Driving down Canada’s transportation emissions: Federal Clean Fuel Regulations now in force

Canada’s long-awaited Clean Fuel Regulations (CFR, under the Canadian Environmental Protection Act, 1999) came into force on July 1, 2023.  Efforts to develop a national clean fuel standard began in 2016, the objective of which is to incentivize the adoption of lower carbon fuels and new technologies. While the initial scope of the clean fuel standard included liquid, gaseous and solid fuels, the program’s scope was narrowed under Canada’s December 2020 climate change plan – A Healthy Environment and a Healthy Economy – to include only liquid fuels.

Snapshot of the CFR

The CFR is premised on a life cycle approach and requires primary suppliers (i.e. producers and importers who domestically produce or import at least 400 cubic metres of liquid fossil fuel for use in Canada) to reduce the carbon intensity (CI) of the liquid fossil fuels they produce in, and import into, Canada from 2016 CI levels by 3.5 grams of carbon dioxide equivalent per megajoule (gCO₂e/MJ). The stringency of the target will increase by 1.5 gCO₂e/MJ each year until it reaches 14 gCO₂e/MJ in 2030. The federal government anticipates that the CFR will deliver up to 26.6 million tonnes (Mt) of greenhouse gas (GHG) emission reductions in 2030, which is equivalent to removing approximately two weeks of GHG emissions from the Canadian economy. Reduction requirements for the years after 2030 will be held constant at 14 gCO₂e/MJ, subject to a review of the regulations and future amendments.

Certain components of the CFR came into force when the final regulations were published in the Canada Gazette, Part II on July 6, 2022, including:

• registration processes for primary suppliers (i.e. a person that owns, leases, operates, controls, or manages a fuel production facility where gasoline or diesel is produced), registered credit creators (i.e. a person that carries out a GHG reduction project, produces/imports low carbon fuel into Canada, or supplies fuel or energy to vehicles), foreign suppliers (i.e. an owner of a facility outside of Canada where low carbon fuel is produced), and carbon intensity contributors (i.e. a person that applies for the approval of a CI for an activity with the intention of transferring the approved CI to another registered entity);
• application requirements for the recognition of GHG emission reduction projects;
• application requirements for the approval of CI values; and
• processes for creating compliance credits.

The CFR Credit and Tracking System (CATS) provides the technological framework for the program and supports the following program activities: (i) registration of parties; (ii) applications for the recognition of CO₂e emission reduction projects; (iii) applications for the approval of CI values; (iv) reporting requirements; (v) verification activities management for third-party verification bodies; and (vi) management of compliance credit creation and their transactions.

The CFR repeals the Renewable Fuels Regulations (RFR), but retains the minimum volumetric requirements set out in the RFR (at least 5% low CI fuel content in gasoline and 2% low CI fuel content in diesel fuel and light fuel oil). Primary suppliers with surplus compliance units under the RFR will be able to convert these units into credits under the CFR. As a result, there will be a one-time rollover of credits from the RFR in 2024, estimated by Environment and Climate Change Canada (ECCC) to be 1.4 million credits based on departmental data. The main difference between the CFR and RFR is a focus on life cycle GHG emissions under the CFR, rather than volumetric blending requirements for renewable fuels under the RFR. While a number of other jurisdictions have already implemented renewable fuel mandates, the CFR is the first national low-carbon fuel standard in North America.

On June 22, 2023, Bill C-47 (An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023) received Royal Assent. Among other things, Bill C-47 modifies certain provisions in the Canadian Environmental Protection Act, 1999 to allow the Minister of Environment and Climate Change Canada to set up an Environmental Economic Instruments Fund for compliance purposes in connection with programs such as the CFR. Such a fund could be used to collect payments made by regulated entities to satisfy their compliance obligations (e.g. as an additional compliance option or where the regulated entity is unable to use credits to meet regulatory requirements).

Driving innovation with lowest-cost compliance actions

The CFR allows for flexible compliance options to both drive innovation and to enable primary suppliers to choose the lowest-cost compliance actions. For each compliance period (usually a calendar year), a primary supplier will demonstrate compliance with their reduction requirements by creating credits or acquiring credits from other creators in the credit market established by the CFR. Primary suppliers will then use the required amount of credits to meet their annual CI reduction requirements. Under the CFR, each credit represents a life cycle emission reduction of one tonne of CO₂e. Entities with surplus credits can bank them for use in later years or sell them. Once a credit is used for compliance, it is cancelled and can no longer be used. Parties that are not primary suppliers are also able to participate in the credit market as voluntary credit creators. Market participants can create compliance credits in three ways:

1. Compliance Category 1: By undertaking projects that reduce the life cycle carbon intensity of liquid fossil fuels (e.g. carbon capture and storage, on-site renewable electricity, co-processing);
2. Compliance Category 2: By supplying low carbon fuels (e.g. ethanol, biodiesel); or
3. Compliance Category 3: By supplying fuel or energy to advanced vehicle technology (e.g. electricity or hydrogen in vehicles).

