On November 28, 2023, the Alberta government introduced the Alberta Carbon Capture Incentive Program (“ACCIP”), a new grant offered by the provincial government to incentivize carbon capture, utilization, and storage (“CCUS”) projects located within the province. The announcement was quickly followed by the federal government’s introduction of its legislation setting out the previously announced investment tax credit for CCUS projects (the “ITC”). The ACCIP provides a 12% grant that can be coupled with the ITC to support new CCUS projects in the province of Alberta. These two incentives will collectively provide CCUS proponents with a competitive advantage in developing CCUS technology and bringing CCUS projects to completion, while helping Alberta maintain its economic growth and diversification and achieve its emission reduction targets.
CCUS technology is used to capture carbon dioxide (“CO2”) from large emission projects or, if using direct air capture, the atmosphere directly. Captured CO2 is then compressed into a liquid state and transported for storage in deep, underground geological formations or to locations where it can be used in alternative applications such as for enhanced oil and gas recovery, fertilizer production and refrigeration. CCUS may also form a crucial part of the technology needed to meet emission reduction targets in Alberta and globally.
The Alberta Carbon Capture Incentive Program
The ACCIP is intended to encourage the growth of, and investment in, CCUS technology and projects in Alberta. It is also expected to generate job growth and help Alberta reach its emission targets without negatively impacting the province’s economic growth. Many details of ACCIP are still in development, but the core characteristics were set forth by the initial announcement and a further update released on April 3, 2024.
The ACCIP will provide a 12% grant for eligible CCUS capital costs. Funding from the ACCIP will be available once the federal government has legislated its ITC, which will give clarity around the expected operation of the ITC. The government of Alberta cited a need for clarity from the federal government on “contracts for difference”. These contracts set a minimum price on CO2 for the purposes of trading carbon credits and are intended to bring much needed stability to the carbon credit market. However, the mechanism for determining a minimum price of CO2 is yet to be determined. The provincial government wants to ensure that the ITC legislation is finalized before the ACCIP is in force. The province announced it would begin funding CCUS projects in 2024. However, CCUS projects will be considered eligible retroactively to January 1, 2022. Applicants can learn if their proposed CCUS project may be eligible for the ACCIP and receive a high-level estimate of potential ACCIP benefits prior to completing the full application process, which is scheduled to open in late 2024. The ACCIP can be combined with the ITC and the Alberta government hopes that, in combination, the two programs will provide a clear competitive advantage in CCUS technology that can be demonstrated to the rest of the world.
A number of industry sectors will initially be granted eligibility for the ACCIP, including those relating to: oil sands, oil and gas production, petrochemicals, power generation, and manufacturing cement production. By incentivizing these typically high-emitting sectors to adopt CCUS technology, the Alberta government hopes such sectors will reduce their emissions and ultimately contribute to Alberta achieving its emission reduction targets. No minimum carbon capture rate applies for eligibility for the ACCIP. Also, the ACCIP is intended to include CCUS sequestration via enhanced oil recovery, which is a material difference from the ITC under which enhanced oil recovery is an excluded use.
The ACCIP will purportedly provide between $3.2 and $5.3 billion in support from 2024 until 2035. The Alberta government is predicting a large return on the ACCIP investment. It is expected that the program will generate up to $35 billion in further outside investment alongside 21,000 new jobs in the province. The ACCIP grants will be paid in three installments over three years, commencing one year after a CCUS project begins operating in Alberta. This is meant to mirror the structure of the existing Alberta Petrochemical Incentives Program. Funding sources for the ACCIP are not yet entirely known, although a portion will reportedly come from the Alberta Technology Innovation and Emissions Reduction Fund (the “TIER Fund”). The TIER Fund is financed by large industrial emitters who purchase carbon credits in order to meet their carbon pricing and emission targets.
Canada’s CCUS Investment Tax Credit
The federal government first announced its CCUS tax credit in the 2022 Canadian Federal Budget to similarly incentivize the funding and development of CCUS projects across Canada. The CCUS tax credit has since been enacted into law, by way of amendments to the Income Tax Act (Canada).
The refundable CCUS ITC is equal to a specified percentage of eligible expenses incurred in respect of qualified CCUS projects in Canada. It will be applied retroactively to expenses incurred from January 1, 2022.
The specified percentage of the CCUS ITC varies between the three qualified CCUS project categories. These categories and their respective ITC percentages are: 60% for equipment used in direct air capture; 50% for equipment used in other CCUS projects (i.e., projects that do not use direct air capture); and 37.5% for equipment used in the transportation, storage, and use of captured CO2.
Qualified CCUS projects will be eligible for the ITC on eligible expenses incurred through the 2030 tax year. Following this, each rate will be reduced by half from 2031 through the 2040 tax year.
The CCUS ITC provisions the previously announced labour requirements, which include both wage and apprenticeship training conditions. If a qualified CCUS project does not comply with these labour requirements, the applicable ITC rate will be reduced by 10% accordingly. Proponents of projects seeking to claim the full amount of the ITC will need to ensure they meet these labour requirements or risk having their eligible ITC rate reduced.
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Chrysten E. Perry, KC, is Managing Partner of the Stikeman Elliott Calgary office, Co-Head of the Energy Group and a member of the Partnership Board, as well as a partner in the Commercial Energy, Corporate and Projects and Infrastructure Groups.
Julie D’Avignon is a partner and head of the Tax Group at Stikeman Elliott, Calgary, whose practice focuses on providing tax advice on mergers and acquisitions, corporate reorganizations, equity investments, debt financings, with expertise in oil and gas, mining and renewable energy projects.
Kurtis Reed is a partner in the Commercial Energy, Corporate, and Projects & Infrastructure Groups, whose practice focuses on commercial and project development arrangements, primarily in the energy sector.