Investment Tax Credit for Carbon Capture, Utilization and Storage

As initially proposed in Budget 2021, the government introduced an investment tax credit (ITC) for capital invested in Carbon Capture, Utilization and Storage (CCUS) projects. This note contains the costing of the ITC for CCUS. It covers the announcement in Budget 2022 which introduced the refundable tax credit for CCUS as well as Budget 2023 which announced revisions to the credit.

The credit will apply to eligible expenses incurred starting on January 1, 2022.

From 2022 through 2030, the CCUS investment tax credit (ITC) offers a refundable ITC of up to:

• 60% on capture equipment using direct ambient air,

• 50% on other capture equipment, and

• 37.5% on qualified carbon transportation, storage or usage equipment.

From 2031 to 2040, the investment tax credit rates will be halved and fully phased out after 2040.

Eligible jurisdictions include Alberta, Saskatchewan and British Columbia.[^1]

In Budget 2023, the government expanded eligibility to include dual use equipment that produces heat and/or power or that uses water. Dual use power or heat production equipment would be eligible only if the energy balance is expected to be primarily used (i.e., more than 50 per cent) to support the CCUS process or hydrogen production that is eligible for the proposed Clean Hydrogen Investment Tax Credit.

The PBO estimates that the cost of the CCUS investment tax credit will be $5.7 billion from 2022-23 to 2027-28.

• All years are estimates.
• Estimates are presented on an accrual basis as would appear in the budget and public accounts.
• A positive number implies a deterioration in the budgetary balance (lower revenues or higher spending). A negative number implies an improvement in the budgetary balance (higher revenues or lower spending).
• Totals may not add due to rounding

Confidential data was received from Natural Resources Canada (NRCan) and Finance Canada. NRCan provided an extensive list of anonymized current and proposed projects.[^2] Data provided by Finance Canada included the 2021 consultations with stakeholders.[^3] In addition to the confidential data provided, when available, we incorporated insights from publicly available company statements delineating new CCUS projects.

For projects with missing capital expenditure (CAPEX), costs were assumed based on industry averages, adjusted for the size and type of project.

Company level data provided by NRCan did not include annual profiles. To estimate the annual profile, we first projected construction start and end dates. Leveraging available information on project status[^4] and size[^5], we calculated the average number of years until the project was expected to be operational, referencing industry timelines for projects of a comparable scale. Subsequent adjustments were then made on a project-by-project basis.

After computing the start and end years, we derived the annual spending profiles by drawing insights from the consultation data provided by Finance Canada which included yearly breakdowns for select projects. Using this data, we computed spending profiles for each company, taking into consideration the project size.

Not all CAPEX is eligible for the ITC. Based on studies, we estimated that, on average, approximately 30% of total CAPEX would be eligible.[^6] Applicable ITC rates for each project were then applied.

Lastly, we adjusted for the current depreciation rates that the equipment would otherwise be eligible to receive.

In Budget 2023, the government expanded eligibility to include dual use equipment that produces heat and/or power or that uses water. Information on dual-use projects is extremely limited. We received some confidential information from Finance Canada in which companies self-indicated the use of dual use equipment. Our estimate was supplemented further with public announcements.

Momentum for CCUS investment has progressed, yet the industry continues to evolve rapidly as significant scale-up is anticipated in the near term with new policy support. Given the relatively small number of projects currently operational in Canada and globally, inherent uncertainty persists. Data received consists of projects in the early stages of planning and have incomplete and/or estimated data.

We took all projects provided as given and assumed all projects would eventually be operational. Capital cost could decrease in the future due to economies of scale and mass production which would lower the future cost of the ITC.

In situations with incomplete information, assumptions were made based on other similar projects and public data sources. The majority of projects provided and used in this estimate were anonymized. Verifying the micro data provided was not possible in most cases. 

The ITC will reduce the capital cost of the relevant capital cost allowance (CCA) classes in which the CCUS investment tax credit is claimed. When adjusting for CCA, we assumed that all corporations are taxable. This may underestimate the overall cost associated with the tax credit.

Due to limited available information, the impact of the labour requirements introduced in Budget 2023 was not considered in this note.