The Government recently tabled legislation requiring emissions reduction targets every five years on a path to net-zero emissions by 2050. The first target and plan for 2030, which will come within the next year or so, could outline a national strategy for carbon capture, utilization, and storage (CCUS) that makes targeted investments to develop CCUS capacity. Making these investments now could help underpin a low-carbon transition, drawing in business investment, and complementing the government’s efforts to support jobs and economic recovery. In doing so, we can help steer the economy towards a more productive, prosperous, and sustainable future.
Canada’s 2030 Paris Agreement target would be a natural choice for the first binding emissions target. Despite significant efforts already toward this goal, about a quarter of our promised emissions reductions are unaccounted for. While meeting this target will require a range of additional measures, the scale of abatement efforts in major carbon-intensive industries—oil, gas, and heavy industry like concrete and steel production— is often seen to be cost prohibitive.
That would be a missed opportunity. While heavy emitting sectors have reduced emissions intensity, they remain a large share of overall emissions. Many CCUS projects are technologically feasible in these industries, and experts agree we will need these technologies in the future to offset emissions, notwithstanding forecasts of declines in long-term fossil fuel demand and improvements in energy efficiency.
CCUS technologies trap carbon dioxide before it is released into the atmosphere (capture), and prevent it from being released by using it in a production process such as curing cement or creating chemicals (utilization) or by locking it permanently underground (storage). Canada is at the forefront of this technology: public support has helped large domestic oil, gas, and petrochemical projects to capture and store 4 million tonnes of carbon dioxide annually, about 2% of oil sector emissions. Canadian companies are technology leaders in this space.
But CCUS projects are capital intensive and high-risk during the extended construction phase. Oil and gas companies and other consequential emitters will not invest in these projects if they do not meet return thresholds, particularly if they continue to be capital constrained. Add that many CCUS technologies outside this space are nascent or not yet commercially viable, and it’s no wonder investments in this critical technology are few and far between.
Public funding of R&D for emerging CCUS technology can deepen the Canadian CCUS ecosystem, producing the important technologies of the future. Incentivizing large-scale projects with public support may help move the needle on costs and innovation. Governments should aim for the right balance between early-stage public investments in CCUS projects (to achieve efficiencies) and enhanced regulatory policy, with the ultimate target of encouraging CCUS investment to become increasingly market driven.
Many of Canada’s heavy emitters, including oil and gas companies, are already publicly committed to tackling emissions. A coherent policy framework would signal that our government is committed to aligning heavy emitting sectors with climate ambitions, and attract private and sustainability-minded investors.
With growing international momentum on the need to tackle climate change, industry will need to increase abatements to aid market access, including for energy exports. The ability of larger economies, notably the U.S., to scale abatement technologies like CCUS is a further concern. President-elect Joe Biden is the most recent world leader to make climate pledges central to his campaign, with a focus on economic growth and job creation, which could add competitive pressure for Canadian industry as federal and state policies align to encourage abatement. Meanwhile, Canadian provinces have taken differing stances, with some outlining ambitious climate plans and others just meeting minimum federal standards.
As it lays out long-term climate plans, the federal government has an opportunity to write a new chapter in Canadian climate policy: One that acknowledges the importance of the energy sector, encourages abatement across industries, leverages investment from the private sector, and spurs innovation in sectors that contribute the most to our climate challenge.
How can CCUS accelerate a low-carbon transition?
By our best estimates, CCUS will be needed to get to net zero.
Three of the four UN climate scenarios that limit average temperature rises to 1.5 degrees (the threshold over which significant physical impacts of climate change are considered unavoidable) include a role for CCUS. It’s even more critical to scenarios that don’t require faster, more significant, and more disruptive changes in how we power life. Even in a future where fossil fuels are a smaller share of energy production, CCUS can help limit the emissions they create.1
It’s already an abatement option in some industries and complements existing strategies.
In some industries, carbon capture is among the lowest-cost options for near-term abatement (e.g., steelmaking).2 In others, cheaper options exist: addressing methane emissions in oil and gas production costs significantly less. But lower cost abatement can be incentivized by other policies like the carbon tax and output-based pricing system. CCUS can complement these efforts by addressing emissions these other methods cannot: Methane accounts for just 20% of oil and gas sector emissions, so adding CCUS to the toolkit could help abate some of the rest. We must be cautious not to overstate its potential; CCUS will not solve our entire emissions challenge. But funding these projects where they are among the lowest cost options, or can address more emissions than current options and help reduce costs for future projects, can be an effective part of a climate strategy.
It can develop non-emitting uses for natural resources.
As our energy system changes, we will need to find net zero uses for natural resources. Carbon capture at scale could allow natural gas and oil to be used as a feedstock in petrochemicals like fertilizer or to create clean-burning hydrogen, without growing emissions. Non-combustion uses for fossil fuels, like producing carbon fibres from bitumen, could also become feasible. These solutions are key to developing our resources sustainably, and finding a role for existing industries in a net zero economy, but will require public and private investment in research.
It’s a Canadian solution to a Canadian challenge.
Canada has long been a leader in large-scale carbon capture projects, with Shell’s Quest upgrader and SaskPower’s Boundary Dam providing benchmarks for global projects We are also leaders in new solutions like capturing CO2 directly from air, as BC’s Carbon Engineering has demonstrated, and finding uses for carbon in industrial processes like concrete curing, like Nova Scotia’s CarbonCure and Quebec’s Carbicrete. Alberta and Saskatchewan have invested in other major projects, including the Weyburn-Midale enhanced oil recovery operations, North West Refining and Alberta Carbon Trunk Line. Low-carbon technologies are also growing rapidly where governments have made historic investments in clean energy: Ontario and Quebec generated 70% of cleantech goods production. Investing in this growth industry could prove a critical offset to changing demand for fossil fuels, and provide economic benefits across the country.