While there is no limit to the number of liquid-based compliance credits that may be used by a primary supplier for the purpose of compliance, a primary supplier may only use gaseous-based compliance credits in order to satisfy up to 10% of its total reduction requirement annually. These credits can be created in respect of the production or import of low-CI gaseous fuels or GHG emission reduction projects that involve the production or import of co-processed low-CI gaseous fuels. Further, a primary supplier may only use credits created under the generic quantification method (discussed in further detail below) in order to satisfy up to 10% of its total reduction requirement annually.

Credit Creation under Category 1

Category 1 recognizes actions that reduce a fossil fuel’s CI through an eligible emission reduction project conducted at any point along the life cycle of a liquid fossil fuel. The ability of a project to create credits is governed by quantification methods provided by ECCC. All eligible projects must reduce the CI of a liquid fossil fuel along its life cycle, achieve incremental GHG emission reductions, and must have begun to reduce, sequester, or use CO₂e emissions on or after July 1, 2017. Project proponents can apply to ECCC to have a project recognized for credit creation; each year, project proponents will be required to submit to ECCC an annual validation report with a third-party verification report and verification opinion.

To date, ECCC has developed the following project-specific quantification methods: (i) Quantification Method for Low-Carbon-Intensity Electricity Integration; (ii) Quantification Method for CO₂ Capture and Permanent Storage; (iii) Quantification Method for Enhanced Oil Recovery with CO₂ Capture and Permanent Storage; and (iv) Quantification Method for Co-processing in Refineries. In addition, ECCC has established a Generic Quantification Method for projects of a type for which there is no specific methodology. Provided they meet the eligibility criteria, projects under the generic quantification method may include, but are not limited to:

• methane reductions that are additional to regulatory requirements;
• combined heat and power;
• fuel switching;
• electrification; and
• energy efficiency projects.

As noted above, there is no limit for credit creation under the generic quantification method, but a primary supplier may only use credits created under this methodology to satisfy up to 10% of its annual reduction obligation. ECCC has issued the Quantification Method Development Guidance Document to provide guidance on the process that it will follow to develop quantification methods under the generic methodology and criteria to assess the additionality of project types.

The crediting period for all projects is 10 years (with a possible one-time extension of five years of the crediting period for most projects), except for:

• a project that is CO₂ capture and permanent storage or enhanced oil recovery with CO₂ capture and permanent storage, for which the crediting period will be 20 years; and
• a project that is under the quantification method for co-processing in refineries, for which there is no end to the crediting period.

It should be noted that overlapping federal and provincial legislation could result in project additionality issues that may impact credit creation. Specifically, if federal or provincial legislation is implemented that creates a legal obligation that overlaps with the scope of the project, no credits may be created for the legislated actions as of the date the requirements in the legislation come into force. However, if credits being created under the quantification method are not covered by the legislation, then that portion of the project would continue to earn credits annually. During the review of an existing quantification method, if ECCC determines that a methodology is no longer additional for reasons other than legislative overlap and the quantification method is withdrawn, existing projects will still receive credits for the duration of the initial crediting period.

Credit Creation under Category 2

Category 2 encompasses credits that are created under the CFR for low-CI fuels produced in or imported into Canada. Low-CI fuels are fuels – other than fossil fuels – that have a CI equal to or less than 90% of the credit reference CI value for the fuel. Most low-CI fuels available on the market are types of biofuels, such as ethanol. Other low-CI fuels include synthetic fuels (e.g. those made from CO₂ captured from the atmosphere as a result of direct air capture, or syngas generated from biomass). Credits may be created by the producers and importers of liquid and gaseous low-CI fuels as of the date of registration of the CFR. Credits for low-CI fuels are created based on the amount of low-carbon fuel supplied in Canada annually (in MJ) and the difference between the life cycle CI of the low-CI fuel and the credit reference CI value for the fuel. In most cases, a low-CI fuel producer or foreign supplier is required to obtain an approved CI value for each low-CI fuel that they produce or import in order to create credits. The CFR requires the use of either the Fuel Life Cycle Assessment (LCA) Model (discussed in further detail below) to calculate facility-specific CI values using facility-specific data, or the use of default values available in the regulations.

Fuel producers and suppliers are able to use the Fuel LCA Model to determine CI values once they have 24 months of operating data. A provisional CI value using the model may be used with only 3 months of data, until 24 months of data is available. Facilities with less than 3 months of operating data for a low-CI fuel need to use prescribed default values. As noted above, most fuel producers are required to submit an application to the Minister for approval of each fuel’s CI, as well as to submit an annual CI Pathway Report. Starting in 2025, credits will be adjusted annually based on the CI Pathway Report. If the CI in the annual CI Pathway Report is higher than the approved CI by an amount exceeding the materiality threshold for CI, the equivalent number of credits created in excess will be removed from the account of the credit creator and the CI will no longer be valid. On the other hand, if the CI determined in the CI Pathway Report is lower than the approved CI, additional credits may be created.

