Canada Releases the Final Clean Fuel Standard (CFS)
The final rule for Canada’s Clean Fuel Standard (CFS) was published in the Canada Gazette on July 6, 2022. By 2030, the rule aims to reduce the emissions for Canadian suppliers of gasoline and diesel by over 15 percent (compared with 2016).
This week on the podcast, Jackie and Peter talk about the new rule. While a draft version was published in December 2020, the final rule had some unexpected revisions.
They also talk about Alberta carbon policy. The provincial government issued a document for feedback on proposed changes to the large emitter program, called Technology Innovation and Emissions Reduction (TIER).
Content referenced in this week’s podcast:
- The Final Canadian Clean Fuel Standard
- A Review of Alberta’s Technology Innovation and Emissions Reduction (TIER) Regulation
If Carbon Policy is your jam – this is the episode for you. As Peter notes, it’s an episode “for carbon policy nerds, but still plenty important.”
This past July 6 (2022) two important pieces of the puzzle were introduced – the Canadian Clean Fuel Standard, and the long-awaited draft policy known as TIER (Technology Innovation and Emissions Reduction).
The TIER Program is the Alberta-based large emitter carbon pricing system. With legislation in place there is a required review by the end of this year preceded by a consultation process for proposed changes.
One potential change is to increase the percentage of industrial emissions taxed. Today that’s about 10%-12% per year with a scheduled increase of one percent annually. The proposed change is to make that two percent per year.
“And so, the large emitters are going to be arguing, well, we only want it to go up by 1% a year not two. And a whole bunch of other people are going to say two, including probably the government. Is that what’s going on?” Asks Peter.
“Well, I actually think some of the large emitters that can do CCS are going to be arguing it probably makes sense to increase this stringency to help create more certainty to that carbon price.” Says Jackie.
The Federal Clean Fuel Standard is even more complex.
“The goal,” explains Jackie “Is to make liquid fuels in Canada more low carbon. And how to measure what is low carbon is, everything from producing to refining, to the end use of the fuel, must go down by about 15% compared to a baseline. Now, initially it was all liquid fuels. The final rule is just gasoline and diesel. So, they’ve kind of narrowed it.”
“There are three categories. One is, you can reduce emissions from the upstream oil and gas. You can dilute your petroleum by using a lower carbon substitute, like biofuels. Or you can use alternatives, like switching to EVs or hydrogen vehicles and things that are less greenhouse gas intense on a life cycle basis.”
“There are a lot of questions.” Notes Peter “The good news is that this legislation, it seems, has more clarity and finalized what’s included, what isn’t, how is it going to theoretically work. So, it’s good that we have the heads up on this, but I feel like we need to bring on the podcast somebody from the Biofuels Industry Association and somebody from the Canadian Liquid Fuels Association, to really understand the impacts of what this means. And ultimately what it also means to consumers and the price of the fuels.”
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Episode 163 Transcript
Disclosure:
The information and opinions presented in this Arc Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the Arc Energy Ideas podcast with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the Arc Energy Ideas podcast, I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian and welcome back. So, Jackie, we’ve got a podcast here on … well, it’s for carbon policy nerds.
Jackie Forrest:
Yeah, exactly. So, if you’re not a carbon policy nerd, you may find this a little bit less interesting. But, hey, if you are, and you’re a Canadian, there’s some pretty important policy that’s been introduced several weeks ago, July 6th was actually a huge day for carbon policy in Canada. We had the final rule for the Canadian Clean Fuel Standard come out. That was long awaited. And also maybe a little less earth shattering, but we did have a draft policy that came out to discuss what the Alberta government might want to do with its large emitter program, which is called TIER.
Peter Tertzakian:
T-I-E-R, right?
Jackie Forrest:
Yeah. Technology Innovation and Emissions Reduction, TIER. Also, the policy news, the Feds put out a discussion document about how to impose a cap on the greenhouse gas emissions from Canadian oil and gas. Now this is of course a bit controversial and it’s a big topic, so we’re not going to talk about it today, we’ll reserve this for a future podcast.
