The Clean Fuel Standard (CFS) is a proposed regulation under the Canadian Environmental Protection Act, 1999, which aims to reduce greenhouse gas (GHG) emissions by reducing the lifecycle carbon intensity (CI) of liquid fossil fuels used in Canada. While the initial scope of the CFS included liquid, gaseous and solid fuels, the scope of the CFS was narrowed under Canada’s latest climate change plan, A Healthy Environment and a Healthy Economy, to include only liquid fuels.
The objective of the CFS is to decrease the CI of liquid fuels approximately 13% by 2030. The proposed Clean Fuel Regulations (CFR, under the Canadian Environmental Protection Act, 1999) would establish annual lifecycle CI limits per type of liquid fossil fuel, expressed in grams of carbon dioxide equivalent per megajoule (gCO2e/MJ). The liquid fossil fuels that would be subject to the annual CI reduction requirement are gasoline, diesel, kerosene and light and heavy fuel oils. This obligation would be placed on primary suppliers (i.e. producers and importers) who domestically produce or import at least 400 cubic metres (m3) of liquid fossil fuel for use in Canada. Under the proposed CFR, primary suppliers would be required to reduce the CI of the liquid fossil fuels they produce in and import into Canada from 2016 CI levels by 2.4 grams of carbon dioxide equivalent per megajoule (gCO2e/MJ) in 2022, increasing to 12gCO2e/MJ in 2030, at a rate of 1.2 gCO2e/MJ per year. Reduction requirements for the years after 2030 would be held constant at 12 gCO2e/MJ, subject to a review of the regulations and future amendments.
The proposed CFR allows for flexible compliance options to enable primary suppliers to choose the lowest-cost compliance actions. Primary suppliers are required to satisfy their emission reduction requirements by creating or acquiring compliance credits. Primary suppliers can obtain compliance credits by:
1. undertaking activities that generate credits for its own account;
2. acquiring credits from others; or
3. paying into a compliance fund to acquire credits at a price of $350/tonne.
The proposed CFR would establish a credit market, where each credit would represent a lifecycle emission reduction of one tonne of CO2e. Parties that are not fossil fuel primary suppliers would be able to participate in the credit market as voluntary credit creators.
For each compliance period (typically a calendar year), a primary supplier would demonstrate compliance with their reduction requirement by creating credits or acquiring credits from other creators, and then using the required number of credits for compliance. Once a credit is used for compliance, it is retired and can no longer be used. For primary suppliers unable to satisfy their reduction requirement by June 30 following the end of a given compliance period, a market-clearing mechanism that facilitates credit acquisition by primary suppliers would also be available. The proposed CFR would set a maximum price for credits acquired, purchased or transferred in the credit clearance mechanism (CCM) at $300 in 2022 (CPI adjusted) per compliance credit. Where primary suppliers are unable to acquire sufficient compliance units through the CCM, they may carry forward up to 10% of their compliance obligation into subsequent compliance periods for up to two years. However, a 20% annual interest rate applies to amounts carried forward.
Compliance credits may be created by primary suppliers or voluntary credit creators who take one of the following actions:
1. Compliance Category 1: undertaking projects that reduce the lifecycle CI of fossil fuels;
2. Compliance Category 2: supplying low-CI fuels; or
3. Compliance Category 3: end-use fuel switching in transportation.
Environment and Climate Change Canada (ECCC) has identified four initial quantification methodologies for development in respect of Compliance Category 1, including: (i) carbon capture and storage (CCS); (ii) low-carbon intensity electricity generation; (iii) enhanced oil recovery; and (iv) co-processing of biocrudes in refineries and upgraders. In addition, a generic quantification methodology will be developed that can be utilized for activities which do not have their own bespoke quantification methodology, which will apply to such projects as energy efficiency, cogeneration, electrification and methane reductions. Project proponents would apply to ECCC to have a project recognized for credit creation and then submit an annual validation report with a third-party verification report and verification opinion. The credit period is 10 years with a possible five-year renewal for most projects, and a 20-year credit period and five-year renewal for CCS projects.
All low CI fuels supplied to the Canadian market, including fuels used to comply with existing federal and provincial renewable fuel regulatory requirements and British Columbia’s Renewable and Low Carbon Fuel Requirements Regulation, would be able to create credits under the proposed CFR.
To incentivize investments in low carbon fuels, the proposed CFR imposes limits on the proposed compliance options. These include a 10% limit of payment into the compliance fund mechanism, a 10% limit on the trading credits across fuel classes, and a 10% limit on carrying forward a credit obligation.
The CFR will retain the volumetric requirements under the existing federal Renewable Fuels Regulations (RFR) (5% low carbon fuel content in gasoline, 2% low carbon fuel content in diesel/fuel oil). This means that each primary supplier would be required to demonstrate for each compliance period that, of the total number of compliance credits it retires for compliance, a minimum (equivalent to 5% of its gasoline pool and 2% of its diesel and light fuel oil pool) is from low-CI fuels. These compliance credits are part of the total credits used to meet reduction requirements, but the same compliance credit cannot be used to meet the 5% and 2% requirements respectively. Prior to repeal of the RFR in 2024, companies will be entitled to rollover any existing compliance units and convert those units into credits recognized under the CFR.
The consultation period for the proposed CFR ended on March 4, 2021. Final regulations are expected to be published in the Canada Gazette, Part II in late 2021. Once the regulations are published, credit creators can register for and begin to create credits in the credit trading system. The CFR is expected to come into force on December 1, 2022.