Canada: Fueling A Lower Carbon Future: Environment And Climate Change Canada Releases Discussion Paper For A Clean Fuel Standard

In November 2016, Environment and Climate Change Canada (ECCC) announced that it would be kicking off a process to develop a clean fuel standard (CFS) in support of Canada's commitment to meet its greenhouse gas (GHG) emissions reduction target of 30% below 2005 levels by 2030. The CFS, which is included as part of the Pan-Canadian Framework on Clean Growth and Climate Change released in December 2016, would require reductions in the carbon footprint of fuels supplied in Canada, based on a lifecycle analysis. On February 24, 2017, ECCC released a discussion paper for consultation on the proposed new CFS.

Overview

New regulatory requirements for a CFS will be developed under the Canadian Environmental Protection Act, 1999. ECCC has said that the CFS will take a performance-based approach to incentivize the use of a broad range of lower carbon fuels and alternative energy sources and technologies such as electricity, natural gas, hydrogen, and renewable fuels. The CFS will also address a broad suite of fuels including liquid, gaseous and solid fuels, and will go beyond transportation fuels to include those used in industry, homes and buildings. The approach will not differentiate between crude oil types produced in or imported into Canada. Also, it will build on the existing foundation established by the current federal Renewable Fuels Regulations (RFR), while taking into account the exemptions that are currently available under the RFR.

The purpose of the discussion paper is to facilitate consultations by seeking early input to help inform the development of the CFS regulatory framework. It describes different approaches that are being used in other jurisdictions and poses technical questions related to the potential applicability of various elements including scope, timing and stringency.

Proposed Regulatory Approach

As part of Canada's efforts to achieve its 2030 emissions reduction target, the objective of the CFS is to achieve 30 megatonnes (Mt) of annual reductions in GHG emissions by 2030. This 30 Mt reduction will be incremental to what is achieved as a result of current measures. The performance-based standard will be designed promote the creation of lower carbon fuel pathways, while providing compliance flexibility to fuel suppliers, including a market-based approach (such as a crediting and trading system). In particular, requirements will be established to reduce the lifecycle carbon intensity of fuels supplied in a given year, based on lifecycle analysis. Overall lifecycle carbon intensity reductions of approximately 10-15% by 2030 are being considered. Carbon intensity requirements would be measured against a baseline, which could be a sector-wide average, facility-specific or set on some other basis. The CFS will also include requirements for regulated entities to reduce the GHG emissions from the fuel they supply.

Current Regulatory Context

When it comes to reducing emissions from fuel use, there are primarily two models in use around the world. Many jurisdictions, including Canada and a number of provinces, use renewable fuel mandates, under which a minimum amount of renewable fuel is required to be blended into traditional petroleum fuel such as gasoline or diesel. Some jurisdictions (including Alberta and Ontario) also require the renewable fuels used to meet a specific GHG performance standard. Other jurisdictions such as British Columbia (BC) and California, have implemented standards to lower the carbon intensity of fuels – referred to as low carbon fuel standards or clean fuel standards, under which requirements are set to reduce the lifecycle GHG emissions intensity of the fuels supplied in a given year.

Set out below is a table summarizing current renewable fuel requirements in Canada:

Jurisdiction(s) Renewable Fuel Requirement Commentary
Federal Under the RFR, petroleum fuel producers and importers must have an average renewable content of at least 5% based on their volume of gasoline and an average renewable content of at least 2% based on their volume of diesel fuel and heating distillate oil.

There are exemptions for specialty fuels (e.g. fuel used in aircraft, competition vehicles, military combat equipment), for fuel used in northern regions and Newfoundland and Labrador, for export and for space heating purposes.
The purpose of the RFR is to reduce overall GHG emissions from gasoline and diesel fuel, primarily used in transportation.

The RFR does not require reductions in GHG emissions on a lifecycle basis, nor does it contain sustainability requirements.

