New federal regulations to replace the most highly polluting fuels with cleaner alternatives are facing resistance, with some provinces calling the policies a “second carbon tax” that will burden low-income residents.
The Clean Fuel Regulations (CFR) due July 1 are meant to cut the carbon intensity of automotive fuels sold in the Canadian market, based on the amount of carbon dioxide equivalent released over the fuel’s life cycle, explains CBC News.
Producers can comply with the new rules in several ways, CBC writes. “They could put more ethanol in their gasoline, use more biodiesel, or find innovative ways of reducing their refineries’ emissions.” The limit on carbon intensity of gasoline and diesel will be ratcheted down each year until it reaches 15% below 2016 levels in 2030.
Eventually, the CFR will make gasoline more expensive, CBC notes—a possibility that has the federal Conservatives and the Canadian Taxpayers Federation calling them “carbon tax 2.0” or “the second carbon tax.”
“It’s almost like a carbon tax, but it doesn’t put the charge on every litre, so it can do more to encourage efficiency or fuel switching toward low-carbon fuels or low-carbon electricity without having the same price impacts on the fuel itself,” said climate economist Mark Jaccard, a professor at Simon Fraser University and an expert on clean fuel standards.
The new regulations are part of Canada’s larger plan to cut emissions and shift to more sustainable energy sources, increasing “incentives for the development and adoption of clean fuels, technologies and processes.” They will act like a cap-and-trade system, with the money paid by higher emitters transferred to cleaner energy producers, not the federal government.
“Those who make biofuels, those who make hydrogen, those who make electricity, they actually get money coming into their pockets, because the higher-intensity sellers of fuels have to buy credits from them,” Jaccard said.
Environment and Climate Change Canada is counting on the CFR to deliver up to 26 million tonnes of greenhouse gas emissions reductions in 2030.
Budget Officer Sparks Resistance
In late May, the Parliamentary Budget Office (PBO) issued a report that found gas prices will increase at the pump by 17¢ per litre by 2030 because of the CFR. That increase will affect lower income households more, as fuel represents a larger share of their disposable income. The report concluded that, by 2030, the cost impacts will range from 0.62% of disposable income (or C$231) for lower-income households to 0.35% disposable income (or $1,008) for higher-income households. Impacts will be felt differently across the provinces, with higher impacts in in Saskatchewan, Alberta, and Newfoundland and Labrador reflecting the higher fossil fuel intensity of their economies.
The report acknowledges that it “does not account for endogenous technological change where new technologies appear—in response to the CFR—that are more productive than existing technologies” because while “such a scenario is possible … it is not predictable.”
Crucially, the report also leaves out the economic benefits of cutting national emissions because “Canada’s own emissions are not large enough to materially impact climate change and therefore their reduction would not materially affect the Canadian economy,” the PBO wrote.
Studies from other organizations contradict this conclusion. A 2022 report from the Canadian Climate Institute found that climate change threatens households with C$25 billion in losses, with individual and low-income households likely to take the greatest hit.
CFR proponents—like federal Environment Minister Steven Guilbeault—say the PBO report, which prompted the provincial resistance, is misleading. He described the PBO’s analysis as an “unbalanced modelling approach” that does not account for new technologies.
“That is not a reasonable assumption, especially given the $120-billion clean economy investments our government has made in Budget 2023 alone,” Guilbeault said.
“The PBO also fails to recognize the cost of climate change to Canadians, like extreme weather,” he added. “We know that every tonne of carbon dioxide costs our society $261 from the costs of climate change. These costs are not taken into account.”
Moreover, Guilbeault said the regulations are designed to ensure there is no immediate impact on fuel prices, and that prices in 2030 “will depend on the choices of oil refiners” to invest in clean production that delivers affordable fuels. He has urged regulators in Atlantic Canada to consider oil industry profits before passing cost increases on to consumers.
“Given these elevated refinery margins and the compliance flexibilities built into the Clean Fuel Regulations, there is no reason the marginal costs of the regulations should automatically be passed along to consumers,” he wrote in a May 25 letter.
There’s been some speculation that Guilbeault’s letter was a factor in Irving Oil, the family conglomerate that controls much of the economy in New Brunswick, to launch a strategic review that could lead to the company being sold—or that Irving is bluffing in the hope of forcing Ottawa to delay or water down the regulation.
The PBO said Environment and Climate Change Canada had not disputed its findings prior to Guilbeault’s public statements, adding that its mandate is not to help promote government policies, the National Post reports.
Provinces Push Back
In the wake of the report, Canada’s eastern provinces, joined by Saskatchewan Premier Scott Moe, called for a delay in the CFR, saying they needed more clarity on expected impacts—even though the new rule has already been delayed for years while officials consulted and gathered input and withstood organized opposition along the way from industry, some provinces, and then-Conservative leader Andrew Scheer.
“I agree with my Atlantic counterparts, premiers from Atlantic Canada, that have called on the federal minister to delay the implementation of these to ensure that the minister is doing proper and appropriate consultation,” Moe told CBC News this week.
“The clean fuel standard has a potential for quite a disproportionate impact in various areas of the nation.”
But ECCC responded that it had conducted years of consultations with industry to understand the possible outcomes when preparing its regulatory impact assessment, and that the provinces were “heavily engaged” in the process, CBC says.
Jaccard also expressed doubt that there will be negative impacts on provinces, arguing that the regulations’ support for biofuels could actually be good for oilseed producers in the prairies. The executive director of the Canadian Oilseed Processors Association, Chris Vervaet, told CBC his group had been “heavily involved” in the regulations’ development and that they could benefit his industry, with billions of dollars already flowing for new processing facilities.
“That could explain why Moe—who never has a single nice word to say about carbon taxation—has been less ferocious in his opposition to the Clean Fuel Regulations,” CBC writes. “He acknowledged they have the ‘ability’ to rein in emissions and could even bring benefits to agriculture in his province.”