Peter Tertzakian:
Okay, well, let’s start with this TIER program, the Alberta-based large emitter carbon pricing system. So, there are legislation that’s been put into place, requires a review by the end of this year, 2022. There’s feedback and all sorts of consultations that are going on.
Jackie Forrest:
Yeah. So, this came out, and they’re only giving a month for people to put written feedback on, so it’s a discussion document that proposes some changes to the policy. Now, this policy’s really important. It’s going to drive, I think, a big part of the investments in carbon capture and storage, as well as other emissions reductions in Alberta, which is where a lot of the emissions sit in terms of Canadian emissions from the industrial sector. So, there’s lots here and I think it’s worth reading. You do need to give feedback if you’re going to do it in the next month, but I thought I’d just highlight two areas that I think are pretty important for the future of how this market looks and therefore how much investment we may see.
Peter Tertzakian:
So, but first of all, I mean just distilling this, TIER is basically a carbon tax program.
Jackie Forrest:
For large emitters.
Peter Tertzakian:
For large emitters over, what is it, 100,000 tons a year? Is that [inaudible 00:02:23]. Yeah, so large emitters. If you’re a large corporate emitter, you pay a carbon tax. And this has been in place for a long time. And this is why Alberta says that we already have a carbon tax, unlike many other jurisdictions, and the monies collected then go into a fund.
Jackie Forrest:
So, part of the money goes into a separate entity that then invests in carbon reduction projects. But part of it also can be paid by buying offsets from others. So, we’ll get into that. So basically, as a large emitter … and actually, companies that are smaller than the amount you said can opt into it as well. And conventional oil and gas producers can opt into it as well.
Peter Tertzakian:
Why would they do that?
Jackie Forrest:
Well, because it’s cheap. They only have to pay a portion of their emissions if they opt into it versus being taxed on all their emissions. So, most of them have done that. It all gets very complex, but I will say that there’s two areas that are being proposed, I think, that are very consequential to how the market looks. One is that they change the stringency. So today, only a small fraction of all your industrial emissions are subject to the carbon policy. It’s about 12%. So why is that done? It’s because if you taxed everything, they would be uncompetitive because they have to compete in the export markets.
Jackie Forrest:
They don’t set the price for the goods that they sell. And so, the idea was you just charge a portion of the emissions, it gives them some incentive to reduce, but doesn’t make them economically uncompetitive. Now the idea is, today, that this stringency would increase by 1% per year. And the draft is saying, we’re going to move this up to 2% per year. So, this would help create a larger market of buyers for carbon credits because, all things the same, you’re going to have to buy many more credits in 2030 than you would if they didn’t make [inaudible 00:04:03].
Peter Tertzakian:
So, what you’re saying is that the amount of carbon emissions that fall under the taxation regimen is going to increase, potentially, by 2% per year?
Jackie Forrest:
Up from the current 1% per year. So, it’s 10 to 12 today, so next year it would be 13, the following year 14. Instead, it’s going to be 2% growth each year, instead of one. And remember back when we had our CCS podcast with the BMO analyst, talking about the fact that, if everyone invests in CCS, then there’d be so many people selling credits and not enough fires. And what we really need to do, there’s a couple levers we can do, and one of the biggest ones is to make the market larger. So, this would help solve that problem by every company that emits now has to buy more credits than they would’ve before, because now more is subject to the tax.
Peter Tertzakian:
So how does that square with a competitiveness issue?
Jackie Forrest:
Well, that’s the thing. If you’re one of those people that can’t reduce their emissions, maybe your emissions are very expensive and you’re somewhere very remote where it’s hard to do CCS, then it does make your cost go higher and makes you maybe a little bit less competitive.
