Driving Discussions: Canada's Clean Fuel Regulations

In this new episode, vice presidents of business development Louise Burke and John Demopolous, join host Jason Metko to chat about the Clean Fuel Regulations (CFR) program.

They also discuss how Argus plans to support transparency in the market, and how it affects the Canadian consumer.

Transcript

Jason: From Argus Media, this is "Driving Discussions," a podcast series where we chat on the forces that affect North American road fuels. Greetings and salutations once again. I'm Argus' US Gulf Coast blendstocks reporter, Jason Metko. Today we've got a pair of guests on the presentation, vice presidents of business development, Louise Burke and John Demopoulos. Our focus today, on Canada Clean Fuel Regulations, also known as CFR. Louise and John, thanks so much for coming on. Louise, let's start with you. Give us a bit of a rundown of what CFR is, and enlighten us as to some of the latest developments.

Louise: Yeah, great. Thanks, Jason. Thanks for inviting me on, and happy to give you some perspective. It's really interesting, because in Canada, they've had clean fuel regulations, and they do have both a federal and the provincial regulations. But the latest clean fuel regulations is an important part, really, of their overall plan. It's gonna reduce emissions, but they, of course, wanna increase clean technologies and fuels. They've targeted the transportation sector, like everyone else. So, under their plan, they'll have an incentive mechanism. And I think that's important.

I think, you know, to modify behavior, do you put in a specific blend, or do you create an incentive? And that's what they've done under this new regulation. And to give you a perspective of how much the transportation sector actually contributes to emissions, it really accounts for over 20% of Canada's total emissions. So, the idea is really to get this down to a much lower level by 2030.

Jason: So, how does all this work? I understand it replaces a program that was on the books until recently, right?

Louise: Correct, yeah. So, it's interesting. It replaces what was known as the renewable fuel regulation. That expired in December of 2022. And so, the concept of this new CFR regulation is really to create that credit market. And we actually feel this credit market, which is known in other regions as the low-carbon fuel standard credits, we feel it's gonna be the second-largest North American market.

The program will require a yearly reduction to transportation fuel carbon intensity, which is fairly typical of all other programs. And the way they work is higher-carbon fuels that exceed annual limits incur deficits. Suppliers have to offset with credits generated from approved fuels that have lower carbon intensity. So, in this market, a credit would be awarded to companies that produce or use biofuels, such as biodiesel or renewable diesel. And then credits can be bought by companies to help them meet their regulatory or compliance obligations related to reducing these emissions. So, the plan is, you know, it's similar to other programs that exist in the state of California, which is the largest one, Oregon, and, of course, Washington State.

So, the similarities are very key, so that the market understands the basic rules. So, you have a credit and a debit market system. You have calendar year targets. Credits and deficits are assessed on the difference between, again, that fuel carbon intensity of the typical transportation fuel, the targets they wanna reach. And also, really important, credits in these markets don't expire. It's kind of different than another program called the RIN program that exists in the U.S., where you have expiration of credits. But under the LCFS programs, that doesn't happen.

Trading is really between the obligated and registered parties. There's really not a lot of speculative participation. But, importantly, as these markets and these credit markets continue to develop, there's differences between them. So, they can't be traded seamlessly. So, that will provide potential, maybe, opportunity and arbitrage for various bio producers as they look to see, "Where should I get my highest value?" So, that's important, and we'll be monitoring that, and seeing how, with this new program evolving, how that will affect the overall North American market.

Jason: We're talking all things CFR here on this edition of "Driving Discussions," alongside John Demopoulos and Louise Burke. I'm Jason Metko. Louise, what's the timeline looking on all this, and what is Argus planning to do to support transparency within the market?

Louise: Sure. Actually, in the summer of 2022, the program allowed provisional credit generation. So, if you were a bio producer, you could actually start to generate these credits. The enforcement of the program, actually, is just gonna start July 1, 2023. So, what we're trying to do, and, of course, what we consistently try to achieve in any of the markets that we cover, is independent and transparent assessments. So, here, in this program, it's very new. So our intention is, really, to begin publishing for what we call interim CFR compliance cost estimates. Two are gonna be federal in scope, so they're gonna cover all of Canada, and two would be for Atlantic Canada.

The way we wanna provide this transparency is to create a, what we call a calculation, until there is really sufficient trade or liquidity to support a market-based assessment. So, we would, of course, once we switched from a calculation to a market-based, we'll let the market know in a broad enough fashion that they'll understand that there has been a change.

So, the calculation incorporates assessments from other credit markets, the California LCFS, the D4 RIN, which is here in the U.S. And then it has carb CI scores, really to try to calculate a green premium, specifically for renewable diesel and ethanol. We then take that information and calculate a modeled per-liter CFR credit price, and that's based on Environment and Climate Change Canada, or ECCC, as they're known in Canada. It's their projection for fuel demand and CI scores for ethanol and RD. And then we convert to an estimated ton per credit price. So, there's a lot of conversions, but we eventually get to a calculation, per liter, compliance costs for either the gasoline and the diesel pool. And that's the number that we'll be publishing starting July 5th.

Jason: John, let's get you in on this. How does all this affect the Canadian consumer?

John: Thanks, Jason. Well, yeah, there is a cost for the Canadian consumer, as I believe is really the intention of the program, and that gets passed down from the obligated parties. The new data series that Louise was talking about are really intended to allow an obligated party under the CFR to pass the cost of that obligation on to their customers, and then, of course, ultimately the consumer. So, the ways in which that would likely happen is really that these data series get included into contracts, and thenceforth into invoices, simply as a separate line item.

So, you can almost imagine it as an additional tax being levied on a party, and they would add that in, and line item that in very similar with this. So, what we're providing is really just a way for the obligated parties to pass that cost of the CFR down the chain, and ultimately to the consumer, who, as you know, has to pay, in a competitive market, has to pay the cost of all of these additional programs.

Jason: Got a couple more minutes here with our guests, John Demopoulos and Louise Burke here, talking CFR on this edition of "Driving Discussions." Y'all have anything else to add, how maybe things play out here in the next few months or so?

Louise: I just wanted to mention one thing. I think it's really important as these federal environmental policy programs come into place, because they do provide two things. As John indicated, they provide visibility to the consumer, just simply because you have that cost of compliance, price adjustment, and many of these you can translate into really the cost of carbon. And I think that's generally, with environmental initiatives and our move to sustainable transportation fuels, what the intention is of all these policies.

They do need to work effectively. And so, again, we continue to see the programs, particularly here in North America, and the latest one now, Canada, really modifying behavior, so that you will see more of these sustainable fuels coming online. So, we'll be monitoring this, and we'll certainly be looking at the, as I mentioned, the arbitrage opportunities from the supplier in the bio side, because I think that'll be an interesting development across the North American credit markets.

Jason: Our Vice Presidents of Business Development, John Demopoulos and Louise Burke. Many thanks to the both of them for coming on the presentation today. And with that, we'll conclude another edition of "Driving Discussions," a production of Argus Media, a leading independent provider of energy and commodity pricing information. This reminder to check out the previous chats in our series. And for more details on Argus' new CFR coverage, make sure you visit argusmedia.com/americas-biofuels.