Authored by: Greg Boone, EY Canada Tax Energy Market Leader and Krista Robinson, EY Canada Partner, SR&ED and Business Tax Incentives
Canada is uniquely positioned to make a meaningful mark in the carbon capture utilization and storage (CCUS) space.
What matters most to Canadian companies investing in carbon capture utilization and storage?
Tax incentives have proven to be a valuable tool in accelerating any number of objectives. But throughout our cross-country discussions with Canadian companies on the federal government’s proposed CCUS tax incentive program, one thing became clear: the credit itself must be designed with end users in mind to work effectively.
Across industries — and especially in the energy sector — we heard again and again that a credit alone is not enough to spark capital investment in innovative CCUS solutions. The program must reflect the daily realities and constraints that organizations will face as they pour financial, human and technological resources into CCUS projects. Anything less could fail to accelerate CCUS innovation and limit the tremendous potential Canadian companies have to share.
Our expansive client conversations have yielded five principles which could serve as a guide that help policymakers shape a CCUS tax incentive program that works best for Canadian companies here and now:
Certainty and predictability make a big difference
CCUS projects require massive upfront capital investments. Organizations that take this leap need upfront certainty on the value of the incentive they’re likely to receive. There’s no room here for lack of clarity or blurry timelines. Especially as the cost of carbon itself fluctuates on the global scale, Canadian companies want clear line of sight into any proposed claims process at the front end.
A broad scope of permissible expenditures, including the cost of feasibility studies, should also be a top priority. Grant-style approaches that link credit amounts to eligible spends, offer pre-approval and are globally competitive (covering 50% to 75% of expenditures) could be a step in the right direction.
Refundable credits are more impactful
Non-refundable tax credits alone are not enough. Most of the Canadian organizations we spoke with wouldn’t be willing to take on the financial risk of a CCUS project if the credit itself is non-refundable. That’s especially important in the current market, where so many complex dynamics are at play. Companies here are looking for an immediate liquidity boost to offset capital costs. Going one step further, building in a mechanism to monetize the credits — as in US-style tax equity structures — could enhance the program with the ability to attract new market participants.
Flexibility fosters interest and participation
One-size-fits-all tax credit programs won’t work for projects of this magnitude. Given the multi-partner and collaborative nature of CCUS investments, the credit must be inherently flexible and capable of encouraging businesses to join forces or get involved. It must also improve the participant’s ability to negotiate commercial agreements with various collaborators and enable them to transfer all or some of the credit among stakeholders. These considerations become even more important if the credit created is non-refundable.
Performance is a sliding scale
Innovation of this scope and scale requires multiple performance metrics. If all program participants are tied to the same definition of success, CCUS projects may be considered too risky to pursue. That risk is compounded by the fact that feasibility and effectiveness can change dramatically as a CCUS project takes shape.
Canadian companies operating in this space are looking for tax credits that incorporate a sliding scale, one that compensates for the level of uncertainty on project timing and the variability in the amount of carbon ultimately captured. This is considered table stakes by organizations aiming to better evaluate the financial and operational risks of a given CCUS project. Bonus incentives could then be incorporated when projects exceed their timing or emission-reduction targets.
Efficiency is a key program driver
Good governance is critical. But any tax credit developed must effectively safeguard the program’s integrity while ensuring the audit process is efficient enough to encourage participation. Most companies consider audit timelines a fundamental measure of effective program management. Quarterly funding certificates, upfront project approvals, third-party certification and longer timelines are also considered attractive features that could bolster program participation. Put simply: companies here expect the program to minimize costs and operate efficiently so they can focus on upfront engineering requirements, capital builds and project execution.