This is the third in a series of blog posts where we look to dive deep on the proposed Clean Fuel Standard (CFS) regulation. The CFS has a complex regulatory design, so we look to break it down piece-by-piece. In our last update [1], we provided an overview of the CFS requirements and reporting obligations for primary fuel suppliers and credit creators. Prior to that, we provided an overview of the CFS development process [2]. In this update, we will look to detail CFS credit creation. CFS credits are key to the regulation. Without credits, there is no pathway to compliance. So how are credits created? That question will be the focus of this post.
Before we dive into the rules for CFS credit creation, let’s first recap the objectives of the CFS. The CFS is a proposed regulation that will require greenhouse gas (GHG) emission reductions through the use of lower-carbon fuels, energy sources, and technologies. All Canadian businesses that participate in the extraction, production, distribution and use of fuel will be impacted in some way by the program. Environment and Climate Change Canada (ECCC) has set out to tackle the liquid fuel stream first and has published a Proposed Regulatory Approach in June 2019 [3]. This the regulation will eventually be extended to cover all fossil fuels with separate requirements for liquid, gaseous, and solid fossil fuels.
CFS Credit creation activities
CFS credits can be created by both primary suppliers (i.e. those that produce or import fuel into Canada) and voluntary credit creators. Credit creation will be permitted for the following types of activities:
- Actions that reduce the lifecycle carbon intensity (CI) of a fossil fuel
- Supplying low CI fuels
- End-use fuel switching in transportation
We detail the rules for credit creation for each of these three types of activities in the following sections.
Category 1: Actions that reduce the lifecycle carbon intensity of a fossil fuel
Actions that reduce the lifecycle CI of a fossil fuel are eligible to generate CFS credits. This includes things like electrification; switching from a higher carbon intensity fuel to a lower-carbon-intensity fuel; renewable energy integration; and carbon capture and storage (CCS). These actions can be taken by primary suppliers or by others in the oil and gas lifecycle including upstream oil producers. CCS can also be undertaken by industrial facilities outside of the oil and gas lifecycle. Credits will not be pro-rated for oil and gas products that are exported outside of Canada. Credit prices in similar programs California [4], Oregon [5], or British Columbia [6], trade above CAD $300 per tonne of carbon dioxide. If this type of pricing carries over under the Canadian CFS, this will provide a powerful price single for electrification where economically feasible and CCS for processes that are difficult to electrify. More details on the requirements for category 1 credits is provided in Table 1.
Table 1 – Requirement for creation of category 1 credits resulting from actions that reduce the lifecycle carbon intensity of a fossil fuel
If a project reduces the fuel lifecycle CI of only one fuel class (i.e. liquid, gaseous, and solid classes) it will create credits in that class type. It is possible however, that a project may reduce the CI of fossil fuels in multiple fuel classes. In this case, the credit creator will be allowed to select which fuel class the credits are created in. The credit creator will also have the option to split the credits between fuel classes. Once the selection of the fuel class and the proportion split between fuel classes has been made, it can only be changed once for a given project. Given that credit transfers between fuel streams will be limited, it is likely that each of the liquid, gaseous, and solid classes will have a different price. Credit creators therefore should have a view on which credit markets will offer the greatest value.
Additionality requirements
Additionality is the concept that a GHG emission reduction or removal results from an activity or action that is beyond legal requirements and business-as-usual (BAU) expectations. A CFS credit-generating activity must be additional to a defined base case which will be determined during the quantification methodology (QM) development process. The additionality assessment will address the following three types of additionality:
- Financial additionality (i.e. does the project need CFS credits to be economic?)
- Regulatory additionality (i.e. is the project required by law?)
- Technological additionality (i.e. does the project category exceed a defined adoption rate?)
A project must meet either the regulatory and financial additionality test or both the regulatory and technological additionality to be eligible for CFS credit creation. Projects that are already subject to carbon pricing will be permitted to generate CFS credits even through carbon pricing is required by regulation. The intention of the CFS credit is to provide a stackable price signal. Carbon pricing however could impede the financial additionality of the project. In addition, if a project receives funding from government, this could impede the financial additionality of the project. For example, if a technology has a GHG mitigation cost of $60 per tonne of carbon dioxide equivalent, but the activity is subject to a carbon price of $50 per tonne of carbon dioxide equivalent and received a government grant equivalent to $20 per tonne of carbon dioxide equivalent, the technology is not financially additional. There is already a $70 per tonne price incentive to implement a project that only costs $60 per tonne. Therefore, the project would not be eligible to generate CFS credits.
