financial evaluation of pathways ccs incentives

optimizing carbon capture economics through policy design

08-Jul-25

Executive Summary

This analysis reveals critical insights about CCS incentive design through detailed financial modeling:

Important

Key Finding: While a 50% Investment Tax Credit yields sustainable 17% returns, combining high ITC rates with price floor guarantees creates infinite IRRs, signaling dangerous over-subsidization that would transfer excessive value from taxpayers to producers.

Scenario comparison showing the progression from balanced to over-subsidized incentives

Scenario comparison showing the progression from balanced to over-subsidized incentives

Introduction

Carbon capture and storage (CCS) represents a critical technology for decarbonizing Canada’s oil sands. However, designing incentives that balance producer viability with public value presents complex challenges. This analysis uses detailed financial modeling to identify optimal policy structures.

Comprehensive Model Framework

Model Parameters and Assumptions

Scenario Analysis

Granular Scenario Definitions

Cash Flow Analysis

Comparing cash flow profiles across scenarios reveals the impact of increasing subsidies

Comparing cash flow profiles across scenarios reveals the impact of increasing subsidies

Carbon Price Sensitivity Analysis

Project viability is highly sensitive to carbon pricing assumptions

Project viability is highly sensitive to carbon pricing assumptions

Optimization Analysis

Grid search reveals the dangerous zone of over-subsidization

Grid search reveals the dangerous zone of over-subsidization

Policy Implications


=== Scenario Analysis Results ===
                Scenario    NPV IRR(%)    LCOA  Capex_Coverage(%)  CfD_Floor
   Base_50pctITC_NoFloor $1.63B  17.1%  $-37/t              50.00       0.00
        60pctITC_90Floor $4.61B   nan%  $-99/t              60.00      90.00
70pctITC_170Floor_Opex10 $8.94B   nan% $-183/t              70.00     170.00

=== Policy Recommendation ===

Recommended Scenario: Base_50pctITC_NoFloor
  - ITC Rate: 50.0%
  - Price Floor: $0.0/tonne
  - Expected IRR: 17.1%
  - NPV: $1.63 billion

⚠️  WARNING: The following scenarios yield infinite returns:
  - 60pctITC_90Floor: 60.0% ITC + $90.0 floor
  - 70pctITC_170Floor_Opex10: 70.0% ITC + $170.0 floor

Understanding the CfD Mechanism

The Contract for Difference mechanism creates complex financial flows

The Contract for Difference mechanism creates complex financial flows

Conclusions and Recommendations

Based on comprehensive modeling with realistic operational parameters:

Optimal Policy Design
  1. ITC at 50%: Provides sufficient support without distorting markets
  2. No price floor: Unnecessary given carbon price trajectory to $170/tonne
  3. Focus on execution: Regulatory streamlining more valuable than additional subsidies
Critical Finding on Over-subsidization

The combination of high ITC rates (≥60%) with price floor guarantees creates infinite IRRs because the government effectively eliminates all project risk while guaranteeing profits. This represents poor value for taxpayers and could undermine public support for climate policy.

Key Insights

  1. Operational realities matter: Including TIER discounts, capture efficiency, and OPEX inflation significantly impacts project economics

  2. CfD design is critical: The repayment mechanism prevents windfall profits but must be carefully calibrated

  3. Carbon price trajectory sufficient: The path to $170/tonne by 2030 provides adequate revenue without additional guarantees

  4. Transparency essential: Clear modeling of all subsidies helps maintain public trust

Analysis demonstrates the importance of detailed financial modeling in climate policy design. Balancing ambition with fiscal responsibility requires understanding complex incentive interactions.