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Carbon capture rollout slows down as industry and government disagree over who should be at risk

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Companies have said in order for carbon capture projects to make financial sense, they need some kind of assurance that a future government won't come in and eliminate the industrial carbon price.

The question of who should bear the financial risk for pricey carbon capture and storage projects has become a stumbling block slowing the technology’s adoption in Canada.

It has been half a year since privately held Entropy Inc. inked a deal with the federal government that saw Ottawa agree to underwrite much of the risk for the company’s proposed carbon capture and storage project.

Entropy said it would go ahead with its $49-million second phase of the project — located at parent company Advantage Energy’s Glacier gas plant in Alberta — after the two parties signed the first-of-its-kind deal. Called a “carbon offtake agreement,” or “contract for difference,” the deal was hailed by many as an example of what needs to be done if Canada is to see a significant rollout of carbon capture and storage.

But six months after the Entropy agreement, not a single other company has successfully negotiated a similar deal. And the bulk of carbon capture projects proposed for Canada still only exist on paper, with final investment decisions yet to be made.

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Carbon capture, or CCUS as it is often called, traps harmful greenhouse gas emissions from industrial processes and stores them deep underground. Its deployment is widely seen as being key to successfully decarbonizing the energy sector.

So what’s the holdup? It comes down in part to tension between government and industry over the perceived financial risk of CCUS investments, and differing opinions about how much of that risk should be borne by taxpayers.

“If you’re the government, you want to make sure the money that taxpayers are paying is being spent wisely,” said Entropy CEO Mike Belenkie.

He added not all carbon capture projects are the same. Their cost can vary widely based on factors like the intensity of the emissions being captured and whether the site has access to local underground storage or must invest in pipeline transportation.

“For carbon capture and storage to work, there has to be a relentless focus on picking the best projects,” Belenkie said.

Captured carbon doesn’t have any value on its own as a product, but can lower a company’s own carbon tax expenses by reducing its overall emissions. In addition, companies that deploy CCUS can generate carbon credits to sell to big polluters looking to offset their own emissions.

But companies have said in order for carbon capture projects to make financial sense, they need some kind of assurance that a future government won’t come in and eliminate the industrial carbon price, or that the bottom won’t fall out of the carbon credit market 10 years down the road and remove the expected return on investment.

That’s where carbon contracts for difference, or carbon offtake agreements, come in.

The federal government, through the $15-billion Canada Growth Fund, has committed to reaching such agreements with emitters who deploy CCUS — essentially guaranteeing that if the price of carbon falls below a certain level in the future, the fund will pay the difference.

The sticking point, though, appears to be at what “strike price” these contracts will be triggered. Entropy’s successful carbon offtake agreement saw the Canada Growth Fund agree to purchase up to 185,000 tonnes of carbon credits from Entropy for a 15-year term at an initial strike price of $86.50 per tonne.

That means if the market price Entropy can expect to receive for its captured carbon falls below $86.50, the Canada Growth Fund will step in and pay the difference.

For its part, the federal government has pledged to develop an expanded range of carbon offtake offerings tailored to different markets and their unique risks and opportunities. It has said the Canada Growth Fund — which still has $6 billion left earmarked for contracts for difference — will explore developing ready-to-go contracts for certain jurisdictions, so that each contract doesn’t have to be negotiated from scratch one by one.

That would go a long way toward removing investor uncertainty, Bernstein said.

“There are various ways you could do this, but Clean Prosperity’s recommendation is to have a standard strike price,” he said.

“You would basically design a contract that says ‘Come one, come all, at $100 a tonne’ or whatever price you choose and then let everyone that’s cheaper than that come and fill it,” Belenkie said.

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