On November 1, 2024, the Government of Alberta (the Province) released the Draft Quantification Protocol for CO2 Capture and Permanent Geologic Sequestration version 2.0 (the Draft Protocol) for public comment. The Draft Protocol is the updated quantification protocol for generating emission offsets from the capture and permanent geological sequestration of CO2 under Alberta’s Technology Innovation and Emissions Reduction Regulation (TIER) and establishes the methodology and requirements for measuring, monitoring, quantifying and verifying the removal of CO2 emissions by a CCS project, including the baseline sources, sinks and reservoirs of CO2 that factor into the quantitative analysis.

The Draft Protocol is intended to replace the Quantification Protocol for CO2 Capture and Permanent Storage in Deep Saline Aquifers that was issued in 2015 (the Existing Protocol) and contains highly anticipated updates and substantive changes that reflect the evolution of carbon capture and storage (CCS) projects and carbon markets since 2015. The Draft Protocol is currently undergoing a 30-day public comment period, and comments will be accepted until Monday, December 2, at 5:00 p.m. MST. Parties may submit their comments in the comment table to epa.ghg@gov.ab.ca.

Please see below for a summary of some of the key elements of the Draft Protocol based on our review of legal considerations that may factor into commercial decisions.

Protocol scope

The Draft Protocol can be utilized by direct air CO2 capture facilities and CCS emission offset projects where CO2 is captured from TIER regulated large emitters or opted-in facilities and injected into an approved CO2 sequestration area. The Draft Protocol does not apply to small emitters that do not satisfy the requirements to “opt-in” under TIER. This excludes smaller facilities that want to voluntarily reduce their CO2 emissions through geological sequestration from generating TIER emission offset credits. Projects involving CO2 enhanced oil recovery or acid gas injection linked to sour natural gas processing are also excluded under the Draft Protocol.

The Draft Protocol acknowledges that different entities may be responsible for the CO2 capture, pipeline transportation and sequestration facilities forming the CCS scheme and aligns with the Province’s priority to create strategically located carbon storage hubs in Alberta. Accordingly, the emission offset project developer under TIER is not assigned to any particular CCS process or facility. However, the emission offset project developer is responsible for ensuring that each entity participating in the CCS scheme provides access to all records, data and equipment required to monitor, measure, quantify and verify CO2 emission reductions.

Offset crediting period

The Draft Protocol establishes a 20-year offset crediting period for CCS projects, with the possibility of ongoing 5-year extensions. The Draft Protocol does not clarify whether the offset crediting period applies separately to each subsurface area operated under a given Sequestration Agreement that may receive injected CO2 at different times. Stakeholders may seek clarification from the Province that injecting CO2 into one subsurface area does not “start the clock” on other portions of the storage hub. 

The 20 year offset crediting period generally aligns with the required project review periods for CCUS investment tax credits under the Income Tax Act. However, there appears to be a disconnect with the 15 year license granted by the Province to sequester CO2 in subsurface areas under the Sequestration Agreements.

Limiting credit revocation risk

One of the key risks inherent in CCS projects is the uncertainty that future events may result in the revocation or invalidation of serialized emission offset credits after such credits have been retired, sold or otherwise monetized. Project proponents have compared the liability for credit reversals under the Existing Protocol to CCS regimes in other jurisdictions that provide more certainty on this risk. For example, the 45Q tax credit for carbon sequestration in the United Sates limits the lookback period for credit reversal to 3 years. In contrast, any limitation of liability for credit reversals under the Existing Protocol can only occur after a closure certificate for the sequestration area is issued by the Province. Closure certificates can only be issued after injection of CO2 ceases, and the Province is assured (by an extended post-closure period and other conditions to be established by the Province) that the CO2 sequestration is permanent (i.e., a 30+ year lookback).

The Draft Protocol incorporates a flexibility mechanism that allows project developers to limit the liability associated with CO2 credit reversals by opting for an increased discount factor on their emission offset credits. This flexibility mechanism establishes a cap on CO2 credit reversal liability – the obligation to account for CO₂ leakage and losses during crediting and post-crediting stages – equal to three times the annual average of injected CO2 (i.e., a three year lookback).

If project developers select this mechanism, then the standard discount factor of 0.5% will apply to injected CO2 for the first three years. From the fourth year onward, a higher discount factor of 1% will be applied to cover post-closure reversal. If project developers do not select this flexibility mechanism then the standard discount factor of 0.5% will apply for the entire crediting period and there will be no cap on CO2 credit reversals.

Further clarification on how the discount factor will apply “after the issuance of a closure certificate” is required. It is unclear whether the “discount factor” – which is described as being “retired to atmosphere” – will be a permanent reduction of available credits or a holdback that will be released upon issuance of a closure certificate. Project proponents may seek clarity on this issue through the public comment process.

Reversals

The Draft Protocol defines reversal as “an accidental or intentional release or removal of CO2 from the targeted geologic storage zone(s) during or after the offset crediting period” and includes a release or migration from the licensed subsurface area to an adjacent geological zone. This risk of loss of containment of CO2 is difficult to quantify at this stage of CCS projects because of the complexities of geological formations and storage. The practical impact of this broad definition of reversal is qualified by requiring that an accidental reversal include: (a) a determination by the Alberta Energy Regulator that a loss of containment has occurred under the appliable scheme approval; (b) the loss of containment cannot be remediated; and (c) an expert investigation determining that the CO2 that is the subject of the lost containment will foreseeably leak into the atmosphere within 100 years.

Project proponents may seek clarity on the threshold requirements and monitoring obligations related to loss of containment and proposed remediation measures through the public comment process.

If there is a reversal prior to the issuance of a closure certificate, then previously issued emissions offsets must be removed and invalidated to true-up for the volume of CO2 actually sequestered. The true-up process will apply last-in first-out accounting whereby the last emissions injected will be considered the first emissions released as part of the reversal. This mitigates the practical difficulty of having to identify the serialized credits that were issued for the released CO2 molecules.

Importantly, the Draft Protocol establishes that true-up will note be required if the reversal is caused by a terrorist activity or natural disaster.

Conclusion

The Draft Protocol provides helpful direction and guidance from the Province on quantifying the removal of CO2 emissions by geological sequestration and subsequent reversals. However, there are a number of items that require further consideration, clarification and alignment and we are hopeful that the public comment process will address these items. The Draft Protocol also highlights the complex interconnected project to project risks and governmental incentive risks inherent in the development and operation of CCS projects. 

Dentons will continue to monitor the development of the Draft Protocol and provide updates as the Draft Protocol is finalized. Please reach out to a member of our Energy Innovation and Transition group for assistance with participation in the public comment process and/or the structuring and implementation of your proposed CCS projects.