Analysis

A liquid-fuels-first approach makes sense for Canada’s Clean Fuel Standard

On July 19, Environment and Climate Change Canada announced it would split the Clean Fuel Standard into two distinct regulations: one focused on liquid fuels, primarily gasoline and diesel, and another on gaseous and solid fuels, primarily natural gas. The plan is to develop the liquids regulation first.

A liquids-first approach is the right move since it allows the federal government to start with a policy that has already been implemented elsewhere. Existing experience provides the federal government and industry a familiar policy template to build upon. This in turn allows the government to implement the liquids portion more quickly, which will help Canada meet its climate targets and is a significant economic opportunity for Canada’s clean fuel producers. Given this sort of regulation of gaseous and solid fuels hasn’t been implemented elsewhere, it’s understandable—and prudent—to take more time to ensure the policy is designed right the first time.

The announcement also noted a significant delay, however. Canada won’t see a liquid fuel draft regulation until Spring 2019 (a six-month delay), while the full regulation won’t be ready until 2020 (up to a year delay). The regulation won’t be implemented until 2022, with gaseous and solid fuels being added in 2023.

The delay is disappointing. A 2022 implementation date is a long way off and there will be a federal election in 2019. The long wait time and uncertainty of the election will likely keep clean fuel producers and regulated entities (refiners) from investing in clean fuel facilities. Still, it does give Environment and Climate Change Canada time to get the details right, and the 30 million tonnes CO2eq emissions target for the policy remains. The department has also committed to provide more details on critical design elements and sector targets in the fall, which will help reduce uncertainty.

Below, I go into some more detail on why a liquids-first approach makes sense, and what’s next for the Clean Fuel Standard. But first, a quick refresher.

What is the Clean Fuel Standard again?

The Clean Fuel Standard is a proposed regulation that would require fuel suppliers to reduce the carbon intensity of the fuels they produce and sell. Suppliers, like refiners and natural gas providers, decide what technologies and fuels will be the cheapest way to comply—whether it’s through biofuels, electricity, natural gas, hydrogen or some other solution. This means that fuel used across Canada will get cleaner year after year.

Canada’s Clean Fuel Standard aims to reduce carbon pollution by 30 Mt CO2eq by 2030—equivalent to taking more than seven million cars off the road.

Environment and Climate Change Canada announced more details on the policy back in December 2017 and has since continued consulting with stakeholders and designing the policy.

Why focus on liquids first?

Focusing on liquids first allows the government to build a policy off of established policies in B.C., California, and Oregon, while spending more time on getting the new part of the policy right for fuels like natural gas and coal. There is evidence that the policy will cut carbon pollution and expand the market for clean fuels, which are needed to help achieve Canada’s 2030 climate target and 2050 ambitions.

Experience to date

B.C., California, and Oregon all have versions of a Clean Fuel Standard for their transportation sectors. Since 2010, B.C. has seen clean fuel use double while avoiding 6.4 MtCO2eq of carbon pollution. Meanwhile, the cleaner fuels are getting ever cleaner—by 25% for ethanol and 75% for renewable diesel. California has seen cleaner fuel use grow by 70%, with nearly 10 MtCO2eq of avoided emissions in 2017. In Oregon, cleaner fuel has grown by 15% over the past two years, and its clean fuel program has avoided 0.9 MtCO2eq.

Environment and Climate Change Canada can learn from all three jurisdictions on policy design. And just as importantly, industries that are likely to be regulated by this standard (refiners) and users of the fuels (virtually all businesses) are familiar with the policy and its implications. Many already operate in jurisdictions with this policy in place—in B.C., for example.

Transport and carbon pollution reductions

Switching to lower carbon fuels is critical to achieving Canada’s 2030 climate target and setting us up for success in 2050 (see figure 1, which includes the Clean Fuel Standard). Study after study after study has shown the importance of cleaner fuels at global, federal, and provincial levels.

Existing carbon pricing plans (as well as other policies in the Pan-Canadian Framework on Clean Growth and Climate Change) are unlikely to move the needle much on transportation fuels (see figure 2). The Clean Fuel Standard is uniquely suited to this task because it provides a gradual but consistent signal to reduce the carbon intensity of fuels specifically over time—which is an important consideration when building long-lived clean fuel facilities. The standard would extend to 2030, while current plans for a national price on carbon pollution only see it rise to 2022.

Figure 1 – Canada’s 2030 greenhouse gas target with historical and projected emissions, assuming the Clean Fuel Standard is implemented

Figure 1
From Canada’s 7th National Communication and 3rd Biennial Report

Figure 2 – Carbon intensity with and without the Clean Fuel Standard

Figure 2
Based on data analysis from Analysis of the Proposed Clean Fuel Standard

Canada’s opportunity

China, Europe, and India are all looking for clean fuels and want a share of the growing market. Canada can and should do the same. The Clean Fuel Standard would mean more than doubling the market for clean transportation fuels in Canada. Building and operating these facilities would see upwards of $4 billion in additional economic activity by 2030, not to mention the 24,000 new jobs that level of investment would likely create to build, operate, and supply the new facilities.

Canada is also home to many world-leading companies like Enerkem, Carbon Engineering, Ballard, and AddEnergie that stand to benefit from the Clean Fuel Standard. Having experience in your home country—supported by policies like the standard—is an important stepping stone to international success.

What’s next?

Environment and Climate Change Canada has committed to provide more details by this fall. First and foremost, the department must propose a carbon intensity target for the liquids stream. This tells regulated parties what standard they need to achieve and clean fuel providers how big the market opportunity will likely be for them.

A 10% carbon intensity target from 2015 levels by 2030 would be sufficient to cut about 20 MtCO2eq of carbon pollution from liquid fuels, assuming credits can only be traded in the liquid fuel sector.

Environment and Climate Change Canada will also need to outline how the credit market will work, what fuels will be eligible, how costs will be contained, and how the standard will address indirect land-use change and sustainability concerns with biofuels. We’ve recommended a few approaches on these points.

The department is making a wise choice starting with liquids, and design details in the fall will help define the policy. It’s a critically important one if Canada is to hit its targets in the fight against climate change.