Carbon Dioxide Capture and Storage and Oil Sands

Contributed by Robert Lyman © 2021. Read his full bio here.

The Government of Canada is now considering the introduction of Investment Tax Credits for investments in carbon dioxide capture and storage projects, with a declared goal of avoiding 15 million tonnes of emissions per year, or about 2% of Canada’s current greenhouse gas (GHG) emissions.

A recent report from global consulting firm Wood Mackenzie claims that Canada is leading in carbon capture and storage (CCS) reduction technology. According to the report, If all proposed CCS projects in Canada came online, they could reduce up to 115 million tonnes of CO2.

https://www.mining.com/canada-a-global-leader-in-carbon-capture-report/

Something isn’t quite right about the Wood Mackenzie claims, at least as reported in the press. Canada’s total GHG emissions in 2019 were 730 million tonnes, so 115 million tonnes would be 16 percent of that. The annual carbon dioxide emissions from the oil sands are about 70 million tonnes per year. There is no way that currently proposed CCS projects could more than completely offset the emissions from the oil sands. Perhaps the Wood Mackenzie estimates relate to emissions reductions over the lives of the projects, meaning that in total they would remove perhaps six million tonnes per year.

The more important question is how much would the proposed investment tax credit affect the economic viability of a typical CCS project.

Globally, there have been several studies and pilot projects to test the viability of CCS as a technology. The information arising from these studies has differed considerably depending on the interests of those conducting them.

What Would be the Effects of the Tax Credit?

The costs, and qualifying expenditures, of a carbon capture and storage project will vary depending on several factors including:

• The overall capital costs of the project
• How concentrated is the stream of CO2 produced (i.e. how easy it is to capture)?
• The operating costs
• The costs to transport the CO2 to the storage site
• The storage costs
In a paper written in 2017 [1], Professor Gordon Hughes of the University of Edinburgh wrote that analyses of the costs of carbon capture rely heavily on what are called Nth-of-a-kind (NOAK) estimates, i.e. after a reduction in costs due to economies of scale and learning.

“With that warning, I will rely upon the review of NOAK CCS costs published by Rubin et al in 2015. These estimates imply that a new supercritical coal plant with a net capacity of 800 MW (close to the average for new plants in China) would cost $2.2 billion without carbon capture and $3.85 billion with carbon capture (see Appendix E). The cost of retrofitting an existing coal plant of this size would be at least $2 billion and could be as high as $2.5 billion if scrubbers and other environmental controls were required. For a plant operating with a load factor of 60% – the average load factor for Chinese coal plants in 2015 was less 50% – the NOAK cost of adding carbon capture to a new supercritical plant would be $90–100 per tCO2 reduction in emissions. Retrofitting an existing plant would push the cost up to $120–140 per tCO2 depending on plant’s age and thermal efficiency.”[2]

A 2018 paper [3] that contained a commercial engineering cost breakdown concluded that the levelized costs would range from US $95 to US $232 per tonne.

The International Energy Agency issued a report in February 2021 [4] in which they stated that the cost of carbon capture can vary greatly by source, from a range of US$15-25 for industrial processes producing “pure”, or highly concentrated, CO2 streams (such as ethanol production or natural gas processing) to US $40-120 per tonne for processes with “dilute” gas streams, such as cement production, oil sands production and power generation. To illustrate, the IEA estimated the levelized cost of CO2 capture in 2019 to range from US $40-80 per tonne from power generation and from US $40 to $100 per tonne from iron and steel production.

I found no authoritative estimates of the costs of retrofitting an existing oil sands plant. Based on the range of estimates cited previously, it is probably realistic to say that the costs may be around CDN$100 per tonne for first plants, with the possibility that future plants will cost less, perhaps as low as CDN$60 per tonne. Finance Canada, no doubt with plenty of input from Environment and Climate Change Canada and perhaps Natural Resources Canada, will examine quite closely what the likely costs will be and how they will vary by industry. Transportation and storage costs may average about CDN$7-14 per tonne, but that presumably will not be covered by the Investment Tax Credit.

The Canadian Association of Petroleum Producers (CAPP) has recommended that the rate of the CCS tax credit be set at 75% of qualifying expenditures. A tax credit will normally reduce the tax that a company pays on its taxable income, so it must have taxable income to benefit from it. Less often, tax credits are refundable, meaning that a company can receive a financial benefit even if it has no taxable income. It would be unusual for a CCS tax credit to be refundable.

Assuming that most of an oil sands CCS project’s incremental costs were judged to be eligible, and CAPP’s proposed rate were accepted, the value of the tax credit could be (75% of $100=) CDN$75 per tonne. This would leave the producer paying only CDN$25 per tonne (plus the transportation and storage costs) and the federal taxpayer providing a CDN$75 per tonne subsidy.

If this were the means of reducing emissions by 15 million tonnes per year, the annual taxpayer costs would be (15 million times $75=) CDN$1.125 billion.

Could such a tax benefit be extended via CCS to cover all current oil sands emissions of about 70 million tonnes per year? If that entire volume of emissions were somehow to qualify for tax credits and the cost of capture decline, the annual cost to taxpayers could rise to (70 million times $60 per tonne =) CDN$4.2 billion per year. Of course, to this would be added the cost of similar tax credits for other industries.

The producing industries would also save the carbon dioxide taxes otherwise payable. With carbon dioxide taxes set to rise to at least CDN$130 per tonne by 2030, the total benefit to an oil sands producer could be ($130 plus $60=) CDN$190 per tonne. As oil prices seem likely to rise, that may be more than enough to provide an incentive for continued production. It is easy to see why the oil industry would lobby for it.

Is Such an Outcome Likely?

The federal government is only committed to providing a tax credit for enough projects to capture and store 15 million tonnes per year. The construction of such projects will take a number of years. It could easily be five to seven years before the effects of the initial tax credit can be seen and evaluated by Finance Canada.

Assuming a decision were taken to continue and expand the credit, there are many unknowns about how this would unfold. A tax credit of 50% or less or a narrowly restrictive definition of which project costs would be eligible for the credit would reduce its benefit to oil sands producers and its costs to taxpayers. Environmentalists have opposed CCS on principle, viewing it as a “back of the tailpipe” approach to emissions reduction and as allowing continued oil and gas production, which they view as unacceptable. The Liberal government, and taxpayers in general, may resist the prospect of billions of dollars per year in “tax subsidies” to the oil industry. There may not even be enough CO2 storage sites (typically former coal mines or other geological structures of sufficient integrity to prevent the release of the stored CO2).

In a rational policy world, prospects for tax credits and for increased use of CCS would depend on its cost of reducing GHG emissions compared to other technologies. In Canada to date, however, government subsidies and climate policies in general have largely disregarded considerations of commercial viability and cost/benefit. I offer the examples of massive subsidies to renewable energy, ethanol, electric vehicles and mass transit as evidence of that point. Policies have been driven by a combination of ideology and politics, and that may also be the case with respect to CCS.

Everything considered, the Wood Mackenzie report, and the optimism it has prompted, seem premature.

References:

[1] Gordon Hughes, The Bottomless Pit: The Economics of Carbon Dioxide and Storage. Global Warming Policy Foundation, 2017

[2] Ibid

[3] David Keith et al, A Process for Capturing CO2 from the Atmosphere, DOI, 2018

[4] Adam Baylin-Stern and Niels Berghout, Is Carbon Capture Too Expensive? International Energy Agency, February 17, 2021