Calgary Chamber of Commerce submission of feedback on draft regulations released December 19, 2020

Introduction

Our collective vision for Canada is one of environmental responsibility and a competitive business environment. Currently, Canada is on a strong path to achieving net-zero emissions by 2050, and industry is ready and eager to participate as an active partner in achieving this goal.

However, some regulations, such as the Clean Fuel Regulations (CFR), have posed a significant challenge to Canada’s ability to maintain a competitive business environment that allows businesses to attract investment, continue innovating, and keep people employed.

Several of the changes made to the Clean Fuel Standard in December 2020 were welcomed by industry, in particular the elimination of gaseous and solid streams. At the same time, the Clean Fuel Regulations as they stand now continue to pose challenges to our business community in two major areas: (1) the limited options through which compliance obligations can be met, and (2) the lack of stability and certainty created for business.

This submission reflects the Calgary business community and has been developed using input from the energy, agricultural, transportation, and manufacturing sectors. It outlines the two overarching concerns with the CFR and brings forth tangible solutions. These policy solutions should be considered as a package, rather than a menu of options – we urge the federal government to implement each of the six solutions offered in this submission in order to continue on Canada’s path to achieving net-zero emissions by 2050 while maintaining a competitive business environment.

Summary

Increase paths to compliance by:

1. Removing the 10 per cent limits on using various compliance pathways

2. Implementing alternative compliance pathways for EITE and capital-intensive sectors

3. Developing capacity for emissions reductions within Canada

Support stability and certainty for business by:

1. Ensuring assumptions and information are accessible and current

2. Allowing existing projects to be grandfathered

3. Providing clarity on interactions with other policies

1. Paths to Compliance

With limited options for compliance, many find the CFR challenging to adhere to. Companies may be unable to purchase biofuels due to a lack of supply, are unable to purchase credits due to an undersupply of credits, and/or may not have pathways to reduce their emissions due to the status of technology development in the industry. These realities mean that for many companies, they have no path to comply with the Clean Fuel Regulation, leading to enforcement that could involve criminal charges being laid. Therefore, greater flexibility and optionality regarding compliance must be integrated into the CFR.

Problem 1: Credit availability

Under the current CFR, industry projections indicate that there will be an insufficient number of credits generated. This poses a significant challenge, as the Clean Fuel Regulation does not allow adequate flexibility for companies to comply through alternative pathways, given the 10 per cent limits imposed on several of the compliance options. We recommend that the limits on each compliance option be lifted entirely.

If, after employing the recommendation detailed below, the market becomes flooded with credits, adjustments can be made to the system at a later date to increase stringency. If additional stringency is required, adding percentage limits on compliance streams would be the most economic and stable solution for business. Removing technologies from being eligible to generate credits through the general quantification method would cause significant economic disruption and uncertainty for business and should be avoided entirely.

Solution 1: Remove the 10 per cent limits on using various compliance pathways

10 per cent Credit Usage Limit from Gaseous and Solid Streams

Critically, the 10 per cent limit on credit usage from gaseous and solid streams should be removed. This will increase the number of credits that can be generated and the number of emissions that will be reduced. Eliminating this maximum would incentivize emissions reductions from not just liquids streams, but also gaseous and solids, despite no longer being subject to the CFR.

This compliance stream is particularly important, as it reduces emissions and can spur innovation more broadly across the economy. The proposed CFR system creates a two-tiered system, such that emissions reductions in liquids are more valuable than in solids or gases. This means that under the current 10 per cent limit, if companies invest to decrease emissions from gases and solids, gaseous and solids credits could be stranded, disincentivizing emissions reductions investment in those streams.

We recommend that the 10 per cent limit be removed entirely, allowing companies the flexibility to reduce emissions at the lowest cost possible. The CFR should support emissions reductions achieved with the lowest economic cost, to ensure efficiency and minimize the economic impact to business. There should be no concern that this will result in a lack of incentive to reduce emissions in liquids streams, because the recently announced $170 carbon price provides adequate investment to incent technology across the economy.

