Canada’s Carbon Management Strategy Reveals Policy and Regulatory Challenges for CCUS
The government will need to address existing gaps and inefficiencies to ensure a favorable environment for CCUS projects over the longer term.
At the end of September, the government of Canada published its Carbon Management Strategy, which clarifies Ottawa’s vision of the carbon management industry through 2050. The document highlights five priority areas, where government action is required to reinforce Canada’s international competitiveness, including policies and regulations. While the country’s CCUS regulatory and legal regime is in the top-five most attractive regimes among 56 jurisdictions, according to the Global CCS Institute, there is still significant room for improvement.
Interprovincial CO2 transport could be challenging
The federal government has the authority over cross-border CO2 pipelines and the review of such projects could prompt delays. Interprovincial carbon pipelines are regulated by the Canada Energy Regulator (CER), and this type of pipelines is likely to trigger a federal impact assessment under the 2019 Impact Assessment Act (IAA). The ruling Liberal Party promoted the IAA as a streamlined framework that would ensure shorter review timeframes and accelerated project approvals relative to the previous Canadian Environmental Assessment Act (CEAA, 2012). However, this does not seem to be the case. For example, Cedar LNG (British Columbia), one of the first projects to enter the updated impact assessment process, completed it in 3.5 years. This is approximately the same amount of time it took Bay du Nord, an offshore oil project in Newfoundland and Labrador, to get a go-ahead under the CEAA.
Moreover, around a dozen other projects remain at the Planning phase of the impact assessment process, which is intended to address any potential project-related problems and concerns at an early stage. The phase has a legislated limit of 180 days, but the IAA allows for extensions and suspensions, which significantly increase the number of total days, sometimes exceeding the limit by over 500 days. The situation fuels uncertainty and can also lead to delays as more projects stack up at the agency straining its capacity to process the growing number of proposals. Such a protracted procedure is likely to become a major obstacle to CCUS projects over the longer term, if and when the demand for interprovincial pipeline transportation of CO2 emerges.
Offshore carbon storage framework is yet to be developed
The federal and subnational governments in the Atlantic provinces will need to implement multiple legislative and regulatory amendments to enable offshore CO2 storage. Newfoundland and Labrador and Nova Scotia are interested in sequestering carbon under the seabed and repurposing oil and gas infrastructure for offshore carbon transportation and storage. To enable this, the federal government will need to amend the 1999 Canadian Environmental Protection Act (CEPA) to allow the disposal of carbon dioxide in offshore regions. In addition, new regulations will be required to lease offshore acreage for CO2 storage activities, but the expertise of existing regulatory bodies (offshore boards) is likely to facilitate relatively quick development of such rules and procedures. Moreover, the federal and provincial authorities will need to clarify the regulations governing the repurposing of hydrocarbon facilities for CO2 transportation and storage as well as the issues associated with longer-term liability for stored carbon.
In the meantime, the provinces in East Canada may consider importing carbon dioxide from other parts of the country, which again raises the issue of interprovincial pipelines and project approval timelines. The role of Newfoundland and Labrador and Nova Scotia as the potential storage locations for carbon dioxide coming from elsewhere is likely to strongly depend on the adoption of the related federal regulations and improvements to the IAA review process. Ottawa will also need to clarify if offshore carbon storage qualifies as ‘designated project’ under the IAA requiring a federal impact assessment, which could significantly affect development schedules.
Incentives: the mix of provincial and federal actions
Aspiring provinces will need to modify their regulatory frameworks to be eligible for the federal Investment Tax Credit (ITC) for CCUS. This year, British Columbia has become the third province (along with Alberta and Saskatchewan) where companies can claim the federal ITC. Provincial governments could also introduce their incentives to provide additional support to CCUS developments. Alberta, Canada’s leader in CCUS deployment, is expected to announce its tax credit before the end of 2023, which is likely to be set at 12% of eligible project’s capital costs (in addition to 50% ITC). In other provinces, the amount of potential support is likely to be more limited than in Alberta, given its financial capacity to provide material support thanks to sizeable oil sands revenue.
In offshore Canada, the situation is likely to be more complicated, with larger burden falling on the federal shoulders. For example, Newfoundland and Labrador is financing a $50-million program to encourage oil and gas exploration, and has made several unsuccessful attempts to convince the government in Ottawa to provide additional tax credits to spur offshore E&P activity. The provincial authorities are unlikely to offer generous CCUS support, and the federal government is reluctant to increase the ITC rate. However, the potential introduction of carbon contracts for difference (CCfDs) as an investment tool of the C$15-billion Canada Growth Fund could be an alternative route to supporting offshore carbon storage. CCfDs would backstop future carbon price and make sure that investors are still eligible for compensation if the price regime changes significantly or is scrapped altogether by a new government.
Regulations... What else?
Canada has a track record of major disruptions to pipeline projects and it is possible that carbon dioxide infrastructure could face similar challenges. In early 2020, protests against Coastal GasLink, a 670-kilometer pipeline to supply the LNG Canada project in British Columbia, were accompanied by large-scale railway blockades. Another pipeline project, Trans Mountain Pipeline Expansion, recently faced a lawsuit from a First Nation group, related to its proposed change of route. Pipelines remain a contentious issue in Canada, especially when they cross traditional lands of Indigenous groups, and CO2 pipelines (either intra- or interprovincial) could trigger strong opposition. In addition, environmental groups are likely to pursue legal challenges against CO2 pipeline operators, given their overall criticism of the development of the CCUS industry in the country. Although the latest Carbon Management Strategy suggests that the federal government would prioritize meaningful stakeholder engagement to mitigate public concerns, the risk of protests, disruptive events, and lawsuits is non-negligible.