Peter Tertzakian:
Right. So presumably all the big emitters are going to be providing written feedback by August 7th, in advance of the final ruling on these numbers that are going to come up by the end of the year.
Jackie Forrest:
Yes, for sure. Yeah.
Peter Tertzakian:
And so, the large emitters are going to be arguing, well, we only want it to go up by 1% a year not two. And a whole bunch of other people are going to say two, including probably the government. Is that what’s going on?
Jackie Forrest:
Well, I actually think some of the large emitters that can do CCS are going to be arguing, probably make sense to increase this stringency, because they want … That’s going to help create more certainty to that carbon price, which is one of the big barriers holding back CCS investment, is that carbon price going to be … Remember the BMO analyst said it needs to be $100 a ton?
Peter Tertzakian:
You need carbon price policy certainty over a long period of time. We’ve talked about that before in that podcast and in other podcasts, otherwise who’s going to spend billions of dollars if you don’t have that kind of certainty? So, by putting in this regimen and the increasing amount of volumes that are eligible under this program, or that are mandatory under the program actually, is offering a sense of security of policy or certainty of policy.
Jackie Forrest:
Well, it’s creating a bit more certainty that the market won’t be flooded with all the CCS. Now, on the other hand, if we don’t do all those CCS projects, then maybe it’s going to drive the price up too high. So, it’s not an easy thing. And I do think those folks that can’t actually reduce their emissions economically, because they’re going to say, “I don’t want to have this stringency go up.” So, there’ll be people on both sides of this. But I think if we’re looking at, just from the perspective of what’s going to get CCS investment going in Alberta, what’s going to drive billions of dollars investment in Alberta, I think we need to have this stringency be increased. There’s another piece to the puzzle, which is in the document, which is how much can you use credits to meet your obligation under this policy? So today, only 60% of your obligation can be met by buying credits from the market. The rest, you have to pay a tax at the posted price, which is $50 today, and it would grow to 170 by 2030, following the Federal government’s plan.
Peter Tertzakian:
Okay, so let’s just pause and clarify this. So, by buying a credit, say from somebody who’s planted trees, to somebody who’s installed solar whatever, so you buy this carbon credit for emission reduction from somebody who’s done that. Only 60% of the emissions you generate can fall under that?
Jackie Forrest:
Exactly. So, of the 10% of all your emissions that fall under this plan, you could only buy, from the market, 60%. The rest would have to be paid to the government, and as you talked about, that money goes into that emissions reduction file.
Peter Tertzakian:
Or the company works hard to reduce its emissions, physically.
Jackie Forrest:
Exactly. And they don’t need to pay.
Peter Tertzakian:
Which is really what they’re trying to incent companies to do so they don’t have to worry about 60%, 40%, whatever. They just lower their emissions and they …
Jackie Forrest:
And then they don’t have to pay, so you can either reduce or you can go buy offsets and then pay the tax. Now what the draft document proposes is that they would actually increase the amount from 60% to a much greater number that you can use offsets for. So, the positive for this is, come back to that whole scenario, if everyone does CCS, there may be more people trying to sell credits than there are buyers, and we may have just an oversupplied market and that means lower carbon prices. However, what this does is it allows a deeper amount of buyers because now instead of having to pay tax for 40%, maybe you don’t have any tax. It all can be bought with offsets. So, it creates more buyers.
Jackie Forrest:
I think it’s a really good idea because, again, it creates a deeper market. The other interesting thing is they said maybe they would make this amount dynamic, changing over time, and that would be interesting too because they could assess, well, where is the carbon market today? And they could adjust how much can be paid for on the carbon market based on … so, if it’s trading low, then we’ll say, hey, everything can be bought off the carbon market to increase the amount of buyers. If the carbon price is too high, you could adjust that fraction so that you could create more stability and predictability in the carbon price. which is ultimately what’s needed to get that CCS investment going [inaudible 00:09:29].