10 per cent Credit Usage Limit under the Generic Quantification Method

We recommend the 10 per cent usage limit on credits generated through the generic quantification method be removed. The regulation should not be overly prescriptive in how emissions are achieved, but rather should ensure that emissions are reduced within the economy. To minimize the cost burden on businesses, compliance should be allowed by reducing emissions at the lowest cost possible. This will allow the market-based system of credit generation and trading to perform most effectively, maximizing both cost-efficiency and emissions reduced.

While the limit is intended to incentivize emissions reductions in liquids production, it instead dampens investment in CCS, low-carbon intensity electricity integration, enhanced oil recovery, coprocessing of biocrudes, etc. This is counterproductive, given that these technologies will be critical to the industry being a leader in low-carbon production and achieving net-zero emissions. Removing the 10 per cent limit on credits created under the generic quantification method would further incentivize investments in these types of projects.

10 per cent Maximum Deferral

We recommend removing the 10 per cent maximum deferral. If businesses encounter a disruption, as is often the case in energy due to scaling up of projects, project turnarounds, or other interruptions, emissions are often higher than average. Based on this, compliance costs will increase, and the company will also be unable to reduce emissions. If there is a shortage of credits, which is likely under the regulation as it currently stands, compliance mechanisms are insufficient and provide very limited flexibility to businesses. The two-year deferral limit will provide much-needed flexibility for a short period.

10 per cent Limit on Registered Funding Program Contribution

Lastly, the 10 per cent limit on contributions to the registered funding program should be removed. This mechanism will only be used as a pressure release if industry is unable to satisfy CI reduction requirements through other mechanisms. Because non-compliance is a criminal offense, there must be an alternative compliance pathway for businesses, should no credits be available for purchase and a company be unable to decrease its own emissions.

Challenge 2: Hard hit, trade-exposed sectors have limited compliance options

Several of Canada’s businesses are highly trade-exposed and their competition lies in international markets with much lower operating costs. These industries often have long timelines for technology development and deployment given the size and scale of their operations, and based on current technology, are unable to switch to lower-emissions fuels. This leaves them unable to reduce their emissions and generate credits, and only subject to financial compliance burdens created by the CFR.

Many of these industries, including transportation (e.g. airlines) and manufacturing have been particularly hard hit by the COVID-19 pandemic and will not be able to recover with additional cost burdens placed on their businesses. Industries that rely on transportation to get their goods to market will be faced with higher costs if they rely on medium or heavy duty vehicles, including rail, marine or aviation, as electric mobility in these other segments are not as advanced as light duty vehicles. Consequently, these industries will be faced with higher costs to get their goods to market.

In a situation where they are unable to generate credits, businesses could lose the incentive to remain in Canada and reduce their emissions and may choose to shut down or relocate their operations to a jurisdiction with less stringent measures. Technology advancement will occur across all industries, and Canada should harness these opportunities to contribute to efforts to create jobs, attract investment, and develop low-carbon technology.

Solution 2: Implement alternative compliance pathways for EITE and capital-intensive sectors

We recommend that Natural Resources Canada create an application system that allows companies unable to access options under the generic quantification method, and in disproportionately affected industries (emissions-intensive and trade-exposed (EITE) and capital-intensive) to apply to generate credits and contribute to reducing emissions through alternative pathways. This application process should allow companies to demonstrate how they will reduce emissions by equivalent amounts by investing in new, earlier stage technologies that yield long-term emissions reductions. The emissions reductions potential of these alternative projects and pathways should be equivalent to the CI reduction requirement.

We recommend these companies remain subject to the CFR to maintain incentives to decrease emissions and support their competitiveness and progress in the low-carbon economy. By removing these companies altogether, the incentive to invest in emissions reduction technology will be diminished. It will also become more difficult to grandfather these new projects into the CFR system once viable technologies to meet CI reduction requirements become available.

