Clean fuel standard regulatory framework

Introduction

The Government of Canada plans to put in place clean fuel standard regulations under the Canadian Environmental Protection Act, 1999 to reduce Canada’s greenhouse gas (GHG) emissions. The objective of the proposed regulations is to achieve 30 megatonnes of annual reductions in GHG emissions by 2030, contributing to Canada’s effort to achieve its overall GHG mitigation target of 30% emission reduction below 2005 levels by 2030.

The clean fuel standard will establish lifecycle carbon intensity requirements separately for liquid, gaseous and solid fuels that are used in transportation, industry and buildings. This performance-based approach will incent innovation, development and use of a broad range of low carbon fuels, energy sources and technologies.

Consultations on the development of the clean fuel standard were launched in January 2017 and a discussion paper was released in February, seeking views to help inform the development of a regulatory framework. Following the release of the discussion paper, extensive consultation sessions were held, including a face-to-face workshop, technical webinars and bilateral meetings with various stakeholders. More than 120 comments were received on the discussion paper. Comments were quite diverse, on the various themes of policy objectives, regulatory design, fuels covered by the regulations, targeting emission reductions, timelines, interactions with other measures (including the Renewable Fuels Regulations) and competitiveness. A report, Clean fuel standard: summary of stakeholder written comments on the discussion paper, summarizing these diverse comments, was prepared by the International Institute for Sustainable Development.

This document provides clarity on a number of key issues raised during consultations, and identifies other important issues which require further consideration. This framework covers:

• the scope of the regulations
• regulated parties
• the carbon intensity approach
• the timing for the regulations; and
• compliance mechanisms 

The clean fuel standard regulations will use a lifecycle approach to set carbon intensity values and requirements, accounting for the amount of greenhouse gases emitted to produce a unit of energy. This lifecycle approach will assess GHG emissions from all stages in a product’s life, from cradle to grave (that is, from raw material extraction through materials processing, manufacture, distribution, use, repair and maintenance, and disposal or recycling where applicable).

The clean fuel standard will drive actions that reduce GHG emissions throughout the lifecycle of fuels and fuel alternatives. The clean fuel standard may lead to changes in crop demand and land management practices that impact GHG emissions, which will be included. However, indirect GHG emissions that may result from the clean fuel standard will not be considered in the design, at least initially.

Partitioning

The clean fuel standard will achieve reductions from each of the transportation, building and industry sectors. This will be achieved by setting separate carbon intensity requirements for subsets of fuels, as well as through rules around credit trading.

The clean fuel standard will set separate carbon intensity requirements for liquid, gaseous and solid fuel streams. This approach will lead to emission reductions from fuels used in industries and buildings. For gaseous fuels, consideration will be given to setting volumetric requirements for renewable content or a hybrid approach, such as volumetric requirements with GHG performance standards.

Approximately 80% of liquid fuels are used for transportation. Setting a separate carbon intensity target for liquid fuels will ensure GHG reductions are achieved from transportation fuels.

Consideration may be given to further groupings of fuel types within fuel streams (for example, grouping transportation fuels together in the liquid fuel stream). Some trading of credits between the fuel streams will be considered. This approach offers compliance flexibilities to regulated parties to achieve emission reductions across the fuel types within the separate fuel streams.

Clean fuel standard and the pan-Canadian approach to pricing carbon pollution

The clean fuel standard will complement the Pan-Canadian approach to pricing carbon pollution. The clean fuel standard will focus on reducing carbon intensity across the lifecycle of fuels, from production to use, reducing GHGs along the value chain of individual fuels and incenting innovation and technology. Carbon pricing will price fossil fuels, as well as emissions from industrial activities, to send a price signal to markets and end-users and further incent GHG emission reductions.

Scope of the clean fuel standard regulations

The clean fuel standard will apply to liquid, gaseous and solid fuels combusted for the purpose of creating energy including “self-produced and used” fuels, that is, those fuels that are used by producers or importers.

The clean fuel standard will not apply to fuels when they are primarily used as feedstocks in industrial processes or when used for non-combustion purposes (for example, solvents).

Certain fuels will be excluded from application of the carbon intensity requirements of the clean fuel standard, including fuels that are exported from Canada, fuels that are in transit through Canada, and coal combusted at facilities that are covered by coal-fired electricity GHG regulations. Other exclusions may be considered.