Together with existing provincial policies, the RFR is achieving an estimated 4 Mt/year of reductions.
BC
Alberta
Saskatchewan
Manitoba
Ontario
Each province has a renewable fuel mandate equal to or higher than the current federal requirements for the transportation sector. BC is currently the only province with a low carbon fuel standard in place in addition to its renewable fuel requirements.
BC BC's Renewable and Low Carbon Fuel Requirements Regulation requires fuel suppliers to have a minimum renewable fuel content of 5% for gasoline and 4% for diesel, on a provincial annual average basis.

In addition, fuel suppliers must progressively decrease the average carbon intensity of their fuels to achieve a 10% reduction in 2020 relative to 2010.

Under the Regulation, fuel suppliers can choose one of the following approaches to complying with the LCFS:
  • supply more low carbon fuels;
  • acquire credits by agreement with the BC government; or
  • trade credits with other suppliers.
These requirements apply to all fuels used for transportation in British Columbia with the exception of fuel used by aircraft or for military operations.
Under BC's Climate Leadership Plan, the provincial government will increase the stringency of BC's Low Carbon Fuel Standard to 15% by 2030.
Ontario Ontario's Greener Diesel Regulation requires both a minimum volume of bio-based diesel to be blended into petroleum diesel as well as minimum reductions in lifecycle GHG intensity. Implementation of the regulation is being phased in over 3 years, with final requirements (which came into effect in 2017) for bio-based diesel to comprise at least 4% of total diesel and have at least a 70% reduction in lifecycle GHG intensity.

Ontario's Ethanol in Gasoline Regulation requires at least 5% ethanol in gasoline and provides a regulatory incentive for cellulosic ethanol (1 litre cellulosic ethanol is equivalent to 2.5 litres of ethanol).
The regulations allow fuel suppliers to lower their minimum volume requirements if the fuels they supply have a lower GHG intensity than the standard, incenting greater use of lower carbon intensity renewable fuels. Fuel suppliers may also transfer their credits to other fuel suppliers

Ontario has announced its intention to increase the availability and use of lower carbon fuels, including the renewable fuel content of gasoline.

Design Principles

ECCC is seeking feedback on the following design aspects of the CFS:

Scope – As noted above, ECCC is considering setting carbon intensity requirements for fuels used not only in the transportation sector, but also the building and industry sectors (discussed in further detail below). This could include liquid fuels (e.g. gasoline, kerosene, diesel fuel, light fuel oil, heavy fuel oils), gaseous fuels (e.g. natural gas, propane, butane), and solid fuels (e.g. petroleum coke). Further, ECCC is considering regulating fuel suppliers (e.g. producers, importers and/or distributors) under the CFS. This would include both fossil fuel and alternative fuel suppliers. The requirements would also apply to the fuel used by a producer/importer (e.g. fuel oil or natural gas that is produced by an oil and gas company for its own use). The specific sectors included for discussion include the following:

  1. Transportation. The current RFR applies to gasoline and diesel used throughout the transportation sector (with certain exemptions, e.g. for the aviation sector). The intent of the CFS would be to set requirements for a wider range of transportation fuels to ensure broad coverage of on-road transportation (light-duty and heavy-duty vehicles) and most off-road sources (e.g. snowmobiles). To cover emissions from the rail, marine and aviation sub-sectors, requirements would need to be set for a number of other fuels used in these sub-sectors, including heavy oil, jet fuel and other specialty fuels. Since locomotives, ships and airplanes operate across national boundaries, the CFS approach will consider harmonization with any international requirements by organizations such as the International Maritime Organization and the International Civil Aviation Organization.
  2. Industry. The current RFR applies to a small share of energy use in the industrial sector, by way of gasoline and diesel fuel used in non-road applications (such as construction equipment and power generation). Addressing the carbon intensity of fuels used in the industrial sector will require targeting fuels beyond gasoline and diesel, such as natural gas, heavy fuel oils, and potentially including electricity, solid fuels and other liquid and gaseous fuels. Applying the standard to fuels other than diesel and gasoline presents significant emission reduction opportunities in the industry sector; however it may also present a number of challenges. Certain industrial uses of higher carbon fuel may not be readily replaceable, such as petroleum coke in cement kilns. Supply of alternate fuel may also be challenging in some locations (e.g. remote mining operations).
  3. Buildings. The building sector includes residential, commercial and institutional buildings, which use fuel or alternatives for space heating and power needs. According to the ECCC National Inventory Report, energy use in Canada's buildings sector is mainly from natural gas (46%), electricity (38%), heating oil (6%) and biomass (10%). The RFR currently exempts space heating oil from the regulations to mitigate cost increases for Canadians who use oil to heat their homes. The additional flexibility provided by the CFS may make it easier to apply requirements to heating oil.

