Canada’s clean fuel regulations might lock in fossil fuels

Ottawa’s incoming clean fuel standard is being designed to help curb transportation sector emissions, but critics say the existing draft text waters down climate targets and will lock in years of fossil fuel use.

The standard has been in development since 2016 and is scheduled to take effect by the end of the year, aiming to cut about 20 million tonnes of greenhouse gas emissions annually. Ottawa wants the regulation finalized by spring to give time for companies to prepare.

It will require fossil fuel suppliers to lower the carbon footprint of fuels over time, using strategies like carbon capture technology or blending ethanol into gasoline to lower emissions, while encouraging clean fuel suppliers that produce alternatives like biodiesel to scale up production.

To do that, the government is proposing a credit program that will incentivize companies to reduce emissions by doing things like investing in electric vehicles, swapping natural gas with renewable energy at a production site or supplying low-carbon fuels.

Details of the credit program are still being finalized, but the idea is similar to carbon offset credits. Companies that successfully reduce emissions during the production process and meet or exceed the clean fuel standard will be awarded credits, which they can sell. Companies that fail to meet the clean fuel standard will be obligated to buy credits. It’s expected there will also be a “compliance fund” where companies can pay to pollute up to a certain amount.

The clean fuel standard is a performance-based regulation, meaning it does not tell companies how to meet emission reduction targets, rather it sets targets and leaves the path to compliance up to industry. The federal government says by creating a market for compliance credits, it can “incentivize innovation” and “expand the use of low-carbon fuels throughout the economy.”

Energy-intensive companies, like oil refineries, pushed back against an earlier draft of the regulation. They argued forcing companies to meet cleaner fuel standards would cause them to lose business to out-of-country competitors. The latest iteration of the proposed clean fuel standard policy has been substantially weakened, critics warn.

Advanced Biofuels president Ian Thomson says ways to generate these credits — introduced in earlier drafts of the regulation to help energy-intensive industries stay competitive — remain, even though the scope of the clean fuel standard has changed significantly. Earlier versions planned to include solid and gaseous fuels like wood pellets or natural gas; the latest applies only to liquids like gasoline and diesel.

Despite the narrower scope, as it stands, an oilsands company will be able to generate credits for lowering its emissions by scrapping natural gas in favour of renewable electricity during the production process here in Canada. Although this helps reduce “upstream” emissions — emissions from the production of oil — it does nothing to curtail overall oil production. Fuels produced in Canada, regardless of where they are burned, create carbon emissions and contribute to the overall amount of carbon in the atmosphere. Under the current proposal, there is no incentive to reduce production, meaning global greenhouse gas emissions could still rise.

Thomson said other policies, like the federal promise to cap oil and gas sector emissions, are better suited to addressing the industry’s upstream emissions, and that a clean fuel standard shouldn’t allow companies to find emissions savings in their production. Rather, he says a clean fuel standard should be focused on reducing the amount of carbon in the fuel itself, given that roughly 75 per cent of emissions associated with transportation come from when the fuel is burned, compared to about 25 per cent related to taking oil out of the ground, transporting it and refining it into fuels.

“What the government should have done is to have a separate regulation to reduce the carbon intensity of crude,” Thomson said, adding it’s a “completely unlevel playing field” to treat fossil fuels and non-fossil fuels with the same regulation.

Thomson says Ottawa should adopt either a “guardrail” policy that caps the number of credits a fossil fuel company could generate proportional to the emissions it’s ultimately responsible for or draft separate regulations for fossil and non-fossil fuels. Essentially, the concern is that without a guardrail in place, credits from upstream emissions improvements will make up a predominant number of the credits in the market, hampering the ability of clean fuel suppliers to scale up.

In June, Thomson, along with representatives from the Canadian Biogas Association, Clean Energy Canada, the Pembina Institute, Renewable Industries Canada and several others, wrote to then-climate minister Jonathan Wilkinson calling for a net-zero guardrail in the CFS.

The letter says the current draft text runs the risk of suppressing investments in electrification and renewable fuels by giving too many opportunities for fossil fuel producers to generate credits, tilting the playing field in favour of oil and gas companies.

“We submit that a regulation in which obligated parties generate the majority of credits from relatively dead-end pathways should be corrected before it is launched, not a half-decade or decade later,” the letter reads, referring to oil and gas production.

“We believe the Net-Zero Guardrail would provide a critical signal to all stakeholders to invest in clean fuel projects that are consistent with Canada’s strengthened climate action plan commitments,” it adds.

Environment and Climate Change Canada (ECCC) says it is considering the proposal and acknowledges the scope of the clean fuel standard has changed significantly. But it says it’s only one part of a suite of tools Ottawa is using to fight climate change. The 2020 climate plan included an increased carbon price, which ECCC says will drive progress toward climate goals. It’s a strategy that effectively trades in a stronger clean fuel standard for a stronger carbon price.

“In the context of the continued increase to the carbon price from $10 per tonne every year to $15 per tonne for post-2022-30, as well as significant new investments ($1.5 billion) to grow the market for low-carbon fuels in Canada, the scope of the CFS was narrowed to cover only liquid fossil fuels, like gasoline, diesel and oil, which are mainly used in the transportation sector,” an ECCC spokesperson told Canada’s National Observer.

NDP climate critic Laurel Collins called the CFS “deeply concerning” as it stands, telling Canada’s National Observer it could undermine greenhouse gas reduction goals.

“This could be an important tool in reducing our emissions, but the Liberals have watered it down to the point where the new clean fuel standard will not only fail to meaningfully contribute to emissions reductions, but it actually will delay the transition away from fossil fuels that's already happening,” she said.

Canada has committed to reduce its greenhouse gas emissions 40 to 45 per cent from 2005 levels by 2030, meaning there are now eight years to cut roughly 290 million tonnes of greenhouse gases.

The Pembina Institute estimates that because the transportation sector accounts for a little more than a third of total energy-related emissions in Canada, emission reductions planned under the clean fuel standard could add up to more than 20 million tonnes annually.