How Carbon Capture Investments Can Generate Carbon Credits
Canada is committed to achieving net-zero emissions by 2050,1 and finding ways to expand and monetize the compliance and voluntary credit markets will play a large part in achieving the goal. Making large-scale deployment of carbon capture technologies economic will be critical to that effort, given their potential to lower carbon emissions at some of the largest emitters.
Carbon capture technologies represent one of the best near-term opportunities to reduce C02 emissions. Still, the current challenge is their cost can make it difficult for entities to develop them independently.
That was one of the key takeaways from our Sustainability Leaders podcast recording, hosted by Michael Torrance, Chief Sustainability Officer of BMO Financial Group, and featuring BMO Radicle experts: Cooper Robinson, Director, Innovation Lead, Global Markets, and April Hillier, Director, Carbon Capture & Sequestration and Industrial Innovation.
As BMO Radicle’s Cooper Robinson explained, for Canada to keep pace with the reductions needed to meet its climate commitments, it means embracing technologies like Carbon Capture and Storage (CCS) and Carbon Capture, Utilization and Storage (CCUS).
Listen to our ~25-minute episode
The Power of CCS and CCUS
CCS refers to the process of capturing post-combustion gas from an emission stack, for example, isolating the carbon dioxide in the waste stream and then injecting it into a deep saline aquifer in the ground for permanent storage. CCUS adds another layer to this process by using this carbon dioxide in another product, like cement, to mineralize it as a way to store it. “The key to understanding CCUS is that the CO2 that has been captured has to be permanently fixed so that it cannot be released into the atmosphere again,” said Robinson.
“Our friends at the International Emissions Trading Association and the Center for Global Sustainability have done a lot of modeling and research in this area. Their statistics suggest that emissions trading could unlock cost reductions in achieving our targets to the order of US$250 billion per year in 2030,” noted Robinson. “If those cost savings are reinvested, mitigation could be more than doubled.”
Steps in the Right Direction
Encouraging the country’s biggest emitters to participate in decarbonization projects is the other key piece of the puzzle. On the state of the voluntary market, BMO Radicle’s April Hillier explained the demand for removal credits is highly sought after, in part because there is a low supply of them in the market.
While the demand for the voluntary credits created by carbon capture technologies is there, the funding to undertake these projects needs to catch up. “Whether these are offset opportunities or fuel credits, you need some incentive to help these projects go forward,” Hillier said. “The pathways that are available to them for monetization are actually quite limited now.”
Fortunately, there are more roads to monetization in the works, and by the end of 2024, Hillier predicts we should see roughly three more registries with emission offset pathways approved for CCS and CCUS projects. Canada also offers an investment tax credit (ITC) for CCS projects, and the Canada Growth Fund (CGF) has been announced as an organization that can help build confidence in the market.
“There’s quite a bit of detail in both the ITC and the CGF that have yet to be disclosed, but I think they are very much steps in the right direction to help accelerate the advancement of these projects in Canada,” Hillier said.
The U.S. is also looking to develop its own CCS projects, noted Hillier, pointing to the 45Q tax benefit, a tax credit for CO2 storage, which is helping companies move from the concept phase into bankable projects.
Getting CCS Projects off the Ground
One aspect of CCS projects that can’t be overlooked is that they require a high price in the carbon market today and a guarantee that price can be sustained over time given the size of the investment and the time involved. “That’s where that interplay between incentives can come in,” said Hillier. “We need a solution for that long-term price level of that underlying carbon offset or carbon credit.”
Normally, the crediting period is about eight years, but given the long life of CCS and CCUS projects, Alberta is offering up to a 25-year crediting period once the project is registered. “The crediting agencies recognize that these are unique projects that require some long-term certainty, so they’re getting a benefit of a longer crediting period to help address some of those challenges,” said Hillier.
There is value to be found in getting a CCS project off the ground and unlocking the somewhat complex process. “It takes a village to get one of these things from concept to monetized credits and CO2 permanently stored in the ground,” Hillier noted. Even in Alberta, despite the robust ecosystem for these technologies, few individual entities have the resources to carry a project of this scale forward on their own, she said.
“I would encourage folks to reach out to their networks and build their team with the right people to get one of these things over the finish line.”
