Canada unveils its new Clean Fuels Standard, carbon price, and $2.25B in new sector investment

In Canada, the federal Department of Environment and Climate Change Canada has focused its new Clean Fuel Standard on  liquid fossil fuels. released its updated climate and clean growth plan, A Healthy Environment and a Healthy Economy.

The government said, “This is a progression in the design of the Clean Fuel Standard from its initial discussion in 2016, when it was proposed that the new measure will cover liquid, gaseous and solid fuels. “

The Standard is expected to be finalized into regulations by the end of 2021.

Key provisions

• Carbon pricing, set to be $50/tonne by 2022, will rise at $15 per tonne after 2022 up to 2030, continuing to return the proceeds back to households.

• A new Low-carbon and Zero-emissions Fuels Fund capitalized with $1.5 billion will increase the production and use of low-carbon fuels. 

• Pre-commercial clean technologies will be supported with an additional $750 million over five years via Sustainable Development Technology Canada. 

• Canada’s light-duty and heavy-duty vehicle regulations will be aligned with the most stringent performance standards in North America post-2025. 

A 2016 baseline

The proposed Regulations will require liquid fossil fuel primary suppliers (producers and importers) to reduce the carbon intensity of their fuels used in Canada from 2016 levels by 2.4 gCO2e/MJ in 2022 increasing to a 12 gCO2e/MJ reduction in 2030. This represents a decrease of about 13% below 2016 levels in the carbon intensity of liquid fuels used in Canada by 2030.  

The Three Compliance Credit Categories

The Canadian Government said: “The broad range of compliance strategies allowed under the proposed Regulations will give fossil fuel suppliers the flexibility to choose the lowest cost compliance actions available. The proposed Regulations will establish a credit market, where each credit will represent a lifecycle emission reduction of one tonne of CO2e. Each year primary suppliers will demonstrate compliance with their reduction requirement by creating credits or acquiring credits from other creators.”

The Clean Fuel Standard provides three ways to create credits: 

1. Compliance Category 1: undertaking projects that reduce the lifecycle carbon intensity of fossil fuels (e.g., carbon capture and storage, on-site renewable electricity, co-processing). 
2. Compliance Category 2: supplying customers with low carbon intensity fuels (e.g., ethanol, bio-diesel). 
3. Compliance Category 3: investing in advanced vehicle technologies (e.g., electric or hydrogen fuel
   cell vehicles). 
4. Category 1 credits for biocrudes

Following feedback over the spring of 2020, the approach to determining the eligibility of these projects has been streamlined, and the length of time for which a project can generate credits has been extended. These changes will provide for more credit generation opportunities and more lead-time for capital investments. Credits can be created as of the date of registration of the final Regulations. Projects can include an aggregation of reductions from multiple sources. The amount of credits created will be determined by a specified quantification method. ECCC will develop quantification methods for various project types, starting with the following list: carbon capture and storage; low-carbon intensity electricity integration; enhanced oil recovery; and co-processing of biocrudes in refineries and upgraders. 

Special provisions for hydrogen and renewable natural gas

All three categories of credit creation will include opportunities for hydrogen and renewable natural gas: 

• Compliance category 1: Credits can be created for carbon capture and storage when hydrogen is used to produce fossil fuels or lower carbon intensity fuels. 
• Compliance category 2: Credits can be created for eligible renewable natural gas and hydrogen that are used as fuels. 
• Compliance category 3: Credits can also be created for the hydrogen supplied to fuel cell vehicles, as well as for the renewable natural gas or hydrogen supplied to natural gas powered vehicles. 

Land Use Provisions

The Clean Fuel Standard will increase the use of biofuels in Canada and the demand for biofuel feedstock. Only biofuels made from biomass feedstock that adhere to land use and biodiversity criteria will be eligible for compliance credit creation. These criteria ensure the financial incentives created by the Regulations do not result in loss of biodiversity from growing and harvesting biofuel feedstock. These criteria apply to feedstock regardless of geographic origin. 

Further to feedback over the spring of 2020, the design of the land use and biodiversity criteria has been streamlined to minimize administrative burden and expand the economic opportunity for feedstock suppliers. In the June 2020 proposal, a key criterion was no harvest from land expanded after 2008 into highly biodiverse or high carbon stock land. These lands are forests, wetlands, grasslands and riparian zones. The June 2020 proposal also required that compliance with this criterion would have to be demonstrated be each feedstock producer, that is by each farm or forest site. 

In response to feedback, two changes have been made: the baseline year has been changed from 2008 to 2020, and compliance can now be demonstrated at a national level. If a country shows that there has been no net land use expansion, there will be no need for individual farmers or foresters to undertake any further action. 

Analysis from Advanced Biofuels Canada

Ian Thomson, President, Advanced Biofuels Canada reports: 

“Canada’s government has delivered on its promise to lay out a clear plan to meet our emission reduction targets and build economic resiliency in the face of a changing climate. The new 2030 climate plan will help Canada’s innovative clean energy technologies compete globally and deploy those technologies here at home to create new jobs and economic prosperity across our diverse geography. using cost effective mechanisms such as the Clean Fuel Standard.

“The proposed Clean Fuel Standard remains a centre-piece of the plan. For the transportation sector, refinements to the Clean Fuel Standard have aligned it more closely with the British Columbia and California-style low carbon fuel standards. These regulations have achieved significant, real greenhouse gas reductions over the past decade, with no material cost impact on fuel consumers.

“The CFS will require new non-fossil liquid clean fuel production capacity. Notwithstanding a wealth of natural resources, skilled labour, and proven ability to move goods to domestic and export markets, Canada has lagged other jurisdictions in the development of advanced biofuels capacity. The new clean fuel fund and clean tech investment support via SDTC can help attract billions of dollars of new capital investment, support our farm and forestry communities, reduce reliance on imported fossil fuels, and expand exports of Canadian-made clean fuels.

“Over time, the proposed increase in the revenue neutral carbon charge on fuels will create a meaningful clean fuel signal in the market. Fuel consumers will be able to choose higher blends of low carbon biofuels, which are tax-exempt on blends above 10% in gasoline and 5% in diesel. The carbon tax will properly shift the true cost of carbon pollution to the consumption of high-carbon fossil fuels. 

“We look forward to the release of the draft CFS liquid fuel class regulations in the coming days, and to working with the government on the design of funding programs and other elements of the climate plan that address industrial and transportation emissions. Canadians expect to see a CFS design that will increase choice at the pump, reduce energy costs over time, and lead to new jobs and support prosperity across the supply chain. The CFS is now even more closely aligned with the proven, affordable, and feasible fuel regulatory models – but, we’re losing ground in global clean energy race. Our global competitors are building advanced biofuels production platforms to supply the growing demand for non-fossil clean fuels; to attract clean energy investments in Canada, our federal and provincial governments need to resolve market access and regulatory risks. A well-designed CFS is absolutely critical to driving investments in new advanced biofuels production in Canada.

The complete plan can be downloaded here.

In a rush? The Clean Fuels Standard’s Liquid Fuels Annex is here