The federal government's Clean Fuel Standard: Its effect on consumers

Let’s begin a discussion of the federal government’s planned clean fuel standard (CFS) with some fundamentals.

A fuel is any material that reacts with other substances or processes to release the energy, which then can be used for work. Eating is an example of transforming the chemical energy of food through digestion into another form of chemical energy when it is stored as glucose or fat. The latter are then converted to mechanical energy when people move, with two of the by-products being heat and carbon dioxide (CO2) from exhalation. The laws of thermodynamics are constant regardless of the fuel-work combination — or the spin that politicians commonly attach to new policy and regulatory measures.

Fossil fuels are the detritus of plants and animals compressed for millennia until they are liquid, gaseous, or solids. They continue to dominate the world as primary energy underpinning all manner of work and other human activity. And this is expected to remain the case for decades, since they are the densest and most flexible form of energy, are used ubiquitously around the world, and for the most part have few true substitutes.

Biomass and biofuels are simply less dense nearer-term versions of fossil fuels, and therefore are spatially more intensive. They too have carbon molecules, which create CO2 when burned to do work. Even renewables contain carbon molecules when considered from the perspective of the embedded energy contained in the materials used to build machines to capture wind, solar rays, and water, and from anaerobic decomposition of plant matter in reservoirs. This is also true for hydrogen, especially if it is reformed from natural gas. Electricity is a secondary rather than a primary form of energy and a complex physical electromagnetic phenomenon. It is not a fuel per se, and therefore electricity can only produce emissions by virtue of the input fuels used to generate it.

This leads us to the idea of the carbon intensity (CI) of fuels, a central feature and point of debate in Canada’s proposed clean fuel standard (CFS). The definition of CI is the measure of greenhouse gas (GHG) emissions in grams per joule, from the production and consumption of fuels. It is an important concept because the lower the CI of the finished fuel, the lower the aggregate greenhouse gas emissions from source to end use.

The federal government’s CFS will limit the CI of all fuels listed in a regulation. In theory, reducing the CIs of fuels is a sound objective. But there are many challenges with the current design of Canada’s CFS. For example, Ottawa’s scheme is not technology neutral and the methodology used to calculate CIs is not consistent across all fuels. For several other reasons, it unlikely to yield low cost solutions expected by consumers and required to ensure the competitiveness of the Canadian economy.

Technology neutral and outcome-based criteria work together and are ultimately part of the compliance equation. Outcomes specify the desired result of a policy or regulation. In the case of the CFS this is the number of grams of CO2e per joule of energy — the proper focus. How to meet the standard, rightly, is the responsibility of the regulated party. Businesses should have the freedom to choose the least cost way of meeting the compliance requirements within the unique context of their operations. Governments are not qualified to make these decisions and when they try, it usually leads to the wrong solution and higher marginal abatement costs. In fact, the federal government’s own estimates of CFS abatement costs, based on preferred technologies, are in the vicinity of $350/tCO2e, 7 times greater than — and on top of — the carbon tax, which in 2022 is set to reach $50/tCO2e. This is something the Trudeau government is not being transparent about.

In our view, there are also other knotty issues with the CFS, including jurisdiction creep as Ottawa oversteps its proper role. In Canada, provinces have the authority for managing and developing resources and for regulating many other aspects of business, even though there is shared responsibility for the environment. There is also dubious reasoning behind the CFS. It is a regulatory “solution” that is piled on top of carbon pricing – something the current federal government has strongly advocated for tackling greenhouse gas emissions. Economists agree that carbon pricing is the most efficient tool for reducing GHG emissions – that is, setting a transparent price, attached to every tonne of emissions, is the most cost-effective way to lower them.

Under the Pan-Canadian Framework for Climate Change, all regions of the county now have some form of carbon pricing. Yet, the federal government continues to add new regulations, including the CFS, to address GHG emissions, seemingly without concern for the cost-effectiveness of the measures nor for the cumulative impact of the ever-lengthening list of policy actions being taken under the rubric of climate policy. Ultimately, energy consumers, both individuals and businesses, shoulder all of these compounded costs. And they will certainly pay for the inefficiencies, poor design, and inconsistencies in the CFS, in the form of increased direct energy costs and higher prices for many other goods and services that are produced and/or shipped using energy inputs — virtually everything.

So, as now proposed, the CFS, according to one estimate,[1] will cost Canadian businesses ~$6 for every $1 of environmental benefit, leading to 30,000 lost jobs and upwards of $22 billion in foregone business investment and capital flight. For the average person buying gasoline at the pump, prices could rise between 10% and 19%, depending on the province, with British Columbia at the high end given that it has fuel prices well in excess of the national average.

In this province, if the CFS had been fully in effect in 2019 when gasoline prices rose to $1.70 per litre, the retail price would have been closer to $2/litre. The public outrage at the time was hard to miss, prompting the B.C. government hurriedly to order an inquiry. Today, at $1.20/ litre in the Vancouver area, the price of gasoline would rise by $0.24 per litre with the CFS in place, with taxes equal to some 54% of the total pump price.

It is worth recalling that energy demand is price-inelastic for most individuals and businesses. This means that escalating prices do not cause much change in behaviour or dampen demand, particularly in the short-term. As Canada emerges, haltingly, from the COVID-19 crisis and as worries persist over affordability, governments should avoid increasing costs for essential goods, like energy. Affordability was a pre-pandemic concern and remains an issue for many Canadians. This is especially true for people least able to afford increases in the cost of essential goods and service like energy, food, and transportation.

Canada must think carefully about the design of the CFS. A badly designed and rushed CFS that does not fully consider economic impacts and unintended consequences is neither smart policy nor smart politics. The fact that after three years there are still many substantial unresolved concerns is telling and demonstrates the need for some sober second thought. The CFS as proposed will do very little to reduce GHG emissions but is certain to hike the cost of energy and energy-intensive goods, foster carbon leakage as some types of industrial production relocate from Canada to other jurisdictions along with the jobs, and undermine Canadian energy security.