7. Appendices

• Appendix A: Comparison of Canadian and U.S. Health Benefits
• Appendix B: Estimation of Canadian Refinery Costs
• Appendix C: Possible Framework for Canadian Regulations

In 1997, through the work on setting sulphur levels for gasoline and diesel, the independent expert panel on health and environmental impacts estimated the health impacts of reducing sulphur in on-road diesel in seven Canadian cities from an average of 475 ppm to an average of 50 ppm These estimates can be extrapolated to all of Canada using the methodology developed by the 1998 Government Working Group on Setting a Sulphur Level for Sulphur in Gasoline and Diesel (GWG). Column 4 of the table below shows the (GWG)¹² estimates adjusted to reflect the change in sulphur level that is now being considered. It should be noted that this does not reflect the impact of the new heavy duty vehicles requirements, which would result in greater benefits.

This estimate of Canadian health benefits can be compared to one-tenth of the US benefits (i.e., scaling for the relative population of the two countries) that were estimated by the EPA for its new diesel fuel and heavy duty vehicle program.

(*) Regional levels in 1999 were: Pacific & Yukon 330 ppm, Prairies & Northern 250 ppm, Ontario 360 ppm, Quebec 410 ppm, and Atlantic 390 ppm In all cases, 1999 regional levels are well below the level of 475 ppm assumed by the health panel. Source: Environment Canada's Sulphur in Liquid Fuels report, 1999.

Studies to estimate costs for two on-road diesel fuel scenarios were carried out as part of work undertaken in 1997 to determine the appropriate level of sulphur in gasoline and diesel fuel. As part of the sulphur in gasoline and diesel fuel process, the Cost and Competitiveness Assessment Panel engaged Kilborn Inc., a consultant, to carry out cost analyses. Based on the results of those analyses for on-road diesel fuel scenarios, it is possible to extrapolate estimates for the 15-ppm maximum limit.

The study entitled "Sulphur in gasoline and diesel study: the costs of reducing sulphur in Canadian gasoline and diesel" undertaken by Kilborn Inc. provides an understanding of the technical changes and associated capital and operating costs that would be required at refineries in Canada to meet various fuel standards. The consultant received direct input on costs from 15 of Canada's refineries and modeled the capital and operating costs for the remainder. In both cases, the cost estimates were based on existing sulphur reduction technologies and existing refinery configurations. The consultant verified the information submitted by the refineries for technical consistency. The cost information was aggregated by region in order to protect confidential company data.

Estimated refinery costs for reducing sulphur in on-road diesel to an average of 50 ppm with a maximum of 100 ppm are outlined in the following table. Details on the calculation of these estimates can be found in the consultant's report (i.e.. Tables 4.1, 4.2 and 4.6).

Generating cost estimates for the 15 ppm scenario proposed by the Regulations can be undertaken using a number of methodologies. Three methods of estimation are outlined below.

The first method is to extrapolate the estimated costs of a 15-ppm scenario from the costs developed by the consultant for the 50-ppm scenario assuming a linear relationship between costs and sulphur reduction. Based on this assumption, the compliance costs of introducing a 15-ppm level of sulphur in diesel fuel standard would be approximately 108%¹⁴ of those found for the 50 ppm scenario, specifically $1.25 billion capital and $86 million operating. Total capital and operating recovery would be approximately 1.7 cents per litre. It is recognized that the relationship between sulphur reduction and costs below 50 ppm is not linear. As a result, this estimate will likely understate the compliance costs to the refining industry.

The second method is to apply the estimation of costs in the United States to the industry in Canada. The US EPA estimated that the overall compliance costs for the US refining industry of a 15 ppm maximum limit would amount to 4½ to 5 US cents per gallon. The average US refinery is expected to spend approximately $30 million (US) in capital expenditures during 2004 and 2005, and a further $8 million (US) per year in operating costs starting in 2006 (note: US refineries are, on the average, larger than those in Canada). If these figures are converted into Canadian dollars and applied to the 17 refineries in Canada that make on-road diesel¹⁵, then the total capital costs would be approximately (in Canadian dollars) $765 million capital and $204 million per year operating costs. Under this methodology, the unit cost would be the same as in the US; that is 1.8 to 2.0 cents per litre.

