Terry Daynard's Blog

Overview of New Canadian Clean Fuel Regulations – Implications for Biofuel and Farmers

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This overview is organized in two parts: The first involves the general nature of the Clean Fuel Regulations and its carbon credit requirements for fuel producers and marketers. The second part is specific to farmers supplying feedstock to bioethanol and biodiesel plants.

The overview is written, primarily, for those in Canadian agriculture seeking to know in simple terms what the Clean Fuel Regulations (also commonly called, Clean Fuel Standard) are all about and how it will affect them.

Image courtesy of Grain Farmers of Ontario

On December 18, 2020 the Government of Canada released details of its long-awaited Clean Fuel Regulations. This follows an announcement, one week earlier, on how Canada intends to meet its Paris Accord commitment for a 30% reduction in net greenhouse gas emissions by 2030 compared to the base year 2005 (details here and here).

Prior to the December 11 announcement, Canada had only announced a plan for a 19% reduction (more details here). The two December announcements are about the missing 11%.

The 11% gap equates to about 80 Mt of greenhouse gases (aka, GHG, measured as carbon dioxide equivalents, or CO2e) in 2030, of which up to 20.6 Mt CO2e – or one-quarter – is projected to be achieved through the new Clean Fuel Regulations.

The lengthy document published in Canada Gazette Part I on December 18 contains the proposed regulations, consisting of 160 sections and 19 schedules, and prefaced by an equally lengthy “Regulatory Impact Analysis Statement.” The following is a quick overview focused on how this affects biofuels and farmers who grow feedstock grain and oilseeds.

In simplest terms, the government has set a base for carbon intensity for liquid fuels which declines from 91.8 gCO2e/MJ in 2022 to 82.5 gCO2e/MJ in 2030. “Carbon intensity” means net CO2 released during manufacture of both the feedstocks and liquid fuels, and during combustion. (MJ means millions of Joules of combustible energy – 33.5 MJ/litre for gasoline and 38.4 MJ/litre for diesel.) On a per-litre basis, these carbon intensity targets equate to 3.08 and 3.53 kg of CO2e/litre for gasoline and diesel, respectively, in 2022, and 2.76 and 3.17 kg/litre MJ in 2030.

(Note that the Regulatory Impact Analysis Statement lists the carbon intensity range as 90.4 to 81.0 g CO2e/litre, versus the numbers shown in the previous paragraph that are copied from the Regulations themselves. I don’t understand why the discrepancy – quite possibly an error – and am using the values listed in the Regulations.)

For companies producing/marketing liquid transportation fuels, a quarterly calculation is made of the difference between the average carbon intensity of their products. Where this amount is below the carbon intensity target, the company must achieve/secure offsetting credits, each ‘credit’ being 1 tonne of CO2e.

During the initial two years of implementation, beginning in December 2022, the carbon intensity target is still quite high and many oil companies will accumulate credits during this period for the reason explained below. These credits can be banked and used to offset credit needs during a few years to follow. But additional C credits will be required starting in 2026 or 2027 as the banked credits are used up and carbon intensity requirements become more demanding.

This is illustrated in Fig 1 extracted from the Canada Gazette Part I Regulatory Impact Analysis Statement.

Fuel companies will be required to secure the credits needed by a combination of five routes.

One of these involves improvements in the GHG efficiency of fossil fuel production and refining. This also includes energy savings achieved by co-generation of heat and energy, and the sizeable amount of CO2 that will be pumped into oil-wells to increase crude oil flow. This unground storage of CO2 is the primary reason for the accumulation of credits for initial years shown in Fig. 1. However, the opportunity for CO2 storage is also expected to maximize by about 2024. The credit only applies for added capacity.

A second source of credits involves the usage of “low intensity carbon fuels,” including bio-based ethanol and biodiesel. The precise amount of the credit per litre/tonne depends on life cycle analyses still to be completed (an interim calculation lists the carbon intensity of ethanol and biodiesel as 49 and 26 g CO2e/litre, respectively).

The Clean Fuel Regs have included minimum contents of 5% bioethanol and 2% biodiesel, which are currently required for Canadian gasoline and diesel. Some provinces require more, or will require more by 2030.

The Clean Air Regs refer to three categories of “low intensity carbon fuels.” These are described in Section 33(1) of the regs as follows. Note that virtually all farm crops to be used to manufacture biofuel are in category (c). The regulatory requirements are substantially less stringent for categories (a) and (b).

