The Clean Fuel Standard (CFS) is a proposed regulation that will require greenhouse gas (GHG) emission reductions through the use of lower-carbon fuels, energy sources, and technologies. The CFS policy has wide-reaching and potentially transformative impacts for all Canadian businesses especially those that participate in the extraction, production, distribution and use of fuel. The CFS will cover all fossil fuels with separate requirements for liquid, gaseous, and solid fossil fuels. Environment and Climate Change Canada (ECCC) has set out to tackle the liquid fuel stream first and published a Proposed Regulatory Approach in June 2019 [1].
This is the second in a series of posts where we look to dive deep on the CFS regulation. The CFS regulation has a complex design and the regulation will have material implications across the fuel value chain - so we look to break it down piece-by-piece. In our last update, we provided an overview of the CFS development process [2] including a recap on the government consultation process that has taken place already. In this update, we will look to detail the CFS requirements and reporting obligations.
Who does the CFS apply to?
The CFS will apply to “primary suppliers” and it will require that they reduce the carbon intensity (CI) of liquid fossil fuels. Under the regulation, primary suppliers are Canadian fossil fuel producers and importers with volumes greater than 400 cubic meters. This is a small volume, so if you produce or import fuel, you will likely be a regulated entity.
Virtually all liquid fossil fuels will have a CI reduction requirement. This includes gasoline, diesel, kerosene and light and heavy fuel oils. There are however a few exemptions. Fuels that are produced and used on-site by fossil fuel producers will not have a CI reduction requirement. These self-produced fuels will be accounted for in the lifecycle carbon intensity of the finished fuels (which are regulated) but will not have a separate CI reduction requirement. Liquid fossil fuels used for non-combustion purposes will also not have a CI reduction requirement. This means that solvents that might be used in heavy oil production or other industrial process will not be caught in with a CI reduction requirement. ECCC has also provided exemptions for fuels that are used in research, are in transit through Canada, remote communities, and fuels used for international a marine or aviation use.
How is lifecycle carbon intensity determined?
The CFS sets CI performance standards on a lifecycle basis. The CI will be measured in grams of carbon dioxide equivalent per megajoule (CO2e per MJ). These lifecycle CI values will cover all GHGs released from oil extraction right through to the end-use combustion of the final production. The CI values will be determined with a Fuel Lifecycle Assessment Modelling Tool. ECCC will develop and maintain this tool. The tool will be used to determine baseline lifecycle carbon intensity values for refined petroleum products and will also be used to quantify the CI of low-carbon fuels such as ethanol.
What are the carbon intensity reduction requirements?
All fossil fuels types will be assigned the same baseline CI. The baseline values will be set using 2016 data and will be calculated using ECCC’s lifecycle tool. For a primary fuel supplier with a CI reduction requirement, these baseline values will be used to calculate the compliance obligation. These values are provided in Table 1 for each of the regulated liquid fuels.
Table 1: Canadian Average Baseline Carbon Intensity Values for Liquid Fossil Fuels
Importantly, the CFS will not differentiate among different types of crude oils that are produced or imported into Canada. The slate of different crude types used in Canada are already reflect in the average values shown in Table 1. If you are a high CI crude producer this works to your advantage. If you are a low CI crude producer, this means you will get no benefit. This rule, however, does reduce the administrative complexity and the potential for crude pricing differentiation on the basis of CI. ECCC will monitor the national CI values for changes over time. If baseline CI values increase, the reduction requirement for primary suppliers could also increase. ECCC has stated that the baseline CI values will be subject to a 5-year review period beginning in 2030.
Given the baseline CI values in Table 1, the CI reduction requirements will be set. These reduction requirements will begin in 2022 and will become more stringent over time. For the 2022 compliance year, the CI reduction requirement will be 3.6 g of CO2e per MJ. The reductions per fuel will follow a linear pathway and will eventually reach 10 g of CO2e per MJ in 2030 (see Table 2). This represents a 10-12% CI reduction below a 2016 baseline, or 23 Mt of total reductions. After 2030, the CI reduction requirement will be held constant at 10 g of CO22 per MJ until the regulations are reviewed.
Table 2: Annual carbon-intensity reduction requirements and limits
The primary supplier’s reduction requirement will be based on the volume of fossil fuel produced or imported. The compliance obligation will be represented in tonnes of carbon dioxide equivalent and will be calculated on a company-wide basis. The obligation must be met with credits from specified low-carbon activities. The rules for developing credits is complex, so we will dedicate a separate newsletter on this topic in our next update on the CFS.