A third approach is to develop a rough estimate of the costs based on the expectation of the American Petroleum Institute (API) that the costs of introducing a 15-ppm standard would be approximately double the costs of implementing a 50-ppm standard. Based on the estimates compiled by Kilborn Inc., this method results in an estimated cost for the Canadian refining industry of approximately $2.3 billion in capital costs and $159 million per year in operating costs, representing an average unit cost of 3.1 cents per litre. Kilborn Inc. indicated that costs would be borne unequally amongst Canada's refineries.

It is reasonable to assume that an aggregate of individual refinery costs based on a rigorous technical analysis would yield a result somewhere in between the application of the API's approach (i.e. $2.3 billion) and extrapolating results for a 15-ppm scenario from Kilborn's estimate for a 50-ppm scenario (i.e. $1.25 billion). Thus, the average unit cost would likely be between 1.6 and 3.1 cents per litre, and probably close to the EPA's estimate of 2.0 cents per litre. Give the level of uncertainty in the Kilborn analysis (±40% on capital costs), another such study is unlikely to provide a more precise range of costs than noted above.
It should be noted that EPA found that technology currently under development has the potential to reduce the cost of reducing sulphur in on-road diesel by 25%. The experience in the United States on reformulating fuels shows that compliance costs are usually less, and sometimes much less, than first estimated. The consultant who estimated the effect on competitiveness on Canadian refineries of reducing sulphur in gasoline and diesel (Purvin & Gertz) concluded that:

The regulations that would be developed under the two options discussed in section 4 would be very different depending on the option selected.

If Canada aligned with most of the US on-road diesel quality, Canada would set a straightforward never-to-be-exceeded limit for sulphur in on-road diesel of 15 ppm starting June 1, 2006 at the refinery and import level and 15 ppm starting September 1, 2006 at the retail and wholesale level. This could be achieved through a simple amendment to the existing federal Diesel Fuel Regulations. In this amendment, the test method for sulphur in diesel would also be changed¹⁷.

If Canada aligned with most of the flexibilities in the US on-road diesel rule, Canada would have to develop new diesel fuel regulations to replace the existing Diesel Fuel Regulations. (The structure of the existing regulations could not be adapted to include the necessary provisions to address the many issues associated with having two grades of on-road diesel.)

Under this option, Environment Canada envisions regulations that would set the 15-ppm limit in 2006, but then provide regulatees the option of electing to be part of a transition program. If a regulate did not opt into the transition program, it would then be subject to the 15-ppm limit starting in June 2006, but would avoid a few of the administrative requirements placed on those who opt into the transition program.

Regulatees opting into the transition program would be able to produce some small portion of their on-road diesel pool to meet the existing 500-ppm limit. Such regulations might also include a credit generation, banking and trading program. If it did, the regulations would have to define all the rules for the program, including trading restrictions and the tracking and reporting of trades.

However these flexibilities would have to be accompanied by considerable additional administrative requirements. There would have to be records and testing to ensure that the regulatee produced or imported the required volume of 15-ppm diesel. The various types of diesel would have to be identified in records prior to dispatch from a refinery or importation into Canada. Reporting to Environment Canada would be more comprehensive than under Option 1. In addition, an annual independent audit would likely be required by a regulation under Option 2.

The existence of a second grade of on-road diesel would also require extremely complex and administratively burdensome provisions to ensure enforceability of the regulations. These provisions would include product transfer documentation and provisions to ensure segregation of the two grades, and to handle the occasional contamination of low-sulphur diesel. At refueling facilities, the type of diesel would have to be identified somehow. There would also likely be a provision to prohibit the dispensing of high-sulphur diesel into the new heavy-duty vehicles. Other provisions may also have to be included once more details of the regulations are developed.

¹² Health and Environmental Impact Assessment Report, June 25, 1997 (revised March 1998), Table B-34; Government Working Group, 1998. "Setting a level for sulphur in gasoline and diesel". June 14, 1998, Table A.4.6.
¹³ Range of uncertainty is + 40% for capital costs and + 25% for operating costs.
¹⁴ Computed based on average levels of (475 - 10) / (475 - 45 ppm) = 1.08%.
¹⁵ Suncor and Petro-Canada's lubrication plant also produce a small amount of diesel, but it is not their primary business.
¹⁶ Purvin & Gertz's review of the US experience with fuel reformulation, Phase II report, May 1997, p. VI-1.
¹⁷ In order for Environment Canada to better understand the regulated community, Environment Canada may also take this opportunity to add a provision requiring refiners and importers of diesel to register with Environment Canada. This would be similar to the registration requirement under section 7 of the Benzene in Gasoline Regulations for refiners and importers of gasoline.