[co-author: Lillian Liu - Articling Student]

Government of Canada Tables Clean Tech ITC and CCUS Tax Credit and Alberta Government Announces New Alberta Carbon Capture Incentive Program

On Tuesday, November 28, the Federal Government released a Notice of Ways and Means Motion for the implementation of certain provisions of the November 2023 Fall Economic Statement and March 2023 Budget. On the same day, the Alberta Government introduced a new Alberta Carbon Capture Incentive Program (ACCIP). Such announcements were made ahead of the annual COP28 climate conference being held in Dubai, United Arab Emirates.

The Notice of Ways and Means Motion represents the latest round of proposed legislation tabled by Parliament on measures such as the Carbon Capture, Utilization and Storage Tax Credit (CCUS Tax Credit), Clean Technology Investment Tax Credit (Clean Tech ITC), and labour requirements relating to these credits. Proposed legislation for the latter two measures was initially introduced on August 4, 2023 (the August Proposals) and we previously discussed some of these incentives in our blog, Federal Government Releases Legislative Proposals for Clean Technology Investment Tax Credit.

The Alberta Carbon Capture Incentive Program (ACCIP) represents the provincial government's response to emissions reduction, providing operators with a grant of up to 12 percent for capital costs of new facilities relating to the adoption of carbon capture, utilization and storage (CCUS) technologies.

Federal Tax Incentives

Notice of Ways and Means Motion

The provisions tabled by Parliament in the Notice of Ways and Means Motion on the CCUS Tax Credit, the Clean Tech ITC, and the labour requirements include some significant changes to the August Proposals.

Changes to the CCUS Tax Credit were largely of a technical nature. Some of the more notable changes include:

• Some changes to the definition of dual-use equipment, including but not limited to:
  • to exclude equipment used for natural gas processing, or acid gas injection;
  • to include electricity transmission equipment that transmits electricity that is generated by other dual use equipment;
  • to include distribution equipment that distributes electrical or heat energy; and
  • including some equipment that is physically and functionally integrated with some other dual use equipment, provided it is part of one of the systems itemized by the legislation.
• A clarification to the definition of "first day of commercial operations" to be the day 120 days after carbon dioxide is first captured, and a proviso that such capture must be "on an ongoing operational basis."

Further, the definition of "non-government assistance" has been amended to ensure that any direct government assistance will not be included in the definition. This ensures that the CCUS Tax Credit will not be reduced by such assistance. This is particularly important to ensure that the CCUS Tax Credit is not reduced by other government incentives or subsidies (such as the ACCIP).

Details of the changes to the CCUS Tax Credit and labour requirements will be further discussed in a future article by the Bennett Jones team.

Changes to the Clean Tech ITC include:

• in the context of the Clean Tech ITC, the addition of a recapture event reporting requirement, under which the taxpayer is required to notify the Minister where a recapture event occurs (i.e. where Clean Technology Property is converted to a non-clean technology use, is exported from Canada, or is disposed of);
• the applicable time period for recapture was reduced from 20 to 10 years;
• partnership recapture provisions which provide that if clean technology property is exported from Canada or converted to a non-clean technology use, or is disposed of, then recapture will apply equal to the lesser of the amount of Clean Tech ITC claimed by members of the partnership, and
• allowance of the Clean Tech ITC to be claimed by real estate investment trusts.

New partnership provisions were added that essentially provide:

• that the allocations of clean economy tax credits (defined to include the CCUS Tax Credit and Clean Tech ITC) to limited partners from partnerships shall not exceed the limited partner’s at-risk amount in any fiscal period;
• that allocations of clean economy tax credits shall not be unreasonable, having regard to the capital invested in, worked performed by members of the partnership or other relevant factors;
• that government or non-government assistance in respect of a clean economy expenditure (defined to be either a qualified CCUS expenditure or the capital cost of clean technology property) received by a member of a partnership shall be deemed to be received by the partnership; and
• a tiered partnership rule that provides that members of a particular partnership that is a member of another partnership is deemed to be a member of the other partnership.

Fall Economic Statement

In the recent Fall Economic Statement, released November 21, 2023, the Federal Government presented updates on previously announced clean energy incentives.

Among the announcements were further inclusions to the Clean Tech ITC and investment tax credit for clean electricity (the Clean Electricity ITC) for equipment that produces electricity, heat, or both electricity and heat from waste biomass.

