Grant Bishop is the Calgary-based founder of KnightFork, which builds data-driven tools for carbon pricing and the energy transition.
Ottawa unveiled the long-awaited Clean Fuel Regulations earlier this month, imposing an annually increasing obligation for fuel suppliers to reduce the carbon intensity of gasoline and diesel.
Certain environmental groups criticized the final regulation as just “new revenue sources for big oil producers,” while other commentators allege the CFR will merely heap additional costs on households amid surging inflation.
Both objections miss the mark.
First, since obligations for fuel suppliers don’t kick in until July, 2023, any price impact from the CFR is still a year off. With reduction requirements for carbon intensity gradually phasing in, I calculate the gasoline price impact would, at most, start at four cents per litre next year and rise to 17 cents per litre in 2030. These aren’t insignificant costs, but drivers have time to prepare.
Second, meeting Canada’s greenhouse-gas targets is no free lunch: Someone must pay for reductions. Governments face a tricky balance to reduce GHGs across the country’s emissions-intensive economy while buffering hits to household well-being and industry competitiveness. In a merciless global marketplace where companies must deliver returns to shareholders, industry players won’t make major investments to reduce GHGs unless governments make it profitable to do so.
Canada already has a minimum national carbon price that is scheduled to ramp up to $170 per tonne in 2030. However, it’s increasingly doubtful that this alone will be sufficient to meet federal GHG targets – particularly given the nuances of output-based carbon pricing for large emitters, as well as fears that some future federal government may undo the measure altogether.
The CFR complement today’s carbon price with another market-based incentive targeted at specified activities to accelerate definite, near-term GHG reductions. Ahead of the final regulations, Canada already saw a spurt of announcements for new biofuel production.
Nonetheless, there are legitimate concerns about whether the CFR reduce enough emissions to justify their labyrinthine design, and whether their inflexibility could force future fuel rationing.
The CFR can seem like a Rube Goldberg machine: fuel suppliers must reduce carbon intensity – that is, the well-to-wheels GHGs per unit sold of gasoline or diesel – by a specified amount annually. Suppliers therefore face a total reduction obligation equal to the annual reduction requirement multiplied by the total fuel they sell. In turn, they meet that obligation by acquiring credits for tonnes of GHGs reduced by designated activities – including recharging electric vehicles, blending biofuels and capturing carbon for storage (CCS).
The CFR also specify a cap on traded credits of $300 per tonne. If fuel suppliers cannot buy enough credits on the market, they can resort to paying into a government fund at $350 per tonne for up to 10 per cent of their obligation.
Yet for all this complexity, Ottawa forecasts that the CFR will only yield 18 megatonnes of incremental GHG reductions by 2030. This is a somewhat small share of the goal in the federal Emission Reduction Plan to cut roughly 230 megatonnes from Canada’s 2019 GHGs.
It’s a fair question whether Ottawa might have wrung more GHG reductions from the CFR. The federal government made a late-breaking decision that carbon captured from exported petroleum would be ineligible for CFR credits. Ottawa’s call is partly explained by a generous investment tax credit for CCS in the last federal budget. If carbon captured from exported petroleum received credits, Canadian consumers would effectively pay for GHG reductions on fuel consumed abroad.
But since Canada exports the vast majority of our crude production, the exclusion reduces incentive to build CCS projects at, for example, oil-sands facilities. CCS can still earn revenues under output-based carbon pricing systems, but certain projects may not be profitable without a further boost. Ottawa’s Emissions Reduction Plan aims to reduce GHGs from oil and gas by more than 70 megatonnes from 2019 by 2030. This appears unlikely without other carrots or sticks.
Finally, the CFR risk constricting Canada’s future fuel supply. They impose a hard 10-per-cent limit on suppliers paying into a fund to meet their annual carbon-intensity reduction requirement. The government’s own regulatory assessment projects that fund payments by suppliers will hit that limit in 2030, accounting for 3.4 megatonnes of suppliers’ total 34.3-megatonne obligation in 2030. This leaves little buffer.
Moreover, the federal government’s modelling is predicated on consumption of gasoline and diesel having peaked in 2019 and declining by at least 1 per cent annually until 2030. Suppliers face criminal penalties if they sell fuel without the required CFR credits. Therefore, if fuel demand does not fall as anticipated and suppliers cannot get more credits, they must limit deliveries, and drivers could face empty pumps.
The CFR’s imperfections should remind us that decarbonizing Canada’s economy is no easy road. The country is still far from the destination, and our journey faces many more potholes ahead.
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