Clean Fuel Standard: technical backgrounder
Official title : Clean Fuel Standard (CFS) Technical Backgrounder: Objectives, illustrative costs, and compliance pathways
The Clean Fuel Standard is part of Canada’s climate plan. This technical document explains how it will work to reduce carbon emissions and slow climate change.
Objectives of the Clean Fuel Standard
The Government of Canada is developing a Clean Fuel Standard (CFS) that will reduce the lifecycle carbon intensity of fossil fuels used in Canada, with the objective of achieving 30 million tonnes (Mt) of annual reductions in greenhouse gas emissions (GHGs) by 2030. The CFS will be a performance-based approach designed to incent the innovation and adoption of clean technologies in the oil and gas sector and the development and use of low-carbon fuels throughout the economy. The CFS will make an important contribution to Canada’s target of reducing national emissions by 30% below 2005 levels by 2030, and is complementary to other climate policies and investments being made under the Pan Canadian Framework on Clean Growth and Climate Change – including carbon pollution pricing. These policies work in concert to reduce emissions across the economy, and create incentives for innovation and clean growth.
The Clean Fuel Standard is part of Canada’s climate plan
In its final form, the CFS will apply to all fossil fuels – liquid, solid and gaseous. The first phase of the CFS will focus on liquid fuels, such as gasoline and diesel. Most liquid fossil fuels used by Canadians and industry are for transportation, a sector that contributes about one-quarter of Canada’s emissions. According to a recent report by the Government’s Advisory Council on Climate Action, concerted, multi-faceted efforts are needed to reduce transportation emissions. By ensuring cleaner fuels, the CFS will work together with investments in public transit, making zero emission vehicles more affordable, and stringent vehicle emissions standards.
The CFS will require fossil fuel suppliers and importers to reduce the lifecycle carbon intensity of fuels (i.e., accounting for all GHG emissions associated with its extraction, production, distribution and use). The performance standard for liquid fuels is expected to come into effect in 2022, and will increase in stringency gradually from 2022 to 2030. By 2030, the carbon intensity of liquid fuels such as gasoline and diesel will be reduced by between 10 to 12% from 2016 levels. Fossil fuel suppliers will be able to meet the performance standard by taking action themselves or by purchasing credits from low-carbon-intensity fuel producers and other credit generators.
The Clean Fuel Standard is complementary to carbon pricing
The CFS will complement carbon pricing by making low-carbon-intensity fuels and technologies more widely available. The CFS and carbon pollution pricing also send mutually reinforcing price signals. For example, actions by a fossil fuel supplier (such as a refinery) to reduce its emissions by installing more energy efficient technology will reduce its exposure to carbon pricing: it will either pay less or will be able to earn credits that it can sell to others covered by the pricing system. It will also create credits that can be used or sold for compliance under the CFS.
There are also important differences between the CFS and carbon pollution pricing. First, whereas carbon pricing promotes reductions throughout the economy, the CFS will apply more narrowly to companies that import or supply fossil fuels. Second, carbon pollution pricing is an emissions cost, whereas the CFS creates an abatement cost. Carbon pollution pricing applies a cost on all of the GHG emissions that result from the combustion of a carbon fuel, whereas the costs imposed by the CFS are associated with the actions taken to reduce only the GHG emissions needed to reduce the carbon intensity of the fuel at some point in its lifecycle. These could include, for example, the costs to provide additional low carbon fuel, install energy efficient equipment, or switch to electric vehicles. These abatement actions receive credits on the basis of the tonnes of GHG emissions they reduce. These credits can then be traded in the market so that all fossil fuel suppliers and importers have access to lower cost opportunities.
The difference between carbon pollution pricing and the estimated cost for a CFS credit is illustrated in the table below. In this simple example, the combustion of 450 litres of gasoline releases approximately 1 tonne of GHGs into the atmosphere. That amount of gasoline will be subject to a $50/tonne carbon pollution charge in 2022 (about 11 cents per litre), which leads to a total cost of $50.
The same amount of gasoline would create a regulatory obligation for fossil fuel suppliers of 0.16 tonnes under the CFS in 2030Footnote 1 . The total cost would equal $7.87 if the cost to abate that 0.16 tonnes is $50/tonne (i.e., chosen here for illustrative purposes to be the same as the carbon pollution charge). As a result under this illustrative scenario, there would be an increase of 1.8 cents per litre of gasoline under the CFS, compared with 11 cents per litre due to the carbon pollution charge. If the cost to abate the 0.16 tonnes is higher than $50/tonne – say, for example, $200/tonne – the gasoline price impact would be 7.2 cents per litre, or just over half the cost impact of the carbon pollution price.
| Carbon price | Proposed CFS | |
| Price per tonne | $50/t of emissions released | $50/t of emissions reduced |
| Obligated emissions from 450 litres of gasoline | 1 tonne | 0.16 tonne |
| Total cost | $50/t x 1 t = $50 | $50/t x 0.16 t = $7.87 |
| Impact on gasoline cost | $50 ÷ 450 L = 11 ¢/L | $7.87 ÷ 450 L = 1.8 ¢/L |
Note: t=tonnes, L=litres, and ¢/L=cents per litre
Flexible compliance pathways create incentives for investment and innovation
The CFS will provide significant flexibility for companies to meet the requirements in a cost-effective way while also creating a push for innovation and deployment of low carbon technologies. Three types of actions that reduce the lifecycle carbon-intensity of fossil fuels will be able to create credits:
- reducing emissions at any points along the lifecycle of fossil fuels, for example improving energy efficiency at refineries
- supplying low-carbon-intensity fuels, for example ethanol and biodiesel, and
- switching to cleaner end-uses of energy such as electric vehicles.