Additionally, further proposals were announced for the investment tax credit for clean hydrogen (the Clean Hydrogen ITC), including:

• providing further details to the previously announced inclusion of ammonia to the Clean Hydrogen ITC at a 15% rate, specifically providing that such equipment is eligible for inclusion where:
  • the taxpayer uses their own hydrogen feedstock for ammonia production, which is sourced from clean hydrogen projects of the taxpayer which are eligible for the Clean Hydrogen ITC (the Clean Hydrogen Project);
  • the Clean Hydrogen Project must have sufficient production capacity to satisfy the needs of the ammonia production facility; and
  • if the Clean Hydrogen Project is not co-located with the ammonia production facility, the taxpayer must demonstrate the feasibility of transporting the hydrogen to the ammonia production facility;
• dual-use equipment used in both ammonia production and hydrogen production would be allocated between the hydrogen and ammonia equipment based on the relative use of the equipment vis-à-vis hydrogen and ammonia;
• allowing the use of renewable natural gas (RNG) and power purchase agreements to be eligible for the purpose of calculating a project's carbon intensity (CI), subject to certain conditions;
• requiring that the initial project CI assessment process be validated by a third party;
• requiring that projects be subject to a one-time verification, based on a five-year compliance period; and
• providing a recovery mechanism for the tax credit depending on a project's verified CI.

The recovery mechanism that will apply appears similar to the one provided for the CCUS Tax Credit and will essentially clawback the amount of Clean Hydrogen ITC claimed in excess of the amount of Clean Hydrogen ITC that should have been claimed based on the verified CI tier of project. If a Clean Hydrogen Project that supplies an ammonia production facility exceeds the threshold of 4 kilogram per carbon dioxide equivalent (such that the Clean Hydrogen Project would not longer qualify for the Clean Hydrogen ITC), then the entire amount of Clean Hydrogen ITC claimed for the ammonia production facility would also be clawed back.

There will be a de minimus threshold which will provide that projects that have a verified CI of 0.25 kilogram per carbon dioxide equivalent higher than their original assessed carbon intensity will not be subject to recovery. Interest will be charged on amounts clawed back from the time the Clean Hydrogen ITC was claimed.

Carbon Contracts For Difference

Another key component of the Fall Economic Statement commitment from the federal government that up to $7 billion in federal funding will be allocated from the Canada Growth Fund to carbon contracts for differences and offtake agreements (CCFDs), the purpose of which would be to establish certainty/allow parties to lock-in or hedge around a long-term future national carbon price.

Such pricing certainty afforded by CCFDs will in turn provide assurance and impetus for proponents evaluating the substantial capital investments required for GHG abatement projects, and may provide better certainty for carbon credit markets.

Key details around the parameters of the CCFDs still need to be formulated, including what types of projects will be prioritized and how many projects the CCFDs will support. The CCFDs have been touted by some commentators and policymakers as a further means by which Alberta and Canada can match or exceed incentives offered by the U.S. under the Inflation Reduction Act to attract decarbonization projects.

Alberta Carbon Capture Incentive Program

Modelled after Alberta’s petrochemicals incentive program which offers similar funding, the ACCIP is intended to support the development of CCUS infrastructure and technologies by providing businesses that incorporate such technologies into their operations with a grant of up to 12 percent for new eligible CCUS capital costs.

A variety of industry sectors will be eligible for the grants including oil and gas, petrochemicals, power generation and cement production. Grants will be distributed to operators on an installment basis over three years after the project begins commercial operation. Notably, as payment under ACCIP will not be received until after a project achieves commercial operation, this differentiates ACCIP from the CCUS Tax Credit, which is payable annually for qualified CCUS expenditures incurred during the year.

In the next 10 years, the Government expects to provide between $3.2 to $5.3 billion of support through the program, some of which will come out of the TIER program.

Further details on the ACCIP are expected to be released in spring of 2024, and the press release notes that funding will be available once the Federal government has enacted the CCUS Tax Credit and related supports, such as the CCFDs.

It is unclear at this stage whether funding under ACCIP will apply retroactively to eligible CCUS capital costs already incurred in the course of CCUS project development. While precise details around how the ACCIP and the CCUS Tax Credit will interact are not yet available, the initial rollout of the ACCIP indicates that the intent is for it to build on the CCUS Tax Credit, which indicates that proponents will have access to both programs in a complementary fashion.

Conclusion

The recent Notice of Ways and Means Motion released by the Federal Government presents significant changes to the CCUS Tax Credit, Clean Tech ITC and labour requirements legislation as provided by the August Proposals, that will impact energy producers across Canada. Most importantly the tabling of this legislation signals the Federal government’s intention to finally get these incentives enacted, in order to provide certainty to businesses looking to invest in these clean technologies in a competitive world market.

The 2023 Fall Economic Statement also provides additions and clarifications to the Clean Tech ITC, Clean Electricity ITC and Clean Hydrogen ITC.

For operators in Alberta, the ACCIP provides an additional economic incentive to invest in CCUS technologies. The incentive will likely continue to drive CCUS development in Alberta, and is aimed at ensuring that Alberta continues to be a global leader in CCUS development.