by Melissa Harris – Director of Policy, The Delphi Group
With a recent poll finding that the environment is a leading concern for voters in the upcoming federal election, it’s no surprise that one of Canada’s potentially most impactful climate policies has become the newest topic for political debate.
The forthcoming Clean Fuel Standard (CFS) aims to reduce greenhouse gas (GHG) emissions in the transportation, industry, and building sectors by 30 megatonnes (MT) by 2030, but some are concerned about the cost and complexity of the policy.
The CFS requires fossil fuel suppliers (producers and importers) to reduce the overall lifecycle carbon intensity of fuels, meaning all GHG emissions from “well to wheel” (ie from when it’s extracted to when it’s used as fuel) need to be considered. The policy aims to reduce the carbon in the fuels we use by 10 to 12%. Simple enough, right? Where it gets more complex is in the implementation.
Companies can comply with the CFS to meet their reduction requirements in three ways:
(1) reducing emissions along the lifecycle of fossil fuels for example through enhanced oil recovery;
(2) adding low-carbon-intensity fuels, such as second generation biofuels; and/or
(3) switching to cleaner energy sources, like end-use fuel switching to renewable natural gas. Any of these actions can generate credits under the CFS. Suppliers can also pay into a compliance fund to meet up to 10% of their CFS obligation.
Any of these actions can generate credits under the CFS. Alternatively, suppliers can also pay into a compliance fund to meet up to 10% of their CFS obligation.
The CFS is not as straightforward as a carbon tax, which sets a specific price for each tonne of GHG emissions from fossil fuels. However, the CFS can lower carbon intensity where traditional fuels are still needed – for example, within parts of the transportation sector.
Given that there are simpler and, some would argue, more cost-effective approaches to reduce emissions, why pursue this regulatorypath? The CFS has the potential to reduce emissions by 30 MT. As the world comes to grips with an emerging climate crisis and the fact that we have just over 10 years to reduce emissions if we hope to mitigate the worst effects, Canada is currently facing a significant gap in meeting our international climate change commitments. The CFS can help close that gap by setting clear standards for fuel suppliers across various sectors, providing the necessary support and infrastructure to help meet those standards, and allowing for flexibility.
If designed and implemented properly, the CFS can also drive innovation, expand adoption of sustainable biofuels, increase research and development, enhance electric vehicle (EV) uptake and new electrification opportunities, create new credit generators, and provide new opportunities for carbon capture and storage (CCS), among others.
While Canada is a pioneer in terms of the broad proposed scope of its CFS covering not only transportation but building and industry sectors, other jurisdictions including BC, California, Oregon, and the EU have valuable experience with these standards in the transportation sector. Take California, for example: its Low-Carbon Fuel Standard (LCFS) faced significant initial opposition but is now operating successfully, and California has adopted new, more stringent targets out to 2030. Since 2010, the carbon intensity of fuels in California has decreased almost 5% and the LCFS has reduced emissions by more than 38 MT. EVs have thrived under the policy, although other credit-generating projects like CCS have struggled to find sufficient capital, providing valuable lessons for Canada about the importance of long-term policy certainty.
On June 28, 2019, Environment and Climate Change Canada released the Proposed Regulatory Approach for liquid fuels under the CFS. The document shares detailed information on carbon intensity requirements; credit-generating activities; market flexibility; measurement, reporting and verification; and the CFS review process. Many questions remain, such as: how will domestic aviation fuels be handled, what will the maximum credit price be, what will compliance fund(s) look like? Stakeholders are invited to comment on the draft until August 26th.
As a next step, draft regulations for liquid fuels are planned for early 2020, with final regulations in early 2021 that will come into force in 2022. Gaseous and solid fuel regulations are expected in 2021, to be finalized in 2022 and coming into force in 2023.
Crucial design decisions will be made in the coming months and getting them right will determine the overall effectiveness of the CFS. Voters are showing they care about climate action and, given its mitigation potential and the ongoing political divide on carbon pricing, we can expect to see the Clean Fuel Standard’s moment in the spotlight continue.
Melissa Harris is a Director of Policy at The Delphi Group. For more information on the Clean Fuel Standard or Delphi’s policy services, feel free to reach out to Melissa directly – firstname.lastname@example.org