This blog is the second in a series on the role of non-pricing climate policies. Can other policies substitute (i.e., be an alternative) for carbon pricing? Can they complement (i.e., work in addition) carbon pricing? In this blog, I consider policies that provide financial support for Carbon Capture and Storage (CCS), using Saskatchewan and its Boundary Dam CCS project as a backdrop.

What is CCS?

Carbon Capture and Storage is a process that “captures” CO₂ emissions produced from the use of fossil fuels in electricity generation and industrial processes, preventing the carbon dioxide from entering the atmosphere. Saskatchewan’s Boundary Dam plant #3 is a coal-fired electricity generation plant has been equipped with CCS since 2014. The technology captures 90% of the coal plant’s CO₂ emissions, about 1 Megatonne (Mt) per year. Nearly all of this CO₂ is sold to Cenovus, which uses it to extract additional oil through a process called Enhanced Oil Recovery (EOR). 30% of the CO₂ is released in the EOR process, so Boundary Dam’s net annual sequestration is around 600,000 tonnes. (This number could rise in the future if more of the captured CO₂ was diverted to Aquistore, a deep saline formation where carbon dioxide can be retired permanently.)

SaskPower, Saskatchewan’s public electric utility, has invested $1.5 billion (funded mostly by SaskPower ratepayers and a $240 million investment from the federal government) in outfitting Boundary Dam with CCS. Over the next 30 years the project is also expected to lead to operating losses totalling $651 million. According to the province’s Climate Change White Paper, this spending forms the largest per capita investment in clean technology in the world, and is aimed at making Saskatchewan a leader in CCS technology.

Are CCS subsidies a good substitute for carbon pricing?

Saskatchewan has claimed that its investment in CCS is a better approach to reducing emissions than the federal government’s recently announced carbon price policy. It has called on the federal government to also support the development of CCS technology.

But is technology-focused policy a good alternative to carbon pricing? Does a focus on CCS in particular make sense?

A small bite at a hefty price

The goal of climate policy is to cost-effectively lower emissions. At less than 1 Mt of mitigation per year, CCS at Boundary Dam is having a fairly modest impact on emissions. It’s also expensive. Estimates of its mitigation cost put it at $57 per tonne at the low end and $110 per tonne at the high end—well above any current or planned carbon prices in Canada, although below the prices estimated to be required to meet Canada’s 2030 targets.

Aiming for bigger bites later

But the province’s subsidies toward CCS at Boundary Dam have a bigger aim than just the direct mitigation that they deliver in the short-term in Saskatchewan. By funding CCS, the province is hoping to trigger learning and innovation that can eventually make the technology a viable way to deeply and cost-effectively cut emissions, both in Saskatchewan and abroad. As we’ll see below, there can be good arguments for government supporting technological innovation. However, as stand-alone climate policy, technology subsidies don’t perform well relative to alternatives.

In a widely cited study, Fischer and Newell find that among six policy options for lowering emissions and encouraging innovation, carbon pricing ranks first and subsidies last. Overall, they find that a portfolio of policies is the best approach. Similarly, in a recent CD Howe study, David Popp finds that simply providing subsidies to increase the supply of low emissions technology is not enough—that the optimal policy mix includes carbon pricing, to create demand for new technologies.

Betting on CCS

Technology subsidies tend to be a poor substitute for carbon pricing, both as an emissions mitigation strategy and as technology policy. But a singular focus on the technology of CCS may be particularly problematic.

First, CCS is a gamble. There is no guarantee that it can become cost-effective enough to compete with renewable energy technologies. Second, CCS is focused on a single slice of the GHG inventory. While electricity generation is a significant source of emissions (particularly in Saskatchewan), focusing on it at the expense of other sectors ends up making mitigation more expensive overall.

In the long-term, CCS can maybe provide Saskatchewan and other jurisdictions with deep and cost-effective emission reductions. But it doesn’t do much to reduce current emissions, or to reduce emissions outside the electricity sector. As we argued in The Way Forward, carbon pricing is the best way to get cost-effectively cut emissions. Overall, CCS is a poor substitute for carbon pricing in Saskatchewan.

Are CCS subsidies a good complement to carbon pricing?

The story can be quite different if CCS policies complement carbon pricing rather than substitute for it. When a broad-based and stringent carbon price becomes the main engine for cost-effective mitigation, CCS subsidies only need to be judged against how well they support deep, cost-effective mitigation, rather than how well they deliver it single-handedly.

Bridging the gap

One of the crucial features of a carbon price is that it creates demand for emission-reducing technologies. This demand can help to stoke R&D and investment in technologies like CCS, and help them get deployed at scale. But as we saw above, the current costs of CCS exceed any existing or planned carbon prices in Canada. So until carbon prices rise or CCS’s costs fall, we’re unlikely to see much CCS get deployed.

This is where government policy to support CCS can come in. By providing subsidies, government can kick-start investment and innovation in CCS, and—critically—by doing so, potentially bring the costs down over time as a result of learning and experimentation. Indeed, as a result of their experience with Boundary Dam, SaskPower thinks that next time around they could get the capital costs down by 20-30%.

Of course, CCS is still a gamble: there are no guarantees that its costs will ever come down far enough to make it economical. However, this risk is the very reason that it can make sense for government to provide support, since the private sector is unlikely to make large investments in still unproven technologies. Government support for CCS can be complementary to carbon pricing when it helps to close this gap by driving costs down and reducing uncertainty and risk.

Betting on CCS (as a complement)

In his CD Howe report, David Popp recommends governments focus on R&D in emerging technologies that are not yet cost-competitive, and critically, avoid picking winners. However, others, such as Severin Borenstein, defend picking winners in some cases.

With its focus on CCS technology, Saskatchewan has picked what it thinks is a winner. While this single technology focus might not be a sensible strategy on a national scale, it can make sense for a smaller province like Saskatchewan to (in addition to a carbon price) invest in a technology area that it thinks holds promise and where it thinks it has a competitive advantage.

However, there are no guarantees, and Saskatchewan’s experiment with CCS will come at a cost. As Brett Dolter, an economist who has studied development pathways in Saskatchewan’s electricity sector, notes: “SaskPower has many pathways for reducing emissions that do not require CCS. In the near-term a combination of wind turbines and energy conservation, backed-up natural gas facilities and imports from Manitoba may offer a lower cost pathway for the utility.”

Normally, it might be hard to get a sense so early on of whether the excess costs of CCS are worth it. But interestingly, we’ll soon get a pretty clear indication of whether or not Saskatchewan thinks its bet on CCS is paying off.

Hindsight in 2020

Under the federal coal regulation, plants at the ‘end of their useful life’ (usually 50 years) must either shut down or adopt CCS technology. In 2020, Saskatchewan’s Boundary Dam plants #4 and #5 are scheduled to shut down, so the decision of whether or not to equip them with CCS will need to be taken soon. So essentially, SaskPower will have to decide whether it wants to double down on its CCS bet, or walk away. And shaping that decision, the federal carbon price will come online in 2018.

Substitute, no. Complement, maybe

As we saw above, CCS support is a poor substitute for carbon pricing. But it can potentially make sense as a complement to it. Very shortly, we’ll get to see whether Saskatchewan believes in CCS enough to turn support for it into a complementary climate policy—yet another reason the next few years will be an interesting time in Canadian climate policy.