Canada’s proposed tax credit for carbon capture technology investments — billed by the government as an emissions reduction measure — would add to fossil fuel subsidies that the government has vowed to eliminate, observers have claimed.
The diversion of billions of dollars in government funding globally to carbon capture, utilization, and storage (CCUS) technology “has not made a dent in CO2 emissions,” a group of over 400 academics and scientists said in a January 19 letter urging Deputy Prime Minister Chrystia Freeland to abandon the government’s plan for the investment tax credit.
The government proposed the credit as part of the 2021 budget and said in its 2021 Economic and Fiscal Update, released in December 2021, that the design of the credit will be outlined in the 2022 budget. “CCUS is an important tool for reducing emissions in high-emitting sectors,” the government said in a June 2021 release. But the government’s reliance on the technology may be misplaced, according to the letter to Freeland.
Carbon capture “is not a negative-emissions technology,” the letter says. It's "neither economically sound nor proven at scale, with a terrible track record and limited potential to deliver significant, cost-effective emissions reductions,” it asserts, adding that more than 80 percent of U.S. CCUS projects have failed.
Carbon capture can even contribute to emissions by boosting oil production, the letter cautions. “The only existing commercially available market for captured carbon is enhanced oil recovery,” and the majority of captured carbon is being used in this way, it says.
CCUS "is about reducing emissions,” Adrienne Vaupshas, spokeswoman for the Office of the Deputy Prime Minister and Minister of Finance, told Tax Notes in an emailed statement. “It is not intended that the tax credit be available for enhanced oil recovery projects,” she said, adding that the credit is supposed to be available for applications of the technology across a range of industrial subsectors, like concrete, plastics, and fuels.
Canada’s Office of the Parliamentary Budget Officer recently issued successive reports estimating that while resource-related tax deductions for the oil, gas, and coal mining sectors cost the government over C $9 billion in federal tax revenue between 2015 and 2019, oil and gas extraction and support businesses contributed C $3.1 billion in federal taxes over the same period. A carbon levy exemption for agriculture was estimated to cost C $179 million in 2019, and the cost is expected to increase to over C $1.5 billion in 2030, the office said.
Backlash against the design of fiscal policies ostensibly aimed at combating climate change has proliferated perhaps as quickly as the policies have themselves. Critics have highlighted continued subsidies and incentives benefiting high-emitting sectors from governments that have net-zero targets for greenhouse gas emissions and obligations under the Paris Agreement.
The watering down of a commitment to move away from fossil fuel subsidies in the final climate pact produced at COP 26, the U.N. Climate Change Conference, in November 2021 was similarly controversial, and the OECD recently has leveled critiques against some national climate policies. Denmark could benefit from a minimum tax rate on carbon emissions, according to a December 2021 OECD economic survey, and in its January 22 economic survey of Switzerland, the OECD said exemptions to that country’s carbon tax compromise its effectiveness, and that plans to raise the tax have stalled.