Carbon Capture Tax Credit Could Drive Up Emissions, Analyst Warns
A troubled demonstration project in Saskatchewan may be an example of the challenges the Trudeau government will face if it relies on carbon capture, utilization and storage (CCUS) technologies to reduce the country’s greenhouse gas emissions, as this week’s federal budget proposes, an analyst with the Institute for Energy Economics and Financial Analysis has told The Energy Mix.
“Budget 2021 proposes to introduce an investment tax credit for capital invested in CCUS projects with the goal of reducing emissions by at least 15 megatonnes of CO2 annually,” the budget states. “The government intends to take significant action to support and accelerate the adoption of these technologies. By providing incentives to adopt CCUS technologies, the proposed measure will be an important element in Canada’s plan to achieve net-zero emissions by 2050.”
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IEEFA’s director of resource planning, David Schlissel, said he supports funding in the budget to experiment with newer forms of CCUS. But he told The Mix those efforts could run into the same financial headwinds that have plagued the Boundary Dam CCUS project in Saskatchewan, while creating momentum for power plants to burn more carbon.
“You now have a plant that has two products,” he explained in a phone interview yesterday. “Yes, they produce electricity, and they’re also a factory for CO2. The more CO2 they produce, the more they can capture, and the higher their revenues are, so they have an incentive to run the plants more to capture more CO2. All in the name of reducing our CO2 emissions in order to help stave off climate change.”
“You could be nice and say this is a perverse incentive,” added Schlissel. “But when I’m alone, I just say it’s insane.”
In an IEEFA briefing note released yesterday, Schlissel said provincial utility SaskPower should not be taking a victory lap after Boundary Dam finally hit its four-megatonne carbon capture target 2½ years late. The note looks at the tortured path of a CCUS installation that was bolted on to a Saskatchewan coal plant almost a decade ago.
“SaskPower is basically bragging about being only 2½ years late to achieve a goal,” but “Boundary Dam 3’s operating performance hardly shows that the capture technology is financially viable,” Schlissel said in an IEEFA release. “The plant has barely achieved its design capacity of capturing 3,200 tonnes of CO2 on any single day and has never done so over any extended period.”
SaskPower touted its big achievement in a March 31 release, just a day after it hit the four-megatonne milestone. “This facility was the first of its kind in the world and stands as a strong example of our government’s commitment to supporting innovation,” said Don Morgan, the provincial minister responsible for SaskPower. “We believe finding technological solutions such as CCS are crucial for transitioning to a prosperous, low-carbon future.”
“The fact that SaskPower has the chutzpah to say they’re proud to have reached this goal when they should have reached it 2½ years ago?” Schlissel told The Mix. “That’s why I ended up writing this brief.”
The operating data for Boundary Dam paints a rather less rosy picture then the provincial media release. “SaskPower commends itself for improving the performance of Boundary Dam 3’s carbon capture facility through upgrades made during plant outages,” Schlissel writes in the briefing note. But “through April 2018, its first 3½ years of operation, the carbon capture facility only achieved its design capacity for three days. A review of more recent operating data suggests that it has failed to achieve this design goal any more frequently in the almost three years since—hardly a milestone to be proud of.”
In the end, Boundary Dam downgraded its capture target from 90 to 65% of the carbon dioxide the accompanying coal plant produces, “another ‘milestone’ for which the company should not be commended,” Schlissel writes.
The briefing note suggests three possible reasons the project missed its targets: problems with the carbon capture technology, lower electricity (and therefore CO2) output in the coal plant, or a conscious management decision to capture less carbon for economic reasons. “All of these represent serious risks for any project,” Schlissel warns, and “increasing government subsidies or increasing the value of tax credits given to developers does not eliminate these risks. It merely transfers the risk from developers to the government and its taxpayers.”
After Monday’s federal budget announcement, Schlissel said the same cost and cost recovery arguments would apply to CCS technology attached to a natural gas plant. The budget sets aside $319 million over seven years for CCUS research, development, and demonstration.
“My view is that it’s good to do a couple of these projects on gas and ‘blue’ hydrogen to test the technology, to see whether it works. to see whether it makes financial sense,” he told The Mix. “And if it doesn’t, then don’t do it.”
But while “I’m in favour of doing a couple of prototypes,” he said, “it’s crazy to give money to a lot of projects when you don’t have a tested technology, and when you’ve got alternatives like wind, solar, increasingly battery storage, and energy efficiency that can do a large part, if not all of the job.”
While there may be some reason to think CCUS will integrate better with a gas plant than with a coal facility like boundary dam, he added, the only way to find out is to run a multi-year test on a commercial-scale gas plant. “And that’s the problem. The world doesn’t have the time to try out these new technologies. So use the stuff that works. We know solar works. We know wind works. We definitely know energy efficiency works.”
At 15 megatonnes per year, the annual target for the new CCUS investment tax credit is nearly four times the capture at Boundary Dam since it opened in late 2014. Ottawa says it will announce the size of the tax incentive following a 90-day consultation period, but adds that “it is not intended that the investment tax credit be available for Enhanced Oil Recovery (EOR) projects”.
Refreshing though it might be to imagine a CCUS project that isn’t tied in with EOR, that provision could mean pulling a revenue stream away from a technology that is already uncompetitive—at a time, Schlissel said, when proponents in the U.S. are already finding that the country’s 45Q tax credit isn’t a generous enough subsidy to make the projects work.
And indeed, Saskatchewan Premier Scott Moe and Alberta Energy Minister Sonya Savage are already declaring themselves disappointed at the exclusion for EOR. Late Monday, Moe said the provision “really begs the understanding of how we actually use” carbon capture and sequestration.
Schlissel previously warned that the 45Q tax credit runs the risk of driving higher greenhouse gas emissions and producing unexpected surprises for investors.