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An Overview of the Canadian Clean Fuel Standard

January 6, 2021 by Utkarsh Akhouri

Article Contents:


Overview

The Canadian Clean Fuel Standard (CFS) is a proposed set of regulations which aims to reduce the carbon intensity (CI) of liquid fuels that are imported, sold, and consumed within Canada. It is modelled around the Californian and European fuel standards that are already in place, and has ambitious goals for emissions reductions and improvements to air quality. In one sense it goes beyond these schemes, as it includes fuels for all use rather than just for road transport. 

The carbon intensity regulations will come into force at the end of 2022 with an initial CI reduction of 2.4 g CO2e/MJ from the baseline intensity of each fuel. This reduction in carbon intensities will continue on an annual basis through to 2030, when a reduction of 12 g CO2e/MJ from the baseline will have been achieved. From 2030-2040 the CI limit will remain constant, but will be subject to review. Table 1 provides an overview of the CI targets of the program.


Table 1. CI Target timeline for the Canadian Clean Fuel Standard Program

It is anticipated that the CFS will deliver a 20 MMtCO2e annual reduction in greenhouse gas emissions by 2030. The policy also aligns with the government’s aims of net-zero by 2050, and will be likely to spur investment in clean energy and fuel developments. The program is complemented by other initiatives set up by the government with investments such as the CA$ 1.5 billion Low-Carbon and Zero-Emissions Fuels Fund. The timeline for the deployment of the CFS regulations is set out in the figure 1 below.


Figure 1. Regulatory timeline for Canadian Clean Fuel Standard Program
Comparison with other Fuel Standards

A comparison of Canadian Clean Fuel Standard with the existing similar programmes in California, Oregon and British Columbia is instructive. These three programmes are part of the Pacific Coast Collaborative, a regional agreement between California, Oregon, Washington, and British Columbia, to strategically align policies to reduce GHGs and promote clean energy. These standards are expressed in terms of the “carbon intensity” (CI) of gasoline and diesel fuel and their respective substitutes. The program is based on the principle that each fuel has “life cycle” greenhouse gas emissions that include CO2, CH4, N2O, and other GHG contributors. The carbon intensity schedule for gasoline and diesel in the British Columbia LCFS, California LCFS, Canada CFS and Oregon CFP markets are shown in the figure below. A comparison of the program goals, scope of implementation, credit generation, compliance mechanism, and market size of the programmes are also shown.

British Columbia: Renewable and Low Carbon Fuel Requirement Regulation California: Low Carbon Fuel Standard (LCFS) Oregon: Clean Fuels Program (CFP) Canada: Clean Fuel Standard (CFS)
Program Goal 15% CI reduction by 2030 20% CI reduction by 2030 10% CI reduction by 2025 13% reduction by 2030
Scope Includes all transportation fuels; low-carbon fuels added as they become commercially available; suppliers included by default; excludes fuel for military aircraft and small volume providers. All fuels for on-road transportation are covered; low-carbon fuel providers can opt-in to generate and trade credits; military, ocean-going and aviation fuel use are exempt. Gasoline, diesel, ethanol, biodiesel and renewable diesel are included; low-carbon fuel providers can opt-in; exempts fuel use for military, ocean-going, aviation, railroad and agricultural vehicles. Includes all fuel use for transportation and other uses; small-volume suppliers exempt as well as aviation and fuels for use in scientific research and competition.
Compliance The regulated parties must meet annual CI reduction requirements demonstrated by the balance of credits obtained and deficit accrued. Credits may be purchased and traded in the market or banked for future compliance. See BC column. Credit deficits can be rolled over and incur 5% interest where the deficit must be met within five years.  See BC column. 5% of deficit may be rolled over to the subsequent period where current credits may be used to meet this deficit. There is no limit to when the deficit must be met but continued shortfalls will DEQ involvement to propose solutions to the shortage. See BC column. 10% of the deficit may be rolled over to the subsequent compliance period but the credit deficit must be met within two years.
Credit Clearance Mechanism (CCM) A CCM is being considered. If at the close of a compliance period a registered party holds a credit deficit, the party may buy credits in the CCM at a maximum price of $200 (indexed to 2016). Registered parties may buy credits in the CCM at a maximum price of $200 (indexed to 2017). A CCM may be used if a registered party holds a deficit where credits may be purchased at a maximum price of 350 CAD (indexed to 2022) (~$275 USD).
Additional Credit Generation Projects agreed by both the Director and registered party that are likely to reduce the CI or facility-specific emissions may generate credits. Credits from methods to reduce emissions from crude generation, refinery-specific CI reductions and renewable hydrogen. 2018 amendment to generate credits through creating EV or hydrogen infrastructure. Extra credits may be purchased from the Registered Emissions Reduction Funding Program for 350 CAD (indexed to 2022).
Credit Price
(Average)
337.50 CAD (2020 Q3) (~$265 USD) $198 (2020 Q3) $133 (2020 Q3) 330 CAD (2022, estimated)
(`~$260 USD)

