Canada’s clean fuels standard is increasingly out of sync with Canada’s climate ambitions

Canadians went to the polls last week and returned a minority government for Trudeau’s Liberal Party of Canada (LPC). While carbon taxes and climate policy were a contentious issue in this year’s election campaign, particularly in fossil fuel-rich Alberta, roughly two-thirds of Canadians voted for parties promoting ambitious climate policies. While carbon pricing has been an integral component of the LPC platform over the last several years, its impact on Canada’s emissions trajectory has thus far been relatively mild. In addition, Canada’s proposed Clean Fuels Standard (CFS) has slowly morphed since its announcement in late 2016 from a policy supporting the deployment of alternative fuels to one that largely supports the fossil fuel status quo.

What’s ailing the CFS? The most recent proposed regulatory approach for liquid fuels released this past summer by Environment and Climate Change Canada (ECCC) lays out the scope of the policy and the compliance pathways that obligated parties, who are largely fuel suppliers, can use to meet the program’s targets. While the policy’s 30 million tonne GHG reduction target, 23 Mtonnes of which are to be from liquid fuels, is ambitious on paper, the devil is always in the details. Expanding upon allusions in the 2017 CFS regulatory framework to crediting the fossil fuel industry with upstream GHG reductions, the proposal lays out a variety of compliance options for fossil fuel producers to participate within the program—essentially supporting the continued reliance on fossil fuels rather than promoting lower-carbon alternatives. Even as Canada’s fossil fuel industry expands and its emissions grow in the aggregate, the proposed CFS provides a framework for crediting GHG reductions from efficiency improvements implemented through that expansion.

The ICCT has previously noted that compliance category 1 contains loopholes large enough to move an oil tanker through. The primary issue here is one of “additionality”; that is, ensuring that GHG reductions generated through the CFS are actually motivated by the policy and would not occur in its absence. Under existing carbon offsetting schemes such as the Clean Development Mechanism, additionality must be demonstrated through an accreditation process to ensure that projects generate “real” carbon reductions; criteria include financial tests to demonstrate the project isn’t viable without credits and that the technologies deployed are not common practice in their region. In contrast, ECCC’s proposed additionality requirements merely stipulate that eligible projects aren’t required under separate Canadian laws or otherwise make use of fuels that have already been credited under the CFS to avoid double-counting. In fact, ECCC explicitly recognizes projects that overlap with existing carbon pricing systems in Canada—including new oil and gas facilities. Entirely new fossil fuel producers or refiners could simply generate credits by being more efficient than a benchmark set within Canada’s output-based pricing system.

Beyond the thorny issue of additionality, the sheer scale of compliance category 1 poses a risk of crowding out better methods of achieving GHG reductions. By virtue of Canada’s vast fossil fuel industry, there are an abundance of potential projects to generate emissions reductions. For example, the Alberta Carbon Trunk Line, in which captured CO2 is pumped underground for enhanced oil recovery, could generate approximately 1.8 Mtonnes of carbon credits annually when it is complete, with the potential for almost 15 Mtonnes annually in the long term. In a break from similar policies in other jurisdictions, even efficiency improvements for fossil fuel production for exported fuels will generate credits under the CFS. Continued efficiency improvements for crude oil extraction fail to fit the “common practice” requirement for additionality under most carbon offsetting schemes yet would nonetheless generate substantial quantities of GHG credits under the CFS. Consultancy IHS Markit estimates that with continued market growth, the GHG intensity of oil sands extraction could continue its downward trajectory despite higher absolute emissions. Based on IHS’s forecast of 4 million barrels per day of oil sands production in 2030 and a per-barrel carbon intensity reduction of 5 to 10 kg CO2e per barrel from 2022 levels, efficiency improvements for oil sands extraction alone could comprise 7 to 14 Mtonnes of GHG reductions annually in 2030. With such an abundance of credits generated by large fossil fuel producers, there’s little room left for alternative fuels.

While reducing the carbon footprint for existing fossil fuel infrastructure is a laudable goal, the recent changes to the CFS now make it a poor method for decarbonizing the liquid fuel sector. Under the CFS, oil producers have multiple, overlapping incentives for implementing efficiency improvements for fossil fuels; meanwhile, alternative fuel suppliers will only have the CFS incentive along with any applicable provincial policies. There will be little incentive to ramp up alternative fuel production when emissions reductions from fossil fuel efficiency improvements are relatively cheap. Cost modeling by the Canadian Energy Research Institute indicates that at wholesale prices, blending average-CI ethanol and biodiesel bears a compliance cost of $CAD 62-$124 and $CAD 110-183 per tonne CO2e. In contrast, generating emissions reductions from improving the efficiency of oil and gas operations is estimated to be much cheaper. The Environment Defense Fund and the Pembina Institute estimate that oil and gas sectors can achieve several million tonnes of methane emissions reductions at a compliance cost of under $CAD 8 per tonne CO2e.

It’s time to take the CFS back to the drawing board. Canada must focus on bringing new, cleaner sources of energy into use rather than supporting marginal tweaks to its existing fossil fuels industry. Revising the CFS to refocus on low-carbon alternatives to fossil fuels would be a meaningful first step. If the CFS stays untouched, there is not only a real risk of making the reduction target meaningless by allowing fossil fuel efficiency improvements to double-count towards multiple policies, but also that those same fuels will crowd out cleaner, low-carbon alternatives. We recommend that Canada caps the contribution of fossil fuel improvements to the CFS target and ensures that those projects generating credits for the CFS comply with strict additionality measures. On the biofuels side, Canada still hasn’t addressed the glaring omission of indirect land-use change emissions from biofuels for those few that may still be used under the program. Without these changes, there’s a very real possibility that the CFS will offer few actual emissions reductions and Canada’s emissions will continue to increase.