Regulated parties

Fuel producers and importers, or in some cases distributors, will be subject to the clean fuel standard and will need to meet specific requirements for the fuels that they produce, import or distribute.

In the case of liquid fuels:

• the producers or importers of the liquid fuel (for example, gasoline, diesel, and heavy fuel oil) will be the regulated parties.

In the case of gaseous fuels:

• for pipeline-quality natural gas delivered via gas distribution pipeline systems, the distributors of the natural gas will be the regulated parties.

• for other gaseous fuels supplied to end-users other than through a gas distribution pipeline system (for example, biogas, natural gas from producers),the regulated parties remain to be determined.

In the case of solid fuels:

• the producers or importers of the fuel (for example, coal and petroleum coke) will be the regulated parties.

Approach to setting requirements

Carbon intensity values will be expressed in grams of carbon dioxide equivalents (g CO₂e) per unit of energy in megajoules (MJ), and will account for GHG emissions over the lifecycle of a fuel. Carbon intensity values will not include an estimate of the impact of indirect land use change on GHG emissions.

Baseline carbon intensity values and carbon intensity requirements will be set for either each fuel in a stream (liquid, gaseous, solid) or for groupings that include some or all fuels in a stream.

The clean fuel standard regulations will set carbon intensity requirements expressed either as absolute values or as percent reductions from the relevant baselines.

The carbon intensity requirements will become more stringent over time, with the goal of achieving at least 30 Mt CO₂e of emission reductions annually commencing in 2030.

Calculation of lifecycle carbon intensity of fuels

For renewable fuels, other low carbon fuels and energy sources and technologies, carbon intensity will be differentiated by type and origin of the fuel to reflect the GHG emissions associated with different feedstocks and technologies.

In the case of crude oil based fuels, the regulation will not differentiate among crude oil types, or on whether the crude oil is produced in or imported into Canada. A Canadian-average default carbon-intensity for crude oil produced and imported and consumed in Canada will be used.

For other fossil fuels, consideration is being given to whether or not the same approach as for crude oil based fuels should be applied. As an example, for natural gas-derived fuels, consideration is being given to initially setting carbon intensity values separately for sweet gas and sour gas, and assessing the potential of further differentiation by origin of the gas in the longer-term.

Renewable fuel content

The federal Renewable Fuels Regulations require 5% renewable content in gasoline and 2% renewable content in diesel fuel and heating distillate oil. In the short-term, these volumetric requirements will be maintained. In the longer-term, the clean fuel standard will replace the Renewable Fuels Regulations.

With respect to natural gas, setting carbon intensity requirements as noted above is the intended approach, but further consideration will be given to setting volumetric requirements for renewable content or a hybrid approach, such as volumetric requirements with GHG performance standards.

Compliance pathways

The clean fuel standard will provide a range of pathways for complying other than reducing the carbon intensity of the fuel produced or imported for use in Canada. A key pathway for fossil fuel suppliers will be to include renewable fuel content in their product.

It will be possible to generate compliance credits for actions that improve carbon intensity throughout the lifecycle of the fuel. One issue to be determined is whether to specify a minimum threshold for process improvements that qualify for credit creation. It will also be possible to generate credits through fuel switching and the deployment of energy sources and technologies that displace fossil fuels, such as electric vehicles.

Credits will be tradeable among regulated parties within each stream of fuels (liquid, gaseous and solid). There will also be limited banking of credits. Consideration is being given to allowing some use of credits across streams of fuels.

Review and update

The clean fuel standard regulations’ referenced lifecycle GHG emission models and the carbon intensity values will be updated and revised periodically. Additionally, a review of the clean fuel standard will include future consideration of the treatment of renewable fuel requirements, whether the impacts of indirect land use change should be accounted for, and whether consideration should be given to other sustainability issues.

Timing of requirements

Environment and Climate Change Canada plans to publish draft regulations in Canada Gazette, Part I in 2018 and final regulations in Canada Gazette, Part II in mid-2019. Carbon intensity requirements for liquid, gaseous and solid fuel streams will come into force at the same time; however, the coming into force date is still to be determined. Industry will be provided with sufficient lead time to prepare to meet requirements, while at the same time providing adequate time for carbon intensity requirements to achieve the required 30 Mt of GHG reductions by 2030.