Volume of credits generated
263,512 (CY 2019) 14,146,000 (CY 2019)
693,261 (CY 2019)
5,000,000 (*estimated credit required in CY 2022)



Value of credits traded

2 million CAD (~$1.6 million USD) (2020 Q3)
$974 million (2020 Q3) $19 million (2020 Q3) TBD
Figure 2: CI reduction Schedule comparison for various clean fuel programs
CFS – Compliance and Accreditation

In order to promote the implementation of renewable fuels, a crediting mechanism is being developed whereby regulated parties (i.e. producers, refineries and importers) must comply with the performance standard for a given fuel by creating or purchasing compliance credits. Compliance credits each represent 1 metric tonne of CO2e emissions reductions. Regulated parties are those who produce or import more than 400 m3 of liquid fuel in a given compliance period, with aviation gasoline and fuels exported from Canada being excluded from the regulations. The CFS will enable regulated parties with a surplus to bank their credits for future compliance periods. Additionally, non-regulated parties can opt-in to the CFS regulations in order to create credits and obtain access to the market. After initial discussions in 2016, it is now proposed that liquid fuels will be the primary constituents of the CFS market with gaseous and solid fuels experiencing credit creation limits of 10% of the total pool. There are three main compliance categories in which it is possible to create CFS credits:

Table 2: Compliance categories and credit generation mechanisms for each pathway

When generating credits, provisional compliance credits are initially provided and cannot be traded or used in compliance until a credit creation report is submitted, whereupon it ceases to be provisional and is deposited into a compliance credit account. A primary supplier can use compliance credits to satisfy the reductions requirements in a compliance period and are then cancelled after use. Credit deficits are created by producing fuels that have a greater proven CI than the limit set for the given fuel in the given year; in this case, credits must be purchased in the market to achieve compliance.

The Registered Emissions Reduction Funding Program is another avenue in which registered parties can obtain credits. Credits can be purchased in a compliance period for CA$ 350 (indexed to 2022) and can be used to meet a maximum of 10% of the primary supplier’s compliance requirements. These credits, however, cannot be traded, nor are they able to be banked for future compliance periods, with any excess credits from this source cancelled after each period. This program uses revenue created to further enable the development of low-carbon solutions whilst retaining funds to maintain jobs in the oil and gas sector.

If registered parties hold a credit deficit at the end of a compliance period, a Credit Clearance Mechanism may be held where it may be possible to purchase credits to cover the deficit. This is being instituted to alleviate the risk of a credit shortfall. If there is still a credit deficit, a registered party may then defer 10% of the compliance requirements to the following compliance period; after one year the deferred reduction requirement is increased to 20% whilst the compliance obligation must be met within two years. 

Requirements for Fuels

Reduction requirements will come into effect in December 2022 with the requirements calculated from the difference between the CI limit and the baseline intensity of the fuel. Furthermore, there is an annual volumetric compliance requirement coming into force from January 1, 2023. Here, 5% of the volume of a primary supplier’s pool of gasoline must be displaced each year with a low-carbon intensity fuel, while 2% of the pool of diesel must be displaced by either biodiesel or HDRD (hydrogenation-derived renewable diesel). On June 30, at the end of a compliance period, the use of compliance credits by primary suppliers acts to displace an equivalent quantity of gasoline or diesel from all compliance credits used, until both the reduction and volumetric requirements are met. The CI limits for each fuel type until 2030 are seen in table 1. 

Table 3: CI limit for each fuel type 2022 – 2030

For credits being sought under CC1, the number of credits allocated to the project will be calculated using a Quantification Method (QM). Credits can be generated by improvements to the lifecycle processing of the fuel, but only if other regulations do not also enforce a change. Most credits will initially be allocated over a 10-year period with some CCS project credits generated over 20 years.

In order to determine the number of credits generated under CC2, either a fuel life-cycle assessment (LCA), incorporating extraction, refining and end-use, is carried out for a facility-specific evaluation of the CI of the fuel, alternatively the default value for each fuel can also be used (table 2). A change in the facility-level process may invalidate a CI value, in which case a new CI can be submitted provided it’s at least 1 g CO2e / MJ below the previous value.