The CFR also allows the creation of credits from the production of low-CI fuels produced from biomass-based feedstocks. In order to prevent adverse impacts on land use and biodiversity resulting from the increased harvest and cultivation of these feedstocks, the CFR establishes land-use and biodiversity (LUB) criteria. Only low-CI fuels made from biomass feedstock that adhere to the LUB criteria are eligible for compliance credit creation. These criteria apply to feedstock regardless of geographic origin. ECCC has noted that the criteria do not apply to feedstock that is not biomass or a biomass feedstock that has a lower risk on land use and biodiversity (such as municipal solid waste).

Credit Creation under Category 3

Category 3 covers advanced vehicle technologies and enables credit creation for changing or retrofitting a fossil fuel combustion device to be powered by another fuel or energy source, such as electric vehicles (EVs). While this does not directly reduce the CI of fossil fuels, it reduces GHG emissions by displacing gasoline or diesel used in transportation by fuels or energy sources with lower CI levels. This category is also designed to encourage the uptake of EVs by allowing credits to be created by network operators for residential EV charging. Credits may be created as of the date of registration of the CFR by: (i) owners or operators of fuelling stations that supply fuels for transportation uses (natural gas, renewable natural gas, propane, renewable propane); (ii) producers and importers of low-CI fuels (renewable natural gas and renewable propane) used for transportation purposes; (iii) owners or operators of fuelling stations for dispensing hydrogen to hydrogen fuel cell vehicles or other vehicles; (iv) by charging network operators for residential and public charging of EVs; and (v) charging site hosts for private or commercial charging of EVs.

The CFR requires charging network operators to reinvest 100% of the proceeds from the sale of credits created by residential and public EV charging. The revenue must be reinvested into two available categories of actions: (i) reducing the cost of EV ownership through financial incentives to purchase or operate an EV, or (ii) expanding charging infrastructure in residential or public locations, including EV charging stations and electricity distribution infrastructure that supports EV charging. ECCC has indicated that credits for residential charging of EVs will be phased out by the end of 2035 for charging stations installed by the end of 2030. Further, any residential charging station installed after the end of 2030 will not be eligible for credits.

Fuel Life Cycle Assessment Model

The Fuel Life Cycle Assessment (LCA) Model is a tool used to support the calculation of the life cycle CI of fuels and energy sources used and produced in Canada. Registered entities can use the Fuel LCA model to create credits under the CFR. The Fuel LCA Model consists of three main components:

1. Fuel LCA Model Database: Contains a library of CI datasets and fuel pathways developed to model a CI specific to a fuel or an energy source.
2. Fuel LCA Model Methodology: Describes the methodology, data sources and assumptions that were used in the development of the Fuel LCA Model, and provides the rationale supporting the methodological approach.
3. Fuel LCA Model User Manual: Provides information on general definitions and concepts related to LCA from the perspective of the LCA Model. Also provides technical guidance on how to perform basic operations in the openLCA software that are required for CI calculations.

ECCC has also developed two other CFR-specific components that stakeholders can use in order to determine the CI of a fuel or energy source:

1. CFR Specifications for Fuel LCA Model CI Calculations: Provides instructions for calculating CI values of fuels, energy sources and material input for the purpose of creating credits under the CFR.
2. CFR Data Workbook: A spreadsheet that helps convert applicant data to ensure compatibility with the Fuel LCA Model. For the purpose of the CFR, it must be used to carry out all calculations (i.e. unit conversion, calculation of allocation factors, etc.) prior to data entry in the Fuel LCA Model.

All components are available in the Environment and Climate Change Canada Data Catalogue.

Renewable fuel requirements in the provinces

Currently, six provinces have renewable fuel requirements that are equal to or higher than current federal renewable fuel requirements (as set in the RFR and maintained by the CFR):

• British Columbia

BC is the only province with a low carbon fuel standard, which came into force in January 2010 under the Renewable and Low Carbon Fuel Requirements Regulation (RLCFRR). The RLCFRR targets a 20% reduction in fuel CI by 2030. In addition, BC’s program requires 5% ethanol content in gasoline and 4% in diesel fuel.

The RLCFRR applies to all fuels used for transportation in province, with the exception of fuel used by aircraft or for military operations. Fuel suppliers can comply with the RLCFRR by reducing the overall CI of the fuels they supply, acquiring credits from other fuel suppliers, or by entering into an agreement with the province. Under these agreements, fuel suppliers are able to generate credits based on activities that reduce GHG emissions through the use of low-carbon fuels sooner than would have otherwise occurred without the agreed-upon activity.