Improving our track record will require a concerted effort to make it easier for the country’s biggest emitters to embrace new technologies that will help them remove and store carbon emissions as quickly and cost-effectively as possible.
“To meet the climate change goals, we need extremely large quantities of reductions,” said Robinson.
At the end of the day, to meet the climate change goals that have been set, we need extremely large quantities of reductions. And so CCS and CCUS will be part of that solution, or we will not meet the targets as far as especially some of the earlier stage targets, like what can be built by 2030 to meet some of those targets.
Welcome to Sustainability Leaders. I'm Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic, and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment business practices and our world.
The views expressed here are those of the participants and not those of Bank of Montreal, it's affiliates, or subsidiaries.
Well, welcome to the podcast Cooper and April. Cooper, why don't we start with you? If you could just tell our audience a little bit about yourself, what you do, and what your background is that led you to your role.
Thanks, Michael. Cooper Robinson, I lead the innovation team at BMO Radicle. My background is in engineering and entrepreneurship, and my journey has largely been driven by a belief that environmental sustainability and profitability are not mutually exclusive, and that in fact, over a long enough arc, we'll see them sort of converge. And I've had the privilege of being deeply involved in many first of kind carbon monetization projects in the energy related sectors. And I built a business focused on scaling them, which was first acquired by Radicle in 2019 and then subsequently by BMO in 2022, so that's how I've come to BMO Radicle.
Great, thanks, Cooper. What about you, April?
Well, thanks Michael, happy to be here. I'm April Hillier. I am a chemical engineer with 25+ years of experience. I've been working in sustainability carbon markets for about 12 years now. My years of experience have afforded me the opportunity to develop a multidiscipline skillset, and I think the combination of these things have proven really beneficial to prepare me well for my role at BMO Radicle as their director of CCS and other industrial innovations working with Cooper.
So for those who aren't familiar, can you just define CCS and CCUS?
CCS is carbon capture and storage as compared to CCUS is carbon capture, utilization, and storage. Carbon can be captured from a variety of different project activities. There's a post-combustion, and that would be when you capture post-combustion flue gas from an emission stack. And you capture the CO2 that's in that waste stream and you are able to then isolate the CO2 in that stream and transport it and then inject it into a deep saline aquifer into the ground for geological and permanent storage. CCUS, on the other hand, is when you capture that CO2 and you use it in another way, in another product. You can put it into cement, for example, and mineralize it as a way to store it. And the key to understanding CCUS is that the CO2 that has been captured has to be permanently fixed so that it cannot be released to the atmosphere again.
So the purpose of this podcast is to talk about CCS and CCUS in relation to carbon markets. Can one of you maybe take, maybe Cooper, just kind of give us an overview of what is the relationship between that kind of technology and carbon markets?
Yeah, happy to Michael. I'll maybe start with just kind of my take on why I believe carbon markets are important. So carbon markets are a tool that enables the trading of emissions. And emissions trading allows flexibility that can accelerate our progress towards climate change mitigation in pretty important ways. So some of our friends at the International Emissions Trading Association and the Center for Global Sustainability at the University of Maryland have done a lot of modeling and research in this area, so we actually have some statistics. Those suggest that emissions trading, so as they would describe cooperative implementation of Article 6 from the Paris Agreement, could unlock cost reductions in achieving our targets on the order of $250 billion per year in 2030. And if those cost savings are reinvested, mitigation could be more than doubled.
So just to show the power that this kind of policy can have, now, the current state, one of the shorthand ways that we categorize global carbon markets is between compliance carbon markets and the voluntary market. Of course, it doesn't quite split cleanly down the middle, but it's still a useful frame. So with voluntary markets, which are global in nature, across borders, largely kind of self-regulated by mostly nonprofits and scientists and engineers and they're not commoditized in my view, although there's always efforts to standardize and commoditize. But what we see is a lot of folks, buyers in that market caring about the story, or as we'll sometimes say, the charisma of a voluntary carbon credit. And that's because the demand does largely come from voluntary actions and commitments by corporates. So they're fundamentally sort of an instrument of climate finance. So they're often talked about in that frame of capital flows to emerging economies. And there's a handful of major registries globally together represent about $2 or $3 billion in value per year.
