Why Canada Must Increase Investment in Decarbonizing Its Chemistry Industry

The world needs more Canadian-made chemistry products. 

Many do not realize that chemical production in Canada is amongst the lowest in carbon emissions in the world due to our natural gas-based feedstocks and our low-carbon electricity systems. In fact, per million dollars produced, Canada’s chemistry sector manufactures products that are one-eighth the emissions intensity of similar products made in key Asian economies. It is Canada’s third-largest manufacturing sector, responsible for $108 billion in shipments in 2022 and nearly 200,000 direct jobs. But we could – and should – be doing so much more.

The State of Canada’s Chemistry Industry

Canada’s chemistry and plastics industry transforms raw materials into the building blocks needed to manufacture the products that enable our modern lives – 95% of all manufactured products are made with chemical products and plastics. Our products allow for the processing of critical minerals and the materials needed for electric vehicle batteries. Our products are in solar panels, wind turbines, every electronic device you can imagine, and modern energy-saving insulation for buildings. There is no path to decarbonize in other sectors without significant and growing inputs from Canada’s chemistry and plastics sector.

Despite our advantages, our sector still has significant work to reduce its own emissions. As pointed out in the recent Clean Energy Canada report on decarbonizing Canada’s chemistry sector, in 2020, Canada’s chemical and fertilizer sector produced 21 Mt of greenhouse gases, making it by far the largest emitter of the heavy industries (not including oil and gas). Unlike other heavy industries, there is currently no government decarbonization strategy for the chemistry industry. Canada has an opportunity to be a key global supplier of low-emission chemicals, with the ability to deliver both transitional, lower-carbon chemicals and a future of sustainable zero-carbon products.

“There is no path to decarbonize in other sectors without significant and growing inputs from Canada’s chemistry and plastics sector.”

Fully decarbonizing this supply chain will require significant new investments in research and development. This is a global transformation, and Canada is at a crossroads to harness the full potential it presents. But we must act to ensure we attract the investments here when so many other jurisdictions are also clamouring for the same business. 

Attracting Investment for the Chemistry Industry

Over the last 10 years, chemistry investments in the United States have been nearly $300 billion. Based on historical growth and proportionality, Canada should have seen about 10% of this or $20 billion to $30 billion. Despite many advantages such as abundant feedstock availability and a skilled workforce, Canada’s chemistry sector was only able to attract an investment growth of 2%, or $8 billion, between 2000 and 2020. 

Recent investment incentive programs have begun to attract some impressive projects to Canada. Like Canada’s auto sector, chemistry-sector investments require billions of dollars of capital, long construction periods, and decades of operation to recover the initial capital investment. As in the auto sector, securing such investments is highly competitive and requires active government involvement to de-risk investments of this scale. It takes political will and the right policies for chemical companies to make the decision to build in Canada. 

“Despite many advantages such as abundant feedstock availability and a skilled workforce, Canada’s chemistry sector was only able to attract an investment growth of 2%, or $8 billion, between 2000 and 2020.”

For instance, the federal Strategic Innovation Fund along with provincial investment attraction efforts such as the Petrochemicals Incentive Program (APIP) in Alberta, led to Inter Pipeline’s Heartland Chemical Complex in Alberta and the expansion of Nova Chemicals in Corunna, Ontario, which are nearing completion after a total capital spend of nearly $8 billion. Both facilities offer state-of-the-art, low-carbon production of the products Canadians need. APIP supports privately funded large-scale projects by providing grants equal to 12% of eligible capital costs to companies that build facilities to turn ethane, methane, and propane feedstocks into products such as plastics, fabrics, and fertilizers. The grant value is paid out over three years once projects become operational.

Between early 2021 and mid-2022, an additional 20 chemistry-sector investment proposals were announced. These proposals are all low- or near zero-carbon from initial operation. For instance, Dow Canada has a proposal for the world’s first zero-carbon petrochemical facility in Fort Saskatchewan. This project has the potential to decarbonize approximately 20% of Dow’s global ethylene capacity while growing the polyethylene supply by about 15%. BASF Canada has proposed a battery chemical site in Bécancour, Quebec which would provide much-needed infrastructure for electric vehicle production. In 2022, it seemed like Canada was taking the lead in low and zero-carbon chemistry. 

The Challenges and Opportunities Ahead

However, the introduction of the US Inflation Reduction Act (IRA) last year means that most, if not all chemistry sector decarbonization proposals in Canada are being reconsidered in boardrooms across the industry. The IRA seeks to harness private capital towards the public good of decarbonization through focused investment attraction and is embedded in the US tax code. 

“The introduction of the US Inflation Reduction Act (IRA) last year means that most, if not all chemistry sector decarbonization proposals in Canada are being reconsidered in boardrooms across the industry.”

It includes investment support for its chemistry industry and other sectors to pursue decarbonization through carbon capture and storage, hydrogen production and utilization, as well as low-carbon energy generation, including nuclear. It also includes support to drive the automotive sector’s transformation, including production tax credits tied to battery chemical manufacturing. In all instances, the IRA investment supports are broad in scope, meaningful, transparent, certain, and available to any entity wishing to invest and assist in decarbonization efforts in the US.

Alberta has responded to the IRA by announcing proposals to extend the APIP program to attract carbon-capture investments in existing chemistry facilities. We were pleased to see that the 2023 Federal Budget earmarks over $20 billion in support of carbon-reducing technologies and specifically, the government’s continued commitment to investment tax credits for clean hydrogen, clean technology, and carbon capture utilization and storage. Canada is already a world leader in hydrogen production with multiple low-carbon pathways to expand and address the demand of a net-zero future. However, Canada’s proposed supports for the decarbonization of industry are narrower in scope, smaller in value, and subject to political decision-making behind closed doors rather than to supporting broad capital attraction through the tax code as we see in the IRA.

“Canada’s proposed supports for the decarbonization of industry are narrower in scope, smaller in value, and subject to political decision-making behind closed doors.”

The new Clean Technology Manufacturing Investment Tax Credit, which considers the manufacturing or processing of certain upstream components and materials including chemistry, was also welcomed. Carbon Contracts for Differences (CCfD) can be an effective mechanism to de-risk the uncertainty of future carbon prices or carbon credit prices below currently scheduled carbon price increases to $170 per tonne by 2030. The government’s signal to implement CCfDs encourages their broad eligibility as a form of long-term insurance against future carbon price volatility to all industrial emitters – including chemistry – making large decarbonization investments. 

These are all good first steps in decarbonizing our chemistry supply chains. But more must be done in order not to miss such a significant opportunity. 

Canada must create a competitive regulatory and policy landscape that welcomes private capital. Certainty and predictability in carbon policy and revenue recycling will underpin chemistry and plastic sector investments to help the chemistry industry and others (including the federal government) achieve society’s net-zero ambitions. It is also critical that industry be part of this conversation.

“Canada must create a competitive regulatory and policy landscape that welcomes private capital.”

Policy actions should avoid stranding previous investments in emissions reductions that generate capital, credits, or offsets and instead utilize Canada’s tax code to increase transparency, program access, and uptake by private sector capital.

The only path forward for Canada’s future prosperity and its climate ambitions lies in a fundamental rethinking of this nation’s ability to attract private capital in the shared pursuit of both economic growth and decarbonization. The alternative will not only deprive Canada of tens of billions of dollars of new investment and a significant contribution to future prosperity, but it will also hurt Canada’s net zero ambitions in the chemistry and other industrial sectors.