Explaining clean fuel regulations and the price of carbon

On Saturday, the federal government’s long-promised clean fuel regulations will go into effect across Canada. Here are five things to know about what they are, how they will affect you, and why they are different from carbon pricing.

What are the clean fuel regulations?

First promised in 2016 but not completed until last year, the clean fuel regulations are designed to reduce emissions from every stage of gasoline and diesel production, processing, transportation, and use.

It is also meant to boost investment in biofuels and electric vehicle charging infrastructure.

The regulations are being implemented gradually over seven years. The goal is that by 2030, the emissions produced by each fuel are reduced by 15 percent compared to 2016 levels.

The impact analysis of the regulations said they could result in a reduction of 26.6 million tons of greenhouse gases by 2030, or roughly what is produced from six million passenger vehicles for a year.

That represents 10 to 12 percent of the emissions needed to meet Canada’s current climate goal for 2030.

The regulations are similar to those already in place in the states of California, Oregon and Washington, as well as the European Union.

Who has to comply with the regulations and how?

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The regulations apply to refiners and importers of gasoline and diesel. They must reduce the emissions of their products, either by producing their own emission reduction credits or by purchasing them elsewhere.

One way to create credits is to invest in technology that directly reduces emissions from gasoline and diesel, such as installing carbon capture and storage systems at a mining site, or using zero-emissions electricity, such as wind power. or nuclear, instead of coal or natural gas to power a refinery.

Companies can also get credits for producing or importing low-carbon fuels such as ethanol, which are added to gasoline or diesel to reduce their emissions output.

The third way to create credit is to invest in electric vehicle charging stations or hydrogen fuel cell stations.

There is already a requirement to blend biofuels with gasoline and diesel in all provinces except Newfoundland and Labrador, so most companies affected by the new regulations are already producing enough credits to comply for at least the first two to three years.

Why will they affect Atlantic Canada more than other regions?

The cost of regulation should be less for companies that create their own credit than for those that rely heavily or totally on buying it. In Atlantic Canada, there are fewer opportunities to create such credits, in part because the region’s geology does not allow for carbon capture and storage. There has also been slower acceptance of electric vehicles and biofuels.

Because Newfoundland is exempt from the current biofuel requirements, businesses there are not yet meeting the initial requirements under the regulations and will have to purchase credits more quickly to comply.

How is this different from carbon pricing?

Both the carbon price and the clean fuel regulations are climate policies designed to reduce Canada’s greenhouse gas emissions.

The carbon price is a fee charged directly to the purchase price of 22 different fuels, including gasoline, diesel, propane, and natural gas.

The idea is to increase the cost of these fuels so that people are motivated to use less of them.

That can happen by driving less, using an electric car, upgrading your home’s heating system or insulation to use less heat, or anything else that helps you reduce the amount of fossil fuels you use.

Instead, clean fuels regulations force refiners and importers to make changes to their processes to reduce emissions from their products directly or indirectly by purchasing credits from others who have already done so.

The costs are not passed on directly to consumers, but may be passed on indirectly by refiners and importers who must pay for them.

The more refiners and importers make their own investments to comply with regulations, the lower the cost. The more they rely on buying credits from others to do so, the higher the costs.

Unlike carbon pricing, the regulation applies only to gasoline and diesel. Initial plans to also apply them to kerosene, jet fuel and heating oil were dropped after consultations.

How much are these policies going to cost consumers?

At current levels, the carbon price adds about 14 cents per liter of gasoline. That will rise 3.3 cents a year until 2030, when it will add 37 cents.

HST and GST are charged on top of that, which varies by province. The additional sales tax due to the carbon price in 2023 ranges from 0.7 cents in the prairies to 2.15 cents in the Atlantic. In 2030 it will range from 1.85 cents on the prairies to 5.56 cents in Atlantic Canada.

The cost of clean fuel regulations is murkier because it is not a direct fee. It will depend on what refiners and importers do to comply with regulations and how much of the costs are passed on to consumers.

Costs are expected to be low at first, because most companies won’t have to do much to comply in the first few years.

By 2030 the cost is expected to range from six to 13 cents per liter for gasoline and from seven to 16 cents for diesel, depending on how companies choose to comply.

But the energy boards of two Atlantic provinces have already decided to start passing costs on to consumers now, at different levels.

New Brunswick will raise prices by eight cents a liter on July 7 and Nova Scotia by 3.74 cents. Prince Edward Island and Newfoundland and Labrador are still deciding whether to raise prices immediately.

Other provinces do not have energy boards that set gas prices, so it will be up to fuel suppliers to decide if they change.

Ultimately, next month’s costs will range from 15 cents a gallon of gas in the Prairies to 24.45 cents in New Brunswick.

In 2030, carbon price regulations and clean fuels together could add up to between 45.15 cents and 56.2 cents per liter.

The federal government reimburses the cost of the carbon price through quarterly checks in the eight provinces that use the federal system rather than their own provincial equivalent.

The parliamentary budget officer says the rebates exceed the direct cost of the carbon price for most households.

This report by The Canadian Press was first published on June 29, 2023.

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