Canada’s Minister of Environment and Climate Change has announced the publication of the final Clean Fuel Regulations (CFR) to replace the federal Renewable Fuels Regulation (RFR). The final CFR was approved by Cabinet on June 20, which will now also be the date that early crediting commences. The official version of the CFR will be published in Canada Gazette Part II on July 6. The federal government intends for the CFR to reduce Canada’s greenhouse gas (GHG) emissions by up to 26.6 million tCO2e by 2030. An unofficial version of the Regulatory Impact Analysis Statement has also been released.
This bulletin briefly highlights key details and recent changes to the CFR, which repeal and replace the RFR while retaining the minimum volumetric requirements of at least 5% low CI fuel content in gasoline and 2% low CI fuel content in diesel fuel and light fuel oil.
Compliance requirements. The CFR will require gasoline and diesel primary suppliers (producers and importers) to reduce the carbon intensity (CI) of the gasoline and diesel they produce in, and import into, Canada from 2016 CI levels by 3.5 gCO2e/MJ in 2023, increasing at a rate of 1.5 gCO2e/MJ to 14 gCO2e/MJ in 2030 (up from 12 gCO2e/MJ in prior iterations). The annual CI reduction requirements that primary suppliers must meet for the gasoline and diesel fuels they supply to Canada is the difference between a baseline CI value and a CI limit for gasoline and diesel. Compliance requirements under the CFR will come into effect on July 1, 2023, with the first compliance review in December 2023.
Credit market. The CFR will also establish a credit market providing for three main categories of credit-creating action:
- Actions that reduce the CI of the fossil fuel throughout its lifecycle through GHG reduction projects (e.g., carbon capture and storage);
- Supplying low-carbon fuels (e.g., ethanol); and
- Applying fuel or energy to advanced vehicle technologies (e.g., electrification of transportation).
Annual reduction requirements. Primary suppliers are required to use credits to satisfy their annual CI reduction requirement (with no limit to the number of liquid compliance credits that may be used by a primary supplier for the purposes of compliance, but a limit of 10% of total reduction requirement for gaseous compliance credits). A primary supplier may also use a compliance fund mechanism (CFM) by contributing to an eligible “registered” funding program in order to satisfy up to 10% of its annual reduction requirement. The credit price under CFM is currently set at CAD $350 per compliance credit in 2022. A credit clearance mechanism (CCM) will facilitate credit acquisition by primary suppliers unable to satisfy their reduction requirement by July 31 following the end of a given compliance period. The CFR sets a maximum price for credits acquired, purchased or transferred in the CCM at CAD $300 per compliance credit in 2022. After satisfying these obligations, a primary supplier may carry forward up to 10% of its reduction requirement into a future compliance period, with a maximum deferral of five years (subject to 5% interest).
Market implications and related initiatives. The federal government has indicated that approximately 2.2 billion litres of additional low-carbon-intensity diesel and 700 million litres of additional ethanol will be needed in 2030 under the CFR. The Government of Canada’s Clean Fuels Fund will invest $1.5 billion to build new or expand existing clean fuel production facilities. The Clean Fuels Fund will help deliver on early actions outlined in the Hydrogen Strategy for Canada and help support the implementation of the CFR.
For further information or to discuss the contents of this bulletin, please contact Lisa DeMarco at lisa@resilientllp.com.