ECCC has already ruled that the follow project types will not be deemed as additional:
- Projects required by law
- Use of renewables for low CI fuels that have already generated CFS credits
- Change in the type of crude oil production or curtailment of production
- Replacement of pneumatic devices
- Maintenance activities
Emission reduction quantification methodologies
The ability of a project to create credits will be governed by a QM. These QMs will be provided by ECCC when the regulation comes into force. ECCC has stated that the following QMs will be prioritized:
- carbon capture and storage;
- enhanced oil recovery;
- low-carbon intensity electricity integration;
- methane reductions that are additional to regulatory requirements;
- co-generation;
- electrification; and
- co-processing of biocrudes in refineries and upgraders.
Beyond the list above, there will be a process to develop new QMs. This process will involve a team of technical experts including ECCC representatives and new QMs will be reviewed by a broader consultative committee.
New oil and gas facilities
ECCC is also considering credit generation for new oil and gas facilities that implement technologies and practices that outperform a benchmark. For refineries and upgraders, a benchmark utilizing the complexity weighted barrel metric is being considered. For upstream operations, certain technologies are being considered, for example electrification, co-generation and methane reductions so long as the activity is additional. The QMs will provide the same credit creation opportunities to new facilities as to existing facilities including from those QMs that ECCC has said they will prioritize.
Category 2: Supplying low CI fuels
The second category of CFS credits is the supply of low CI fuels. A key pathway to reducing the lifecycle CI of fossil fuels is to blend low-carbon-intensity fuels with fossil fuels or use low-carbon-intensity fuels directly. For the purposes of CFS generation, low CI fuels are those which have a CI that is equal to or less than 90% of the credit reference carbon intensity value for the fuel. Eligible fuels in the liquid class may include ethanol; renewable diesel; biodiesel; hydro-treated vegetable oil; low-carbon-intensity jet fuel; synthetic fuels; and renewable methanol. Low CI fuels in the gaseous class include hydrogen; biogas; renewable natural gas; and renewable propane.
Credit creation
All low CI fuels supplied to the Canadian market will be able to create credits under the CFS. This includes those fuels used to comply with existing federal and provincial renewable fuel mandates and the BC Low Carbon Fuel Standard. To be eligible, these fuels must have a CI that is at least 10% lower than the credit reference carbon intensity value. The credit reference CI for liquid class fuels is the average carbon intensity for all liquid fuels supplied in Canada in 2016 (fossil and renewable fuels) minus the carbon intensity reduction requirement for all liquid fuels for a given compliance year. These values, along with the reference values for natural gas and propane, are provided in Table 2. If the fuel does not have a CI that is at least 10% lower than the reference values, it will not be eligible to generate a CFS credit.
Table 2 - Credit reference carbon intensity for the liquid and gaseous classes (g CO2e/MJ)
Carbon intensity values
So how does one determine if a fuel has a CI that is at least 10% lower than the reference values outlined in Table 2? This is where ECCC’s Fuel Lifecycle Assessment Modelling Tool (the Tool) comes into play. In order to be able to create credits, a low CI fuel producer will be required to obtain an approved CI value for through either the Tool or the use of a set of disaggregated default values. An application for a CI value must be submitted to ECCC for approval, along with supporting data and a verification report. There are 3 options to obtain a carbon intensity value using the Tool:
- Existing low-carbon-intensity fuel pathway
- Modified low-carbon-intensity fuel pathway
- New fuel pathway
More details on the Tool are expected to be released by ECCC in 2021 when the model is launched publicly. If project proponents are requesting a new carbon intensity value, a minimum threshold of an improvement of 1g CO2e/MJ or a 5% difference between the current value and the proposed new value, whichever is greater, will be required.