Methodology for Determining Carbon Intensity – The CFS would set requirements to reduce the carbon intensity of fuels covered by the regulations. Carbon intensity is the measure of how much carbon is emitted to the atmosphere relative to the amount of energy in the fuel consumed (e.g. grams of CO2 equivalents per megajoule). The carbon intensity requirement would be set on a lifecycle basis, which assesses the environmental and GHG impacts of a product from cradle to grave. ECCC intends to require a lifecycle analysis methodology or model to assess the carbon intensities of fuels, which would follow a standardized approach compliant with the International Organization for Standardization (ISO) standard IS/ISO-14040: Environmental Management – Life Cycle Assessment – Principles and Framework.

The tool that is the most commonly used in Canada to model lifecycle carbon intensity of fuels is GHGenius (v4.03), which is a Microsoft Excel-based data analysis tool with a comprehensive database of lifecycle inventories for various fuel and energy pathways. ECCC is considering using GHGenius as the main tool to assess lifecycle carbon intensity under the standard. Other tools are also being considered to assess the lifecycle carbon intensity of fuels.

Compliance Mechanisms – A variety of compliance mechanisms will be included to provide flexibility in meeting CFS objectives. Flexible compliance mechanisms may include:

  • reducing the average carbon intensity of fuels supplied by switching to lower carbon fuels;
  • reducing facility emissions;
  • obtaining credits from other fossil fuel or alternative fuel suppliers;
  • generating credits from other actions that have a possibility of reducing the carbon intensity of fuels improve market access for lower carbon intensity fuels.Other Considerations – The discussion paper is also seeking stakeholder feedback on the following issues:

Compliance with existing lower carbon fuel standards rely to a large extent on credit trading systems, although the design and implementation of these systems vary. A federal standard would consider the use of a credit trading system as integral to the design of the standard to improve the cost-effectiveness of emissions reductions and incent investments in alternative, lower carbon fuels and technologies. Key elements of a trading system may include the ability to bank credit and trade credits and to carry forward of surplus credits into subsequent years. The implementation of a credit trading system would also need to consider how credits are created and verified, tracked, traded and retired once used for compliance.

Other Considerations – The discussion paper is also seeking stakeholder feedback on the following issues:

  • interaction of the CFS with the pan-Canadian carbon pricing plan;
  • future of the RFR and how it will work together with the CFS to minimize compliance burdens for regulated entities;
  • non-regulatory measures that could stimulate alternate fuel supply under the new framework (e.g. research, development and demonstration of fuel technologies and measures to enable retrofits); and
  • other sustainability issues that may be impacted by the CFS (including air pollutants, releases to water and soil, biodiversity and human health impacts).

Consultation – Next Steps

Written comments on the discussion paper may be submitted by mail or email until April 25, 2017, to the following address:

Mark Cauchi
Executive Director, Oil, Gas and Alternative Energy Division
Clean Fuel Standard
Energy and Transportation Directorate
Environment and Climate Change Canada
351 St. Joseph Boulevard, 12th Floor
Gatineau, QC K1A 0H3
Email: ec.cfsncp.ec@canada.ca

The consultation process will involve meetings, workshops, and technical working groups throughout spring and summer 2017. A workshop is planned for March 6, 2017 in Ottawa, Ontario to discuss the issues laid out in the discussion paper in more depth. ECCC will develop a draft regulatory framework for the CFS based on feedback received on the discussion paper and through the consultation process. Proposed regulations are expected in mid-2018, with final regulations to be published in 2019.

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