Last month, Canada's Climate Plan made headlines for its pledges to accelerate the national carbon price to $170/tonne by 2030 and to invest heavily in low-carbon technologies and projects. While setting ambitious emissions targets, the Climate Plan also recognizes that many sectors of the economy will continue to rely on fossil fuels for many years to come, even under the most rapid decarbonisation scenarios. Accordingly, the Climate Plan is complemented by the federal Clean Fuel Standard ("CFS") - a policy proposal for reducing the carbon intensity of liquid fuels that are produced and used in Canada, as well as liquid fuels that are imported into Canada.

"Carbon intensity" refers to the amount of greenhouse gas ("GHG") released per unit of energy generated through fossil fuel combustion. Carbon intensity can be reduced by burning cleaner fuels, by adopting more efficient combustion technologies and processes, or by offsetting GHG releases through complimentary GHG reduction or removal initiatives.

Under the CFS, producers or importers who surpass the minimum clean fuel standard will be rewarded with credits, which may be purchased by other producers or importers in order to achieve compliance. This tradeable credit system is similar to the one already established by the federal carbon pricing framework. Canada intends for the two policies to complement each other.

Originally, the CFS was intended to apply to solid, liquid and gaseous fuels. However, in December 2020, the Canadian Government announced that the CFS would only apply to liquid fossil fuels, including gasoline, diesel and oil, which are mainly used in the transportation sector. The Government explained that this narrowing of the scope of the CFS was a response to the continued increase to the carbon price and its impact on businesses. Both non-liquid and liquid fuels are already subject to Canada's existing carbon pricing framework and solid fossil fuels are largely addressed by Canada's existing plan to phase out coal generation nationwide.

For more analysis of the federal government's new comprehensive climate change plan, see our articles on the Climate Plan, and the Hydrogen Strategy. Further CFS details are provided in this article.

Background

The Government of Canada's plan to develop a CFS was first announced as part of the Pan-Canadian Framework on Clean Growth and Climate Change in November 2016 and was previewed in its 2019 Proposed Regulatory Approach (the "2019 Proposal"). Proposed Clean Fuel Regulations (the "Proposed Regulations") were published for public review and comment in the Canada Gazette, Part I on December 19, 2020.

The Proposed Regulations cover liquid fuels and set performance standards for fuels based on their lifecycle carbon intensity, an approach that considers GHG emissions from all stages of the fuel production process, from extraction to combustion.

The objective of the CFS is to achieve up to 30 million tonnes of annual reductions in greenhouse gas emissions by 2030, making a significant contribution toward exceeding Canada's target of reducing national emissions by 30 percent below 2005 levels by 2030. The Proposed Regulations would be made under subsection 140(1) of the Canadian Environmental Protection Act, 1999 ("CEPA"), which, together with subsection 139(1), empowers the Governor in Council to make regulations that prescribe requirements for the production, import, and sale of fuel in Canada.

Who is regulated?

  • The CFS for liquid fuels will regulate "primary suppliers", i.e., fuel producers and importers.
  • The Proposed Regulations require those who produce liquid fuels in Canada for use in Canada or import liquid fossil fuels into Canada to reduce the carbon intensity of the liquid fossil fuels they produce or import.
  • Primary suppliers who produce or import less than 400 m3 of liquid fossil fuel will not be subject to the Proposed Regulations.

What fuels are covered by the CFS?

  • As noted above, the scope of the CFS has been narrowed to apply only to liquid fossil fuels, which include gasoline, diesel, kerosene and light and heavy fuel oils. Non-fossil fuels (for instance, biofuels like corn and sugar cane ethanol) will not have a carbon intensity reduction requirement.
  • Liquid fossil fuels that are: in transit through Canada; imported in a fuel tank that supplies the engine of a conveyance that is used for transportation (e.g. the fuel tank of a car or truck); or exported from Canada, will not be subject to the Proposed Regulations.

When does it come into force?

  • The regulations are expected to be finalized and published in the Canada Gazette, Part II by late 2021. Once the regulations are registered, the majority of the provisions will come into force and credits can be created.
  • Starting on December 1, 2022, the annual lifecycle carbon intensity reductions requirements for liquid fossil fuels apply to primary suppliers with a 2.4 gCO2e/MJ reduction in carbon intensity increasing to 12 gCO2e/MJ by 2030 at a rate of 1.2 gCO2e/MJ per year (the 2019 Proposal would have commenced mandatory reductions on June 1, 2022. The Proposed Regulations have delayed the requirements by 6 months). Reduction requirements for the years after 2030 will be held constant at 12 gCO2e/MJ, subject to a review of the regulations and future amendments.

What does "Fuel Lifecycle Carbon Intensity" mean?

