Canada’s back in the low-carbon investment game, but we need to play harder to win

Governments need to get even more ambitious about guaranteeing Canada’s provincial carbon markets to reassure firms and investors.

Originally posted in the Hill Times.

Just before the holidays, the Canada Growth Fund landed a historic deal that could start positioning Canada as a competitive destination for big low-carbon projects, and pave the way for a wave of new investments.

But to make that happen, governments need to get even more ambitious about guaranteeing Canada’s provincial carbon markets to reassure firms and investors that they can expect a reasonable return on their investments in industrial decarbonization.

The federal government created the Growth Fund in 2022 as an arm’s-length vehicle to encourage private low-carbon investment, and to respond to the threat posed by the massive subsidies offered under the United States’ Inflation Reduction Act. Even as the consumer carbon tax is looking shaky, the government is doubling down on industrial carbon pricing, which enjoys broad support from industry and conservative provincial governments.

Of the Growth Fund’s $15-billion in capital, $7-billion has been allocated to carbon contracts for difference and offtake agreements which offload much of the risk of big investments in decarbonization by guaranteeing the revenue that projects can generate from carbon credits.

On Dec. 20, 2023, the Growth Fund signed its biggest deal to date with Entropy Inc., a Calgary-based company that designs and deploys modular carbon capture and storage systems. Entropy’s proven technology is already capturing 47,000 tonnes of carbon dioxide per year at parent company Advantage Energy’s natural gas wells in northwestern Alberta, and permanently storing the captured carbon deep underground.

In addition to taking an eventual $200-million equity stake, the Fund also committed to buy up to nine million tonnes-worth of Entropy’s carbon credits at a set price over the next 15 years. Entropy plans to earn credits by capturing the emissions of partner firms.   

Contracts like these can be game-changers for low-carbon projects in Canada, many of which are stuck in limbo because of investor uncertainty about the future value of carbon credits. The credits trade on provincial carbon markets where large emitters buy them to cover their carbon-pricing obligations. They’re a big part of the revenue picture for companies like Entropy.

Because of the uncertain future of Canadian carbon pricing and provincial carbon markets, innovators such as Entropy are being forced to look at options elsewhere, like the U.S., where subsidies for carbon capture projects are generous and uncomplicated. Billions of dollars worth of investment and thousands of good jobs are at stake. 

The Growth Fund’s deal with Entropy signals that Canada is back in the game, and serious about fighting to hold on to homegrown talent and capital. As Entropy CEO Mike Belenkie said, though the company has global ambitions, they now have “a clear path to accelerating growth and reducing emissions, right here at home.”

“We believe our projects are likely to advance much more quickly in Canada than any other country in the world,” Belenkie said. For Canada’s next play, we need to quickly extend that feeling of confidence to as many other Canadian companies as possible.

Growth Fund deals are a good start, but $7-billion can only go so far; even though the deals can ultimately turn a profit for the government, capital still gets tied up. To unlock low-carbon investment on a massive scale, federal and provincial governments are going to have to learn from the Growth Fund’s bespoke dealmaking, and then work to deliver broad-based, standardized programs of contracts for difference or credit offtakes that emitters can access right across the Canadian economy.  

What makes contracts for difference and offtakes especially appealing tools to incentivize investment is that they’re low-cost and low-risk ways of turbocharging Canada’s existing industrial carbon-pricing systems. As long as governments maintain the carbon price for industry and ensure the proper functioning of provincial carbon credit markets, they won’t lose money. In fact, the Growth Fund intends to turn a profit by reselling the credits it buys from Entropy. The returns can be reinvested into other decarbonization deals.

Another attractive feature of deals that guarantee carbon-credit revenue is that they allow governments to backstop results, not intentions. Only verifiable emissions reductions and removals are awarded credits. If Entropy doesn’t capture carbon dioxide and put it back in the ground, taxpayers aren’t on the hook to pay them.

With the Entropy agreement, the Growth Fund has proven that we can do the deals that will drive the growth of Canada’s low-carbon economy and help us compete for investment. What we need now is the ambition and the political will to take Canada’s provincial carbon markets to the next level, by widely offering strong guarantees that successful low-carbon investments can earn fair returns.

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