OG 101

What is the Clean Fuel Standard?

What you need to know about new regulations that will broadly increase Canadians’ fuel costs at a difficult time for our economy.

In late 2019, Environment and Climate Change Canada (ECCC) proposed a clean fuel standard (CFS), a regulatory approach to reduce Canada’s greenhouse gas (GHG) emissions. The objective of the CFS is to achieve up to 30 million tonnes of annual reductions in GHG emissions by 2030, through increased use of lower-carbon fuels, energy sources, and technologies.

CFS is meant to encourage innovation and adoption of clean technologies in the oil and natural gas sector as well as the development and use of low-carbon fuels throughout the economy. The regulations will cover all fossil fuels used in Canada with separate requirements for liquid, gaseous, and solid fossil fuels. This covers a significant majority of all energy used in Canada, including gasoline for vehicles, natural gas for heating homes and coal used to generate electricity.

However, as currently proposed the CFS will have broad implications across Canada, dramatically increasing costs throughout the economy and damaging Canada’s economic recovery without effectively addressing global climate change.

The upstream natural gas and oil industry in Canada is committed to reducing GHG emissions – in fact the industry is already a world leader in addressing emissions through collaboration and innovation. The industry supports the Government of Canada’s desire to create a path for meeting its international climate change objectives, which will require innovation, major investment, a healthy industry and good public policy. To achieve these objectives, the CFS needs extensive revision in order to stimulate the innovation and investment Canada requires to realize desired environmental objectives.

CFS will impact every Canadian

The CFS is separated into three fuel streams (liquids, gaseous and solids) and will assign annual emissions reduction requirements to each stream. For the liquid fuel stream — the first of the three streams to be regulated — the CFS requires primary fuel suppliers such as refiners to reduce the overall lifecycle carbon intensity of liquid fuels they produce or import. Compliance options include the ability to self-generate CFS credits based on ECCC-approved emission reduction protocols; fuel blending with lower-carbon sources such as biofuels; or switching to lower-carbon fuel sources. Each one of these actions will increase the costs of fuels we use every day.

For example, the liquid fuels stream includes gasoline and diesel for personal vehicles, commercial trucking, agriculture (which in turn will increase the cost of food produced in Canada), construction equipment and more. In other words, the regulatory requirements associated with the liquids stream alone will impact every aspect of Canadians’ lives in all regions of Canada, broadly increasing costs.

In addition, one of the compliance options will be blending liquid fuels with lower-carbon biofuels, but biofuel availability is a concern. It’s unclear whether there will be enough supply to meet the created demand. At present, much of Canada’s biofuel supply is imported. A report by ICF Canada estimates that between 81 to 456 petajoules (PJ) of liquid low-carbon fuels will be required annually by 2030 to meet CFS demand, compared to current domestic biofuel demand of 108 PJ annually.

Within the gaseous stream, the primary fuel is natural gas – used by millions of Canadians for home heating, cooking and hot water, by businesses of all sizes for heating and other industrials uses, and generating electricity. The application of CFS on gaseous fuels will also have direct and indirect impacts. For instance, a large portion of the Canadian grid uses natural gas to generate electricity, and CFS regulation of gaseous fuel will significantly increase costs to businesses and consumers purchasing natural gas-fired electricity. Natural gas is already one of our cleanest burning and lowest-carbon sources of energy. No other jurisdiction in the world currently has a low-carbon fuel standard that applies to gaseous fuels such as natural gas.

At the same time, the legislation would decrease the competitiveness of Canada’s exports because Canadian export commodities from manufactured goods to natural gas and oil will be more expensive than those from other nations. This could lead to Canadian fuel products being displaced by our competitors, ultimately leading to the loss of Canadian jobs and economic opportunity.

Many issues and problems

While the goal of reduced GHG emissions is an important one that industry supports, there are numerous problems and associated with the CFS in its current form. For one, rollout of the regulations is proceeding without publicly sharing data or modelling the government has conducted. Many stakeholders are concerned about the validity of data and model results. Stakeholders have also recommended policy revisions that the government has not addressed or incorporated into the regulation.

As well, the legislation is complex and sets arbitrary restrictions that will act as barriers to innovation and needlessly inflate the cost of compliance.

Furthermore, CFS will further duplicate renewable fuel blending requirements already in place within many provinces – it is unclear how provincial and federal regulations may interact. This represents further federal government incursion into provincial jurisdiction regarding energy and climate policy, resulting in duplication and inefficient regulation.

Timeline for implementation

Despite these and numerous other questions and issues, Environment and Climate Change Canada is moving forward to implement CFS:

  • Summer 2020 – engagement with the Technical Working Group on key regulatory design elements.
  • Fall 2020 – publication of proposed regulations for liquid fuels, with a 75-day comment period.
  • Late 2021 – finalize regulations for liquid fuels, draft regulation for gaseous and solid fuels.
  • 2022 – regulation for liquid fuels comes into force.
  • 2023 – regulation for gaseous and solids comes into force.

What’s the bottom line?

The core issue is: the CFS will drive significant energy cost increases across the Canadian economy at a time when the economy is experiencing numerous challenges and unemployment is high. Current demand for diesel, gasoline and natural gas accounts for 50 per cent of energy demand in every province for consumer, commercial, industrial and agricultural use. However, the government has done neither a cost-benefit analysis nor considered different regional infrastructure, economies and geographic conditions, meaning that the CFS will unevenly affect different regions and parts of the economy.

The CFS will make fuels more expensive and these costs will be transferred to Canadian businesses and consumers. This will harm the economy and lead to increased job losses. These impacts will be compounded by the current pandemic economic crisis: the regulation applying to the liquids stream is expected to come into force in 2022, in the midst of Canada’s stabilization and recovery.

The Canadian Association of Petroleum Producers (CAPP) has provided a set of recommendations for updating the CFS that would support the innovation and investment Canada requires to realize its desired environmental objectives, while keeping Canada on a path to economic recovery.