And then we have compliance markets. They aren't the opposite, but a lot of characteristics are sort of reversed. So they're not global, they're constrained to a jurisdiction because they're regulated by a government entity and that government entity would have a jurisdiction. They're much more commoditized, although pricing is still not very often standardized. It usually has more to do with things like risk and counterparties and so on. And the demand comes from a regulatory requirement to reduce emissions that's often applied only to large final emitters. So they're fundamentally an instrument more so of regulatory compliance. And so they're talked about more in the frame of energy transition within developed economies. There's dozens of these, globally. Together they exceed $850 billion in value per year. So when we talk about CCS and CCUS, traditionally, in fact some of the only projects, have occurred in those compliance markets for a variety of reasons.
So we'll get into this more, but when you talk about carbon credits, the generation of carbon credits in the context of CCUS, could you give us an overview of a journey? What does this mean for a company specifically? How does this come about?
It's usually driven by the policy or the regulatory framework or I guess monetization is enabled by some government policy or framework. And that's an important piece of the puzzle that these policies, whether they're offset opportunities, you need some incentive to help these projects go forward. So these are large emitters that are under pressure to decarbonize. Sometimes they are emitters that are in a segment of the industry that's difficult to decarbonize. So it's not always oil and gas, it can be any heavy industry. In order for them to do this decarbonization project, they're very capital intensive, they are long-term projects, and the competition for capital is real in these large companies that are considering this. They should consider things that are in the compliance market, they should consider opportunities that are in the voluntary carbon market. Opportunities for monetization, pathways for monetization exist in the compliance market, they also exist in the voluntary credit market.
And I think in that distinction, there's probably an important difference. April earlier talking about the overall setup of a CCS or CCUS project, the differences in each of those steps can reflect differences in which pathways are available to them. So one really important distinction for these types of projects is whether they're considered avoidance projects or removals project, and that mainly comes from a distinction of whether the CO2 being stored is from an anthropogenic or a biogenic source. Typically, biomass to energy with CCS, or BECCS, direct air capture with CCS, those are considered removals, and sources like an upgrade or refinery, a cement plant, more industrial sources would be considered avoidance. The extent to which that matters depends on the pathway and the market.
So in the compliance markets, we generally see less distinction, so more of the avoidance credits. And then in the voluntary market, there is lately a trend towards a preference towards removal credits. And so depending on the pathway, depending on the source of CO2, the opportunities may be a little bit different.
Absolutely. I think it's really important to include in the conversation here, Canada has a CCS ITC and there's also the Canada Growth Fund that has been announced as an organization that can help build confidence in the market to advance these projects and help them become more bankable and address some of the challenging economics. So I think there's quite a bit of detail in both the Canada ITC and the CGF that have yet to be disclosed, but I think they're very much steps in the right direction to help accelerate the advancement of these projects going forward in Canada.
What about the role of carbon markets then? So as these new sources of funding or better cost of capital emerge, carbon markets are right alongside that. Are there barriers or challenges that you're observing in terms of the functionality of carbon markets that there could be ways to improve them and allow them to support the investment in this area?
Yeah, I think exactly to your point, they are complimentary. And generally when we look at those different types of funding or revenue sources, we do want to be careful that there's no restrictions. So some types of funding will restrict a project from being able to generate credits in addition. So there's sort of the funding comes along with essentially an implied purchase of the environmental attributes. But generally when it comes to CCS, that's not been the case, so the stacking of these different incentives has been enabled. And part of that, I would say that it is for two reasons. One is that, as we talked about earlier, the project economics can be challenging. The capital expenses are quite high. But one of the interesting things where the carbon markets and these other incentives can play together and which I think is a bit unique to CCS is a CCS project, given how large and how long-term it is by its very nature, requires not just a high price in the carbon market today, but a guarantee of that price being sustained over time.
And so that's where that interplay between the incentives can come in with something like April mentioned, the carbon contracts for differences, the intent there is to resolve the barrier that says, okay, we understand that there's a robust price signal today, but we don't have confidence that it's going to continue. We need a solution for that long-term price level of that underlying carbon offset or carbon credit or whichever market you happen to be partaking in.
And how do you think about additionality in this context? If there's regulated requirements to reduce emissions over time, does that affect the ability to generate credits from this type of technology being implemented or how do you think about that?
