On December 15, 2010, the Canadian Government brought into force the Renewable Fuels Regulations (SOR/2010-189) (the "Regulations"), which apply broadly to parties operating within the renewable and non-renewable fuel sectors in Canada. The Regulations introduce a five percent renewable fuel content requirement for gasoline produced or imported in Canada. There is also a two percent renewable content requirement for diesel fuel and heating oil, which is currently not in force, and is expected to be implemented by future amendment (pending the completion of a feasibility assessment). The Regulations include a largely self-regulated, market-based trading system as well as administrative, compliance and enforcement provisions, such as recordkeeping and reporting requirements. The overall structure of the Regulations is similar to the Renewable Fuel Standard in the United States.
The Regulations were passed in September of 2010, pursuant to the Canadian Environmental Protection Act, 1999 (the "Act"), following a period of public and stakeholder consultation which began in 2006, when the Canadian Government published the Notice of Intent to Develop a Federal Regulation Requiring Renewable Fuels. The Notice of Intent announced that the forthcoming regulation would contain the minimum renewable fuel content requirements, and anticipated that the five percent requirement for gasoline would come into effect in 2010, as it has, and that the two percent requirement for diesel fuel and heating oil would follow no later than 2012.
The Regulations are a key component of the Canadian Government meeting its commitment to reduce Canada's total Greenhouse Gas ("GHG") emissions by 17 percent from 2005 levels by 2020. The five percent renewable content requirement presently in force for gasoline is estimated to result in a one megatonne reduction of GHG emissions per year, which is reportedly the equivalent of removing a quarter million vehicles from the road. With the introduction of the content requirement for diesel fuel and distillate oil, this number is expected to quadruple.
The Regulations are based on annual volumes, not individual units. As such, not every litre of gasoline, diesel fuel and heating oil is required to contain renewable fuel, provided the annual total volume target is met. For the purposes of the Regulations, the term "renewable fuel" encapsulates a broad range of products. Along with the most common forms of renewable fuel for use in diesel and gasoline engines, biodiesel and ethanol, respectively, "renewable fuel" includes any liquid fuel (other than spent pulping liquor) that is produced from one or more of the specified feedstocks, which include grains, cellulosic material, starch, oilseeds, sugar components, potatoes, tobacco, vegetable oils, algae, plant materials, animal materials, and animal or municipal solid waste.
The only parties obligated to meet renewable fuel content requirements in the Regulations are "primary suppliers," defined as persons who produce and/or import gasoline, diesel fuel or heating distillate oil. There are limited exemptions in the applicability of the Regulations, allowing that the content and reporting requirements do not apply to persons producing or importing less than 400m3 of fuel per year or persons that only produce or import fuel for special uses (which include: exports, aviation, scientific research, competition vehicles, kerosene heaters, lamps or stoves, military combat equipment, feedstocks in the production of chemicals, use in the Territories or north of the 60th parallel in Quebec). Producers and importers of fuel that are exempt from the content requirements are nevertheless subject to the record-keeping provisions detailed in the Regulations. Further, if a producer or importer that is exempt wishes to participate in the trading system by opting in and registering, all the applicable requirements of the Regulations would apply.
The Regulations put into place extensive reporting requirements on both primary suppliers under the Regulations, and producers or importers of renewable fuel. Further, the Regulations allow that the Minister may require producers, importers, or vendors of fuel or bio-crude (liquid feedstock) to provide additional information (including samples of the fuel or bio-crude) if the Minister so requests.
The most commercially relevant aspect of the regulatory framework is the establishment of compliance units. Ownership of a sufficient number of compliance units is the mechanism by which primary suppliers demonstrate that they have met their renewable fuel content requirements. In general, one litre of renewable fuel equates to one compliance unit. Primary suppliers may create the necessary units, or may acquire them from other trading system participants. Compliance units are generated through activities such as blending renewable fuel into petroleum fuel, importing petroleum fuels with renewable content, and using bio-crude to produce fuel. Although Environment Canada does not issue or validate compliance units, a compliance unit is not valid until it is recorded specifically pursuant to the Regulations, which also contain third party auditing requirements. The method of generating and validating compliance units is conceptually similar to the system used in Alberta for creating and validating compliance offsets and emission performance credits under the Specified Gas Emitters Regulation.
The Regulations specify that there may not be more than one creator of a compliance unit. For any given compliance unit, if there is more than one party involved in the compliance unit creation, the creator of the unit must be designated by written agreement between the parties. This is an important detail, because if the parties fail to designate a creator by written agreement, no compliance unit is created under the Regulations.
As the only parties obligated by content requirements, primary suppliers are the only participants able to acquire compliance units. As such, trading activity by third party intermediaries wishing to buy and sell compliance units is not permitted by the Regulations. Other parties that blend renewable fuel, import renewable fuel or produce, import or sell neat renewable fuel (renewable fuel that is produced at a facility that only uses only renewable fuel feedstock), however, may elect to become participants in the trading system by registering with Environment Canada. There is no central registry to determine how compliance units are to be traded or sold, or at what price. These details are left to market determination.
Compliance periods begin on January 1st and end on December 31st of a given year, except for the first compliance period, which is transitionary and extends from December 15, 2010 to December 31, 2012. An additional three months is allotted at the end of a compliance period for compliance units to be traded. As such, compliance units may be traded for a given compliance period as of its start date, until the March 31st immediately following its end date. This is referred to as the trading period. Compliance units created or purchased within these additional three months may be carried back into the compliance period, up to a specified maximum. At the end of the trading period, compliance units that are neither used nor carried forward are cancelled. The extended trading period is intended to allow primary suppliers to review their records, assess compliance requirements and sell or trade away excess compliance units or acquire additional ones as needed.
This flexible regulatory framework allows for the creation of innovative and symbiotic trading arrangements between participants. Industry members are now in a position to act quickly and establish their compliance mechanisms early in the first compliance period. Although the Regulations create a framework that is largely reliant on the participants to self-regulate, compliance with the requirements of the Regulations is mandatory. Under the Act, noncompliance may lead to fines or imprisonment. In addition, the Minister may require additional steps to be taken by a non-compliant participant, including notification and mitigation requirements. Further, the Regulations add to and do not replace or diminish any existing provincial law, and both federal and provincial regulation must be complied with.
About Fraser Milner Casgrain LLP (FMC)
FMC is one of Canada's leading business and litigation law firms with more than 500 lawyers in six full-service offices located in the country's key business centres. We focus on providing outstanding service and value to our clients, and we strive to excel as a workplace of choice for our people. Regardless of where you choose to do business in Canada, our strong team of professionals possess knowledge and expertise on regional, national and cross-border matters. FMC's well-earned reputation for consistently delivering the highest quality legal services and counsel to our clients is complemented by an ongoing commitment to diversity and inclusion to broaden our insight and perspective on our clients' needs. Visit: www.fmc-law.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.