Peter Tertzakian:
Well, I mean, the good news here is the TIER program has been around for a long time. What’s being proposed here are adjustments to that program, a little more certainty, and that’s all good. You and I are carbon nerds because we have to be in our jobs here, in terms of understanding energy and where energy’s going. But I just find this super complex. It’s just like, it taxes the brain even if you live and breathe it every single day. And if you thought that was complex, then there’s the Federal Clean Fuel Standard.
Jackie Forrest:
Right. So, the final policy-
Peter Tertzakian:
Yeah, I mean, this one is really complicated.
Jackie Forrest:
Yeah, so just as a reminder, we did have a podcast quite a while ago in the end of 2020 when this policy first came out, the draft version of it. Now we have the final version. It is delayed, people expected it to come out sooner, and they’ve actually delayed the implementation of this policy about six months because of all of this coming out slower. But this final policy, I will put a link to it in the show notes, as well as to that draft document for the Alberta government’s TIER program. But, as a reminder, the goal is to make liquid fuels in Canada more low carbon. And how to measure what is low carbon is, everything from producing to refining, to the end use of the fuel, you need to-
Peter Tertzakian:
Like combusting it.
Jackie Forrest:
Combusting it. Has to go down by about 15% compared to a baseline. Now, initially it was all liquid fuels. The final rule is just gasoline and diesel. So, they’ve kind of narrowed it.
Peter Tertzakian:
[inaudible 00:10:55] is out?
Jackie Forrest:
Yeah. Heavy fuel oils and things like that no longer are part of it as well. So, it is a bit smaller in scope than initially thought about. That was a surprise with the final rule. And who has to do this? Well, the fuel distributors and refiners, they need to do this. They need to make sure they comply, so they can either reduce their emissions to meet this, or they can buy credits from other people.
Peter Tertzakian:
Right, so there’s a number of ways they can reduce their emissions. The ones that we’ve talked about mostly are blending with biofuels.
Jackie Forrest:
That’s right. There’s three categories. One is, you can reduce emissions from the upstream oil and gas. You can dilute your petroleum by using a lower carbon substitute, like biofuels. Or you can use alternatives, like switching to EVs or hydrogen vehicles and things that are less greenhouse gas intense on a life cycle basis.
Peter Tertzakian:
Right. So, I mean, the upfront one, reducing upstream oil and gas emissions, the upstream industry is already working on it with the CCS. But I mean, upstream emissions and the whole life cycle’s only … I don’t know, depending on where it is, 10 to 15% max, right? So …
Jackie Forrest:
Yeah. Well, if you include refining, yeah, it’s probably 15 or a little bit greater, but in that range.
Peter Tertzakian:
15%, so then you got to blend in the biofuels and so on and so forth, which, in this current environment of food for fuels … And I remember, I don’t know how long ago, it was well over a year ago, we had a biofuel industry … Hello, talking about these issues and where are the biofuels going to come from?
Jackie Forrest:
Right. And he felt that there wasn’t going to be an issue there, but I think that was a long time ago. I think there’s more concerns with the food prices today and maybe the scarcity of some food, that more and more biofuels are used. But, yeah, that is one way. Now the first generation is using food, he did talk about the second generation that uses more waste products, although that isn’t really a commercial thing today. But hopefully that would play a role as well.
Jackie Forrest:
I do want to talk about that. The first way to comply would be for these refiners to go buy credits from oil and gas producers who have reduced their emissions, and they can use that as a credit. There was a major change in the policy that came out as the final rule from what was expected, in that, they’re only going to allow credits to be generated for oil production that is consumed in Canada. So, if the oil is going to be exported, you can’t generate credits.
Peter Tertzakian:
So, most of the oil produced in Canada goes to the United States.
