Clearing the air: Why Canadian pensions should back carbon removal

Burning fossil fuels generates greenhouse gases, predominantly carbon dioxide and methane^[1], which drive climatic changes, particularly warming. One policy response is the implementation of net-zero goals, such that the total carbon output by a country is zero, with residual emissions balanced by mechanisms that remove carbon. Canada has made a legal commitment to be net zero by 2050.

Emissions from industries like power production, transportation, and waste management show potential for significant emission reductions. However, there are industries, including oil and gas, steel, and cement, with no foreseeable technological pathway to zero emissions. These “hard to abate” industries highlight the importance of directly removing carbon from the atmosphere. Many methods of removal exist, including biochar, kelp farming, among others. In this article we focus on Carbon Capture, Utilization, and Storage (CCUS^[2]).

Understanding DAC and point-source CCUS

CCUS refers to a suite of technologies that capture carbon from different sources and either store it permanently or use it in industrial applications. We discuss:

1. Direct Air Capture (DAC): removes carbon that is already present in the atmosphere.
2. Point-source capture: prevents carbon from entering the atmosphere.

Because DAC pulls carbon directly from the atmosphere, its effect is global. It requires two main ingredients: a large supply of low-carbon energy and a geological structure that provides long-term sequestration (storage) of the carbon. Iceland is an ideal location since it has abundant geothermal energy and basalt, which can lock carbon dioxide into permanent crystals. Canada is also well-positioned, with an abundance of clean energy and geologic storage.

Capturing carbon from the air is the most expensive application of carbon capture. The CO2 in the atmosphere is far more dilute (~450 parts per million) than in flue gas from a power station (typically ~10%). This leads to DAC’s higher energy needs and costs. Globally, about 130 DAC facilities are in stages of development, and if they were all to advance, deployment would almost reach the level required in 2030, according to an International Energy Association (IEA) scenario analysis.

By contrast, point-source capture does not offset carbon emissions. Rather, it prevents emissions from occurring in the first place by capturing them in the smokestack. The captured CO2 is compressed and transported, and either utilized in industrial applications or injected into deep geological formations (including depleted oil and gas reservoirs), which trap the CO2 permanently. In Alberta, the carbon would be captured during the extraction process of oil sands. The recent MOU between the federal government and Alberta includes the $16.5 Bn Pathways project intended to transport and store carbon in Cold Lake, with the potential to store up to 40 million tonnes annually.

According to IEA, as of 2023, 45 commercial CCUS facilities are in operation globally, capturing more than 50 megatonnes annually. Current projections would bring the total in 2030 to around 435 million tonnes per year. However, this is still only about 40% of the roughly 1 Gt CO2 per year that must be captured and stored in IEA scenarios.

The Economics of Carbon Removal

Carbon emissions are an example of an “externality”, since the entity that emits the carbon does not bear the cost of the damage. A key consideration, therefore, is to estimate the global damages of emitting carbon. The Canadian government currently estimates the damages at $294 per tonne. One hotly debated parameter is the discount rate used to quantify the present value of future damages, leading to a wide dispersion in estimates.

A carbon price is intended to address these externalities. It is a mitigation policy that incentivizes people and businesses to reduce emissions. While the Canadian government effectively rescinded the consumer carbon price in April 2025, it continues to have a pricing mechanism for industrial emitters. The 2026 price is $110, and it is scheduled to increase to $170 by 2030. Large emitters, who exceed their carbon allowance, can either pay the price, purchase allowances from other emitters who are below their own cap, or purchase offsets from entities that sequester carbon, including DAC systems. Therefore, the carbon price is a key input to their economic viability.

Because it pulls carbon from the earth’s shared atmosphere, in principle, a DAC system could sell offsets in any jurisdiction. In practice, this is complicated by the fact that it would need to undergo a costly registration process in any jurisdiction where it seeks to sell credits. And some jurisdictions, such as the EU and UK, do not currently recognize DAC offsets.

Similarly, point-source CCUS becomes economical once the operational cost per tonne is less than the price an emitter would otherwise pay or less than what it can earn by selling allowances that the system frees up.

Policy and Market Developments

Operational costs of point source systems vary widely but are typically under $100 USD per tonne. As mentioned above, however, they are more narrow in their application compared to DAC. According to the Payne Institute and MIT Joint Program, current DAC costs range from $400 to $1,000 USD per tonne, depending on the scale and technology maturity, well above the price of carbon in any jurisdiction. However, most of these are small pilot plants focused on technological proofs of concept.

There is a strong expectation that costs will come down. An empirical basis can be found in Wright’s Law: the marginal cost associated with producing each unit of a technology decreases as more and more units are produced, reflecting the learning curve. The first light bulb cost the equivalent of millions of dollars to produce, but with engineering improvements they eventually became commoditized. Costs can fall rapidly as deployment scales, as seen in solar, wind, and batteries.

To further incentivize DAC and point source projects and technologies in Canada, Parliament passed Bill C-59 establishing an investment tax credit (ITC) that will cover qualifying projects. Expenditures between 2022 and 2030 for DAC are eligible for a 60% credit, point-source capture is eligible for a 50% credit, and carbon transport, storage and use are eligible for a 37.5% credit. The U.S. has an analogous provision as part of its 2022 Inflation Reduction Act. Additionally, Canada issued for comment the world's first government-backed DAC offset protocol in March 2025; final drafting is ongoing. The protocol aims to ensure DAC credits meet stringent standards for permanence, quantifiability, and transparency.

Investment Opportunities for Canadian Pensions

Canada hosts approximately 1/7th of all large-scale carbon management projects worldwide, demonstrating its leadership in this sector. Scaling up will require large infrastructure investments such as carbon transportation pipelines, storage facilities, and power. National Bank of Canada and BMO have collectively invested $2.5M CAD in Deep Sky, a Montreal-based carbon removal project developer supporting removal infrastructure. Frontier, an Advance Market Commitment (AMC) founded by Stripe, Alphabet, Shopify, Meta, and McKinsey, aims to accelerate the development of carbon removal technologies by buying an initial $1B+ of permanent carbon removal, creating a net new carbon removal supply.

Carbon removal technologies resemble other forms of infrastructure investment by Canadian pensions, particularly with regards to their long durations. Pensions face growing expectations to integrate climate risk into their investment decisions and their disclosures. Investing in carbon removal infrastructure offers both potential long-term returns and a strategic hedge against transition risk in carbon-intensive sectors. Early capital can help shape the market while reinforcing the fund's climate leadership.

As policy develops, carbon removal technologies mature, and carbon pricing strengthens, Canadian pension funds have a unique opportunity to lead. By investing in long-term, scalable solutions like DAC and point source CCS, pensions can align with national climate goals, meet evolving ESG standards, and help unlock an essential lever in the fight against climate change all while pursuing competitive risk-adjusted returns.

^[1] Henceforth, we use the collective term “carbon” to refer to the totality of greenhouse gases.

^[2] Sometimes “Utilization” is dropped from the definition and the acronym.

Niall Whelan is a managing director of risk and innovation at Bodhi Research Group. Rachel Fan is a junior analyst at Bodhi Research Group.