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3 takeaways from Canada’s upcoming clean fuel standard framework

Clean Fuel Standard will be technology-neutral, companies can comply in way that suits them best

By Bora Plumptre, Pembina Institute

The forthcoming clean fuel standard is the single largest piece of the mitigation effort being taken to achieve Canada’s climate target under the Paris Agreement. Remarkably, by 2030, the federal government expects the policy will reduce carbon pollution by 30 megatonnes annually. That’s equivalent to the combined emissions of Manitoba and Newfoundland and Labrador in 2015.

Bora Plumptre, analyst, Pembina Institute’s federal policy program.

For everyone who wants to see Canada pursue all available avenues for low-carbon innovation — not to mention finally meet its international climate commitments — the design of the clean fuel standard (CFS) really matters. In a long-anticipated “framework” document, Environment and Climate Change Canada outlined several of the department’s regulatory design decisions in relation to the CFS. In part the product of a preliminary round of consultations held over the course of 2017, the CFS framework was a key deliverable on the federal government’s projected timeline for delivering and implementing one of its most important climate policies.

So how will the CFS work, and what design decisions have so far been made?

Cleaning up our act, earning credit

This policy is an example of what other jurisdictions call a low-carbon fuel standard (LCFS). By measuring the life-cycle or “well-to-wheel” greenhouse gas (GHG) emissions associated with each regulated fuel (through production, processing, distribution, and use), and then requiring producers and distributors to gradually reduce the carbon intensity of the fuels they supply — say, by 10 per cent over 10 years — this type of policy ensures a certain level of climate-warming pollution is avoided. In the Canadian case, the CFS will cover fuels consumed by the transportation sector and those used in the building and industrial sectors. Canada will be the first jurisdiction in the world to adopt an LCFS covering these three sectors.

Crucially, the CFS will be technology-neutral, so it will allow companies to comply with its GHG performance standards in ways best suited to regulated parties. Options include innovating to achieve process energy-intensity improvements, upgrading facilities to reduce a fuel’s total carbon footprint, blending renewable content into higher-carbon fuels, and switching from fossil fuels to electricity or hydrogen.

Beyond these actions, companies can also choose to purchase compliance credits from other firms. Tradable credits will come from fuel suppliers that exceed the standard for a given fuel in a given year. As we learned in the framework document released on December 13, they’ll also come from other companies, like electric vehicle manufacturers and providers of vehicle charging infrastructure, that voluntarily opt in to the credit market because they’ll be able to generate credits for deploying alternative energy sources and technologies that displace fossil fuel consumption.

What the new framework clears up

While the shape of the system has been coming into focus throughout the past year of consultations, the CFS framework document provides further clarity around how the federal government views various important design issues.

The document confirms the planned scope of the regulation (i.e. the fuels to which it applies), types of regulated parties (e.g. producers, distributors, and importers), the approach to carbon intensity measurements (i.e. lifecycle analysis of each liquid, gaseous, and solid fuel subtype), timing, and compliance pathways.

Here are three things that stood out to us about the way in which the government says it’s going to proceed with the development of the clean fuel standard.

1. Sustainability and land-use change on the sidelines

Unfortunately, the federal government won’t be considering environmental effects beyond direct greenhouse gas emissions in the first iteration of the clean fuel standard. This is concerning and unacceptable: indirect land-use change (ILUC) is a measurement of the systemic response of the agricultural sector to re-purposing land or crops for biofuel production, and is essential to understanding the net climate effects of biofuel production. While the variety of methodological choices and the absence of reliable data are particular challenges to the inclusion of this variable, other jurisdictions — including California and the European Union — have already acknowledged that non-inclusion essentially assigns a value of zero to this undeniably important factor in biofuels’ emissions profile.

As for sustainability criteria, the commitment so far is that the promised future policy review “will include future consideration of…whether consideration should be given to other sustainability issues.” The CFS should not indefinitely disregard the wider sustainability implications of biofuels.

Environment Canada promises to examine the possible inclusion of ILUC in the CFS at a later date, but this risks getting the policy off on the wrong foot. It’s essential that the Government of Canada do the necessary legwork to ensure this climate-fighting policy spurs new, innovative, and climate-friendly fuel production.

2. Reducing regulatory redundancy?

An important question policymakers must wrestle with is the extent to which a given policy proposal will interact with programs and rules already in place. For example, Canada already has federal Renewable Fuels Regulations, which are volumetric blending mandates requiring a certain percentage of renewable content in the petroleum fuels supplied by producers and importers. The existing mandate for gasoline is set at five per cent; for diesel and heating distillate oil, the mandate is set at two per cent.

The CFS framework indicates that government will maintain these requirements in the short term, but that the new GHG-intensity-based clean fuel standard will eventually replace them. This aligns with what the Pembina Institute recommended in its consultation submission last spring.

While the precise timeline has yet to be determined, the government has indicated that the phase-out will coincide with the first policy review of the CFS before 2030, but after the regulations enter into force. It makes sense to phase down older policy approaches that fail to promote the development of second-generation (i.e. lower-carbon, non-crop) biofuels, like cellulosic ethanol or renewable diesel.

3. The importance of timelines

Draft CFS regulations and the government’s preliminary cost-benefit analysis are due for publication in 2018, with final regulatory text expected midway through the following year. In the interim, Environment Canada will convene two stakeholder groups to receive further input and guide the development of the draft text. There has not yet been word on when the regulations will actually enter into force — though we have learned that the requirements will be triggered at the same time for all fuel streams.

2018 is an important year for the Pan-Canadian Framework on Clean Growth and Climate Change, and as we’ve noted elsewhere, will require sustained focus on implementation. While the signs are promising, each year counts as we draw nearer to 2030. Industry, government, and other stakeholders need lead time to adjust to the new regulatory environment, but the longer this lead time lasts, the more stringent the clean fuel standard will have to be. So a quick pace is necessary to ensure we achieve our clean growth objectives on schedule — and to sustain the possibility that with this marquee climate policy (as with others), Canada might raise its ambition in advance of meeting its current international pledge.

This article originally appeared Dec. 21, 2017 on Bora Plumptre is an analyst with the federal policy program at the Pembina Institute, Canada’s leading clean energy think-tank. 

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