From Section 33(1)

[A] quantity of a feedstock is eligible if the feedstock

(a) is not derived from biomass;

(b) is sourced from any of the following:

(i) animal materials, including manure,

(ii) used animal litter or bedding,

(iii) used or inedible organics from a residential area, a retail store, restaurant, a caterer or a food processing plant,

(iv) used fat and used vegetable oils,

(v) industrial effluents,

(vi) municipal wastewater,

(vii) used construction and demolition materials,

(viii) secondary forest residues that are byproducts of industrial wood-processing operations,

(ix) forest biomass from clearing activities not related to harvesting, including infrastructure installation, fire prevention and protection, pest and disease control, and road maintenance, or

(x) waste used to produce biogas from a waste processing facility; or

(c) is not sourced from a material or source referred to in paragraph (b) and is sourced from agriculture or forest biomass.

The additional demand for bioethanol and biodiesel created by this option is not expected to be substantial until about 2028. The Regulatory Impact Analysis Statement says that a substantial portion of this increased demand, especially for ethanol, is likely to be imported.

A third option for securing credits is through increased supply of non-carbon based energy sources. The document devotes a lot of text to describing how companies can obtain credits by augmenting home recharging capacities for electric motor vehicles.

And there are two other options: One involves buying credits at a cost of $350 per tonne of CO2e by contributions to new funds for developing/promoting new GHG-reducing fuel technologies. And the other involves buying credits from other companies with surpluses to sell, as made available through an auction process.

There are limits as to the quantity of offsetting credits that fuel suppliers can secure using most of the options described above.

Implications for Canadian Farmers

One of the stated goals of Clean Fuel Regs is to prevent/minimize harm to biodiversity and prevent the destruction of forests, wetlands and grasslands in the production of feedstocks for expanded biofuel production.

The regulations list some rather draconian procedures that farmers would need to follow, either individually or in groups, in order to supply crops for the manufacture of bioethanol and biodiesel. As initial plans for the Clean Fuel Regs were outlined to farm groups and others earlier in 2020, these were the only options for Canadian farmers. Absurdly, the proposed requirements were less stringent for imports from the United States which involve adherence to the US Renewable Fuel Standard.

Fortunately, this has been largely corrected in the Canada Gazette Part I wording (specifically, Section 40) released on December 18:

40 (1) A feedstock that is a crop, crop byproduct, crop residue or short-rotation woody biomass crop is also deemed not to have been cultivated on land referred to in section 38 if the Minister decides that

(a) the country in which it was cultivated has not exhibited a net expansion of cropland greater than 2% since July 1, 2020 and that it is not likely to exhibit such an expansion in the future; and

(b) it is unlikely that producers of the feedstock will use land that was not cropland on July 1, 2020 to cultivate feedstock in the future.

The wording is somewhat strange in that it seems to refer to imports from other countries. But this works for Canadian farmers if 1) the word “country” in 40 (1)(a) also includes “Canada,” and 2) the amount of cropland devoted to crops (principally, corn, soybeans, wheat, canola and barley) used to produce biofuels does not change much. (It hasn’t in recent years.)

It’s of interest that the Canadian Clean Fuel Regs refer to the need to preserve wetlands while the US Renewable Fuel Standard does not. But with the blanket Section 40 provision shown above, that should not a major competitive disadvantage for Canadian grain and oilseed farmers.

As one of those Canadian farmers, I express appreciation to farm groups including the Grain Farmers of Ontario who lobbied for needed changes. See the GFO statement here.

Here’s also a release from Renewable Industries Canada (formerly the Canadian Renewable Fuels Association).

Before closing, the following merit special mention:

  1. The market demand for bioethanol and biodiesel created by the new regulations will not materialize in sizable quantities until about 2028.  Much can change in the either years between 2020 and then (including at least two federal elections).
  2. The regs treat ethanol and biodiesel (and grains and oilseed used to produce them) equally whether imported from the United States or produced in Canada. This is as it should be in an open market environment. Unfortunately, the far greater subsidy support being provided to US grain farmers versus Canadian, at least as of late 2020 when this is posted, is of serious concern. Further, the possibility of countervailing duties to offset this differential is not a realistic solution.
  3. Further to point #2, when the life cycle analyses are completed of GHG emissions associated with the production of biofuels, there may be an advantage for ethanol produced from Canadian corn. Irrigation, which requires lots of energy, is used much more for corn production in the US versus Canada. Energy used in transportation may also be a factor.
  4. The third point is that what was published in Canada Gazette Part I on December 18 is a draft regulation. The final version will be published, after a 75-day comment period, in Canada Gazette II, probably sometime in late 2021. Changes are quite possible – indeed likely.

I express appreciation to Mr. Don O’Connor of (S&T)2 Consultants Inc., Delta, British Columbia, and Dr. Paul Hoekstra, Vice-president for Strategic Development, Grain Farmers of Ontario, for comments that were valuable in the drafting of this column. However, responsibility for errors or opinions expressed above is solely the author’s.

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