The Clean Fuel Standard – The Latest in Climate Pancaking

Contributed by Robert Lyman ©  2020. Lyman’s bio can be read  here.

Executive Summary

Companies that have been adversely affected by multiple climate policy measures sometimes refer to the process as “policy layering” or “pancaking”. One of the newest and most damaging examples of this is the federal government’s Clean Fuel Standard.

The Clean Fuel Standard (CFS), for which only the proposed regulatory approach has been published so far, is not the same as the motor vehicle fuel emissions standards. Those standards apply to motor vehicle manufacturers and Importers. The CFS is a system of regulations affecting the suppliers of fossil fuel products – generally oil, natural gas and coal -used as energy sources. The suppliers will be required to reduce the annual carbon dioxide “intensity” of the fuels every year, based on a standard and schedule of reductions set by Environment and Climate Change Canada (ECCC). The “intensity standard” measures the carbon dioxide emissions per unit of energy output, but with a twist. The fuel companies will be regulated on the basis of the emissions from the entire fuel cycle. In other words, in the case of a gasoline supplier, he or she will be held accountable for the emissions per unit of the gasoline taking into account the emissions at the production, transportation, refining, marketing, distribution, and final combustion stages.

Just trying to figure out what these intensities are will prove challenging. ECCC will use a new mathematic model, along with an extensive system of data collection, to determine what is the “right” emissions intensity and what is the “right” rate at which fuel suppliers will be required to lower it. To do this, fuel suppliers will be expected to change their own operations and those of their sources of supply, but they will also have a limited option to meet the requirements by buying credits from low-emission energy sources. These are the usual beneficiaries of government climate measures – wind, solar, ethanol, biomass, electric vehicles, and other industries. The credits, in effect, are backdoor subsidies to the “green” industries. There will be an elaborate system for verification, validation, certification, and compliance.

The CFS will raise the cost of fossil fuel energy and thereby, in theory, lead to reduced use of fossil fuels and increased investment in lower-emissions energy sources. This is exactly what the carbon dioxide pricing system was intended to do. In fact, while the regulatory mechanisms are different, the CFS is so like carbon taxes, output-based pricing systems and emissions trading systems (the various forms of carbon dioxide pricing) that one can fairly call it a duplication. Based on experience with more limited Clean Fuel Standards used in California and British Columbia, the federal CFS may have the effect of doubling the cost of carbon taxes.

The Canadian Chamber of Commerce has published an excellent analysis and commentary on the proposed CFS based on what has been published so far (the draft regulations are not yet available). The Chamber cautioned that the “pathways to compliance are inefficient and overly prescriptive” and the “pancaking of different carbon prices and increased cost of compliance from jurisdiction overlaps will needlessly raise the costs of compliance for Canadian businesses.” The Chamber also warned that the differences in the availability of “credits” in different provinces may cause some provinces to be much higher cost jurisdictions in which to operate.

The complexity of the regulatory system proposed resides in its many components, its use of unfamiliar procedures and modelling approaches, its requirements for large amounts of data, its difficult-to-understand inter-relationships with existing programs and credit systems and its reporting system. In this respect, it is reminiscent of programs implemented under the 1980’s National Energy Program.

The CFS is arguably more important for its economic impact on Canadian business firms, and especially the emissions-intensive trade-exposed industries, than it is for emissions reduction. Yet, its administration is being handled by ECCC, a science-based department of government whose Minister and political staff have shown themselves to be very closely aligned with and influenced by environmental non-governmental organizations. One might have thought that, if such a measure were really required, it could be delivered by a new organization with an economic as well as environmental policy mandate that stood at arms’ length from the Minister of the Environment and Climate Change.

The CFS adds to the 237 existing federal and provincial climate policies and measures. This will make it difficult to assess its incremental effect and cost. The addition of such a complex regulatory regime demonstrates remarkable confidence in the computer modeling skills and policy judgment of ECCC officials. We shall see whether that is warranted.