Prime Minister Justin Trudeau is rolling out one of Canada’s largest single industrial tax incentives to fund carbon capture projects as his government tries to deliver on ambitious climate goals by offsetting emissions from the country’s energy sector.

In a federal budget unveiled on Thursday, Trudeau proposed a refundable investment tax credit to encourage the country’s oil and gas companies to move more quickly to lower emissions.

From 2022 through 2030, the investment tax credit rates would be set at 60% for investment in equipment for direct air capture projects, 50% for equipment in all other carbon capture projects, and 37.5% for transportation, storage and use. To encourage companies to invest more quickly, these rates will be halved for the period from 2031 through 2040.

The tax credit is expected to cost C$2.6-billion ($2.1-billion) during the first five years, and about C$1.5-billion annually until 2030.

Carbon capture projects permanently store carbon dioxide emissions before they are released into the atmosphere. In Canada, the government is relying on this technology to allow an oil and gas sector that accounts for about 10% of the country’s economy to continue production while still meeting the government’s 2030 emissions-reduction goal.

“In the largest economic transformation since the Industrial Revolution, the world economy is going green,” Deputy Prime Minister and Finance Minister Chrystia Freeland said in a statement. “Canada can be in the vanguard, or we can be left behind.”

Tax credits for carbon capture, utilization, and storage technologies are a contentious part of the climate change debate: environmental groups view them as a fossil fuel subsidy that will delay a transition to clean energy, while advocates see them as a way to ensure energy security while more renewable and clean energy sources are built.

With carbon-intensive businesses facing growing scrutiny from climate-conscious investors, Canada’s oil sands companies announced a goal to achieve net-zero carbon emissions from operations by 2050, mostly through carbon capture projects with government support.

The country’s largest producers have formed a group called the Oil Sands Pathways to Net Zero, and estimate carbon capture projects will cost about C$75-billion over three decades. The group is pushing for policies similar to those in Norway and the Netherlands, where roughly 75% of the cost of such projects was covered by public funds.

Canada has a significant opportunity to establish itself as a leader in this area, according to a report led by Toronto-Dominion Bank chief economist Beata Caranci. The country is one of the few that have made inroads in developing and deploying this technology, she wrote, and has a strong dependence on emissions-intensive sectors planning to use it.

CRITICAL MINERALS
Apart from energy, resource-rich Canada is also abundant in critical minerals that are essential for industries like electric vehicles, clean technology and computing. The 2022 budget proposes to provide up to C$3.8-billion over eight years to implement Canada’s first Critical Minerals Strategy.

The investment in critical mineral mining and processing is among the flagship initiatives in this year’s budget that would help ensure medium-term growth for the country, according to a senior government official.

Specific measures to support critical mineral projects include the introduction of a new 30% tax credit for mineral exploration expenses and up to C$1.5-billion in infrastructure investments. The tax credit would apply to exploration expenditures on minerals such as nickel, lithium, cobalt, graphite and copper.