Overview of Comments Received on the Notice of Intent to Develop a Federal Regulation Requiring Renewable Fuels

Introduction
Overview of Respondents' Perspectives
Levels of Renewable Fuels and Timing
Basis to Apply Renewable Fuel Content Requirements
Renewable Fuels Recognized under the Regulation
Biases for Different Renewable Fuels
Renewable Fuels Quality Specifications
Credit and Trading System
Exclusions/Exemptions under the Regulation
Regional Issues
Labelling of Renewable Fuels at the Point of Sale
Implementation Issues at Retail Sites
Miscellaneous

The Notice of Intent (the Notice) to develop a federal regulation requiring renewable fuels (PDF 899 kB) was published in the Canada Gazette, Part I on December 30, 2006 (Vol. 140, No. 52)¹ . The Notice sets out the Government's plans to implement a federal renewable fuels regulation and the intended key elements of a regulation.

The Notice indicates that the federal government plans to develop a regulation under the Canadian Environmental Protection Act, 1999 (CEPA 1999) to require fuel producers and importers to have an average annual renewable fuel content of at least 5% of their volume of gasoline, starting in 2010. In addition, the Government intends to put in place an additional requirement for an average 2% renewable fuel content in diesel fuel and heating oil, upon successful demonstration of renewable diesel fuel use under the range of Canadian conditions. This requirement is intended to come into effect by no later than 2012.

The publication of the Notice of Intent was followed by a 60-day comment period. Twenty-seven written submissions were received on the Notice of Intent. Responses came from various organizations (representing agricultural trade, petroleum and renewable fuel producers, automobile manufacturers and truckers), individual companies (petroleum and renewable fuel producers, and a tank manufacturer), and environmental organizations. Only one provincial/territorial department submitted comments through the Notice of Intent process.

While parties have varied views on key features of a federal regulation requiring renewable fuels, which are summarized in relevant sections of this document, there is a consensus for the Government of Canada to develop and implement a national regulation. A provincial government, noting that fuel regulations are an area of shared federal/provincial jurisdiction, welcomes the proposed collaborative process to develop a framework for a national approach to the regulation of renewable fuels. In line with this comment, the petroleum industry supports a national approach but also emphasizes that it is critical to have provinces support a national mandate to avoid a patchwork of provincial and federal regulations.

A number of stakeholders from Atlantic Canada expressed concerns about the implementation timing of the requirements for renewable fuels, particularly given the lack of local feedstock available to produce such fuels. A province located in Atlantic Canada is requesting flexibility in the level and timing in order to allow the renewable fuels production and supply industry to develop (see the section on regional issues).

Average of 5% renewable fuel in motor gasoline starting in 2010

Stakeholders generally support the average annual renewable fuel content of at least 5% of the volume of gasoline. However, some stakeholders are advocating higher levels, generally an average annual renewable fuel content equal to 10% of the volume of gasoline, either in the short-or medium-term.

Some stakeholders consider an implementation date of January 1, 2010, to be achievable, while others have expressed concerns. The petroleum industry is requesting a 2 to 3 year lead time from the time a regulation is finalized to plan, construct and commission new infrastructure for renewable fuels.

Average two percent renewable content in diesel and home heating fuel, upon successful demonstration of use under the range of Canadian conditions, intended to come into effect by no later than 2012.

Stakeholders generally support a specific renewable diesel mandate within the renewable fuel regulation. Some renewable fuel producers advocate that the requirement be 5%.

A trucking association questions the environmental benefits of biodiesel, considering them small in comparison to the additional operating costs. Other technological avenues were suggested to reduce greenhouse gases (speed limitation, tire pressure sensors, etc.) before introducing renewable fuels.

There are two points of view on the timing to implement a biodiesel requirement. Assuming successful demonstration of the use of renewable diesel fuel under Canadian conditions, refiners consider 2012 implementation to be a challenge, given necessary changes to infrastructure and refineries. The renewable fuel industry and agricultural associations consider earlier implementation to be technically feasible and advocate a start date of 2010.

