January 28, 2021

Clean Fuel Standard Primer: What is it and how has it evolved?

The federal government is preparing to introduce its Clean Fuel Standard (CFS) regulations in late 2021. The CFS has been under development for several years, and Alberta businesses and consumers have been busy trying to understand and prepare for its direct and indirect impacts.

The Business Council of Alberta (BCA) wrote a policy paper, Getting it Right the First Time, late last year which explained how the CFS worked and highlighted some of our concerns with the proposed regulation. Since publication, however, the federal government posted a set of draft regulations that made several significant changes to the CFS—changes intended to address, at least in part, some of those concerns.

So, what is the CFS, how has it changed, and is there still room for improvement?

What is the Clean Fuel Standard?

The CFS is part of the federal government’s wider suite of policies intended to reduce GHG emissions and help achieve Canada’s Paris Agreement commitments. It is designed to reduce the amount of lifecycle emissions associated with each unit of liquid fossil fuel (e.g. gasoline, diesel, and heavy fuel) burned in Canada. Between 2022 and 2030, the CFS sets annual, incrementally increasing carbon intensity (CI) reduction requirements for liquid fossil fuels consumed in Canada. The goal is to reduce emissions by a projected 20.6 megatonnes annually by 2030.

Many sources of emissions contribute to the lifecycle CI of liquid fossil fuels, including emissions generated from their production, refinement, transportation, and consumption. Accordingly, the CFS recognizes emissions reductions at any stage of this lifecycle. Conceptually, the CFS is fairly simple to grasp, but its policy design and implementation details are not so straightforward.

How does the Clean Fuel Standard work?

The CFS will directly regulate producers and importers of liquid fuels (i.e. ‘primary suppliers’), including refiners and importers of gasoline and diesel. These primary suppliers will be responsible for ensuring that the liquid fuels they supply to Canadians meet annual CI reduction thresholds.

The entire system operates through the creation of credits that can be bought and sold. Primary fuel suppliers generate credits for any qualifying activity that lowers the CI of the fuel they produce (or import). If they can get their own emissions below the CI threshold, they can sell their surplus credits to other primary suppliers and create an additional revenue stream.

Additionally, other companies (“voluntary credit generators”) can also generate credits through their own activities. For example, an oil sands producer that invests in carbon capture and storage will generate credits for the carbon it sequesters. It can then sell those credits, helping to offset the cost of the initial installation.

Broadly speaking, there are three ways to generate credits.

  • Reducing the CI of a fuel across its lifecycle, including during the fuel’s production, refining, transportation, and/or combustion;
  • Supplying low-carbon liquid fuels, such as ethanol or biodiesel, which can then be mixed with fossil fuels to reduce their emissions intensity; and
  • Encouraging consumers to move away from higher emitting modes of fuel consumption, such as switching from gasoline-powered cars to electric vehicles.

If primary fuel suppliers cannot meet their annual targets on their own, they can either (A) purchase the credits they need on the open market; or (B) contribute to a compliance fund. However, only up to 10% of the shortfall can be met through the compliance fund and the price is steep. If compliance still cannot be met, primary fuel suppliers will face penalties or be forced to shut down their operations. The federal government’s internal modeling suggests that biofuel mixing will be the most common pathway to CFS compliance.

How has the CFS changed in the December 2020 proposed regulations?

Since we released Getting it Right the First Time in December, several major changes were introduced into the newly proposed Clean Fuel Regulations. Some of these changes take a positive step in the right direction, while others leave issues unaddressed or in further need of improvement.

Major improvements include the following:

The CFS will no longer be extended to gaseous or solid fuels.

The CFS was originally intended to apply to all fossil fuel types, which would have made Canada the only jurisdiction in the world to impose such a standard. Doing so would have added a significant cost burden to businesses across the country, undermining our international competitiveness. Moreover, the impact would have been especially severe in Alberta, where households would also have been affected because electricity in this province is primarily generated using natural gas (because no other baseload option is available).

Initial CI thresholds have been lowered.

Many businesses had expressed concern that when the CFS comes into effect in 2022, the initial compliance threshold was already relatively high. That concern was in part based on the long approval times needed to get emissions reduction projects built, as well as limited domestic supply of biofuels. The new CFS has relaxed the initial CI threshold and has provided six more months to reach compliance, but also made it more stringent in later years.

Clean Fuel Standard - Annual CFS carbon intensity reduction requirements
Emissions reduction projects can generate credits for longer.

The CFS sets limits on how long an emissions reducing project can generate credits. Because the sale of credits helps offset the cost of investment, these time limits have a big impact on a company’s ability to offset these high upfront costs. The new CFS has increased the length of time that emissions reducing projects can generate credits. While a welcome change, there remains uncertainty if this change is enough to increase the viability of major long-term investments in CI reduction projects.

Additional flexibility has been added for innovative new projects.

The original CFS regulations significantly limited the types of projects that would be recognized as legitimate compliance options. This created an artificial barrier for companies looking to invest in novel, innovative solutions. The updated regulations create another, more flexible avenue that will more quickly recognize the eligibility of new or innovative solutions. However, these kinds of projects can only account for up to 10% of annual compliance requirements.

Where should we go from here?

BCA believes that the recent changes to the CFS regulations take several steps in the right direction by creating more flexibility for compliance through business innovation.  However, there is still room for improvement.

The CFS will create new, burdensome compliance requirements that will increase costs of doing business for primary suppliers. These requirements, along with slow government assessments, will disincentivize businesses from making long-term, emissions reducing investments. The CFS should find ways to reduce compliance burdens and speed up government assessments.

While improvements have been made, it remains unclear if the CFS credit market will have enough credit supply for primary fuel suppliers to remain compliant. Barriers remain for innovative carbon reduction projects that could create more credits. All emissions reducing technologies should be treated equally to ensure the credit market works and innovative compliance is encouraged.

The federal government’s internal modeling suggests that biofuel mixing will be the most common pathway to CFS compliance. Government should help ensure that primary suppliers have access to adequate biofuels supply, ideally from Canadian producers.

Finally, the CFS will increase fuel costs, and some of these costs will make life more expensive for regular Canadians and businesses. The federal government should consider providing financial relief for vulnerable Canadians and helping businesses stay competitive.

In the coming weeks, BCA will be developing additional recommendations for how the CFS could be further improved to help businesses, Albertans, and the environment prosper together.

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