Canada’s New Clean Fuel Standard & The Emergence of a Carbon Credit Market

On June 21, 2022, the federal government registered the Clean Fuel Regulations (CFR)¹ under the Canadian Environmental Protection Act, 1999.² The goal of the CFR is to advance the growth of Canada’s clean energy sector by encouraging investment in low carbon fuels and technologies.

Background

In 2016, Prime Minister Justin Trudeau agreed to the Pan-Canadian Framework on Clean Growth and Climate Change (PCF) to further Canada’s commitment to reduce national greenhouse gas (GHG) emissions by 30% (below 2005 levels) by 2030. The CFR was proposed to complement this objective as a performance-based policy tool that mandates specific carbon intensity (CI) reduction targets.

The CFR is aimed at the transportation industry and requires producers and importers of gasoline and diesel (primary suppliers) to incrementally decrease the CI of these fuels produced and sold in Canada.

Repeal of the Federal Renewable Fuels Regulations 

The CFR will repeal the existing federal Renewable Fuels Regulations (RFR) on September 30, 2024.³ Importantly, the CFR maintains the RFR’s minimum renewable fuel content⁴ levels of at least 5% in gasoline and 2% in diesel that is produced and/or imported in Canada during a compliance period.⁵

Scope & Application

The CFR applies to primary suppliers who produce or import into Canada a volume of more than 400 m³ of gasoline or diesel during a compliance period.⁶

The CFR does not apply to gasoline or diesel that is:⁷

• aviation gasoline,
• exported from Canada,
• used for scientific research, or
• sold or delivered for use in competition vehicles.

Annual Carbon Intensity Limits

The CI of a fuel is measured by the amount of GHG emitted when extracting, processing, distributing and using the fuel. The CI reduction requirements take effect on July 1, 2023. The first CI reduction requirement will start at 3.5 grams of carbon dioxide equivalent per megajoule (gCO2e/MJ), subsequently increasing by 1.5 gCO2e/MJ per year up to 14 gCO2e/MJ by 2030.

Market Entry and Participation - Create & Sell Compliance Credits

The CFR creates a credit marketplace to facilitate compliance with the regime. To meet the CFR requirements, primary suppliers must either create or buy credits.  Each credit represents a lifecycle emission reduction of one tonne of carbon dioxide equivalent.

Primary suppliers can satisfy the annual CI reductions through various credit-creating activities including:

• Compliance Category 1: Undertaking emission reduction projects (e.g., carbon capture and storage projects or co-processing fuels),
• Compliance Category 2: Supplying low carbon fuels (e.g., ethanol and biodiesel); or
• Compliance Category 3: Supplying fuel or energy to advanced vehicle technology (e.g., electric or hydrogen for use in vehicles).

By default, credits are initially issued to the person who completed the credit-generating act. The compliance-credit market is also open to voluntary credit creators (VCC) including electric vehicle charging site hosts or biofuel producers. As a VCC, low carbon fuel producers may opt in to this marketplace and sell credits to primary suppliers when engaging in the activities outlined above.  

Alternatively, primary suppliers can satisfy up to 10% of their annual reduction requirement by contributing to the compliance fund. The credit price under this program is set at $350 for 2022.

Registration & Administration

All market participants must register with the CFR’s Credit and Tracking System (CATS). CATS administers credit transactions and manages approvals of compliance projects amongst other reporting obligations.

Related Provincial Regulation of Clean Fuels

In Canada, regulation of the environment is within the jurisdiction of both the federal and provincial governments.  British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec also impose regulatory requirements relating to low carbon fuels. 

The CFR aligns with Canada’s vision to accelerate the shift towards low carbon fuels. The development of a compliance-credit trading economy is likely to spark an increase in domestic emission reduction projects in the near future.

For further information, please contact any member of our Environmental Group, Energy Group, or Cleantech Group.

The author would like to thank Samantha Melhado, Articling Student-At-Law, for her assistance in writing this Update.

¹ SOR/2022-140 [CFR].

² SC 1999, c. 33.

³ CFR ss. 176(2).

⁴ Renewable fuel content is defined by its Carbon Intensity.

⁵ CFR ss. 6(1), 7(1). 

⁶ CFR ss.4(1).

⁷ CFR ss.4(2).