Land-use change
One of the potentially unintended consequences of the CFS regulation is the conversion of land to grow biofuels. This could have deleterious environmental effects for land, water, and wildlife. It could also mitigate any GHG emissions benefit if land with high bio-carbon sequestration potential is cleared to grow crops. There are two terms to describe land-use change impacts: direct and indirect. Direct land-use change happens when land is converted to grow crops for biofuel production. Indirect land-use change occurs when crops grown for biofuels displace traditional food and animal feed crops, leading to land somewhere else being converted to grow the food crop.
To address land-use change impacts, the CFS regulation will account for land-use change in two ways:
- The Tool will account for greenhouse gas impacts of direct land-use change in the carbon intensity of low-carbon-intensity fuels;
- The regulations will define sustainability criteria for biofuels and their feedstocks, related to land-use change – including indirect land-use change – and land management practices. The portion of a fuel made from feedstocks associated with land-use changes that do not meet the criteria will not count for credit creation under the CFS. These criteria for agricultural feedstock and outlined in Figure 1.
Figure 1 - Sustainability criteria for biofuels and their feedstocks related to land-use change
Category 3: End-use fuel switching in transportation
The third and final category of CFS credits are those stemming from end-use switching of transportation fuels. CFS will allow end-use fuel switching to create credits when an end-user of fuel changes or retrofits their combustion devices (e.g. an engine) to be powered by another fuel or energy source. Eligible credit creation activities include natural gas and renewable natural gas (including compressed and liquefied), hydrogen (including compressed and liquefied), propane and renewable propane, and non-carbon energy carriers, such as electricity or hydrogen. Electricity supplied to vehicles will create credits on the basis of three input variables: 1) the energy supplied to the vehicles; and 2) the difference between the CI limit of the fossil fuels being displaced and the carbon intensity of the electricity being used to charge the electric vehicles; and 3) the energy efficiency ratio for the type of vehicles being displaced. The regulations will also allow credits to be created for hydrogen fuel cell vehicles in a similar manner as electric vehicles.
Credit creators for electric and hydrogen fuel cell vehicle charging
The credit creator for electric and hydrogen fuel cell vehicle charging can occur at either the level of: 1) the site host or network operator level (for public and private electric vehicle charging) or 2) the residential charging level. For each of these cases, the default credit creator is summarized in Figure 2.
Figure 2 - Default credit creators for electric and hydrogen fuel cell vehicle charging
* Regardless of whether the site is publicly or privately owned.
**For example, workplace, fleets.
Interestingly, credits generated by charging network operators and original equipment manufacturers will come with strings attached as 50-100% of the review obtained by the sale of the credits must be reinvested into projects, programs, policies or other types of action that:
- Expand the network of electric vehicle charging infrastructure
- Reduce the costs to purchase of operate an electric vehicle
- Educate or inform consumers of the benefits of electric vehicles
Conclusion
As this newsletter has outlined, the proposed CFS regulation is a transformative policy that will drive the use of low carbon intensity fuels across the Canadian economy. The regulation outlines three categories of credits that can be created. These categories span the fossil fuel value chain from upstream oil extraction, upgrading and refining, to biofuel blending and end-use combustion. It is unlikely that credit creators will participate in all three categories given the diversity of the activities and the unique core competencies that will be needed. Understand where the opportunities lie for your organization and how you might participate in CFS credit generation to capitalize on this potentially lucrative opportunity. ECCC recently announced the publication of the proposed regulations for the liquid fuel class would be delayed from spring until fall 2020. This means that the regulation will now come into force in mid-2022 as opposed to January 2022. This delay gives you more time to plan you CFS credit generating investments. Use this delay to your advantage. Start preparing your organization for success under the CFS regulation now.
References
[1] https://mailchi.mp/a8e4025b6f0e/canadas-clean-fuel-standard-a-proposed-regulatory-approach
[2] https://mailchi.mp/fb41d2084fd7/canadas-clean-fuel-standard-requirements-and-reporting
[3] https://www.canada.ca/en/environment-climate-change/services/managing-pollution/energy-production/fuel-regulations/clean-fuel-standard/regulatory-design.html
[4] https://ww2.arb.ca.gov/our-work/programs/low-carbon-fuel-standard
[5] https://www.oregon.gov/deq/aq/programs/Pages/Clean-Fuels.aspx
[6] https://www2.gov.bc.ca/gov/content/industry/electricity-alternative-energy/transportation-energies/renewable-low-carbon-fuels