Issue: Greenhouse gases (GHGs) are primary contributors to climate change. The most significant sources of GHG emissions are anthropogenic, mostly as a result of combustion of fossil fuels. The emissions of GHGs have been increasing significantly since the industrial revolution and this trend is likely to continue if no action is taken. Canada’s contributions to global GHG emissions have increased since the 1990s. Historical data indicates that emissions in 2007 were about 26% above the 1990 levels. The Government of Canada is committed to reducing Canada’s total GHG emissions by 20% from 2006 levels by 2020 (or approximately 280 (see footnote 1) megatonnes of carbon dioxide equivalent (MT CO2e) below forecasted 2020 levels).
In 2007, the GHG emissions from the transportation sector contributed around 27% to Canada’s inventory of emissions. Modeling results from Natural Resources Canada (NRCan) indicate that the use of renewable fuels in liquid petroleum fuel can contribute to GHG emission reductions on a lifecycle basis.
Existing Government of Canada initiatives on renewable fuels have had limited success in achieving significant reductions in GHG emissions. In view of the environmental concerns related to climate change, additional actions are required to further reduce these emissions.
Description: The proposed Renewable Fuels Regulations (proposed Regulations) are a key element of the Government’s Renewable Fuels Strategy. (see footnote 2) The objective of the proposed Regulations is to reduce GHG emissions by mandating an average 5% renewable fuel content based on the gasoline volume, thereby contributing towards the protection of Canadians and the environment from the impacts of climate change. The proposed Regulations are estimated to result in an incremental reduction of GHG emissions of about 1 MT CO2e per year over and above the reductions attributable to existing provincial requirements already in place. The proposed Regulations fulfill the commitments under the Renewable Fuels Strategy of reducing GHG emissions from liquid petroleum fuels and create a demand for renewable fuels in Canada.
The Government of Canada is committed to reducing domestic GHG emissions by 20% below the 2006 level by 2020. These proposed Regulations, along with other initiatives such as reducing industrial emissions of GHGs and the development of regulations to limit emissions of carbon dioxide (CO2) from cars and light-duty trucks, would contribute towards achieving Canada’s domestic commitments. The proposed Regulations would promote an integrated and nationally consistent approach to achieve significant reductions in emissions of air pollutants and GHGs to protect the health and environment of Canadians.
The proposed Regulations would require fuel producers and importers to have an average renewable fuel content of at least 5% based on the volume of gasoline produced and imported. The proposed Regulations include provisions that govern the creation of compliance units, allowing trading of these units among participants and also require record keeping and reporting to ensure compliance.
Certain provisions of the proposed Regulations would come into force on the day on which they are registered, while the 5% requirement and provisions for compliance units would come into force on September 1, 2010. The proposed Regulations also include provisions requiring an average 2% renewable fuel content in diesel fuel and heating distillate oil based on annual volumes. This requirement would only be brought into force once the technical feasibility of renewable diesel fuel use under a range of Canadian conditions has been demonstrated.
Cost-benefit statement: Over a 25-year period, the proposed Regulations are estimated to result in a cumulative reduction of 23.8 MT CO2e in GHG emissions (or an average annual incremental reduction of 1 MT CO2e per year). Although it is difficult to quantify and monetize the full range of benefits attributable to the proposed Regulations, and such an exercise does not take into account the broader socio-economic benefits of the full range of elements of Canada’s climate change strategy, it is estimated that on their own the benefits of the proposed Regulations would be $580.8 million using a carbon price of $25 per tonne. Other benefits to the economy would also complement the benefits to the environment from the proposed Regulations, including increased production of renewable fuels and related increased employment and income. In addition, other government initiatives to improve vehicle efficiency and to develop next generation renewable fuel production technologies are also expected to contribute towards GHG emission reductions over time.
The present value of the cost associated with the proposed Regulations is estimated to be $3.2 billion. Gasoline producers and importers would incur costs of $936.2 million, which includes investments needed to upgrade or modify refinery installations and distribution and blending systems; construction cost for renewable fuel plants are estimated to be $264.8 million; costs to consumers are expected to total $2 billion resulting from increased fuel consumption due to the lower energy content of ethanol-blended gasoline; and costs to the federal government for enforcement, compliance promotion and development and maintenance of the electronic reporting system would be approximately $2.3 million. Income from the crop sector is estimated to increase by 0.7%. While the income impacts in the livestock sector are expected to decline by less than 1%, no measurable impacts on downstream sectors are expected.
Business and consumer impacts: The distribution of impacts on industry and consumers would be relatively modest, but uneven across the country in part due to existing mandates in some provinces and the availability of renewable fuels. As a result, the proposed Regulations would have minimal impacts in some provinces or regions (such as British Columbia, Manitoba, Saskatchewan and Ontario) where ethanol-blended gasoline is already available, with most impacts concentrated in regions where renewable fuel requirements are not yet in place.
The total incremental cost to the petroleum refining sector is expected to be 1.3% of industry revenue. Positive impacts in terms of increased sales volume due to lower energy content of ethanol-blended gasoline for fuel producers are expected. These could amount to 10% of the $2 billion in total incremental costs to consumers. The renewable fuel production sector stands to gain the most from the increase in the demand for renewable fuels. Some increase in employment and other economic activities are also expected.
The impact on consumers would be reflected partly as an increase in gasoline demand due to the lower energy content of ethanol-blended gasoline in comparison to conventional gasoline. These impacts would mainly be incurred in provinces (such as Alberta, Quebec and the Atlantic Provinces) where renewable fuel mandates are currently not in place. On a per-vehicle basis, the average annual impact on consumer expenditure on gasoline is estimated to be $34 for 2011.
In addition, consumers may also be impacted by a small increase in fuel price at the pump if the fuel producers pass on their incremental costs down the supply chain. The precise magnitude of the price impact, given differences between regions and across fuel suppliers, is difficult to predict. In the event that all industry costs are passed on to the consumers, it is estimated that average price increase over the 25-year period ranges from 0.07 ¢/L in provinces like Ontario where a provincial mandate is already in place to 0.30 ¢/L in Quebec and the Atlantic Provinces where renewable fuel requirements are not in place. In most cases, such small price increases are likely to be unnoticeable given the usual price fluctuations experienced in the gasoline market.
As the impacts on the agricultural sector’s income and production are expected to be less than 1%, the impacts on downstream meat and food processing sector as well as on food prices are expected to be minimal.
Domestic and international coordination and cooperation: Extensive consultations were conducted with industry, provincial and territorial governments, other federal government departments and environmental non-governmental organizations (ENGOs). The renewable fuel content requirements were developed based on these consultations. In addition, discussions with the United States Environmental Protection Agency (U.S. EPA) were also undertaken to better understand the development process of their rule.
Performance measurement and evaluation plan: The evaluation of the proposed Regulations would be based, among other criteria, on the volume of renewable fuel blended with liquid petroleum fuels in Canada. This would be determined from information and data submitted in accordance with the reporting requirements. The proposed Regulations would also be evaluated based on criteria included in the evaluation plan of Environment Canada’s components of the regulation of renewable fuel content in gasoline, diesel and heating distillate oil. This evaluation plan will be completed in the 2009–2010 fiscal year.
