The Canadian government has released for public comment draft Clean Fuel Regulations (CFR). The CFR is complex and will impact every Canadian and Canadian business that use liquid fossil fuels, such as gasoline or diesel. 

These regulations will require carbon-intensity (CI) reductions in liquid fossil fuels (i.e., gasoline, diesel, fuel oils, etc.) produced and imported into Canada. CI is the amount of greenhouse gasses (GHG) emitted in the production, distribution and combustion of fuel on a volume basis (e.g., the GHG emissions per litre of gasoline).

The CFR is intended to drive emission reductions in liquid fuels in use in Canada, such as for transportation, heating and electrical generation, and encourage investment in low-CI initiatives.

The CFR will be implemented in December 2022 under the Canadian Environmental Protection Act, 1999. Non-compliance may therefore result in criminal penalties.

What the CFR applies to 

Gasoline, diesel, kerosene and light and heavy fuels will be subject to the CFR. Canada planned to apply the CFR to gaseous and solid fuels such as propane and coal, making it the first country in the world to do so, but that is no longer the case.

The CFR will not apply to liquid fuels used as industrial feedstocks or that are exported, used in a refinery or an upgrader or in certain remote communities.

Who does the CFR apply to?

The persons required to comply with the CFR are the producers (i.e., refineries) and importers of liquid fossil fuels into Canada, called "primary suppliers."

Persons who are not primary suppliers can voluntarily participate in the CFR by carrying out emission reduction projects that create CFR credits they can sell to primary suppliers. They are called "registered creators." 

How does it apply?

Each regulated fuel will have a CI limit expressed in grams of carbon-dioxide equivalent emitted per amount of energy, or "gC02eMJ," with CI limits based on Canadian averages and applicable across the country. 

Primary suppliers will have to determine the total volumes of liquid fuels they produce or import in a year, the annual CI limits on all such fuels on a company-wide basis and the actual CI of all of their fuels. If the actual CI of a primary supplier's fuels on an annual basis is above the CI limits set by the CFR, then they will have to bring themselves into compliance.

Gasoline and diesel must also be supplemented with minimum biofuels content, similar to requirements of the existing federal Renewable Fuels Regulations. The CFR will replace the Renewable Fuels Regulations and the biofuel supplementation obligation will continue under the CFR.

Compliance

The CFR is performance based, meaning it sets CI limits on liquids fuels but leaves it up to primary suppliers to decide how to achieve such limits.

Primary suppliers with a CI above the CFR's CI will have to annually retire credits to achieve compliance. Credits can be created four ways: undertaking actions to reduce a fuel's lifecycle emissions, blending lower CI fuels into existing fuel products, switching to fuels with a lower CI, or paying into a CFR-recognized compliance fund (for up to 10% of the compliance obligation). The proposed rules around credit creation and use are complex and still in development.

The CFR credit system will allow primary suppliers to create credits or obtain them from registered creators and then retire such credits to meet their CI compliance obligations. Each credit represents a lifecycle emission reduction of one tonne of GHGs.

Lifecycle reductions

The CFR will measure a fuel's CI on a "wells-to-wheels" basis, meaning it will sum up all emissions from exploring for, producing, refining, transporting and consuming the fuel. A primary supplier may choose where in a fuel's lifecycle - from production to consumption - it can reduce its fuel's CI and earn credits, which should provide significant flexibility and spur innovation.

For instance, CFR credits can be created by reducing emissions arising from oil and gas production, such as through carbon capture and storage, CO2 enhanced oil recovery or electrification of oil and gas field facilities. Standard methods to quantify such CI reductions are being developed.

Low-CI fuel supplies

Credits may be created by switching to or blending low-CI fuels such as ethanol or biodiesel into fuels. To qualify, the low-CI fuels must have a CI that is 90% or less then the CI value for that fuel and be approved by Environment and Climate Change Canada (ECCC). Qualifying low-CI fuel feedstocks obtained from forestry or agricultural activities must meet a land use and biodiversity criteria. For instance, the biomass used to create ethanol for a low-CI fuel must not come from certain types of forest, wetland, grassland or riparian areas, among other requirements.

Fuel switching

Credits may be created through changing fossil fuel engines to utilize another fuel, such as switching to electric vehicles (EV). The credits may also be created by operators of certain fueling facilities, such as EV charging stations.

CFR fund payments

A primary supplier may meet up to 10% of its CFR compliance obligation by paying a carbon tax of $350 per tonne into a compliance fund recognized by ECCC, such as certain provincial GHG technology funds. The rules for this are still being developed. 

The CFR credit market

The CFR will create a complex credit clearance mechanism that will cap CFR credit prices at $300 per tonne, require primary suppliers and registered creators to register, report all credit transactions, and include credit verification requirements.

Finalizing the CFR

The CFR is to be finalized in late 2021 and brought into force in 2022. Given its scope and complexity, significant effort will be needed by primary suppliers and registered creators to fully understand the CFR's nuances and develop strategies and projects to ensure compliance.

About Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global law firm. We provide the world's preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.

Law around the world
nortonrosefulbright.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.