Why Canada needs a low-carbon transition
Many industries have yet to tackle their emissions challenge.
Despite significant efforts at both the federal and provincial levels, like carbon pricing, about a quarter of the emission cuts promised by 2030— 77 Mt—are unaccounted for. Avenues for reducing or offsetting a further 511 Mt of emissions to hit Canada’s mid-century goal have not been outlined.
Energy producers have reduced emissions intensity per barrel by over one third since 2000, but overall energy sector emissions have grown alongside production. The most trade-exposed industries, like oil, gas, metals, and cement, likely won’t meaningfully reduce or abate emissions this decade without public support, given the high capital costs of abatement. So as we aim toward net zero, we’ll need to increase the efficiency of existing technologies and develop new ones to achieve long-term emissions reductions in these industries.
A global transition in energy use is underway, and failing to leverage our energy sector’s expertise could be costly.
Emissions reduction will be needed in the energy industry for Canada to meet its climate goals. That can be achieved through innovative solutions that improve efficiency, the development of non-combustion uses for fossil fuels, and capture carbon. Meanwhile, failing to innovate could require production cuts to reduce emissions. And falling global demand could lead to production cuts either way. Abating a tonne of CO2 through production cuts is costly: about $550, in terms of lost economic output. If demand falls in line with the International Energy Agency’s sustainable growth scenario, GDP could be nearly $6 billion lower per year by 2030, and over $23 billion lower in two decades. Without a transition strategy, that means fewer tax revenues and royalties for government, fewer high-wage jobs, and a less productive economy.
It can help the economy recover from the impact of COVID-19.
While crisis support for the economy has rightly been the government’s focus, investment in new technologies and industries can limit lasting scars from this recession. Falling private investment will hurt growing economic sectors including clean technology and renewable energy as well as existing industry like oil and gas. Targeted government investments can help prevent the long-term consequences of slower investment, and if focused on sustainable industry can serve to reduce emissions, too. Government spending has larger near-term impacts during a recession, and by bringing back investment its impact will grow over time.
What can government do to help?
Governments can spur research & development to deepen the Canadian CCUS ecosystem.
Some CCUS technologies are currently commercially viable (even if expensive), while others encompass new ways of using fossil fuels or carbon. Additional R&D funding for carbon capture and non-combustion uses for oil and gas could develop new feasible technologies and drive cost declines in existing technologies. Public research has proven critical in early-stage cost reductions for clean technologies, by some estimates accounting for 30% of the decline in solar panel costs.1 Helping support development of new CCUS methods, with a specific focus on helping heavy industry reduce emissions, could reduce the cost of hitting net zero. Combining this with policy to help firms purchase CCUS technology can realize the economic benefits of this research.
Government can help encourage CCUS uptake, moving the needle on costs and spurring innovation.
CCUS projects are costly, with a long lead time and high-risk during the extended construction phase. Raising long-term capital is a challenge for the oil patch. Oil companies have lost significant value in the last 15 years, in large part because of price declines over the past five years. Accordingly, investments compete for funding, and CCUS can have lower returns than business-as-usual project for fossil fuel companies, making them harder to fund.
Looking ahead, energy producers will also have to address changing demand forecasts, uncertain regulatory hurdles and questions from investors about environmental sustainability. Together, these changes highlight the challenges ahead for fossil fuel firms: one that could lead them to prioritize core operations, potentially at the expense of innovation. The oil and gas sector has cut $12 billion in planned capital investments this year, and manufacturing (which includes heavy industry) is not far behind.
Reversing this trend is critical. While large-scale carbon capture projects are expensive, costs have decreased as initial investments prove the concept. If carbon capture mirrors technology like wind turbines, with capital costs falling 12% for every doubling of capacity, early adopters would need to invest $17 billion in carbon capture by 2030 to reduce costs by a third. Doing so could make further lowering emissions regulations less onerous for firms.
To encourage uptake, governments can provide upfront capital via co-investment or lending arms like the Canada Infrastructure Bank. Taking on risk and lowering borrowing costs can make projects more attractive and ensure they get done. And if it ensures transparent disclosures about project costs and the environmental benefits of the projects, government involvement can help build knowledge that the private sector and international investors can scale.Getting long-term private capital in the mix must be a key goal. For these investors, cash flow from carbon capture projects are often unclear. In addition to revenues from enhanced oil recovery, which have thus far supported investment in CCUS, tax credits like the US 45Q program or more specificity on which projects create Clean Fuel Standard credits could provide the needed clarity to get institutional investors onboard. If these efforts increase uptake, as in our hypothetical scenario, a ten-year $50 per tonne tax credit available between 2020 and 2025 could cost the federal government about $4.5 billion.
Helping heavy emitters invest in CCUS will help scale Canadian companies, too. Governments can provide a market for commercialized technology by stipulating clean investment standards for infrastructure projects, which would be impactful for carbon utilization technology that provides solutions for concrete and metals manufacturing.
These policies would indicate seriousness about fostering an energy transition, and supporting our existing industries, further enticing private capital. Making investments now, as we steer the economy towards a new expansion, will set Canada up for a more productive and prosperous future and defend against a changing international policy environment.
1 IPCC (2018). “Global warming of 1.5°C”; Energy Transitions Commission (2020). “Making Mission Possible: Delivering a Net-Zero Economy”.
Colin Guldimann is an economist at RBC. He works primarily on issues related to the public sector, energy, and climate change. Prior to joining RBC, Colin worked on housing policy and macroeconomic research at the Department of Finance in Ottawa.
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