The Clean Fuel Standard (CFS) is a proposed federal 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 greenhouse gas (GHG) emissions by 2030, through increased use of lower-carbon fuels and energy sources, and advanced technologies.
In its current form, the CFS promises to raise costs for Canadians and make Canadian businesses less competitive by taking an inefficient and ineffective path toward this emission-reduction goal. But in the spirit of collaboration and finding outcome-based solutions, Canada’s natural gas and oil industry has proposed a number of enhancements to the federal government that would make the proposed regulations more efficient and effective.
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 federal government’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 industry believes the proposed CFS needs extensive revision in order to stimulate the innovation and investment Canada requires to realize desired environmental objectives.
These are some specific areas where industry believes the CFS could be improved:
Developing protocols for emissions credits
The CFS allows for members of the fuel value chain to generate credits from reducing the carbon intensity along the lifecycle of the fuel. Credits can be applied against emissions, but the CFS only defines seven project types that could generate credits — in other words, there’s no provision for new, innovative projects. If a GHG-reducing project type is not among those listed in the proposed CFS, it cannot be a source of credit generation for CFS compliance until a new protocol is finalized — a complex process that is expected be cumbersome and lengthy.
The industry believes the regulations should focus on environmental performance and allow industry to innovate — which the industry has done (and continues to do) successfully for decades. The goal should be a technology-neutral approach to enable many different solutions to reduce the carbon intensity of fuels affected by the CFS.
Credit expiry period
Currently, the CFS is heavily weighted toward carbon capture and storage (CCS) projects as a means to reduce emissions. The proposed regulations allow CCS projects to claim compliance credits for 10 years, while allowing only five years for other types of emissions-reduction projects. These credit generation limits are shorter than those offered by other jurisdictions. For example, the voluntary Alberta Carbon Offset program guarantees an eight-year period for non-CCS projects and a 20-year period for CCS projects.
A longer crediting period is needed because many of the available emissions reduction projects are expensive and have long payback periods. Longer credit generation periods are needed to attract investment for these innovations. The goal of the CFS should be to encourage emission reductions in a cost-effective manner, but limiting credit periods harms the economics of transformative emission reducing measures – the opposite of the policy’s intent.
The CFS proposes a compliance fund from which companies can purchase credits if they are unable to meet their emission reduction requirements, however funding will be limited to 10 per cent of the total compliance obligation.
Industry does not believe such a limit is needed, particularly as the proposed compliance cost under CFS ($350/tonne of carbon dioxide equivalent reduced) is much higher than current carbon pricing and provides a strong incentive to find technologies and projects that reduce emissions.
In a submission to the federal government in August 2020, the natural gas and oil industry proposed a variety of recommendations to improve and enhance the CFS. Among industry’s recommendations are:
- Respect provincial jurisdiction on energy and climate policy by engaging provinces and territories in assessing the cost and benefits of the CFS, including regionally, to more accurately assess impacts and how to mitigate them.
- Fully evaluate impacts on Canada’s economic recovery from COVID-19. Canada continues to manage the pandemic and recovery is expected to begin just as the liquids stream of the CFS come into force in 2022.
- Exclude gaseous and solid fuels from the CFS carbon intensity reduction obligation, but enable credit generation from these streams within the liquid fuel stream.
- Implement emissions-intensive, trade-exposed (EITE) competitiveness protection mechanisms suggested by the government-created CFS EITE working group.
- Enable innovation by removing CFS barriers to low-cost solutions and investment, such as: ensuring the process for new project types is practical and efficient; increasing the proposed initial credit generation periods; expanding the compliance funding limit.
The bottom line
As proposed, 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 CFS regulation that applies to the liquids stream is expected to come into force in 2022, in the midst of Canada’s fledgling economic stabilization and recovery.
Many provinces already have renewable fuel blending requirements in place, including Alberta, British Columbia, Saskatchewan, Manitoba and Ontario. As a result, the CFS represents further federal government expansion into provincial jurisdiction over energy and climate policy and will result in duplication of efforts.
The CFS should be designed in a way that allows for industry compliance and emissions reduction through innovation, not act as a barrier to the investment needed to enable compliance and the continued growth and transformation of the industry.