Many parties commented on requiring renewable fuel content in diesel fuel and heating oil “upon successful demonstration of renewable diesel fuel use under the range of Canadian conditions.” Some parties feel it is not clear what criteria will determine success in demonstration projects. Petroleum refiners have a detailed perspective on criteria for a successful outcome that include the following:

• demonstration project must be conducted under conditions that are as representative as possible of the Canadian context:
  • use a range of renewable fuels expected to be available in Canada;
  • use the variety of diesels currently available in Canada;
  • reflect as much as possible the full-scale blending and distribution operations, not lab/bench-scale;
  • reproduce hot-and cold-weather operations;
  • cover the range of diesel and heating oil applications (on-road, off-road, marine, rail, mining, stationary engines, etc.)
• demonstration project should include a sufficient number of vehicles/appliances.
• consideration should be given to storage, additive uses, contaminants, emissions, etc.

Some renewable fuel producers feel that demonstration testing is not necessary. They believe that there is considerable experience with the use of renewable diesel in Canada and that the testing program is to verify, not to prove, the all-season operability of renewable diesel.

Other parties are not convinced that the proposed testing is sufficient to address the issues. Refiners consider that the testing program needs to address the full slate of middle distillate applications, including on-road (long-haul trucks, light-duty vehicles and municipal fleets), off-road (agriculture, construction and mining), rail, marine, stationary and heating. The motor vehicle and engine industries requested the opportunity to be included in the review of the testing program’s findings.

The Notice sets out the intention to apply the renewable fuel content requirements (for both gasoline and middle distillate) on a company-wide basis, rather than on the basis of individual refineries or provinces of import. Grounds cited by parties in favour of a company-wide basis include:

• it takes into account the realities of feedstock and market distribution, delivery logistics, and infrastructure; and
• it provides flexibility to refiners and importers in deciding where to blend and at what level.

On the other hand, grounds cited in opposition to a company-wide basis include:

• it is not fair or equitable--it disadvantages regional distributors relative to others operating on a national level. National companies may meet the requirement by selling blends with higher renewable fuel content in central Canadian markets without distributing blends in less populated regions of Canada. Regional distributors would not have this option;
• it will lead to competitive disadvantages for regional companies and cause undue costs to consumers;
• it is inconsistent with the stated rationale of levelling the playing field and helping to address inconsistencies created by a patchwork of provincial fuel requirements;
• it does not ensure adequate regional distribution of fuel with renewable content; and
• it does not create necessary investments for an eventual 10% renewable fuel content as some companies will rely on existing infrastructure and will not have incentive to put in place new infrastructure for renewable fuels.

The Notice also indicates the intention not to have any specific regional requirements for renewable fuel content. While some parties support this, others feel that the regulation should ensure an equal regional distribution of renewable fuels. Grounds cited in favour of having regional requirements include that the proposal:

• would foster the development of a renewable fuel industry across Canada instead of concentrating the industry in specific regions, such as southern Ontario;
• would decrease the likelihood of ethanol imports; and
• would not put regional distributors at a competitive disadvantage.

The Notice explains the intention for the regulation to recognize a broad suite of liquid renewable fuels. This aspect received wide support as it provides flexibility in choosing the most practical way to comply, taking into consideration regional capabilities. Specific comments in this regard include:

• fuels considered “renewable” should have clear life-cycle greenhouse gas and air contaminant emissions benefits relative to petroleum fuels;
• the regulation should adopt the list of renewable fuels specified by the U.S. Environmental Protection Act’s (EPA) Renewable Fuel Standard², subject to appropriate health and environmental impact assessment by Environment Canada;
• there should be broad language to encompass both existing and future renewable fuels; and
• the regulation should account for renewable fuels that are added to the front end of an oil sands upgrading facility such that they become part of the upgrader’s feedstock.

Consideration is being given to include biases in the regulation for different renewable fuels such that a litre of one renewable fuel could count for more than a litre of another towards meeting the renewable fuel content requirement of the regulation.

Petroleum refiners generally support the use of biases. In support of biases, an Environmental Non-Governmental Organization (ENGO) points out that they can have a significant influence on the environmental and social impacts of renewable fuels by:

• encouraging the use of low-impact energy sources to produce renewable fuels and discouraging the use of high-impact energy sources such as coal;
• encouraging sustainable agriculture practices and discouraging renewable fuels derived from crops that have real impacts on agricultural lands and waterways; and
• encouraging fuels that do not negatively impact world food markets.

A majority of stakeholders favour an approach based on greenhouse gas life-cycle assessment to calculate the bias for each renewable fuel. One party expressed support for an energy content approach (similar to the U.S. EPA approach in their Renewable Fuel Standard). Stakeholders supportive of a bias system provided the following additional comments on its key features:

• it should require an increasing proportion of lower-impact renewable fuels over time, thus enabling a timely transition to next generation technologies;
• it should be flexible enough to accommodate constantly shifting technology and encourage investment in improving first-generation technologies; and
• it should favour fuels that do not negatively impact world food markets (e.g. fuels that are produced from cellulose or waste materials).

