Overview

Over the past several years, carbon pricing has been at the forefront of climate change policy discussions. Carbon pricing has merits, especially when applied economy-wide, as it is economically efficient and uses price to help change the behaviour of individuals and companies to pursue lower emissions options.

Carbon pricing was adopted in Alberta in 2008 through the SGER system and has been top of mind at provincial and federal decision-making tables when thinking about climate change mitigation.

Now, there’s a new way of taxing emissions on the horizon called the Clean Fuel Standard (CFS). The federal government hopes it will reduce emissions by 30 million tonnes per year by 2030, nearly 15 per cent of the emissions abatement required for Canada to achieve our Paris Agreement target.

The Calgary Chamber and our business community agree combatting climate change is an important goal and a non-negotiable when doing business these days, particularly given institutional investors are looking increasingly at ESG outcomes. However, we must balance both the cost-efficiency and effectiveness of reducing emissions if we are to achieve the outcome of improving our overall environmental performance while still remaining competitive on the global stage.

For our province and our country to thrive, we must be able to lead in both natural resource development AND solving climate change. Given the Calgary business community’s focus on reducing emissions and tackling climate change without sacrificing business viability – and the economic engine of our country – we dig deeper into the Clean Fuel Standard and how it could impact our province.

The Clean Fuel Standard at a glance

In 2016, the federal government brought forward the idea of the Clean Fuel Standard, and in June 2019, Environment and Climate Change Canada (ECCC) formally proposed the CFS. The objective is to eliminate 30 million tonnes GHGs by 2030, helping reduce Canada’s overall emissions by 30 per cent compared to 2005 levels.

The CFS plans to use a performance-based approach to incentivize innovation and clean technology adoption in the oil and gas sector. The regulation covers all fossil fuels in Canada and sets requirements for liquid, gas, and solid fuel sources, including annual emissions reductions targets in each category. It affects both industry and consumers, as the regulation covers liquids like gasoline for vehicles, natural gas for heating homes, and coal for electricity generation.

There are three ways for industry to comply with the Clean Fuel Standard regulation:

Generate CFS credits based on ECCC approved emissions reductions protocols
Blend low carbon fuels into current fuel sources (e.g. blending biofuels)
Switching to alternative sources of energy with lower carbon intensity

The Clean Fuel Standard targets similar emissions to the carbon tax, however both policies have different aims. The carbon tax is intended to reduce the amount of fuel used, whereas the CFS is designed to make the fuel that we use less carbon intensive.

Key challenges of the Clean Fuel Standard

Policy overlap

The Institute for Research on Public Policy estimates that, at best, the CFS would reduce emissions by 7 Mt, despite federal government projections of 30Mt. This is in large part because the CFS covers emissions that are already impacted by existing federal and provincial regulations. That is, the federal projection double-counts emissions that will already be reduced due to other existing policies.

For instance, the federal CFS is redundant to the federal Renewable Fuels Regulation and Alberta’s Renewable Fuels Standard Regulation. Provincial renewable fuels regulations alone will result in 8.9 Mt of decreased emissions. These reductions would occur without the CFS, but the 30 Mt accounted for in federal projections include these abated emissions. The implementation of the CFS would therefore yield limited additional emissions reductions but would add regulatory challenges and costs to business.

Low cost-effectiveness

All regulations should achieve their desired goal, in this case to reduce emissions, using the lowest-cost and least disruptive methods possible for business. Economists generally believe that a single carbon price is the most effective way of achieving this, as it would not pick winners and losers nor would it impose additional regulation, but rather allocate a predictable cost on emissions and allow emitters autonomy and flexibility. This is because business has certainty that the price on carbon will be $30, and the price will rise predictably and equally across the economy.

According to the Canadian Energy Research Institute, the cost of compliance of the CFS is between $163 and $170 per tonne. Given that compliance can be met through purchasing CFS credits, blending renewables, or switching to alternative fuel sources, the high price of CFS compliance is driven by the market price of CFS credits, the cost to blend renewable fuels, the rising cost of biofuels due to a limited supply and increasing demand, and the cost of lower carbon intensity fuel sources that can be used as alternative fuel sources.

Under the CFS, the cost to reduce emissions by one tonne will be approximately $170, whereas with a single carbon price of $30, it will cost $30 per tonne. Why pay over five times more for the same emissions reductions? We believe reducing emissions is key to combatting climate change, but this is like paying $25 for a coffee when you can buy the exact same one for $5.

Reduces Canada’s competitiveness

The CFS would impact the competitiveness of manufactured goods that require oil and gas because it will increase the cost to produce, and therefore the cost of the goods, putting us at a disadvantage compared to other jurisdictions without these costs. For instance, the feedstock (i.e. inputs like natural gas) for petrochemical projects in Alberta is expected to rise by 30 per cent.

Additionally, Canada’s energy sector has been hard hit in recent years and has taken an additional toll since the cratering price of oil caused by the COVID-19 pandemic. For our energy sector to continue to innovate and reduce emissions, companies require capital, which can only be obtained when we are cost-competitive. Conversely, if the costs for industry to operate are too high, companies are unable to obtain funding from capital markets, and therefore often do not have the funds to continue investing in innovation – and continue employing the people responsible for developing and deploying these technologies. While institutional investors are looking for strong ESG performance, we need to do it in an economically efficient way that also makes sense for business.

Increases costs for all

Because the CFS impacts the price of gasoline in our vehicles, gas that heats our homes, and coal that provides our electricity, it will ultimately have an impact on consumers. Given that almost all of our economy requires fuel at key points in the supply chain, the CFS is expected to cost Canadians $15 to $20 billion per year through higher household heating bills and gasoline prices.

While increased costs do lead to behavioural change away from a carbon intensive lifestyle, CFS will cost consumers more than a policy such as a carbon tax due to its economic inefficiency. That is, if businesses are paying over five times more for the same emissions reductions, consumers will be as well. This has benefits, in that it leads to changing behaviour and thereby reduced emissions, but policies must account for the impact on households and what is affordable to the average consumer.

The Alberta government’s response

Premier Jason Kenney, along with other provincial governments, have sounded the alarm about the potentially disastrous impacts of the Clean Fuel Standard. Premier Kenney has pointed out the potential impacts on job creation and the competitiveness of a critical sector in Alberta and says he’s willing to take the federal government to court over the issue.

It’s not a new battle for Alberta either: Premier Rachel Notley also went to Ottawa to fight the Clean Fuel Standard, calling it a federal policy that has a “gargantuan impact on Alberta.”

Alberta’s Renewable Fuels Standard already requires gasoline and diesel to include five and two per cent renewable content, respectively. This legislation has already resulted in emissions reductions of over 5.1 MT since the legislation came into effect in 2011.

What we can expect

In Fall 2020 we expect to see Clean Fuel Standard regulations proposed, which will be followed by a 75-day comment period, open for all Canadians to weigh in on.

Regulations will be finalized in late 2021, with regulations coming into effect for liquids in 2022 and gases and solids in 2023.

Natural resource development AND climate change mitigation will continue to be a priority for Calgary’s business community, as well as at all levels of government. As we move forward with tackling one of the greatest challenges of our generation, we must consider both the environmental impact, as well as the impact and cost to businesses and households.

At the Calgary Chamber, we will continue to call for policy that supports Alberta and Canada’s competitive advantage as a leader in innovation, enabling us to build a stronger economy and a more sustainable future.

December 2 2020

Policy 101: The Clean Fuel Standard – another way of taxing emissions?

Update - December 21, 2020