Furthermore, CC3 concerns end-user fuel switching, which is the process whereby an end-user of fuel retrofits their combustion device to be powered by another low-carbon fuel or energy source. This will generate compliance credits under CC3. If used for transportation fuel in Canada, hydrogen, propane and renewable natural gas (RNG) can generate credits in the liquid classification of fuels, and can contribute to the generation of credits, split equally between the fuel producer and fuel-station proprietor. Indeed, any revenue created by electric vehicle (EV) charging network operators must be reinvested into expanding EV infrastructure, or investing into initiatives that reduce the financial burden of EV adoption.

The feedstocks for each renewable fuel are separated into three categories: Type 1: feedstock not derived from biomass; Type 2: low land-use concern feedstock; Type 3: all other feedstocks; This policy aims to prevent counterproductive environmental effects from materialising resulting from an increased production of biofuels on agricultural land and on land with large carbon stores. A land-use and biodiversity (LUB) assessment is carried out for each source with the effect of the land-use change being incorporated into the CI. Third-party verification of emissions reductions and accreditation validation will be carried out with site-visits occurring at least once every five years to ensure that the allocation of credits is justified.

Looking Ahead in the CFS

A cost-benefit analysis of the scheme has been evaluated in the period 2021-2040 where it is forecast that between 173-254 Mt CO2e of cumulative greenhouse gas emissions could be prevented by 2030, with an estimated cost of compliance of CA$ 20.6 billion, equivalent to a per tonne cost of CA$ 94.

The implementation of the CFS may incur an additional cost of gasoline of between 4-11 cents per litre in 2030 and a CA$ 6.4 billion hit to the GDP (0.2% of total). However, at least when compared to a more recent calculation of the social cost of carbon at CA$ 440 / tCO2e (Yumashev et al., 2019), the cost of compliance in CFS falls well below this mark. Indeed, it is predicted that CFS will trigger innovation in clean energy technology and improve economies of scale, partially alleviating the economic cost of carbon.

Figure 3: Estimated Credit Supply – Demand forecast for CFS programme

Regarding expected supply-demand balances, initially the costs of CFS credits are expected to be relatively cheap, through to a peak in the number of banked (excess) credits in 2024. As CI limits become more stringent, costs are expected to increase with an estimated 28 million credits required in 2030, whilst the number of banked credits are expected to fall. Greenhouse gas emissions reductions are expected to be visible from 2026 with a peak by 2030 where the level will stabilise.

Figure 4: Estimated Credit generation by different compliance categories

With respect to different compliance categories, by the end of 2021 there will be a beginning of early credit creation followed by annual CI reduction requirements coming into effect by end of 2022. Credits generated via low-carbon fuels are expected to peak in 2022, due to a one time roll over of credits from RFR estimated at 1.4 million. From 2030 to 2040, the generation is expected to remain constant at 12.4 million credits. End use fuel switching in transportation (CC3 pathway) is expected to grow from 4.2 million credits in 2030, to 8.9 million credits in 2040. There is a level of uncertainty surrounding whether there will be a satisfactory supply of low-carbon fuels by 2030 to achieve these emissions reductions. That said, the Environment and Climate Change Canada (ECCC) will continually monitor and implement changes to the CFS regulations as the low-carbon fuel supply and demand evolves.

The Next Step

The proposed regulations are currently under review and amendments may be made; if the CFS is accepted, it will come into force by December 2022.

References

Canada, E. and C.C. (2019) Clean Fuel Standard: proposed regulatory approach. Available at: https://www.canada.ca/en/environment-climate-change/services/managing-pollution/energy-production/fuel-regulations/clean-fuel-standard/regulatory-approach.html#toc28 [Accessed: 30 December 2020].

Yumashev, D. et al. (2019) Climate policy implications of nonlinear decline of Arctic land permafrost and other cryosphere elements. Nature Communications, 10(1), 1900.

CARB (2019) LCFS Basics. Available at: https://ww2.arb.ca.gov/sites/default/files/2020-09/basics-notes.pdf [Accessed: 31 December 2020].

State of Oregon, Dept of Environmental Quality (2017) Overview of the Clean Fuels Program. Available at: https://www.oregon.gov/deq/FilterDocs/cfpoverview.pdf [Accessed: 31 December 2020].

British Columbia (2020) Renewable and Low Carbon Fuel Requirements Regulation – 394_2008. 41.


Analyst Contact:

Utkarsh Akhouri (uakhouri@californiacarbon.info)

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