It is important to note that the CFS will replace the existing federal Renewable Fuels Regulations [3] and will require that primary suppliers incorporate the minimum content requirements under that regulation (i.e. 5% low-carbon fuel in gasoline and 2% in diesel). For 2022, the first compliance year, actions taken under federal and provincial renewable fuel mandates will be eligible for CFS compliance. CFS credits will also be allowed for actions taken under the BC Low Carbon Fuel Standard [4] and the current supply of electricity to electric vehicles. These actions will be eligible upon the finalization of the regulations (which is currently expected to be in fall 2021). The credits that are generated will be bankable until the 2022 compliance start date.
What are the reporting requirements?
There are several registration, reporting, and measurement requirements under the proposed CFS. We detail each of the requirements in this section.
Registration
If you are a regulated entity, your first step is registration. Luckily this is a one-time activity. You must also register if you are a voluntary credit creator. The registration report requires the following:
- Information about the primary supplier or voluntary credit creator
- Location of fuel production
- Destination of imported fuel
- A declaration of the intention to create compliance credits
Reporting
Reporting obligations can broadly be split into two categories, reporting for primary suppliers and reporting for credit creators. Primary suppliers will be required to submit up to three reports annually: 1) the Compliance Report; 2) the Refinery and Upgrader Report; and 3) the Credit Clearance Mechanism Compliance Report. Credit creators will also be required to submit up to three reports. These include: 1) a Credit Creation Report to create Clean Fuel Standard credits; 2) a Carbon Intensity Pathway Report; and 3) a Credit Net Proceed Report. These reporting obligations are summarized in Figure 1.
Figure 1 – CFS reporting requirements for primary suppliers and credit creators
With respect to the Refinery and Upgrader Report, the data collected will be used for the following purposes: 1) monitoring the national average CI of crude oil used in Canada; 2) monitoring the CI of refined petroleum products (used to calculate credits for low-carbon-intensity fuels and end-use fuel switching); 3) monitoring the performance of the CFS; and 4) calculating benchmarks for refineries and upgraders (for new facilities and for general energy efficiency projects).
For the Carbon Intensity Pathway Report the following information is required for low-CI fuels: 1) Types of feedstocks used in the production of low-carbon-intensity fuels; 2) Modes of transportation for feedstocks and finished fuels; 3) Type and amount of energy consumed in the production process; and 4) Quantity and sources of electricity used in the fuel production. In addition, for electricity that is used in transportation, the source and quantity of electrical energy supplied to electric vehicles at the charging stations must be supplied.
If there is an error in the Credit Creation Report, the credit creator will be liable for any invalidated credits. If the invalid credits are still in the creator’s account, ECCC will revoke the credits. If the credits have been traded or used for compliance, the credit creator must satisfy the obligation within 90 days by creating or acquiring credits of the same class and type. If the error is an underreporting of the volume of credits to be generated, no retroactive credit creation will occur. In other words, make sure your credit claims are accurate otherwise you will be liable for any overstatement and there is no ability to recoup credits in the case of an understatement.
Measurement
For primary suppliers, the volume of low CI fuel must be measured. Any volumes that are required to be measured or recorded must be determined in compliance with the: 1) Weights and Measures Act and the regulations made under that Act; or 2) in accordance with the American Petroleum Institute’s Manual of Petroleum Measurement Standards. This requirement should align with existing practices for fuel suppliers and importers, but now is a good time to check your measurement standards to make sure that is the case.
Conclusion
As this newsletter has outlined, the proposed CFS regulation will drive the use of low carbon intensity fuels across the Canadian economy. The regulation will also carry significant reporting requirements for regulated parties and voluntary credit creators. Luckily, you have a little more time to prepare for the CFS regulation. ECCC recently announced that due to the extraordinary circumstances during the COVID-19 pandemic, 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. Use this delay to your advantage. Start preparing your organization for CFS compliance and reporting obligations today.
References
[1] https://www.canada.ca/en/environment-climate-change/services/managing-pollution/energy-production/fuel-regulations/clean-fuel-standard/regulatory-design.html
[2] https://mailchi.mp/a8e4025b6f0e/canadas-clean-fuel-standard-a-proposed-regulatory-approach
[3] https://www.canada.ca/en/environment-climate-change/services/managing-pollution/energy-production/fuel-regulations/renewable.html
[4] https://www2.gov.bc.ca/gov/content/industry/electricity-alternative-energy/transportation-energies/renewable-low-carbon-fuels