Should companies fear the Clean Fuel Standard?

The Clean Fuel Standard will affect a host of industries — many of them unwitting

Canadian industries fear the federal government’s Clean Fuel Standard will translate into an increase in the cost of doing business.

“At the end of the day, this is just another tax that Canadian business has to deal with,” said Bob Masterson, president of the Chemistry Industry Association of Canada (CIAC) , which represents the country’s chemical and plastic sectors. “And because we already have an aggressive, strong and efficient carbon tax, we don’t need the CFS to achieve the country’s emissions goals.”

Both the CFS regulations and the carbon tax target GHG emissions reduction: the carbon tax focuses on reducing the overall volume of these emissions; the CFS focuses on gradually reducing the intensity of the carbon content in liquid fuels produced or imported into Canada.

According to Ottawa, which has been working on CFS for the past five years, the CFS will require liquid fuel (gasoline, diesel, home heating oil) suppliers to gradually reduce the carbon intensity of the fuels they produce and sell for use in Canada over time, leading to a decrease of approximately 13 per cent (below 2016 levels) in the carbon intensity of our liquid fuels used in Canada by 2030. The final regulations are expected to be released near the end of 2021 and implementation is set to start December 2022.

“In 2022 the carbon intensity reduction requirement will start at 2.4 gCO2e/MJ. It will gradually increase over time reaching 12 gCO2e/MJ in 2030,” according to a government document. “To achieve this, fuel producers will need to provide innovative solutions and new fuel options to consumers.

But the CFS has received considerably less attention than the carbon tax. The reason is that the CFS is far less transparent: while the carbon tax targets multiple industries, the CFS’s focus is on liquid fuel suppliers and the transportation industry — although it cuts a much broader swath through the economy.

Those directly regulated include integrated oil companies such as Suncor Energy Inc. and Imperial Oil Ltd. that produce and refine crude, as well as refiners such as Irving Oil. Other regulated companies with refineries in Canada include Cenovus Energy Inc., Gibson Energy Inc. and Parkland Corp.

“Meanwhile, Canadian Natural Resources . . . could also be indirectly affected through its upgraders, while the conventional O&G names would likely only be exposed to pricing changes based on the trickle down effect,” states the National Bank of Canada (NBC) in a recent industry note.

The Canadian Fuels Association, which represents Canada’s transportation fuels industry — the companies who process crude oil into products like transportation fuels and get these products to market — declined comment for this article. But on the organization’s website, Brian Ahearn, the association’s vice-president, Western Canada, opines that CFS “will come with compliance costs for fuel suppliers across the . . .  spectrum of the fuel market.”

Liquid fuel suppliers, then, will be looking to the credit market contemplated by the CFS, where suppliers can create or buy credits in furtherance of compliance. The credits fall into three main categories: projects that reduce the lifecycle carbon intensity of fossil fuels, such as carbon capture and storage; supplying customers with low carbon intensity fuels like ethanol; and investing in advanced vehicle technologies such as hydrogen fuel cells.

NBC expects regulated parties to increase investment in biofuels and renewable fuels, highlighting Suncor’s ethanol plant in Ontario and its recent agreement with Gibson Energy to create a biofuel blending project in Edmonton. As well, the Bank anticipates that companies will be looking at carbon-intensity reducing projects such as cogeneration, and that growing interest will emerge in carbon capture and hydrogen opportunities that could also benefit from tax breaks outlined in the 2021 federal budget.

However that may be, NBC notes that the CFS takes a “lifecycle approach, which means it accounts for all stages of fuel production and use, including extraction through processing, distribution and end-use.”

The upshot is that the CFS will affect a host of industries  — many of them unwitting — apart from the directly regulated liquid fuel suppliers. Indeed, Canadian Manufacturers & Exporters (CME), a trade association, has estimated that compliance costs for its members will exceed $27 billion. And the Montreal Economic Institute (MEI) has concluded that the CFS could affect 1.7 million jobs in the manufacturing sector alone.

“If you produce or use liquid fuels — meaning we’re talking about everything from oil refineries to cosmetics — the CFS will affect you, albeit in different ways,” said Dennis Darby, CME’s president and CEO.

That’s because Canadian manufacturers export some 80 per cent of their output, which travels long distances to North American and global markets.

“Transportation costs are among the top three or four operating costs categories for many manufacturers,” says Miguel Ouellette, an economist the MEI’s director of operations. “And because transportation costs will now be double-taxed by the carbon levy and the CFS, Canadian manufacturers’ competitiveness will be affected.”

Especially concerning is the fact that manufacturers have no control over the impact of the CFS.

“Fuel producers and distributors will have to comply, and they’ll simply pass on the costs, which leaves industries receiving these fuels with no influence at all,” Ouellette said. “That’s different from the carbon tax, whose transparency means that those who are subject to it control the means to comply.”

Non-regulated parties in sectors such as transportation, however, can participate in the credit market. They might see credit-making opportunities from investment in low-carbon gaseous fuels as well as electric vehicle (EV) infrastructure. And NBC believes that other sectors, like utilities, will “capitalize on the ability to play in the CFS arena.”

Here, NBC highlights ATCO’s 52.3 per cent share in Canadian Utilities, which has already built 25 electric vehicle charging stations in Canada, as well as ATCO’s recent announcement of the potential for a clean hydrogen project with Suncor near Fort Saskatchewan. Fortis, Canadian Utilities and Suncor “could all generate CFS credits through their EV infrastructure operations.”

However, the CFS will reduce Canada’s greenhouse-gas emissions by more than 20 million tonnes in 2030 — equivalent of taking 5 million cars off the road each year. The government estimates the CFS will cut greenhouse gas emissions by 221 megatonnes between 2021 and 2040, at a net cost of $94 per tonne. In total, there will be a net cost to society of $20.6 billion. A government analysis said poorer families will be hit hardest as fuel suppliers pass on their increased costs.

“By setting clear market signals to invest in clean fuel facilities, production and distribution, the CFS will boost Canada’s GDP by about $5.6 billion over the next decade, and create as many as 24,000 net new jobs,” Pembina Institute said in a report last year.

“The federal government has proposed more than 60 measures to meet the Paris Agreement target. The Clean Fuel Standard, when fully implemented, will account for about 10 per cent of the planned carbon-emissions reductions in this country. This is a big piece of Canada’s carbon-reduction pie,” Pembina noted in its report.

It’s also important to keep in mind that CFS regulations require that revenues from CFS advanced vehicle technology credits be reinvested in EV infrastructure or the reduction of EV costs.

There may, however, be a giant gap in the logic of the CFS and its credit market: how can the government expect industries to invest in biofuels for internal combustion engines — investments that require hundreds of million of dollars and major industrial facilities — even as it is musing over an eventual ban on gas-powered engines, with British Columbia planning to ban them by 2040 and Quebec targeting 2035.

Julius Melnitzer is a Toronto-based legal affairs writer, ghostwriter, writing coach and media trainer. Readers can reach him at julius@legalwriter.net or https://legalwriter.net/contact.

With additional reporting from Thomson Reuters

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