December 12, 2016 Categories: California Climate Change Low-Carbon Fuel

Canada Leads on Clean Fuels Policy

Donald Trump’s election has called into question U.S. leadership on climate change.  President Obama capped his second term in office with several ambitious and effective policies to reduce carbon pollution, but Trump’s rapidly shifting “plans” are at best a step backward, and at worst an utter disaster for the climate. Our neighbors to the North however, are moving forward by leaps and bounds, most recently by announcing a nation-wide Clean Fuels Standard.

Over the summer, Canada announced that it would require provinces to adopt ambitious carbon pricing policies. Several of its provinces have already done so, British Columbia, the third-largest province, has had a carbon tax since 2008 and the second-largest, Quebec, joined California’s cap-and-trade market in 2013; Ontario, the most populous province, is in the process of joining as well. A national carbon price would set a level playing field for all provinces and create a more robust market for clean energy.

At the end of November, Canada moved even further ahead of the pack on climate policy. Minister of Environment and Climate Change Catherine McKenna announced the Clean Fuels Standard, which would require provinces to reduce the carbon intensity of fuels used in vehicles and industrial processes. It ultimately calls for a total reduction of 30 million metric tons of carbon dioxide by 2030. California and British Columbia have had similar policies since 2010 and Oregon recently adopted their own, but Canada would be the first nation with a policy of this type.

A critical piece of the pie

Canadian GHG Inventory

Canada’s 2014 Greenhouse Gas Inventory. Transportation represents a large and growing share of total emissions.

Transportation represents almost 30% of total Canadian greenhouse gas (GHG) emissions, similar to most other developed economies. Avoiding the worst impacts of climate change will require total emissions in all countries to fall by 80% by mid-century. There’s no way to hit that target without transportation doing its share. This is challenging because transportation is the result of millions of individual decisions by citizens every day: what kind of car to buy, where to live, how much to drive. Changing all of these is not as simple as replacing a coal-fired power plant with renewables or reducing methane leaks from an oil field. Cars last a decade or more, public transit is limited by public finances and personal behavior changes slowly. Increasing the fuel economy of vehicles helps, but doesn’t break the link between transportation and dirty petroleum fuels. Over the long run, clean electric vehicles will go a long way towards cutting carbon, but transition will take time. Recent research has highlighted how important it is to cut carbon pollution as much as possible now. Policy makers need a tool to achieve significant reductions now and provide an alternative to petroleum in the future.

This is where policies like Canada’s proposed Clean Fuels Standard really shine. They target the carbon intensity of fuel – the amount of carbon emitted per unit of energy put in the tank (or battery) – across the entire fuel sector in a flexible and market-friendly manner. Fuel carbon intensity is measured over the full life cycle of a fuel, including production of raw materials, refining, transport and use. Fuel providers must reduce the carbon intensity of their fuels over time or purchase reduction credits from alternative fuel providers. This provides a direct financial incentive for low-carbon technologies to enter the market. Unlike proscriptive fuel blending mandates, like the U.S. Renewable Fuel Standard, the Clean Fuels Standard will not specify what fuel should be used to achieve the targets, only that the fuel sector get progressively cleaner.

Another advantage of Clean Fuels Standards is that they balance a strong financial incentive to clean fuels producers with minimizing costs to consumers. In the short term, many fuel producers will comply with the regulations by blending low-carbon biofuels into conventional petroleum fuel, which can then be used in conventional vehicles without modification; currently most U.S. gasoline contains 10% ethanol. This means within every gallon of gas, there can be a high carbon component (petroleum) and a low-carbon biofuel. The Clean Fuels Standard would subsidize the biofuel by charging a pollution fee on the petroleum component – this way the dirty part of the gallon helps pay for the clean part. Most of the money moved by the program stays within that gallon of gas, and a small fee per gallon of petroleum results in a much larger incentive per gallon of biofuel, so consumers don’t “see” the effect through higher pump prices. California’s Low Carbon Fuel Standard has already reduced carbon emissions by over 16 million metric tons, with only a couple cents per gallon net impact to the consumer at the pump.

 

Value flows within LCFS

At 2017 credit prices and program targets for California, policies like the Clean Fuel Standard result in minor changes in gasoline price, but create a meaningful incentive to use alternatives to petroleum.

Making it Happen

Canada still has a lot of work to do turning this directive into tangible policy. A report is expected on the subject in February 2017 and Provinces will begin their process of developing specific policies thereafter. There are still several critical questions to answer. Unlike California, Oregon and British Columbia, Canada has called for their Clean Fuels Standard to cover industrial facilities, which adds a wrinkle of complexity that will require some careful regulatory design to address. The initial proposal also indicated that the proposed policy would not differentiate between the types of crude oil used to make conventional fuels. Doing so probably eases the concerns of Alberta, the world’s largest producer of tar sands crude – an exceptionally dirty form of petroleum – but functionally forces all petroleum producers to pay for the pollution emitted by one segment of the industry. Provinces may also be interested in linking  new Clean Fuel Standard credit markets with the existing ones, which makes perfect sense in theory but will require comparably stringent standards, and may be a complicated process in practice.

None of these concerns are insurmountable, with several examples of existing systems to draw from, Canadian regulators face a challenge but a very solvable one. Canada has other challenges to face, the government recently approved two petroleum pipelines, which further entrenches dirty fossil energy and only increases the difficulty of achieving long-term climate targets. Still, as policy measures go, a carbon price plus a fuel-carbon policy can be the centerpieces of a robust, comprehensive approach to limiting carbon pollution. Canada’s action has showed that it is moving up into the leadership ranks on a global scale.

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