Paving the Way for Lower Carbon Fuels: Federal Government Releases Regulatory Framework for Clean Fuel Standard
In November 2016, the federal government announced that it would commence development of a performance-based clean fuel standard (CFS) that would incent the use of a broad range of low carbon fuels, energy sources and technologies. The objective of the CFS is to achieve 30 megatonnes (Mt) of annual reductions in greenhouse gas (GHG) emissions by 2030, as part of efforts to achieve Canada’s overall GHG emissions reduction target of 30% below 2005 levels by 2030. As announced earlier by the federal government, the proposed CFS would establish lifecycle carbon intensity requirements separately for liquid, gaseous and solid fuels, and would go beyond transportation fuels to include those used in industry and buildings. The approach would not differentiate between crude oil types that are produced in Canada or imported.
Stakeholder consultations on the proposed CFS were held throughout 2017; in November 2017, Environment and Climate Change Canada (ECCC) released a report prepared by the International Institute on Sustainable Development, which summarizes stakeholder comments received in response to the federal government’s discussion paper on the CFS that was released in February 2017. On December 13, 2017, ECCC published a regulatory framework on the clean fuel standard. The framework outlines the key design elements for the CFS regulation, including its scope, regulated parties, carbon intensity approach, timing, and potential compliance options such as credit trading.
As noted above, the CFS will use a lifecycle approach to set carbon intensity values and requirements, accounting for the amount of GHG emitted to produce a unit of energy. The proposed lifecycle approach will assess GHG emissions from all stages in a product’s life, from cradle to grave (i.e. from raw material extraction through materials processing, manufacture, distribution, use, repair and maintenance, and disposal or recycling where applicable). ECCC expects that the CFS 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.
The proposed CFS regulatory framework covers the following elements:
- Partitioning: In order to achieve reductions from each of the transportation, building and industry sectors, the CFS will set separate carbon intensity requirements for sub-sets of fuels, as well as rules for credit trading. In particular, the CFS will set separate carbon intensity requirements for liquid, gaseous and solid fuel streams. 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 (e.g. grouping transportation fuels together in the liquid fuel stream), along with some trading of credits between the fuel streams.
- Scope of CFS Regulations: The CFS 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 CFS 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.
- In the case of liquid fuels:
- Approach to setting requirements: Carbon intensity values will be expressed in grams of carbon dioxide equivalents (g CO2e) per unit of energy in megajoules, 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 CFS 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.
- Renewable Fuel Content: The federal Renewable Fuels Regulations currently 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 CFS will replace the Renewable Fuels Regulations. With respect to natural gas, setting carbon intensity requirements 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 CFS will provide a range of pathways for compliance 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. Under the proposed CFS regulations, 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.
- Timing of Requirements: ECCC 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.
Given the multiple layers of regulations that are already in place at the federal and provincial levels, careful consideration will need to be given to how the implementation of the CFS will impact provincial initiatives. For an overview of the current federal and provincial regulatory framework for renewable fuels, please refer to our earlier blog. Written comments on the CFS regulatory framework are being accepted by ECCC until January 19, 2018. Comments received in writing and as part of the upcoming engagement on technical details will inform the design of draft regulations to be published in late 2018.