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Government Of Canada Publishes Final Clean Fuel Regulations – Renewables


The federal government has published the final Clean Fuel Regulations (CFR) under the
Canadian Environmental Protection Act, 1999. The CFR sets
increasingly stringent requirements on producers and importers of
liquid fossil fuels to reduce the carbon intensity of gasoline and
diesel.

What you need to know

  • The CFR replaces the current federal Renewable Fuels
    Regulations (RFR). Only liquid fossil fuels (gasoline and diesel)
    are covered under the CFR. This differs from the initial CFR design proposed in 2016, which
    applied more broadly to liquid, gaseous and solid fuels.

  • The CFR will require gasoline and diesel primary suppliers
    (i.e., producers and importers) to reduce the carbon intensity (CI)
    of the fuels they produce in or import into Canada. Relative to
    2016 levels, the required reduction is 3.5 grams of carbon dioxide
    equivalent per megajoule (gCO2e/MJ) in 2023, increasing to 14
    gCO2e/MJ in 2030.

  • The CFR will also establish a credit market in which the annual
    CI reduction requirement could be met through the following
    categories of credit creating actions: (1) reducing the CI of the
    fossil fuel throughout its lifecycle, (2) supplying low-carbon
    fuels, and (3) supplying fuel or energy to advanced vehicle
    technologies.

  • Credit creators will be able to register and start creating
    credits once the CFR comes into force, which is expected to be on
    or before December 1, 2022. To address concerns regarding the
    timing of the CI reduction requirements, those will now come into
    force on July 1, 2023.

  • The Government of Canada is projecting the CFR will help cut up
    to 26.6 million tonnes of greenhouse gas emissions by 2030.

Highlights of final CFR

Repeal of RFR

The CFR replaces the RFR, but it maintains the minimum
volumetric requirements currently set out in the RFR: 5% low CI
fuel content in gasoline and 2% low CI fuel content in diesel fuel
and light fuel oil. The final compliance period for the RFR is
2022, with the final reporting and true-up period for the RFR
occurring in 2023. The RFR will subsequently be repealed in its
entirety in September 2024.

Liquid fossil fuels

The CFR covers gasoline and diesel. While initially proposed to
be within scope, the gaseous and solid streams, and other liquid
fuels, were removed during the regulation design process. Fuel used
in space heating and liquid fossil fuels used for power generation
in remote communities are also excluded.

Carbon intensity

Under the CFR, gasoline and diesel primary suppliers (i.e.,
producers and importers) are required to reduce the CI of the
gasoline and diesel they produce in, and import into, Canada from
2016 CI levels by 3.5 grams of carbon dioxide equivalent per
megajoule (gCO2e/MJ) in 2023, increasing by 1.5 gCO2e/MJ per
calendar year to 14 gCO2e/MJ in 2030. These lifecycle CI reduction
requirements will come into force on July 1, 2023. The final CI
requirements are more stringent than the earlier announced CI
reduction target, which was 2.4 gCO2e/MJ in 2022, increasing
annually by 1.2 gCO2e/MJ to 12 gCO2e/MJ in 2030.

Compliance with CFR

Suppliers can comply in a variety of ways, including by reducing
their own emissions from the production of fuels or purchasing
credits created by other parties who reduce the lifecycle emissions
of the fuels. For each compliance period, a primary supplier of
gasoline and diesel must demonstrate compliance with the CFR by
creating credits or acquiring credits from other creators, and then
using the required amount of credits for compliance.

Credit market

The CFR will establish a credit market in which the annual CI
reduction requirement can be met via three main categories of
credit-creating actions: (1) actions that reduce the CI of the
fossil fuel throughout its lifecycle (e.g., carbon capture and
storage, on-site renewable electricity, co-processing, etc.), (2)
supplying low-carbon fuels (e.g., ethanol, biodiesel), and (3)
supplying fuel or energy to advanced vehicle technologies (e.g.,
electric or hydrogen fuel cell vehicles). The credit market will be
open to primary suppliers of fossil fuels and other participants,
referred to as voluntary credit creators (VCCs), such as low-carbon
fuel producers and importers. Each credit will represent a
lifecycle emission reduction of one tonne of CO2e. The CFR will
also recognize carbon capture and storage projects at low-CI fuel
production facilities outside Canada (if the fuel is imported into
Canada). The CFR also sets out rules on when credits must be
retired.

Credit creation

Some credit creation opportunities for low-carbon gaseous fuels,
like hydrogen and renewable natural gas, are provided in the CFR,
including credits for using low-CI hydrogen as a feedstock in the
production of fossil fuels or low-carbon intensity fuels, suppling
renewable gas and hydrogen to the transportation sector (e.g., fuel
cell vehicles and natural gas vehicles), and supplying biogas,
renewable gas and hydrogen for non-transportation purposes (which
credits can be used to comply with up to 10% of the annual
reduction requirements). The CFR also allows credit creation for
emissions-reduction projects at foreign facilities that produce
liquid fossil fuels or crude oil, but only for the portion of fuel
or oil supplied to Canada, and does not allow for emission
reduction projects to create credits for the portion of fossil
fuels or crude oil that is exported from Canada.

Agreement to create credits

Under the CFR, by default, the credits are issued to the person
that undertakes the credit creating activity. However, a third
party can assume the role of credit creator by entering into an
agreement under the CFR with the party that undertakes the
qualifying activity, including a person carrying out an
emission-reduction project or a producer of low-CI fuel, as
specified in the CFR.

Coming into force

The CFR will come into force once registered, which is expected
to be on or before December 1, 2022. As of that date, credit
creators (including VCCs and others) will be able to register and
start creating credits. To address concerns regarding the timing of
the CI reduction requirements coming into force, that date was
extended to July 1, 2023.

CFR and the race to net-zero

On March 29, 2022, the government released its 2030 Emissions
Reduction Plan: Canada’s Next Steps for Clean Air and a Strong
Economy, which sets out a sector-by-sector approach for Canada to
reach its new climate target of cutting emissions by 40% below 2005
levels by 2030 and to achieve net-zero emissions by 2050. The CFR
is a key part of the government’s plan to achieve these
targets.

Economic and market considerations

The Government of Canada expects the CFR to drive significant
economic opportunities in the development and use of clean fuels
and technologies. In combination with the Clean Fuels Fund1, the CFR will
create incentives for the increased domestic production of low-CI
fuels, such as ethanol, which are expected to create opportunities
for biofuel feedstock providers (e.g., farmers and foresters) and
help Canadian fuel producers compete in the global market for clean
energy.

In the news release announcing the final CFR, the government
noted that the CFR has been designed to ensure there will be no
immediate impact on fuel prices. In the long term, the expectation
is that the CFR could lead to a decrease in overall GDP of up to $9
billion in 2030, and an increase in gasoline prices of between 6
and 13 cents per litre and diesel prices between 7 and 16 cents per
litre by 2030.

Footnote

1 The federal Budget 2021 established the Clean Fuels
Fund through an investment of $1.5 billion over five years, which
is intended to help deliver on actions set out in the
government’s Hydrogen Strategy for Canada (see prior Torys
bulletin here) and support the implementation of the
CFR (including by de-risking the capital investment required to
build new or expand existing clean fuel production
facilities).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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