Jackie Forrest:
Exactly. So, this really changes the opportunity for oil and gas producers. This policy was hoped to be a real driver to reduce emissions from oil production, and including CCS projects, but now it’s a little less certain that it will be. Because it looks like only a very small portion … I worked it out, in Western Canada only about 20% of the oil we produce goes towards Canadian consumption. And even then, there’s big air bars on that because there’s a lot of complexity in figuring that out. First of all, some of the supply we have is not all from Canada. Some of it is, they blend and condensate from the US, so our supply itself isn’t all Canadian. On top of that, our refiners, they refine a whole blend of crude oils at different times, and some of the refined products are consumed here, some go to the US. It’s just really complex.
Peter Tertzakian:
It sounds very complex.
Jackie Forrest:
We import some refined products.
Peter Tertzakian:
If you limit the amount of credits that can come from the upstream, that necessarily means that more has to come from blending and downstream.
Jackie Forrest:
Yeah. This is positive for biofuels and for electric cars, for people that want to generate credit [inaudible 00:14:24].
Peter Tertzakian:
How does a refiner get involved with electric cars?
Jackie Forrest:
Well, they could put in their own electric car charging stations throughout Canada, their existing retail stations if they have that. But they could just buy credits from other people that have charging infrastructure that then sell them the credit.
Peter Tertzakian:
So basically, this is like a mechanism for the liquid fuel refiner, the downstream, to fund the adoption of electric vehicles.
Jackie Forrest:
Yeah, that’s one way, but they don’t have to do that. Like I said, another private investor could put these things in with the idea of generating credits and selling them to a refiner. You know, what’s nice about this, this is Canada’s first pan-Canadian carbon market. So, across the country, people will be able to generate credits and sell them to the refiners. So I think that’s positive, but yeah, back to your first point, this is negative for the opportunity to reduce in the oil sector. But it is a positive for how much biofuels and electric cars and other alternatives, like hydrogen. I mean, they even allow credits to be generated from compressed natural gas vehicles or low carbon [inaudible 00:15:34].
Peter Tertzakian:
Thinking about the biofuels, again, I’m a skeptic, honestly. This whole food for fuel at a time when we’ve got a global fuel crisis, ultimately the consumer’s going to have to pay, right? Because you blend in more biofuels that are more expensive than just petroleum coming out of the ground. Or refined and coming out of … I don’t get it.
Jackie Forrest:
Well, I will tell you that, in the actual document there is an implication section, and the government is assuming that renewable diesel, HDRD it’s called, would grow eight times from now until you look at 2030 to 2040 time period. And that ethanol will double, and that biodiesel would grow five times. So yeah, there’s going to be some major growth. I think people in the biofuel industry think that is sustainable and that … A lot of this growth isn’t going to happen in the next couple of years, it’s further out because, although this policy says you need to reduce your emissions by 15%. It’s more to the latter part of the 2030 time period where you see this.
Peter Tertzakian:
So, when does all this kick in?
Jackie Forrest:
Well, it goes into effect July 2023, but the first few years there isn’t really a lot of change, because the existing biofuels, we are already have and there are requirements in Canada to blend a certain amount of biofuels already, are going to be enough to meet the first few years of the policy. It’s only in the ’27 time period, according to the government modeling, that new things would have to happen. Either more biofuels being blended than today, or more credits coming from the oil sector, or more EV charging, and so it’s a few years off. But we are going to have to see more growth in biofuels and I think that is a question we could have on a future podcast to someone that’s really looking into the constraints today. Because I think when we had that podcast before, it wasn’t viewed to be a constraint in terms of the food stocks.
Jackie Forrest:
I do want to come back, though, to that compliance category one, which is reducing emissions from oil. That is a major change, to say that only 20% or so of the oil and gas projects are going to be able to generate emissions. Or maybe only 20% of all the emissions that are reduced can qualify. I have a big question on how the heck are you even going to do that? If I’m an upstream producer in Grand Prairie who puts my oil in a pipeline, I have no idea where it goes, how do I know if my oil is exported or consumed in Canada? How do I know what fraction of it might be … I don’t know how they’re going to do it, technically. I mean, there’s one way to do it where you just say, we’ll do it at the large scale and that everybody gets the same rule.
