Author: Lennie Kaplan
As the November 15 deadline (or now later November deadline?) for concluding a legally binding, definitive agreement on Pathways carbon capture and storage (CCS) project fast approaches, new research reveals the extent to which the project has become a political bargain among the participants rather than a commercial venture.
The political bargain underpinning the Pathways carbon capture and storage (CCS) project has always been that the oil sands industry agrees to undertake some greenhouse gas (GHG) emissions reductions, while the Governments of Canada and Alberta provide significant financial support, regulatory certainty, carbon pricing incentives and improved access to export markets through such projects as the Pacific Link pipeline.
Thus, a key accountability question is not only how much the Oil Sands Alliance (OSA) partners invest in Pathways CCS, but how much of the capital investment and operating costs requirements Alberta taxpayers will ultimately finance, and what measurable fiscal and economic benefits taxpayers will receive in return.
This commentary estimates the fiscal and economic impacts on Alberta taxpayers arising from the OSA building and operating Pathways CCS between 2027 and 2061. A final investment decision (FID) test is applied to determine whether after-tax, nominal project cash flows clear a 10% internal rate of return (IRR), with a positive net present value (NPV), and the level of government fiscal incentives needed to reach these project benchmarks.
Pathways CCS Phase 1 was initially costed at about $16.5 billion for up to 12 million tonnes per annum (Mtpa) captured.
Under the July 2026 trilateral MOU, the project has now been restructured into a 6 Mtpa capture facility, in Phase 1, with a banded capital cost of between $20 and $30 billion.
The July 2026 MOU also establishes a cumulative target of 16 million Mtpa of net annual greenhouse gas emissions (GHG) reductions by 2045.
In this commentary, I model nine policy scenarios, encompassing three capital cost cases (low: $25 billion; medium: $45 billion; and high: $60 billion), three long-term WTI oil price paths (low: US$60.00; medium: $65.00; and high: $70.00 per barrel), and three fiscal incentive packages (current, enhanced, and NPV/IRR threshold).
The carbon pricing path follows the May 2026 Canada-Alberta Implementation Agreement, with a headline TIER price of $140 per tonne by 2040, effectively capped thereafter. The effective TIER price is $130 per tonne by 2040.
The carbon price floor starts in 2030, reaching $110 per tonne by 2040, and a 75 megatonne (Mt) carbon contract for difference (CfD) pool for all industrial sectors in Alberta is capped at $600 million per government (federal and Alberta).
Compliance obligations then tighten to reach Alberta net zero emissions by 2050 (Alberta NZE 2050), as mandated by the Alberta government.
I estimate that, without any government support, Pathways CCS would have been uneconomic in every capital cost and oil price scenario modelled.
The NPV at a 10% FID hurdle would have ranged from -$8.2 billion in the low-capex scenario to -$25.9 billion in the high-capex scenario, because the effective carbon value of up to $110 per tonne by 2040 would be below the levelized cost of capture and storage.
The current incentive package on the table (federal ITC, Alberta’s 12% CCIP, a capped CfD and CFR credits) from the federal and Alberta governments effectively halves the NPV gap but still leaves the project well below an IRR rate of 10%.
In the low-capex case, the IRR is 6.3%, about four points short of the 10% IRR threshold, and in the medium and high-capex cost cases, the IRRs are -1.2% and -8.4%, respectively. NPVs under the current incentive case are -$2.0 billion, -$7.9 billion and -$12.8 billion, respectively.
An enhanced package of measures (including full ITC rates extended to 2045, a CCIP extension to 2045 and an uncapped CfD on all Pathways tonnes to 2050) would add another $1 to $3 billion of NPV, but overall NPV is still -$0.8 billion in the low-capex case; -$5.8 billion in the medium-capex case; and -$9.9 billion in the high-capex case.
So, what are some potential additional government incentives that might help close the remaining NPV and IRR gap and could be included in the definitive trilateral agreement to be signed later this November?
An Alberta TIER price high enough to finance the project on its own, estimated at between $300 and $600 per tonne by 2040, depending on capital cost and oil price scenarios, is far above the $130 per tonne effective TIER price path by 2040 and would significantly raise compliance costs across all Alberta industries.
I estimate that the current incentive package keeps the all-in compliance costs for producers under $10.00 per barrel because the Alberta TIER price is capped and CCS costs are largely carried by the government support package.
The current incentive package shifts the costs of carbon compliance under Alberta NZE 2050 from oil producers to taxpayers: it keeps oil sands supply costs competitive, at a fiscal cost that Alberta taxpayers bear rather than oil producers.
Thus, a rising effective Alberta TIER price above $130 per tonne by 2040 does not appear politically, if not commercially, viable.
A second option is a top-up capital grant provided on an up-front basis.
However, a top-up capital grant would push total public capital support for the project well above 80%, leaving little private capital at risk and creating weak incentives for efficient operation of the project.
I estimate that an up-front, additional capital grant of about 8% of capex in the low-capex case, 32% of capex in the medium-capex case,and 41% of capex in the high-capex case, on top of the enhanced package, would be needed to fill the NPV and IRR gap.
It appears that a per-tonne government carbon capture operating support (CCOS) may be the most effective mechanism to close the remaining Pathway’s NPV and IRR gap.
