April 17, 2009

Consultations on Accelerated Capital Cost Allowance for Carbon Capture and Storage Assets

Related document

• Backgrounder

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The Department of Finance is inviting interested parties to participate in a consultative process regarding the potential provision of accelerated capital cost allowance (CCA) for income tax purposes to equipment used in carbon capture and storage.

Carbon capture and storage is an emerging technology with potential to significantly reduce greenhouse gas (GHG) emissions resulting from the combustion of fossil fuels at large industrial facilities. Broadly speaking, carbon capture and storage consists of three activities:

1. Capture of carbon dioxide (CO₂) at the source plant, where it is compressed;
2. Transportation of the CO₂ to a storage site; and
3. Storage of the CO₂, typically in an underground geological formation.

In light of the potential importance of carbon capture and storage as a means of reducing GHG emissions, Budget 2009 committed to consulting with stakeholders to identify specific assets used in carbon capture and storage with a view to providing accelerated CCA in respect of such investments. Accelerated CCA is currently used to promote investment in certain clean-energy generation technologies. Advancing the timing of capital cost deductions for tax purposes defers taxation and improves the financial return from investment in particular assets.

Interested parties wishing to comment on the identification of assets used in carbon capture and storage in respect of which accelerated CCA might appropriately be provided should submit their views in writing by June 30, 2009 to:

Carbon Capture and Storage CCA Consultation
Department of Finance Canada
Business Income Tax Division, 17^th Floor
140 O'Connor Street
Ottawa, ON
K1A 0G5

or

ConsultationsCCS-CSC@fin.gc.ca

Submissions should include:

1. The name, address, and telephone number of the person making the submission; 
2. The organization, if any, on behalf of which the person is making the submission; and 
3. Views on the issues that are identified in the backgrounder below. 

Following the consultation period, the Government will review the submissions that have been received, and take them into consideration in its deliberations with respect to possible tax changes in this area.

For further information about the consultation process, please contact:

James Greene
Chief, Resource and Environmental Taxation
Department of Finance
613-992-0960

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Backgrounder

Carbon Capture and Storage

Carbon capture and storage is an emerging technology with potential to reduce greenhouse gas (GHG) emissions resulting from the combustion of fossil fuels at large industrial facilities. Broadly speaking, carbon capture and storage consists of three activities that can be accomplished using a variety of technology options:

1. Capture of carbon dioxide (CO₂) at the source plant where it would otherwise be emitted. This may be accomplished using various technologies. The CO₂ is then normally compressed to facilitate transportation. 
2. Transportation of the CO₂ to a storage site, typically via pipeline.
3. Permanent storage of the CO₂, typically in an underground structure. While in some cases storage may be accomplished through simple sequestration in a geologic formation, in other instances, the CO₂ may be injected into a producing oil or gas reservoir to increase the rate of oil or gas production – so-called enhanced oil recovery.

Capital Cost Allowance

The capital cost allowance (CCA) system determines how much of the cost of a capital asset a firm may deduct each year for tax purposes. CCA rates are generally set so as to spread the deduction over the useful life of the asset – the period over which it contributes to earnings. This ensures a neutral tax treatment of different types of assets, so that investment is allocated to its most productive use.

An accelerated CCA rate allows an asset to be written off for tax purposes more quickly than its useful life would imply. By accelerating the timing of capital cost deductions, this defers taxation and improves the financial return from investment in particular assets. 

Accelerated CCA is currently used to promote investment in certain clean energy generation technologies that have broad social benefits in terms of reduced environmental impacts. Class 43.2 provides accelerated CCA (50 per cent per year on a declining balance basis) for specified equipment that generates energy in the form of electricity or heat by using a renewable energy source (e.g. wind, solar, small hydro), using waste fuel (e.g. landfill gas, wood waste, manure), or making efficient use of fossil fuels (e.g. high efficiency cogeneration systems, which produce electricity and heat simultaneously).

Consultations

Budget 2009 committed to consult with stakeholders on the identification of specific assets expected to be used in carbon capture and storage with a view to providing accelerated CCA for such investments. In this consultation process, the Department of Finance is particularly interested in views from interested parties on the following questions:

1. What are the specific assets likely to be used in a carbon capture and storage plant or installation as compared with a conventional plant or installation, and how could they be appropriately defined in the income tax regulations? What technologies are expected to be used and how might they differ among different types of facilities? How could the income tax regulations identify the incremental equipment used in a carbon capture and storage plant as compared with a conventional plant, in both retrofit and "new build" situations? How could the regulations balance the need to provide general rules applicable to a range of situations with the need to provide enough specificity to ensure reasonable clarity on eligibility across that range of situations? 
2. What is the anticipated cost of the various assets likely to be used in carbon capture and storage, and their incremental cost as compared with those used in conventional plants? What is the likely scale and timing of deployment? 
3. What are the expected operating costs of these assets, and their incremental operating costs as compared with those used in conventional plants? How much impact on emissions of CO₂ and air pollutants is expected to result from the operation of these assets? 
4. What is the expected useful life (sometimes referred to as economic life) of assets likely to be used in carbon capture and storage, and how does this compare with those used in conventional plants? 
5. What is the likely characterization for tax purposes under the current tax regime (e.g. CCA classification, categorization of intangibles) of the various assets used in carbon capture and storage as compared with those used in conventional plants in the industrial contexts with which you are familiar? 
6. What conditions might be appropriately applied to assets in order to be eligible for accelerated CCA treatment? For example, should a threshold percentage of emissions from a process or facility be required to be captured? What conditions should be imposed to ensure that captured CO₂ is stored to an adequate standard of safety and permanency? How could these conditions be applied when capture, transportation and storage activities in a carbon capture and storage system are carried out by different entities?