Canadian Biomass • Fall 2019 • WPAC

Since 2017, the Canadian government has been developing the Clean Fuel Standard (CFS), a low carbon fuel standard-type policy, to reduce the lifecycle carbon intensity of fuels and energy used in Canada. The CFS aims to achieve 30 million tonnes carbon dioxide equivalent (CO2e) of annual reductions in GHG emissions by 2030.

The CFS regulations will cover all fossil fuels used in Canada but will set separate requirements for fuels based upon their state of matter: liquid, gaseous, or solid. The CFS is being developed in a phased approach. Regulations for the liquid fossil fuel class are currently under development, with draft regulations planned for publication by early 2020.

Together with other energy stakeholders, WPAC has been providing input to Environment and Climate Change Canada (ECCC) as it works to design and shape the CFS. In June 2019, ECCC released the federal government’s proposed regulatory approach for liquid fuels.

The CFS will set performance standards for liquid fossil fuels based upon their lifecycle carbon intensity (CI). Each liquid fossil fuel will be assigned a target carbon intensity to be expressed in grams of CO2 equivalent per megajoule of fuel energy (g CO2e/MJ). Obligated parties – finished fossil fuel producers and importers – must reduce the carbon intensity of fuel over time. For example, ECCC proposes a heating oil 2016 baseline CI of 84 g CO2e/MJ must be reduced to 80.4 g CO2e/MJ by 2022 and to 74.0 g CO2e/MJ by 2030.

Under the ECCC proposed regulations, obligated parties would have three ways to comply with the CFS:

3.By fuel switching in the transportation sector (e.g., replacing internal combustion vehicles with electric or hydrogen- powered vehicles).

The CFS would establish a compliance credit trading system whereby obligated parties could purchase compliance credits from credit generators (e.g., electric vehicle manufacturers) or other obligated parties. At the end of the year, they would need to show that their compliance credits result in a CI of the fuel they supplied equal to or better than the regulatory requirements, or else pay a significant fine.

Upon review of ECCC’s proposed regulatory approach, WPAC is seriously concerned that the government will not allow end-use fuel switching in the buildings/stationary fuel use sector. We believe that it is unfair for ECCC to recognize fuel switching from gasoline to electricity or hydrogen in transportation, but not to recognize switching from heating oil to solid biofuels.

To this end, I wrote to ECCC describing WPAC’s position on the current CFS regulatory design, recommending how the regulations could be modified. I, along with technical and policy consultant Dr. Jamie Stephen of TorchLight Bioresources, met with ECCC representatives in Ottawa on Aug. 21, 2019. WPAC made the following arguments:

• One of the CFS’ primary objectives is low-cost compliance. By prohibiting recognition of fuel switching for stationary applications, ECCC will actually increase the cost of CFS compliance, exclude the forest sector from participation in the short-term, and inhibit investment in wood pellet and chip boilers.

• Canada consumes approximately three billion litres of heating oil per year. The majority of heating oil is consumed in rural and Atlantic Canada. Rural and Atlantic Canada have among the lowest per capita income in Canada. ECCC’s proposed regulatory approach will make CFS compliance for these low-income areas significantly more expensive than for those living in cities.

• Under ECCC’s proposed regulatory approach, the principal mechanism for ensuring compliance from heating oil suppliers will be to blend renewable diesel with heating oil. The 2030 target of 74 g CO2e/MJ is less than heating oil combustion emissions, meaning upstream efficiency improvements will be insufficient. The only heating oil-miscible fuel that can also be stored outside in winter is renewable diesel. Renewable diesel is currently trading for $2.00-$2.50 per litre in the U.S. An 18 per cent renewable diesel blend rate – the required rate to meet the 74 g CO2e/MJ target – would increase heating costs by 33 per cent. In addition to a 15 per cent increase associated with the carbon levy, real heating costs will increase by 50 per cent.

• Renewable diesel, at $2.00-$2.50 per litre, has a useful heat fuel cost of $65- $82 per gigajoule (GJ). In contrast, wood pellets, at $300-$350 per tonne for residential sales, have a useful heat fuel cost of $20-24 per GJ. Wood pellets also have half the carbon intensity of default renewable diesel (29 g CO2e/MJ). Wood chips are half the carbon intensity of wood pellets. This means, on an implied carbon price basis and assuming wholesale $0.75 per litre for heating oil, blending renewable diesel with heating oil has a fuel cost of $630 to $884 per tonne CO2e. Switching from heating oil to wood pellets has a fuel cost of -$7 to -$49 per tonne CO2e. But pellet boiler penetration of Canada’s heat market is low. A CFS with a provision for end-use fuel switching in liquid class stationary applications would drive adoption of pellet boilers, thereby lowering fuel and delivered heat costs.

• Despite large investments in lignocellulosic liquid transportation biofuels, all technologies are still pre-commercial. Co-processing pyrolysis oil or biocrude at a meaningful volume will not occur before 2030. Canada’s forest sector represents over 75 per cent of annually available biomass resources and its exclusion from participation in the liquids class, which ECCC seeks to account for over 75 per cent of GHG reductions under the CFS, will increase the cost of compliance. Domestic lipid and starch supplies are limited, so excluding forest feedstocks will lead to more renewable fuel imports to Canada, contradicting ECCC’s goal of attracting investment.

• ECCC’s proposed regulatory approach is in apparent conflict with the government’s objective of phasing out diesel and heating oil in rural and remote communities. Under Clean Energy for Rural Remote Communites, $55 million is allocated to bioheat. It is contradictory for the government to support bioheat displacement of heating oil with one policy, only to exclude it from another policy.

• Since the government has made eliminating diesel and heating oil consumption in remote communities a priority, it is difficult to understand why ECCC would decide to exclude these fuels from CFS compliance. The exclusion misses two important points.

1.In most remote communities, electricity generated by diesel is already subsidized by grid-connected electricity rate payers in the province, the provincial/ territorial government, and/or the federal government. Excluding remote community diesel under the CFS reinforces the status-quo of energy insecurity. Many remote communities have opportunities for bioheat or biomass combined heat-and-power. The CFS is a chance to encourage local distribution companies to engage with residents to pursue these opportunities.

2.Remote communities are already pursuing bioheat development because of potential cost savings. The CFS could accelerate this switch to renewable, low-carbon wood fuel resources. The Northwest Territories is a major bioheat hub. It is not logical to exclude regions that are ideal for switching to low-carbon fuels under the CFS.

ECCC has made a significant effort to design a compliance credit creation mechanism for electric and hydrogen fuel cell vehicles. Companies such as U.S.-based Tesla will generate and sell credits, which will allow them to offer their vehicles for less. This will completely change Canada’s energy market dynamics.

It is only fair for the Canadian wood pellet industry to expect the same policy development effort. Permitting end-use fuel switching in stationary liquid class applications under the CFS is not asking for special treatment – it is asking for the same treatment afforded foreign electric vehicle manufacturers.