Jackie Forrest:
So, my math would show maybe about 20% of all the emissions reductions from oil should qualify, because that’s in Western Canada. Maybe you just say to everybody, that’s what you get, and there’s certainty there. But if you’re actually going to try to figure out which oil projects are actually consumed in Canada and which ones are exported … And by the way, that changes month to month. It’s not consistent throughout the year. There’d be no certainty to how many credits you can actually generate and that’s not going to be good for investment. So, I think I have a lot of questions on just how they’re going to implement that.
Peter Tertzakian:
Yeah. There are a lot of questions. The good news is that this legislation, it seems, has more clarity and finalized what’s included, what isn’t, how is it going to theoretically work. So, it’s good that we have the heads up on this, but I feel like we need to bring on the podcast somebody from the Biofuels Industry Association and somebody from the Canadian Liquid Fuels Association, to really understand the impacts of what this means. And ultimately what it also means to consumers and the price of the fuels.
Jackie Forrest:
Right. Well, yeah, in terms of the supply, because that growth rate for biofuels, is that realistic now that we really are going to depend more on biofuels?
Peter Tertzakian:
Look, I’m not saying I’m against biofuels. I’m just saying that the threshold for using biofuels in a food versus energy debate has got to be a lot higher. I’m just saying that backing companies and … It’s just got to be a higher standard that has to be applied.
Jackie Forrest:
In terms of the cost, though, there was information in their report around the cost, and you could even do math yourself to figure out the cost. The government is expecting, by 2030, the cost could be in the range of 10 or 14 cents per liter. I did some math, it’s probably going to be pretty minimal initially, maybe around 2 cents a liter when it starts in July of 2023. Because I was thinking, how popular is the government going to be if they put in a policy that adds a bunch of cost at the pump? But it’s probably going to be pretty minimal initially, but by 2030, maybe in the range of 10 to 14 cents is what they’re predicting it’s going to increase in terms of the cost.
Peter Tertzakian:
Diarize me as a bit of a skeptic on this, because I think the consequences of limiting the ability to generate credits, and putting more of the onus on the biofuels, again at a time when we’ve got a global crisis that’s not likely to end anytime soon.
Jackie Forrest:
Well, and I do think most of the models show that there is a limit to how much we can get from food-based biofuels. And there has to be a breakthrough where these biofuels that come from straw and waste products and wood waste, that’s the sustainable source of biofuels-
Peter Tertzakian:
But wood waste and these, it’s actually remarkably small in terms of addressing the big picture issue.
Jackie Forrest:
Well, no, if they get to the point … There are modeling that show, for example when you grow wheat, the straw and all that, that gets tilled back into the land, and we don’t need all of that to be tilled back into the land. And if you look at all the husks on corn, there is actually a lot of biomass there today that would be a good source of supply. We just haven’t found a way to do that in a economic, efficient way at scale. And if we do figure that out, I think there’d be a lot more supply there.
Peter Tertzakian:
Okay, well let’s get an expert. I mean, this is an area that, certainly I don’t know a lot about, but I think, at the high level, there is, again, ethical and supply-demand issues.
Jackie Forrest:
Well, and this comes back to this surprise news here that the oil industry is only going to be able to have a small fraction of all their emissions reductions qualify, because it does put more pressure on biofuels. That’s helpful for people in that business. But if all you care about is, if all emissions are equal, then you care if they come from using lower carbon biofuels or from reducing emissions from oil. And there’s plenty of opportunity in Canada to reduce emissions from oil where biofuels may be, like you say, more limited by how much feed stock there is.
Peter Tertzakian:
Okay. Well, it’ll be a story that we’ll continue to follow.
Jackie Forrest:
Well, we’ll wrap this up. That was our episode for the carbon policy nerds out there. If you enjoyed this podcast, please rate it on the app that you listen to and tell someone else about us.
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