Renewable fuel producers generally oppose biases, considering that their use would:

• shrink the size of the renewable fuel pool;
• dilute the demand pool for biodiesel and thwart industry attempts to achieve economies of scale critical to long-term viability;
• create unfavourable distortions in the marketplace and jeopardize previous and future projects; and
• be overly complex and force an unnecessary administrative burden on both government and business.

The Notice indicates that quality specifications for renewable fuels or the final blended product would not be included in the regulation. There was both support and opposition to this statement.

Refiners consider that quality specifications for renewable fuels and renewable fuel blends should not be regulated, but should be left to the industry to address. They consider that the Canadian General Standards Board³ process should serve the function of developing product quality performance standards for such fuels.

A number of parties feel that the regulation should include quality specifications for renewable fuels and blends. The motor vehicle industry has very strong views in this regard. Grounds cited for regulating renewable fuels quality specifications include:

• failing to ensure the sufficient quality of a product imposed by government will expose Canadian consumers to unnecessary risk and has the potential to undermine the future of renewable fuels in this country; the government has a duty to ensure sufficient quality;
• lacking defined standards could lead to uneven levels of product quality and potential vehicle operations issues;
• regulated quality specifications will help ensure that vehicles and their emissions control systems operate as designed and will help ensure proper vehicle performance;
• ensuring that biodiesel meets quality standards is critical to the development and sustainability of a biodiesel industry;
• regulated fuel quality specifications are important to achieve the intended environmental improvements without impacting consumers adversely; and
• regulated fuel quality specifications are essential to avoid a patchwork of “boutique requirements” across the country.

The Notice discussed a credit and trading system that would allow a company to obtain credits from others rather than actually having renewable content in its fuel. Parties supportive of including such a system in the regulation cited enhanced flexibility necessary to facilitate compliance and reduce the risk of unwanted supply problems. Those opposed to credit and trading were concerned about the resulting regional impacts. They consider that credit and trading does not resolve the disadvantage of regional refiners, but simply leads to a transfer of costs to consumers in some regions and subsidization of renewable fuels in other jurisdictions. There was also concern about the liquidity and transparency of a market for renewable credits in Canada as it was considered that there would only be a small number of credit generators.

General comments on the design of such a system include:

• many aspects of this mechanism could be modelled around the proposed U.S. EPA rule⁴ ;
• rules for credit trading across all provinces/territories should be consistent and provincial regulations should incorporate these rules consistently; and
• credit trading mechanisms should apply to renewable content in both gasoline and middle distillates.

In regards to the renewable fuel content requirement, the Notice indicates that consideration is being given to allow for carryover of credits from one year to the next, as well as for deficit carryover.

The petroleum refining industry generally supports such provisions. There was also support from some other stakeholders, conditional on strict timeline and volume caps on credits and deficits that can be carried over into the future years.

Renewable fuel producers and some other stakeholders do not support such provisions, citing the following concerns:

• they add unnecessary administrative complexity and further complicate enforcement of the regulation;
• they create significant uncertainty in the demand for renewable fuels;
• they could be used to delay signing off-take agreements with potential domestic biofuels producers and/or lead to seasonal blending; and
• they are not essential as the flexibility provided by the annual average content requirement meets any concerns in this regard.

The Notice indicates that consideration would be given to excluding fuels for some specific uses such as aviation, scientific research, competition vehicles, and for use in defined northern region from the pool of fuel that is subject to the renewable fuel content requirement.

Some parties support having exclusions for some regions of the country. It was asked that Newfoundland and Labrador be exempted from the requirement for renewable fuels because of the small size of that market. Parties cite the following reasons in support of having regional exclusions:

• regional refiners serve small markets and are disadvantaged compared to national distributors that can meet the regulatory requirement by concentrating their renewable fuel pool in another, more populated region; and
• exemptions for regional distributors would provide flexibility to allow the biofuels production and supply industry to develop.

Others oppose such regional exclusions, citing as reasons that:

• resource industries and transportation in northern regions that might be exempted account for large volumes of fuel consumption;
• not having such exclusions will impel the use of renewable fuels in regions and result in an overall greater environmental benefit through a wider use of renewable fuels;
• the obligation to have renewable fuel content should apply to all players within Canada;
• there are no performance problems with the use of gasoline replacements (ethanol) in the northern latitudes; and
• performance issues with the use of some renewable fuels in specific cold weather applications can be addressed within the proposed company-wide flexibility provision.