  • Lifecycle carbon intensity is a measure of the greenhouse gas emissions released throughout the full lifecycle of a fuel, from extraction to combustion and is expressed in grams of carbon dioxide equivalents (g CO2e) per unit of energy in megajoules (MJ).
  • Low-carbon-intensity fuels and alternative energy sources will also be assessed on a lifecycle carbon intensity basis.
  • The Proposed Regulations also incorporate the minimum renewable fuel content requirements from the federal Renewable Fuels Regulations, which require a minimum 5% low-carbon intensity-fuel content in gasoline and 2% low-carbon-intensity fuel content in diesel fuel and light fuel oil.
  • The Proposed Regulations set out Canadian Average lifecycle carbon intensity values using a model developed by Environment and Climate Change Canada ("ECCC") that assigns each type of fossil fuel an average value, applicable nation wide, based on GHG emissions from all stages in a fuel's lifecycle. The Default Carbon Intensity model is found at Schedule 5 of the proposed Regulations.
  • The Proposed Regulations also set out annual aggregate limits for each fossil fuel type, which are each based on the same overall Carbon Intensity limit for all fossil fuel types.
  • While the 2019 Proposal outlined an initial annual reduction of 3.6 gCO2e/MJ in 2022, ramping up to 10 gCO2e/MJ by 2030, the proposed Regulations begin with a more modest reduction in 2022 of 2.4 gCO2e/MJ, but ramp up to more ambitious reductions of 12 gCO2e/MJ. This will give industry more time to adjust to the new requirements from the current initial intensity of 90.4 gCO2e/MJ.

How do the credits work?

  • The CFS will recognize actions that directly reduce a fossil fuel's carbon intensity through GHG emissions reductions projects at any point along the lifecycle of a fossil fuel.
  • ECCC has prioritized and is undertaking the development of quantification methodologies for the following project types, and will take into consideration existing emission reduction accounting methodologies or offset protocols in other jurisdictions:
    • Carbon Capture and Storage ("CCS")
    • Low-carbon intensity electricity integration;
    • Enhanced oil recovery; and
    • Co-processing of bio-crudes in refineries and upgraders.
  • Credits can be created under the CFS for low-carbon-intensity fuels produced in and imported into Canada.
  • Credits can be created for solid and gaseous low-carbon-intensity fuels, so primary suppliers may meet their requirements with compliance credits from gaseous and solid fuel intensity reductions, but may only do so to up to 10% of their required credits.
  • Following industry feedback on the 2019 Proposal, the Proposed Regulations set out a longer credit period of 10 years with a five-year renewal for most projects, and a 20-year period and five-year renewal for CCS projects.
  • The right to create credits may be transferred from the default credit creator to a party downstream of the production or importation point or upstream of the fueling station. A written agreement between the parties is required.
  • ECCC will establish and administer a credit trading system under the CFS to facilitate the acquisition of credits by primary suppliers and create market opportunities for the deployment of low-carbon-intensity fuels.
  • Participants in the credit trading system will include primary suppliers and voluntary credit creators. These participants will be able to create, own, transfer and acquire credits.
  • Other parties will be allowed to participate in the credit trading system if they enter into an agreement with parties that conduct activities eligible for credit creation, for the purpose of acting on behalf of these parties.
  • A voluntary credit creator will be able to end its participation in the CFS trading system (i.e., be relieved of reporting requirements) at any time upon satisfying its annual requirements respecting record keeping and reporting requirements and the cancellation of remaining credits owned.

What are the expected effects and benefits?

  • The Proposed Regulations require a reduction in the carbon intensity of liquid fossil fuels. As a result, in the near term, their implementation is expected to increase production costs for primary suppliers, which will increase prices for liquid fuel consumers.
  • At the same time, CFS credit revenues are expected to decrease the costs of production for low-carbon energy suppliers, which would make low carbon energy sources (e.g. biofuel and electricity) less expensive.
  • These price effects are expected to lead to decreased demand for fossil fuels and increased demand for lower carbon energy sources, resulting in reduced GHG emissions.
  • The Canadian Government's calculations indicate that, under the Proposed Regulations, GHG emission reductions will be achieved at an estimated societal per tonne cost of between $64 and $128, and a central estimated cost of $94.
  • The Government compared the societal cost per tonne under the Proposed Regulations to the estimated value of the social cost of carbon.[1] The most recent estimates of the social cost of carbon exceed the estimated societal cost per tonne under the Proposed Regulations. It is therefore possible that, in addition to the environmental benefits of the Proposed Regulations, the societal financial benefits will exceed the societal costs.

Comment Period and Timing

  • The Proposed Regulations are subject to a 75-day consultation period. ECCC will accept comments on the Proposed Regulations and the supporting documents available on the ECCC website until March 4, 2021 at ec.cfsncp.ec@canada.ca.
  • Following the public comment period, the final regulations are expected to be published in the Canada Gazette, Part II at the end of 2021. Credits can be created as of the date of registration of the final regulations.
  • The first (short) compliance period is expected to begin on December 1, 2022 and end on December 31, 2022. All other compliance periods will be a year in length.

[1] The social cost of carbon, or "SCC", measures the incremental additional damages expected from a small increase in CO2 emissions (or the avoided damages from a decrease in CO2 emissions). SCC estimates provide a monetary value to carbon emission changes and compare them to the costs of abatement.