441-01694 (Taxation)

Impacts from climate change are wide-ranging and costly, affecting Canadians’ homes, cost of living, infrastructure, health and safety, and economic activity in communities across Canada.

Market-based approaches, such as carbon pollution pricing and Clean Fuel Regulations, are widely recognized as the most efficient ways to reduce greenhouse gas emissions and incentivize innovation and investments in clean technologies.

The Clean Fuel Regulations (CFR) require gasoline and diesel primary suppliers to reduce the lifecycle carbon intensity (CI) of the gasoline and diesel they produce and import for use in Canada. The CFR establishes a credit market whereby the annual CI reduction requirement can be met via three main categories of credit-creating actions:

(1) projects that reduce the CI of fossil fuel throughout its lifecycle (e.g., carbon capture and storage);

(2) supplying low-carbon intensity fuels (e.g., ethanol, biodiesel); and, 

(3) supplying fuel and energy in advanced vehicle technologies (e.g., electricity for Electric Vehicles). 

Parties that are not fossil fuel primary suppliers may participate in the credit market as voluntary credit creators by completing certain actions (e.g., low-carbon intensity fuel producers and importers).

The CFR also creates opportunities for voluntary parties and supporting industries. The CFR encourages innovation and growth by increasing incentives for the development and adoption of clean fuels and energy-efficient technologies and processes. For example, biofuel producers, which are not regulated under the CFR, will see an increased demand for their product. In turn, biofuel feedstock providers, such as farmers and foresters, will also have an economic opportunity.

The Government of Canada expects that the cost to comply with the CFR will be small to begin with and will increase gradually over time. By 2030, according to the Regulatory Impact Assessment Statement (found at https://www.gazette.gc.ca/rp-pr/p2/2022/2022-07-06/html/sor-dors140-eng.html ), Canadians who drive gasoline-powered vehicles may see an increase in fuel price of $0.06 to $0.13 per litre. However, the final price impacts will depend on refineries. The CFR provides many paths for refineries and importers to clean up the pollution associated with their fuel.

The Parliamentary Budget Officer’s report “A Distributional Analysis of the Clean Fuel Regulations” assumed the improbable highest-cost scenario where regulated parties meet compliance solely through credit purchases. The report did not take into consideration the economic and environmental benefits that the CFR will have in addition to not considering an updated social cost of carbon. The Government of Canada published an updated social cost of carbon estimate that, if used to model the CFR, would estimate a positive economic benefit from avoiding 26 megatonnes of greenhouse gas emissions in 2030.

The CFR complements carbon pollution pricing. While carbon pricing creates a broad incentive across the whole economy to use less energy and improve efficiency, the CFR targets transformational changes in how liquid fuels are produced and used in Canada. Actions taken to meet the obligations set by the CFR can also reduce the overall emissions of a refinery, reducing its exposure to federal or provincial carbon pricing systems for industry.

Environment and Climate Change Canada recommends against simply adding the projected cost impacts of the fuel charge and CFR. The two measures work very differently. In addition, the impact of the CFR on gasoline prices will depend on decisions made by refineries about how to comply.