A number of parties support excluding aviation fuel from the requirements of the regulation. One ENGO, while recognizing that renewable content cannot be added directly to aviation fuel, considers that air transport is a growing source of greenhouse gas emissions and that the limitation can be addressed within the proposed company-wide flexibility provision.

The motor vehicle industry suggested exempting fuels used in research and testing or imported into Canada in the fuel tanks of vehicles.

The Notice indicated that consideration would be given to including an exemption for small-volume producers or importers such that they would not be subject to the renewable fuel content requirement. No party indicated support for such an exemption. Those opposing exemptions are of the view that:

• an exemption will provide some players with an unfair advantage. Exempted players would be positioned to undermine local market prices on blended fuel, creating an uncompetitive and patently unfair marketplace; and
• small importers may not be unduly burdened if included in the regulation.

A number of parties feel that the regulation should include explicit language to exempt exported fuels as some refiners export a large portion of their production.

A number of parties focused on impacts in Atlantic Canada. It was pointed out that there is limited agricultural capacity in Atlantic Canada to produce feedstocks for renewable fuels. Stakeholders from Atlantic Canada are therefore concerned about potential adverse impacts in the region. The concerns arise from a variety of factors, including the following:

• a regulatory design with corporate average limits or credits and trading puts regional fuel distributors in the region at a competitive disadvantage and causes undue costs to consumers in Atlantic Canada (see further discussion under the section on Credit and Trading System);
• renewable fuels will need to be imported into the region at a cost to consumers without offsetting economic benefits;
• renewable fuels imported to Atlantic Canada will likely be sourced from non-NAFTA regions such as the Caribbean or Brazil. Such imports of ethanol are subject to a $0.05 per litre tariff that the region would bear;
• unlike other regions, Atlantic provinces do not have incentives that can lessen the costs of renewable fuels;
• there is a risk of fuel supply disruptions in Atlantic Canada as the fuel distribution system is not flexible enough to easily accommodate the integration of renewable fuel blends;
• some Atlantic refineries export a large part of their production and will be disadvantaged if the requirements apply to exported volumes.

There is recognition that the impacts in Atlantic Canada would be alleviated once second-generation renewable fuels, such as cellulosic ethanol, become competitive and widely available.

A number of suggestions to alleviate impacts in Atlantic Canada were provided and include:

• federal financial assistance to help develop renewable fuel production and stimulate markets in the region;
• flexibility in the level and timing of requirements to allow the renewable fuel production and supply industry to develop;
• exemptions for regional distributors, at least until supply and market conditions improve (more details are provided in the section on exclusions/exemptions);
• removal of the $0.05 tariff on ethanol imported from Brazil;
• regulatory design with a "per facility" compliance requirement; and
• clarification that the regulations would not apply to product produced for export.

Some stakeholders support requiring labelling of renewable fuel blends at the point of sale in the retail market. In their opinion, consumers need to be aware of what they are purchasing. One party noted that provincial requirements are not consistent and labelling provisions in a federal regulation would remedy this. On the other hand, an ENGO is concerned that labelling could be misleading to consumers as a fuel could be labelled as having a 5% average renewable fuel content while the actual purchased volume could have 0% renewable content.

Vehicle manufacturers raised a number of implementation issues that can arise with the introduction of renewable fuels at retail sites:

• retail sites need to prepare adequately before they can handle ethanol blends to prevent fuel contamination and leaks to the environment; and
• some underground tanks are not compatible with ethanol-blended gasoline and must be treated or replaced to prevent environmental contamination from tank leakage.

The petroleum industry is suggesting that a provision be included in the regulation to allow the minister to temporarily amend the requirements of the regulation in the event of either a regional, national or international emergency that impacts the fuel supply system.

¹ https://www.canadagazette.gc.ca/rp-pr/p1/2006/2006-12-30/pdf/g1-14052.pdf (PDF Format, 899 kB)
² http://www.epa.gov/otaq/renewablefuels/
³ The Canadian General Standards Board is a government agency within Public Works and Government Services Canada, engaged in the production of voluntary standards through the media of standards committees and the consensus process.
⁴ http://www.epa.gov/oms/renewablefuels/420f06060.htm