A facade of the collector containers unit at the Climeworks AG Mammoth carbon removal plant in … [+] Hellisheioi, Iceland, on Wednesday, May 8, 2024. Once fully operational, Mammoth will be capable of capturing up to 36,000 tons of carbon dioxide a year using a technique known as direct air capture (DAC). Photographer: Heida Helgadottir/Bloomberg
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In the fight against climate change, direct air capture technologies have emerged as a crucial component of global strategies to reduce atmospheric CO2 levels. Both the United States and Canada have recognized the importance of supporting these technologies through financial incentives. The US Inflation Reduction Act (IRA) and Canada’s Carbon Capture, Utilization, and Storage Investment Tax Credit (CCUS ITC) are two major initiatives aimed at accelerating the adoption of carbon removal technologies. Both countries have the natural resources and subsurface storage capacity to become global leaders in the emerging carbon removal industry – offering not only a climate opportunity, but an economic opportunity as well.
In June, Canada passed its monumental CCUS ITC legislation as part of Bill C-59, signaling support for emerging carbon capture technologies. The CCUS ITC is a refundable tax credit that applies to eligible expenditures incurred for qualified carbon removal projects that capture, transport, store, or use carbon dioxide (CO2) that would otherwise be released into the atmosphere. Administered by the Canada Revenue Agency (CRA) and Natural Resources Canada (NRCan), it’s a giant leap forward for green tech innovation in Canada and presents a promising economic avenue for the nation.
While monumental, Canada’s CCUS ITC follows a similar law as that of its southern neighbor. The US passed the Inflation Reduction Act (IRA) in 2022, which focuses on reducing greenhouse gas emissions and promoting clean energy initiatives, among other important elements. Both meant as tax incentives, the Inflation Reduction Act has already enhanced or created 20 tax incentives for clean energy and manufacturing, including the 45Q production tax credit, a credit of up to $130 per tonne of CO2 captured using direct air capture (DAC) technologies.
Canada’s targeted investment tax credit lowers capital costs
While still in its infancy, the CCUS ITC is intended to incentivize carbon capture and storage companies, like Deep Sky (the carbon removals project developer where I work), to pursue projects with fervor in the three approved Canadian provinces: Alberta, BC and Saskatechewan. In Canada, there are already eight commercial carbon capture facilities in operation, in Alberta or Saskatchewan, according to Natural Resources Canada. That includes five commercial-scale carbon management projects, along with three carbon transport and storage hubs that service multiple capture projects. And, a ninth just got off the ground – my team’s project, Deep Sky Labs, in Alberta.
Under the legislation, direct air capture projects in eligible jurisdictions can receive a 60% tax credit for equipment used to capture carbon or 37.5% for equipment used in transporting and storing carbon (it’s an either/or situation). And in Alberta, companies can receive an additional 12%. So, one company can receive up to 72% in covered capital expenses for a project, incentivizing businesses to set up shop in eligible provinces and spurring economic activity. Provinces with the tax credit will see an influx of projects, which in turn brings jobs and local spending.
The United States’ big investment in direct air capture
The US Inflation Reduction Act, signed into law in August 2022, represents one of the most significant climate investments in American history. The IRA includes a broad array of incentives aimed at reducing carbon emissions across multiple sectors, including energy, transportation, and manufacturing. Within this framework, carbon removal technologies receive substantial support, particularly through enhancements to the existing 45Q tax credit.
The 45Q tax credit, which was originally established in 2008, provides financial incentives for companies that capture and store CO2. Under the IRA, these incentives have been significantly increased. The IRA also extends the eligibility period for these credits. Previously, projects had to begin construction by 2026 to qualify, but the IRA has extended this deadline to 2032. This extension provides companies with more time to plan and implement carbon removal projects, potentially leading to a surge in new initiatives over the coming decade.
Alongside the passage of the IRA in 2022, the US pledged $3.5 billion to build four regional Direct Air Capture facilities in Texas and Louisiana. Two massive projects recently awarded DAC hub funding include Project Cyprus, a partnership between Climeworks, Battelle, and Heirloom, and the South Texas DAC Hub led by 1PointFive, a subsidiary of Occidental Petroleum. Calls for additional funding and new projects are currently underway.
Comparing the US and Canada carbon removal incentives
Unlike the US IRA, which has a broad and flexible approach to carbon removal, Canada’s CCUS tax credit is more targeted. It’s specifically designed to support large-scale industrial projects, particularly in sectors like oil and gas, cement, and steel production. This focus aligns with Canada’s broader climate strategy, which includes reducing emissions from heavy industries while also maintaining economic competitiveness.
Another key difference between the US and Canadian incentives is the timeline. While the US has extended its tax credit eligibility to 2032, Canada’s CCUS Investment Tax Credit is currently set to apply to projects that begin construction before 2040, with the ITC rate decreasing by half from 2031 to 2040. The longer eligibility period provides more time for capital projects to get off the ground as it can take years to do the proper community engagement, engineering, and approvals before construction can begin.
At face value, the US’ $130 per ton tax credit is significant. From a cash flow perspective, this helps to reduce operating costs once the facility is built, but does not help reduce the significant upfront capital that needs to be raised. This is particularly difficult for new technologies and first-of-a-kind projects like DAC. As they say, a dollar today is worth more than a dollar tomorrow, and the Canadian 60% rebate for upfront capital will help attract private capital investment into Canada.
The US and Canada are two leading countries poised to scale the nascent carbon removal industry to solve climate change. Both have introduced significant government incentives to kickstart new projects. The US IRA’s broad and flexible incentives are likely to spur a wide range of projects across various sectors with rebates to reduce ongoing operating costs, while Canada’s CCUS Investment Tax Credit is more narrowly focused on specific industries and help to get project capital financing off the ground. As these incentives play out over the coming years, they will provide valuable insights into the most effective ways to support carbon removal and drive meaningful reductions in global CO2 emissions.
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Publish date : 2024-09-03 01:30:00
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