Carbon capture and hydrogen tax credits expected to cost the government over $11 billion: PBO

A pair of new analyses from the Parliamentary Budget Office (PBO) finds the federal government intends to provide over $11 billion to companies investing in carbon capture and hydrogen technologies.

The findings published Thursday are based on cost estimates for Ottawa’s carbon capture, utilization and storage (CCUS) investment tax credit and its clean hydrogen investment tax credit. The PBO estimated the CCUS tax credit would cost $5.7 billion over six years, while the clean hydrogen tax credit would cost $5.7 billion over five years.

The latest figures could cost the public almost $1 billion more than previously expected, according to the analysis. However, there is no upper limit to the CCUS investment tax credit as designed, meaning the public could be on the hook for even more.

The CCUS tax credit allows for reimbursements of 37.5 per cent to 60 per cent of carbon capture equipment, while the clean hydrogen tax credit allows for refunds ranging between 15 per cent and 40 per cent based on how carbon-intensive the hydrogen is.

Both tax credits are intended to attract private investment by refunding significant portions of the cost to companies. However, as previously reported by Canada’s National Observer, they are not direct investments. Canada isn’t taking an equity position in the companies it's financing, meaning the federal government subsidizes private sector profits by taking on some of the risks.

“The federal government is making over $120 billion in historic investments to grow Canada’s clean economy, including unprecedented investment tax credits that support zero- and low-carbon emissions projects,” said Deputy Prime Minister and Finance Minister Chrystia Freeland’s spokesperson Katherine Cuplinskas. “The CCUS and clean hydrogen investment tax credits will be in place for over a decade because we know that Canada cannot afford to miss out on the opportunities of the clean economy and we want to incentivize businesses to reduce their emissions as soon as possible.”

The tax credits were unveiled in last year’s federal budget. That budget was dominated by corporate subsidies, which a senior official called the “workhorse” of the government’s plan to get to a net-zero emissions economy — a fuzzy term generally understood to mean a decarbonized economy where any planet-warming greenhouse gas emissions created are offset.

However, environmental advocates warn these investment tax credits undermine promised climate action. Canada has pledged to eliminate “inefficient” fossil fuel subsidies, which for some is difficult to square with billions of dollars being used to subsidize investments in carbon capture technology used in the oil and gas industry.

Finance Canada says the carbon capture tax credit is not an “inefficient” fossil fuel subsidy based on its definitions.

A 2022 study from the Institute for Energy Economics and Financial Analysis (IEEFA) examined 13 flagship carbon capture projects around the world and found 10 of them failed or underperformed by wide margins compared to their designed capacity.

IEEFA also found “nearly three-quarters” of captured carbon dioxide was reinjected into oil and gas fields to allow for even more extraction; called “enhanced oil recovery.” These findings led IEEFA to conclude that “using carbon capture as a greenlight to extend the life of fossil fuels [and] power plants is a significant financial and technical risk.”

Finance Canada said using carbon capture tax credits for enhanced oil recovery will not be allowed.

“The oil and gas industry has been making windfall profits and polluting without limit while Canadians struggle with the cost of living and climate impacts,” said Climate Action Network Canada executive director Caroline Brouillette. “Now, the Parliamentary Budget Office has found that these two tax credits put taxpayers on the hook for more than $11 billion, much of which will go to fossil fuel companies.

“We need public money for projects that create good green jobs and support community-led renewable energy — not for dangerous distractions that offer a lifeline to a sunset industry.”

In a comprehensive report published last year, the Intergovernmental Panel on Climate Change, widely regarded as the gold standard of climate science, described carbon capture, utilization and storage as the most expensive and least effective option to reduce emissions.