Yeah, it's an important question. I would say at its most basic level, as I kind of alluded to earlier, virtually no company is choosing to do CCS without a financial incentive. So I think at the most basic level, CCS projects are inherently additional. On the other hand, when you talk about the compliance regime, it's important to understand exactly how that ton of CO2 gets recognized through the system. So in Alberta, for example, if you are a large emitter and you're capturing that CO2 and sending it offsite to be injected, the facility, even though that ton of CO2 has been captured, the facility continues to report as if it was emitted, and the injection of the CO2 is what generates the credit. And then that can be, through the system of the compliance reporting, worked back to the large emitter and used against their compliance, but there's no sort of double dipping. And so that's the way that that generally works in Alberta and in Canada is that the injection and permanent storage is this sort of default accrual of the credit and not just the capture.
On the additionality side, there's been some questions in the US about the additionality of some of the projects that are going to be eligible in the voluntary carbon market for credit generation under some of those ones that I was describing as in development, so the gold standard, the ACR protocol that's in development. And the one thing I would say about those projects is that I always lean on the adoption rate as the defining feature of additionality for me. If we're not currently doing it right now and it isn't widely commercialized, the practice of capturing carbon from those operations, it meets the additionality threshold that's associated with the barriers test of the rate of commercial adoption. So I think that, in my mind, I don't have a question of additionality for these projects going forward in the US.
And if we turn, maybe just trying to think about this from the perspective of potential buyer of these types of credits, who are the buyers and how should they be thinking about market integrity? Can you tell us about the buy side of this credit market?
So I think just like a lot of the discussion, we can sort of segment the buy side into those compliance and voluntary categories.
And so like the regulated markets then, the buyers would be other heavy industry companies, high emitters that are looking to meet the regulatory requirements by purchasing these offsets. So they're sort of compelled to do so by that regulatory framework?
That's right. And in these cases, as I was describing earlier about the flow of the credits, the demand can actually be within the project. The facility at which CO2 is being captured is continuing to report that CO2 as being emitted. And so they may work with their injection partner who may be the same company or may be a different company to have those credits flow back to their facility for their own compliance. So it may be a little bit more within sort of a closed loop, if you could think about it that way, or it may hit the market and go to other regulated entities within that compliance market.
And then on the voluntary market, who are you seeing as being the buyers?
When we started talking at the top, we were describing that CCS credits or activities can be removals or they can be avoidance type credits. And so what I'm seeing is that there's a demand for the removal credits, and that's primarily because there's very low supply of them in the market. So any of the project types within CCS that are actually removals, those are sought after, those are in high demand. And so those types of projects are like direct air capture, for example, or biomass to energy type projects, so any of the ethanol facilities with CCS that are in development.
Just to reinforce, the volumes are so low, it's a little bit difficult to characterize the buyers as you describe. The volumes are low and the prices are high. What I think we are keenly interested in understanding and seeing how it plays out is what is the depth of that demand and at what price level. How does that price change over time as more supply comes online and just how deep is that demand curve.
And so when it comes to CCS and CCUS, how important is that in terms of achieving climate policy goals? Do you have a sense of the scale of the growth of the use of that technology as decarbonization accelerates?
I think there's a few ways to think about this, but at the end of the day, to meet the climate change goals that have been set, we need extremely large quantities of reductions. And so CCS and CCUS will be part of that solution or we will not meet the targets as far as especially some of the earlier stage targets, like what can be built by 2030 to meet some of those targets. I think it's the challenging reality that we have been setting, at least in Canada, emission reduction targets since 1988 and we haven't met one. So it's going to have to take a large scale deployment of very impactful technologies like CCS and CCUS. The other lens that I think has been talked about there is a little bit of the scale up of direct air capture in particular.
There's a little bit of an analogy here when people say, for example, why should we go to Mars when we still have problems here on Earth? The reality is, as far as I'm concerned, that we will need the DAC type of technologies to reach the long-term goals. And so we need that technology development cycle, we need those costs to come down, and we need that to happen now. But there is a real question of an unlimited renewable energy world, we should build a lot of DAC in a world where that megawatt hour of renewable energy could go to a DAC plant or it could go to displacing fossil derived electricity somewhere else. There's a real question, and I think there's a lot of people are debating those questions. And my personal perspective is that we need to do all of it, and like I said, we need to do it quickly if we want to have a chance at meeting some of the targets we've set out.
