I don't think it's lame of you at all. I admire your efforts, and really, if it all goes downhill after all this, then you have the satisfaction of knowing you tried your best.
As for the cayenne, wait for a day that has little or no wind, and shake it up against the fence as best you can so when he 'snuffles' up against it he gets a snootful of capsaicin which will irritate his mucous membranes. It won't harm him long term, it will probably cause him some discomfort that day and make him more cautious about getting to 'up close and personal' with the fence. Being a terrior, he may have very good digging instincts, so even if it doesn't stop him from running along the fenceline and barking etc, at least it might make him unwilling to get real close to it and digging.
It would be really good if you could scatter it on the other side along the fence too, but that would probably be pushing things! I'd be careful that YOU don't get it in your face either while you're applying it. Get a face mask (like for painting etc) or tie a kerchief over your face.