Canada’s federal government has proposed a range of policies over the past few years designed to reduce greenhouse gas (GHG) emissions. Among them are the refundable investment tax credits (ITCs) in Budget 2022, designed to increase carbon capture and storage (CCUS) investment in industrial facilities.

The recent tax credit legislation^[1] needs serious changes if it is to give investors the clarity and incentives they need to make the large-scale investments CCUS requires.

Large carbon capture projects face many obstacles, not least the lack of which is meaningful examples anywhere in the world. Financing is only one of the barriers and tax credits are only one policy lever. But under the current proposal, these credits are set to be cut in half and end too soon. They also require unusual burdensome reporting and present confusing provisions to investors. Taken together, these restrictions seriously limit their real-world usefulness.

Investment tax credits return to a company a portion of what that organization spends on eligible projects. This should lower the ultimate cost of the project and in theory, increase the likelihood investors will commit to the investment.

The government proposes time-limited credits for capturing carbon. Projects that capture carbon directly from ambient air receive 60 per cent from 2022 to 2030, and other projects (like those planned in oil sands operations) receive 50 per cent. Other transport and storage expenses receive 37.5 per cent. After 2030 these rates drop by half and end completely by 2041.

Major projects take a long time to plan, build, and complete under the best of circumstances. Carbon capture projects are likely to take significantly longer. First, proponents face a limited supply chain and an experienced labour force. Second, emission-reduction policies in the US and EU are also driving up demand for materials and workers. Those proposing direct air capture projects face yet longer project development time, for which the technology has yet to be commercialized.

Moreover, investors in many provinces, like Ontario, are not yet eligible for the credit because their provinces are still working to develop the needed regulatory frameworks

To give the credit a chance to work, the federal government ought to extend the credit’s maximum value by at least five years. A too-limited window is not the only hurdle to the proposed ITC. Failing to meet certain labour requirements (a concept from the US Inflation Reduction Act) takes another 10 percentage points off the rate.

To receive the maximum tax credit rates under these investment tax credits, businesses are required to pay at least a “prevailing wage” based on certain prior collective bargaining agreements and ensure that at least 10 per cent of tradesperson hours worked are performed by registered apprentices. It comes with added compliance and reporting requirements. Additional burdens like this erode effectiveness by introducing extraneous reporting and uncertainty over how much the tax credit will actually offer.

Investors also worry about a complex and confusing set of provisions which may deter investment such as those that “claw back” value under certain circumstances. In response to consultations, some stakeholders have said;

Claw back provisions, differing phase out schedules, narrow and confusing eligibility criteria, knowledge sharing requirements and a high-level auditing risk are just some of the provisions that could discourage companies and investors from using the ITCs. Meanwhile questions remain about the stackability of certain ITCs amongst themselves and with federal programs such as the Strategic Innovation Fund and projects supported by the Canada Infrastructure Bank, Canada Growth Fund, or provincial governments.^[2]

Investors, provincial governments and their taxpayers contemplating their own support programs, need to know the risks beforehand. There are enough risks in carbon capture already without adding a layer from the Canada Revenue Agency. The legislation should be as simple as possible.

Reducing Canada’s GHG emissions is neither cheap nor easy. Progress has been slower than many would like, especially in sectors like industrial manufacturing or oil sands where energy demands for heat or other processes are high, and few alternatives exist. If the federal government is serious about private sector investment to reduce emissions, Canada needs a more flexible, less burdensome approach, predisposed to removing barriers not erecting them.

GOING FORWARD

To give the carbon capture investment tax credit a fair chance to work, the legislation should extend the time period of maximum credit, drop the unnecessary labour requirements feature, and simplify or eliminate confusing mechanisms.

* Charles Deland is Associate Director of Research at the C.D. Howe Institute in Calgary. The views expressed are those of the author. The CD Howe Institute does not take a corporate position on policy matters. An earlier version of this article was published by the CD Howe Institute on November 2, 2023.

1. “Additional Design Features of the Investment Tax Credit for Carbon Capture, Utilization and Storage: Recovery Mechanism, Climate Risk Disclosure, and Knowledge Sharing” (9 August 2022,) online: Government of Canada <www.canada.ca/en/department-finance/news/2022/08/additional-design-features-of-the-investment-tax-credit-for-carbon-capture-utilization-and-storage-recovery-mechanism-climate-risk-disclosure-and-k.html>.
2. “Members to grow Canada’s clean economy” (8 September 2023), online: Business Council of Canada <thebusinesscouncil.ca/publication/measures-to-grow-canadas-clean-economy>.