• Alberta

Alberta’s Renewable Fuels Standard requires a minimum annual average of 5% renewable alcohol in gasoline and 2% renewable diesel in diesel fuel sold in the province by fuel suppliers. In order to meet the requirements of the standard, renewable fuels must demonstrate at least 25% fewer GHG emissions than the equivalent petroleum fuel.

• Saskatchewan

Saskatchewan’s Renewable Diesel Act requires fuel distributors to include 2% renewable diesel content. The province also has a 7.5% ethanol mandate.

• Manitoba

Manitoba has implemented an ethanol mandate that requires fuel suppliers to blend at least 10% of ethanol in their gasoline. The province’s biodiesel mandate requires fuel suppliers to blend 5% renewable content in on- and off-road diesel fuel.

• Ontario

Ontario’s Cleaner Transportation Fuels Regulation requires fuel suppliers to blend 10% of renewable content in gasoline from 2020 to 2024. The renewable content requirement will increase to 11% in 2025, 13% in 2028, and 15% in 2030. The renewable content must emit fewer GHG emissions than fossil gasoline on a lifecycle basis by 45% before 2030 and 50% from 2030 onward. The regulation also requires fuel suppliers to continue to blend 4% renewable content in diesel, which content must emit 70% fewer GHG emissions than fossil diesel on a lifecycle basis.

• Québec

As of January 1, 2023, Québec requires 10% low-carbon fuel content in gasoline in 2023, which will increase to 15% by 2030. Low-carbon fuel content in diesel will begin at 3% in 2023 and increase to 10% by 2030. In both fuel pools, the low-carbon content volume requirements will be adjusted by a CI factor.

In the Regulatory Impact Analysis Statement for the CFR, ECCC noted that all low-CI fuels supplied to the Canadian market – including fuels used to comply with existing federal and provincial renewable fuel regulatory requirements and BC’s Renewable and Low Carbon Fuel Requirements Regulation – are able to create credits under the CFR.

Economic impacts of the CFR

The CFR is part of a suite of complementary climate policies designed to spur investments in clean energy and the adoption of clean energy technologies and processes as outlined in 2030 Emissions Reduction Plan: Canada’s Next Steps for Clean Air and a Strong Economy. With the CFR, demand for low-carbon fuels is expected to increase and create opportunities for market participants and stakeholders. The feedstocks and processes that have the lowest carbon intensity will create more CFR credits, thus generating greater value in the market for those feedstocks and processes. The CFR is also expected to send a market signal beyond the liquid fuel supply chain. As discussed above, the CFR seeks to incentivize the uptake of advanced vehicle technologies, such as EVs, by enabling the creation of credits for the development of EV charging infrastructure.

To support the implementation of the CFR, the federal government is allocating $1.5 billion for the Clean Fuels Fund (CFF), which is aimed at supporting the domestic production and adoption of low-carbon fuels such as biofuels. The federal government is also supporting clean hydrogen production through the CFF by investing in early-stage opportunities as set out in the national Hydrogen Strategy for Canada.

In May 2023, the Parliamentary Budget Office (PBO) released a distributional analysis of the CFR. ECCC estimates that the CFR will increase the price of gasoline and diesel in 2030 – the year in which the CFR reaches full stringency – by up to 17 cents per litre and 16 cents per litre, respectively. Further, ECCC estimates that the CFR will decrease GDP in Canada by up to 0.3 per cent (or up to $9.0 billion) in 2030, while reducing emissions by about 26.6 million tonnes in 2030. By 2040, ECCC estimates that the regulations will have cut emissions by around 200 million tonnes at a cost to GDP of $30 billion. Nationally, in 2030, the PBO estimates that the cost of the CFR to households will range from 0.62 per cent of disposable income (or $231) for lower income households to 0.35 per cent of disposable income (or $1,008) for higher income households.

The Road to 2030

According to ECCC, the transport sector was the second largest source of GHG emissions in 2021, accounting for 22% of total national emissions with 150 Mt CO₂e emitted. With the introduction of the CFR, the federal government seeks to achieve 26.6 Mt CO₂e of emission reductions from the transport sector in 2030 by sending market signals to both the liquid fuel supply market and the market for advanced vehicle technologies. To facilitate compliance, businesses subject to the CFR will need to understand the registration requirements and application processes under the CFR, CI performance standards for various fuels, available measurement tools, and reporting and record-keeping requirements. Beyond regulatory compliance, the CFR may open up an opportunity for businesses to incorporate emission reduction considerations into their operations. These considerations may include, among others, establishing corporate GHG emission reduction targets, identifying emission reduction and efficiency opportunities, deploying technology to reduce emissions, tracking of abatement activities, and implementing processes to measure performance against targets.

Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s ESG and Carbon Finance group.

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