side, but also on the operating cost side,” Cameron said. “There is a carbon price, but we’re not certain what the value of carbon credits and the volume of carbon credits is going to be.” 

Currently, companies can sell their emissions reductions in the form of credits on carbon offset markets. Polluters can then buy those credits at fluctuating prices dictated by demand. CCFDs would ensure that prices remain at fixed levels, with taxpayers likely paying the difference should demand for those credits fall. 

The policy proposal comes as Pathways and other groups plan multi-billion dollar carbon-capture projects in Alberta and elsewhere in the country as part of an effort to reach net-zero emissions. 

Pathways’ project is by far the largest, among the most ambitious carbon sequestration hubs in North America. The project would gather greenhouse gases from around 20 different oil sands projects in northern Alberta, and transport them 400 kilometres south to Cold Lake, Alta. via a $1.5-billion pipeline. There, the gases would be injected at high pressure into deep underground saline aquifers for permanent storage. 

The project would mark one of the biggest infrastructure expansions in the oil sands in recent memory, comparable in size to some of the major developments beginning in the late 2000s, when China’s rapid economic growth fuelled a global oil boom. 

That’s where the similarities end. Oil and gas executives regularly frame CCUS as an added cost to the private sector, effectively rendering the traditional laws of supply and demand obsolete. (Carbon offset markets are viewed by some as the only way to bring some semblance of the free market to bear on climate change). CCUS also remains somewhat unproven: while projects like Canadian Natural Resources’ Quest carbon-capture facility has successfully sequestered six million tonnes of carbon since it came online in 2015, for example, the technology has not yet been proven economic at commercial scale. 

To help boost the adoption of CCUS, Ottawa unveiled the investment tax credit (ITC) in April, allowing companies to write off 50 per cent of capital costs when building CCUS facilities. The industry viewed the policy as a major step, but fell short of the roughly 75 per cent credit they had called for.

“We’re looking for additional support to make the projects economic, but the ITC was incredibly helpful and we think it’s probably the biggest piece of the puzzle that we have to solve,” Cameron said. 

Pathways is also looking to tap existing funding programs to fund the project. Those include Ottawa’s $8-billion Net Zero Accelerator, Cameron said, which falls under the Strategic Innovation Fund, and Emissions Reduction Alberta, an agency that focuses on funding technology companies and energy infrastructure. 

Representatives of Pathways members met with officials at Innovation, Science and Economic Development Canada in late 2021, where they discussed the $1.5-billion carbon pipeline, according to a document obtained by The Logic through an access-to-information request. The unredacted portions of the document did not specify whether the group would receive funding for the pipeline specifically. 

The federal government floated a number of potential policy supports for carbon-capture developers when it released its Emissions Reduction Plan in March, including contract differences aimed at “de-risking private sector low-carbon investments.”

Environment and Climate Change Canada told The Logic it’s “exploring measures to help guarantee the future price on carbon pollution,” similar to policies already in place in the U.K., European Union and the Netherlands. That “may also include legislative approaches,” said Hannah Boonstra, a spokesperson for the department. 

Proposals to control future prices demonstrate wider concerns around developing cost-effective markets for carbon. At the heart of the issue are worries about oversupply: if too many credits flood the market all at once (or, if too many companies are successful at removing large volumes of emissions), the demand for those credits would fall, thereby driving down the value of carbon removal and shrinking any incentive to cut pollution. 

Policymakers and think tanks are therefore mulling ways to essentially manufacture supply-constrained offset systems, thereby avoiding the peaks and valleys of commodity markets, for example. 

“As long as that market is liquid, so to speak, with enough buyers and sellers, then the system works perfectly, [and] the pricing incentive is maintained,” said Dale Beugin, vice-president of research and analysis at the Canadian Climate Institute. “It falls apart when the intensity benchmarks are so generous that everybody’s getting credit and nobody’s buying credits anymore.” 

Adlai Majer, director of new energy at Calgary-based Whitecap Resources, said a federal guarantee for future carbon prices could get complicated if companies are trading credits on provincial markets. 

“I’m not a marketing guy, but I think that’s a big ask if you create an environment where you can flood the market with credits in a province, but then ask the feds to backstop the price,” he said. 

Whitecap, an early CCUS adopter, operates two carbon-capture projects in Alberta and Saskatchewan, where it has sequestered more than 37 million tonnes of CO2 using enhanced oil recovery, a process whereby carbon is re-injected into a wellbore to produce hydrocarbons. 

Majer said Canadian regulators should create standard rules to establish carbon equivalency, which would allow polluters to trade across markets while reducing the risk of flooding smaller ones. 

Under the federal government’s proposed regulations, companies cannot access the new investment tax credit if they are using it for enhanced oil recovery. That will limit the revenue oil sands companies and other producers can generate through CCUS, Cameron said. 

While carbon can be used in the manufacture of anything from chemical feedstocks to soft drinks, demand for such products is well below the volumes of CO2 captured by major facilities. The industry expects that only about one or two per cent of the CO2 it captures could be used to develop other products, Cameron said. 

“The one exception is enhanced oil recovery,” he said. 

Cameron added that he remains in “a pretty complicated three-way discussion” with Alberta and the federal government about who should bear what CCUS development costs.

“It’s a cost on the books of oil-sands companies and it’s a cost to taxpayers, but there’s also potential to create spinoff industries that become very significant.”