This recommendation is best demonstrated by an example, such as airlines. Airlines are in a very challenging spot after a full year of drastically diminished revenue and a full recovery still several years away. Airlines are trade-exposed (particularly outside of COVID-related border restrictions), as an estimated five million Canadians travel into the U.S. (e.g. Bellingham, Buffalo, etc.) to take more affordable flights on American carriers. Due to aircraft fuel requirements, airlines cannot immediately transition from traditional fuels to biofuels. While airlines are working to develop electric aircraft technology, it is anticipated that liquid fuels will be required for long-haul flights for approximately 15 to 20 years. Airlines are also not able to utilize the general quantification method options, as they are no relevant technologies for airlines’ operations.

There is, however, a major opportunity that would support decreased emissions and an economic opportunity for Alberta and Canada, if included as a compliance measure: Sustainable Aviation Fuel (SAF) production. If airlines can demonstrate equivalent investments in emissions-reducing technologies such as SAF that are not currently included as compliance mechanisms, these should be considered as an alternative CI reduction mechanism. This would support the SAF industry in Canada, helping to diversify our industries and become leaders in a technology that the world will need for decades to come.

Developing an application program as recommended above would (1) provide flexibility to companies unable to reduce their emissions or access the GQM options, (2) incentivize long-term investments in technology, which often stall due to lack of funding, and (3) support diversification in emerging low-carbon industries, which will be in demand globally over the long term. If we extend credit generation opportunities to other low-carbon technologies we want to incentivize, particularly those that require additional financial support to be economically viable, we can solve the credit generation problem and incentivize new technologies.

Currently, with limited alternative pathways and a 10 per cent limit on gaseous and solid credit generation, the CFR encourages long-term investments in liquid fuels. However, encouraging businesses to invest in long-term liquid fuels projects while signalling the mandated phase-out of ICEs within fifteen to twenty years, is contradictory. Encouraging companies to make these investments, knowing that these investments may not pay off by the time ICEs are eliminated, is harmful to long-term competitiveness and ultimately unproductive in reaching our emissions targets. We would be much better served by supporting business investments in alternative technologies to reduce emissions beyond liquid fuels.

Challenge 3: CFR supports industries abroad, rather than supporting our Canadian industries

Canada produces a fraction of North American’s biofuels, as the vast majority of biofuels production occurs in the United States. Therefore, under CFR will import significantly from the United States. The supply of biofuels is limited however the demand for them will increase due to both CFR and increasing trends of climate policies around the world that result in demand for biofuels. This will drive up the price and make the biofuels industry considerably more lucrative, and CFR compliance considerably more costly.

Solution 3: Develop capacity for emissions reductions within Canada

Rather than fueling the American biofuel industry, the federal government should partner with the private sector to invest in Canada’s biofuel supply and should support Canada’s competitiveness with the American biofuel industry. Increased investment in biofuels will ultimately lead to greater compliance flexibility and more emissions reductions, helping achieve our net-zero targets. It will also ensure we are leaders in a decarbonizing world, given increased demand for biofuels as we shift to a lower-carbon future. Doing so will foster diversification within Canada’s energy sector and yield long-term economic benefits associated with developing a product that will be in high demand internationally for the foreseeable future. These investments should fall outside of the CFR but will demonstrate complementary policy.

Alternative fuel sources such as hydrogen should also be incentivized and should receive clear and consistent treatment to provide businesses with certainty to move forward with developing other emissions-reducing technologies. Solution 2 detailed above (allowing for companies to apply for alternative pathways) strongly complements this recommendation, as it supports additional investments in low-carbon emerging industries.

2. Uncertainty for Business

Business requires certainty and stability to plan investment decisions. Without certainty and clarity, businesses will not maximize nor accelerate investments in emissions reduction technologies that generate credits and drive down emissions.