I estimate that the CCOS would need to be about $22 per tonne in the low-capex scenario, $163 per tonne in the medium-capex scenario and $277 per tonne in the high-capex scenario between 2032 and 2051.
In a medium-capex case, assuming the Alberta government contributed 50% of the carbon capture operating support (CCOS) share, Alberta would be on the hook for about $26.5 billion in CCOS, cumulatively, rising from about $300 million per year to $2.1 billion per year between 2032 and 2051
In sum, the Alberta government’s financial support (i.e. CCIP, CfD share, and CCOS share) under a full incentive package is estimated at a cumulative total of $7.7 billion in the low-capex case, $33.4 billion in the medium-capex case and $54.1 billion in the high-capex case.
At 4%, the present value (PV) of the overall support package would be $4.7 billion, $18.2 billion and $29.0 billion, respectively. Meanwhile, federal costs (i.e. ITC, CfD share, CCOS share and net and corporate tax effects) would total $23.7 billion, $59.8 billion and $88.1 billion, respectively.
Of course, there are benefits to the Pathways CCS project, but these benefits are clearly dependent on incremental oil production increases and expanded egress capacity for Alberta.
If the incremental oil production growth is attributed to Pathways and Pacific Link, Alberta’s incremental revenue exceeds the incentive package.
Revenues would include bitumen and crude royalties, the royalty uplift from a narrower WTI-WCS differential (about $3.00 per barrel), corporate and personal income tax and other taxes.
Once the fiscal support makes Pathways cash positive, net royalty and tax gains for the Alberta government become positive, at about $14 billion in net revenues under the medium cost case, clawing back roughly 30% of the operating support. However, if the incremental oil production growth were to happen without Pathways, the incentive package would become a net cost to Alberta that CCS-related revenues alone cannot recover.
I also estimate that Pathways CCS could add about $1 trillion dollars of cumulative nominal GDP over the period 2027 to 2061.
Real GDP could average about $20.5 billion per year above BAU during operations, roughly 4% to 5% of Alberta’s total real GDP.
Employment peaks at about 98,500 jobs during construction and growth-capital spending, and averages about 88,500 jobs over 2032 to 2061, mostly from the incremental oil production that Pathways presumably enables. The unemployment rate falls by about 1.0%.
Labour income, primary household income, the net corporate operating surplus, housing starts, retail sales and average weekly earnings all rise. A critical caveat is that these gains are dependent on Pathways CCS being forced to drive incremental oil production and expanded pipeline egress.
There are some factors that the Alberta government should consider as it concludes its definitive agreements with OSA partners and the Government of Canada in the next couple of weeks:
Cost discipline and independent verification of capital cost estimates are fiscal safeguards for the Alberta government. Alberta should establish a capital cost cap for the Pathways CCS project, along with an independent cost verification mechanism.
OSA partners should take on construction and cost overrun risk. Alberta should cap its fiscal support at a fixed level, with no re-opener for capex overruns. This would protect Alberta taxpayers from an open-ended exposure.
Alberta and Canada should establish Pathways-specific CfD volume beyond the 75 Mt overall CfD pool. An uncapped Pathways CfD removes one of the largest risk factors for Pathways CCS, at the lowest expected cost.
Alberta should structure any additional fiscal support as a per-tonne operating cost payment rather than up-front capital. Alberta could establish a CCOS of $20 to 30 per tonne in a low-capital cost outcome, rising only with verifiable capital costs. A per-tonne CCOS pays only for tonnes stored and ties support to performance. Performance conditions should include paying only on verified net tonnes, with clawbacks for underperformance, as well as a profit-sharing collar. Direct operating payments should also be indexed and time-limited. In contrast, up-front capital cost support, with extra capital grants, puts construction and operating risk on taxpayers before any CO2 is stored.
Alberta’s net fiscal position depends on production growth. If Pathways is the condition for incremental oil production and the Pacific Link pipeline, Alberta’s royalty, tax and economic gain should exceed incentive costs. However, if the growth would have happened anyway, the incentive package is a net provincial cost of between $8 billion and $54 billion in direct payments, depending on the cost scenario, for 388 Mt of cumulative storage over the time period.
Alberta NZE 2050, with a capped carbon price, requires far more CCS volumes than 6 Mtpa. Without Pathways CCS, compliance obligations in the 2040s would push oil sands costs up and threaten the incremental production path. With Pathways CCS, Alberta appears to trade its fiscal support for continued revenues and royalties and some emissions compliance.
Alberta should also publish an independent fiscal assessment of Pathways CCS before the project moves to FID.
I conclude, from my examination of the underlying Pathways CCS project economics, that the fiscal and economic case for Pathways CCS is a tenuous political bargain that rests on expanded pipeline egress and incremental oil production rather than significant reductions in absolute GHG emissions.
Robust due diligence and risk management systems will need to be established by the Alberta government to help prevent the Pathways CCS project from turning into long-term, open-ended commitments like the Swan Hills Waste Treatment Plant and the Sturgeon Refinery. Pathways CCS is clearly a tenuous political bargain.
Lennie Kaplan was a senior manager in the fiscal and economic policy division of the Ministry of Treasury Board and Finance, where he worked on cross-ministry initiatives evaluating the fiscal and economic impacts of federal and provincial energy and climate change policies.
Excellent article.
Good article and informative.
Sadly tenuous political bargains are the norm not the exception.
Pretty much all of them do not end well except for a "select few".