April, anything to add to that?
From my perspective, and I may be biased because CCS is my world, however, I think there's nothing as impactful as these CCS projects that can be as impactful at scale. The small ones are a million tons a year. That's an impactful project relative to lots of the other decarbonization technology, and that the even larger projects are up to 20 million tons a year. And so I think it's really important to look at CCS as a really important tool in the toolkit to reach those targets and ensure that we are actually making forward gains.
So related to that then, can you talk about the hubs that you've seen develop, particularly in Alberta, that they've been awarded permits? And what's the growth of this? Is it accelerating in terms of this investment in Canada and across North America?
So the hubs in Alberta, there was a competitive process where the government of Alberta was taking applications for any that wanted to be considered for a sequestration lease and tenure, which is part of the regulatory framework and retirement if you're going to inject CO2 under the ground in Alberta. And so 26 hubs were awarded the leases, and they're all at this point going through their evaluation stage. So it's a one-year process of evaluation where the data is collected, and at the end of that one year, they will be deciding whether or not containment can be assured and that that is a viable geological storage container.
So outside of Alberta, what are you seeing? What are the trends?
Yeah, I think from my perspective, we're seeing just quite a lot of activity in the US of course with the 45Q tax benefit that is incentivizing these projects from conceptual ideas to bankable projects, really. So lots of them that were under consideration are now going forward. The earliest we're going to see is end of 2024 for first injection for any of them, right? That's quite a long lead time for these projects to go from concept to realization of CO2 stored permanently, but that's the reality of this kind of project cycle is it's a long road.
Cooper, what are your thoughts in terms of what's next for CCUS and the carbon markets around that topic?
Yeah, I would echo a lot of what April is suggesting. I think my hope is that we are building stuff, we're getting steel in the ground and proving business models and getting financial sort of investment decisions. And that's really going to spur what I would say is the medium term sort of technology development cycles where we get some of the costs to continue to go down and down. And we've seen that in other technologies, of course. So we'd like to see that sort of cycle get started and then continue quickly when it comes to lowering the cost longer term.
So as a final question, any final thoughts or comments on this topic, maybe starting with you, Cooper?
Yeah, I mean, my take home message, if you will, when it comes to CCUS somewhat mirrors the overall carbon markets and somewhat mirrors what April just said in that there is complexity and difficulty, but there's also value in unlocking that complexity and there's experts available to help navigate it. So that's what I would say.
How about you, April?
I guess I'll say that it takes a village to get one of these things from concept to monetized credits and CO2 in the ground permanently stored, and I would just encourage folks to use the networks available to them. There's an ecosystem that's very active in Alberta, that's for sure, of folks that are well-connected, well-informed, and have very specific skill sets that can help move these projects forward.
Excellent. Well, thank you both for your time today.
Thank you, Michael.
Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider, and we'll greatly appreciate a rating and review and any feedback that you might have. Our show and resources are produced with support from BMO's Marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.
For BMO disclosures, please visit bmocm.com/podcast/disclaimer.
Michael Torrance is Chief Sustainability Officer of BMO Financial Group and is passionate about sustainability, especially as it pertains to corporate governance an…(..)View Full Profile >
What to Read Next.
Clio Straram | August 24, 2023 | Sustainability Leaders
Clio Straram, Head, Indigenous Banking at BMO, sat down with Mark Podlasly, Chief Sustainability Officer, First Nations Major Project Coalition, to d…Continue Reading>
Who We Are
- Agribusiness & Protein
- Dealer Finance
- Commercial Real Estate
- Correspondent Banking
- Educational Institutions
- Engineering & Construction
- Food & Beverage
- Franchise Finance
- Futures & Securities
- Not-for-Profit Organizations
- Private Equity Sponsors
- Professional Services
- Retail & Wholesale Distribution
- Specialty Finance
- Dental Practices
- Fuel Services & Convenience
- Logistics, Rail and Shipping
- Technology & Innovation
- Wine & Spirits
- Religious Institution Banking
- We Can Help
- Our Podcasts