Environment and Climate Change Canada has examined a number of illustrative scenarios that show the types of actions that could be undertaken in response to the demand for CFS credits. These scenarios are based on proven technologies that are market-ready. Individually, companies will have the ability to comply in a way that is most cost-effective for its circumstances.
Long description
The figure presents the first illustrative scenario which assumes that in 2030 there will be 15% ethanol in gasoline, 6% hydrogenation-derived renewable diesel and 5% biodiesel in diesel and light fuel oil, 10% pyrolysis oil in heavy fuel oil and 2% biojet in jet fuel. By 2022, 1.8 Mt of credits would come from greenhouse gas reduction projects along the life cycle of fossil fuels, 7.2 Mt of credits would come from low-carbon fuels and 1 Mt of credits would come from fuel switching by the end user. By 2030, 7.5 Mt of credits would come from greenhouse gas reduction projects along the fossil fuel life cycle, 14.9 Mt from low carbon fuels and 2.6 Mt from credits would come from fuel switching by the end user.
LFO: light fuel oil is used to heat homes and in small commercial liquid-fuel burning equipment.
HFO: heavy fuel oil is composed of residual fractions from crude oil distillation and processing.
The CFS will allow primary suppliers to offset up to 10% of their liquid class reduction requirement for a compliance period by payment at a fixed price into a fund that invests and obtains greenhouse gas emissions reductions in the short term.
Long description
The figure presents the second illustrative scenario which assumes that in 2030 there will be 11% ethanol in gasoline, 3% renewable diesel produced by hydrogenation and 5% biodiesel in diesel and light fuel oil, 10% pyrolysis oil in heavy fuel oil and 1% biojet in jet fuel. In 2022, 1.8 Mt of credits would come from lifecycle greenhouse gas reduction projects, 6.7 Mt of credits would come from low-carbon-intensity fuels, 1.2 Mt of credits would come from end-use fuel switching and 0.3 Mt of credits would come from emission reduction funds. By 2030, 9 Mt of credits would come from lifecycle greenhouse gas reduction projects, 10.9 Mt of credits would come from low-carbon-intensity fuels, 4 Mt of credits would come from end-use fuel switching and 1.7 Mt of credits would come from emission reduction funds.
The two scenarios depicted in the above chart show that by 2030, between 43% to 60% of compliance could come through increased use of low carbon fuels, including higher levels of ethanol in gasoline, biodiesel, and other low-carbon-intensity fuels (see Case Study 1).
Case Study 1: Supplying low-carbon-intensity fuels
In operation since 2007, Greenfield Globals’s ethanol distillery located at Varennes, Quebec, produces about 200 million litres of renewable, low carbon ethanol from locally grown corn each year. This ethanol is blended with gasoline for retail distribution throughout the province, reducing greenhouse gas emissions and supporting local manufacturing and agricultural jobs. Through the CFS credit trading system, facilities such as Varennes will be able to create credits that can be sold to fossil fuel suppliers to help meet their compliance obligation cost-effectively.
As well, the facility is fueled in part by renewable methane biogas produced by the adjacent SÉMECS anaerobic digestion facility, which allows it to produce some of the lowest carbon intensity renewable fuel in Canada. Because the CFS uses a lifecycle approach for measuring carbon intensities, the fuel produced by Varennes will be able to generate more credits than a similar quantity of ethanol produced without that feature – illustrating how the CFS will create incentive to continue to find innovative solutions to produce cleaner renewable fuels.
Another 30 to 35% of credits in 2030 could come from actions that reduce emissions along the lifecycle of fossil fuels, such as improved energy efficiency at refineries and upgraders or carbon capture and storage (see Case Study 2).
Case Study 2: Actions to reduce carbon intensity of a fossil fuel along its lifecycle
Carbon Engineering (CE), a British Columbia-based company, uses Direct Air Capture (DAC) to take carbon dioxide from the atmosphere to be stored underground or converted into carbon-neutral fuel. In partnership with Occidental, CE plans to build the world’s largest DAC facility in the Permian Basin in Texas, which will capture 500 kilotonnes (or 0.5 Mt) of carbon dioxide annually, which would be used in enhanced oil recovery operations and subsequently stored underground permanently. The CFS will incentivize investment in projects like this in Canada by enhancing the demand for clean technology, which in turn improves the conditions that allow CE and similar companies to innovate.
Finally, the remaining 10% to 16% of credits could come from end-use fuel switching in transportation, mostly from consumers switching to electric and renewable natural gas vehicles (see Case Study 3).
Case Study 3: End-use fuel switching
The City of Surrey’s (British Columbia) Biofuel Facility is an organic waste biofuel processing facility that processes the City’s organic waste into a 100% renewable natural gas (RNG), which is then used to fuel the City’s garbage trucks and to heat Surrey’s city centre. Surrey estimates that its facility reduces about 49,000 tonnes of GHG emissions per year. By producing RNG, the facility will be eligible to receive gaseous class credits under the CFS as a low-carbon-intensity fuel supplier. Furthermore, the use of this RNG to fuel Surrey’s garbage trucks (an example of end-use fuel switching), would allow the municipality’s fueling station to create additional credits for displacing diesel.
The demand for credits under the CFS will create a market signal for investment in low-carbon-intensity fuels and technologies, stimulating the development of Canada’s low carbon economy. Analysis from Statistics Canada found that Canada’s clean energy sector employed 282,000 Canadians in 2017. Together with the investments by the Government of Canada, including $2.3 billion to support clean technology in Canada and the growth of Canadian firms and exports, the CFS aims to contribute to further growth in Canada’s clean energy economy.