Problem 4: Lack of clarity and transparency

Despite multiple iterations of the Clean Fuel Regulations, parts of the policy still lack details and clarity. This prevents companies from determining the impact of the regulation on their business and prevents them from planning accordingly. This hinders investment in emissions reduction technology as businesses cannot integrate CFR credit generation and compliance mechanisms into their business models.

Solution 4: Ensure assumptions and information are accessible and current

The Lifecycle Analysis (LCA) Model must be shared so businesses can understand its inputs and assumptions, and therefore plan accordingly. Without an understanding of the inputs into the LCA model, companies are unable to evaluate the impact on their business, as it is impossible to calculate the impact without adequate input information. Additionally, dated figures are currently being used in the LCA model which makes it impossible for businesses to understand the implications of the policy.

The LCA model must keep up with the pace of business and technological advancement, such that new technologies are integrated very rapidly. If the LCA model lags, technologies will not generate credits for the duration of the lag. If it takes several months or even years for the federal model to acknowledge the new technology as a pathway to compliance, it will disincentivize business from making investments in cutting-edge lower emissions technologies.

Additional requirements that do not remain static, such as market penetration rate, must also be released publicly and in a timely fashion. Companies must be aware of the penetration rate, as they will make very different investment decisions if the rate is approaching 5 per cent. We recommend that the penetration rate for all general quantification method technologies be released publicly once they reach 2.5 per cent.

Problem 5: Existing assets may become instantly uncompetitive

Changing legislation partway through a project leads to significant uncertainty, and often results in stranded assets and lost jobs. Additionally, many businesses and industries are not coming from a position of strength after the pandemic, which combined with additional compliance regulations creates a significant cost burden for businesses. Many businesses have recently laid off workers and do not have the liquidity to support jobs and compliance.

Solution 5: Allow existing projects to be grandfathered

We recommend that existing projects be subject to a three-year grandfathering period to avoid stranding assets, halting investments, and causing job losses. One of the most critical elements of supporting investments, particularly in capital-intensive projects (as many low-emissions technologies in the liquid fuels sector are), is a stable and certain legislative path forward for business. Failure to provide this certainty and stability will deter future investment.

Problem 6: Lack of clarity on policy interaction

There are several other federal and provincial government policies that will affect the liquids fuel industry, and many will affect the LCA model upon which the assumptions for the CFR are made. It remains unclear how these policies will interact and how emissions and technology will be treated under multiple complementary and overlapping policies.

Solution 6: Provide clarity on interactions with other policies

It remains unclear how the CFR will interact with the new federal climate policy, and the LCA model must be updated to reflect the new carbon pricing. Uncertainty around the treatment of technologies subject to both of these regulations will hamper investment and fail to maximize the uptake of emissions reductions technology.

3. Miscellaneous and Inherent Challenges

Problem 7: Policy Overlap

The Institute for Research on Public Policy estimates that, at best, CFS (with the inclusion of gaseous and solid streams) 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 CFR 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 CFR, but the 30 Mt accounted for in federal projections include these abated emissions. The implementation of the CFR would therefore yield limited additional emissions reductions but would add regulatory challenges and costs to business.

Problem 8: CFR is regressive

The CFR is significantly more regressive than the carbon tax. It is expected that the price of fuel will increase significantly, and CFR intends to drive behavioural change by making emissions-intensive goods and services more costly, ultimately intending to pass it along to the consumer. However, unlike the carbon tax, consumers will not receive a rebate to compensate for the higher cost of living. Given that lower-income individuals spend a higher percentage of their incomes on fuel, this policy is inherently regressive.

Conclusion

Thank you for your consideration of the above recommendations. We are confident that with the right policy framework, we can achieve lower emissions while strengthening the competitiveness of our business sector. Our Canadian energy sector remains committed to being a critical part of the solution to climate change and reaching Canada’s net-zero targets.