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UPDATE 3-Alberta unveils carbon capture and storage incentive to help decarbonize Canada

(Adds Dow approving Alberta petrochemical investment)

By Nia Williams

Nov 28 (Reuters) - Canada's main oil-producing province Alberta on Tuesday said it would provide a 12% grant on eligible capital costs associated with building new carbon capture utilization and storage (CCUS) projects to help industry cut emissions that cause climate change.

The incentive from Alberta, which the provincial government has been working on since January, comes on top of a federal government CCUS tax credit announced last year and is designed to spur investment in the costly technology.

Canada, the world's fourth-largest oil producer, is aiming to cut carbon emissions 40-45% below 2005 levels by 2030 but will struggle to hit that target without significant reductions from Alberta, the country's oil and gas heartland and highest-polluting province.

Alberta Energy Minister Brian Jean said CCUS is the "only viable option" to cut emissions of hard-to-abate industries, such as oil and gas, cement and petrochemicals.

"Not only will this technology help preserve our position as a major bitumen producer, but our whole economy will depend on CCUS for large volumes of reduced emissions reductions," Jean told a news conference.

Alberta Premier Danielle Smith said the incentive program was expected to help attract C$35 billion ($25.80 billion) in capital investment and cost the province between C$3.5 billion and C$5.3 billion.

Chemical maker Dow said federal and provincial government CCUS incentives contributed to its board's decision on Tuesday to approve a C$6.5 billion investment in its existing Fort Saskatchewan, Alberta, facility.

The Path2Zero project includes building a new ethylene cracker and increasing polyethylene capacity by 2 million metric tonnes per annum, and will use CCUS to help meet net-zero emissions.

More than twenty new CCUS projects have been proposed in Alberta, including a C$16.5 billion project put forward by the Pathways Alliance, a consortium of Canada's six biggest oil sands producers.

Pathways has long said its project, expected to reach a final investment decision in 2025, needs significant government support to move forward and welcomed Alberta's move.

"This announcement is another step that will move us closer to the regulatory certainty and capital investment commitments necessary for our sector to remain cost competitive with other oil-producing regions around the world while reducing emissions," Pathways president Kendall Dilling said in a statement.

Many environmental campaigners argue CCUS is an expensive and inefficient way to cut emissions, however, and risks prolonging the life of fossil fuel projects when the world should be focusing on renewable energy.

A report released on Tuesday from clean energy think-tank the Pembina Institute said Canadian oil sands crude ranks among the highest-cost and most carbon-intensive in the world, and could become uncompetitive as global oil demand falls.

Pembina said governments should take care not to "over-incentivise" CCUS projects, given the risk of some oil sands projects becoming stranded assets as the world transitions to cleaner energy.

($1 = 1.3567 Canadian dollars) (Reporting by Nia Williams; Editing by Chris Reese and Aurora Ellis)