Federal Clean Fuel Standard is all smoke and mirrors

By Jock Finlayson
and Denise Mullen
Business Council of B.C.

Amid the worst economic and public heath crisis in Canadian history, the federal government has decided to proceed with a major new regulatory initiative that promises to add billions of dollars to the cost of energy for households and businesses in every corner of the country.

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The goal of the government’s Clean Fuel Standard (CFS) is to reduce greenhouse gas (GHG) emissions from the use of fossil fuels in transportation, heating and industrial activity. It’s part of Canada’s broader suite of policy measures for reducing domestic GHG emissions and addressing global climate change.

Jock Finlayson

The CFS mandates a phased reduction in the carbon content of liquid fuels such as gasoline and diesel starting in 2022, with a view to lowering Canada’s emissions by 30 million tonnes by 2030. The primary focus is on fuels consumed in transportation, but in time the CFS will also apply to fuels used in other sectors and for other purposes.

Unfortunately, in designing the new standard, government officials paid insufficient attention to important issues like technical feasibility, compliance costs, the use of credits, the intersection of the CFS with provincial fuel standards, and the availability within Canada of fuel additives or fuel substitutes to help reduce the carbon content of liquid fuels.

As a result, the CFS will significantly increase the cost of energy for consumers and businesses. It amounts to a hidden tax adopted via a set of complex regulatory requirements that consumers won’t see or understand – although they are sure to pay the price.

Not only will the CFS boost fuel prices, it will also make food, most manufactured goods and transportation services more expensive. The Canadian Energy Research Institute puts the economy-wide cost of the CFS somewhere between $7.6 billion and $15.3 billion by the time it’s fully implemented.

Denise Mullen

Consumers will see the per-litre price of gasoline and diesel rise by at least five to 11 cents, while natural gas will cost an extra $0.94 to $1.88 per gigajoule.

Despite these added costs, the CFS will do relatively little to reduce Canada’s overall greenhouse gas emissions, which amount to about 750 million tonnes per year. And it’s unclear whether the CFS, as designed, will lower emissions by the targeted 30 million tonnes.

Moreover, the cost per tonne of any GHG emissions ‘avoided’ thanks to the CFS will be steep – several orders of magnitude greater than the $50 per tonne carbon charge that Ottawa and the provinces notionally have accepted under the pan-Canadian framework for climate change.

Finally, the CFS will have essentially zero effect on the level of global emissions of carbon dioxide and other greenhouse gases.

To understand the latter point, consider the massive Datang Tuoketuo coal-fired electricity generating station in China’s remote Inner Mongolia region. This facility emits 31 million tonnes of GHGs annually and is on track to continue doing so for many years. There are hundreds of other coal-fired power plants in China and the rest of Asia that also emit large quantities of GHGs.

What’s striking is that the GHG emissions from this single generating facility match the reduction in Canadian emissions targeted by the CFS. So with the CFS in place, Canadians will pay tens of billions of dollars more for energy cumulatively over the next decade, in the process managing to offset the emissions produced by one large Chinese power plant.

Who pays for the CFS?

Not the fuel suppliers who are directly captured by the new regulatory scheme. Fuel suppliers, like other businesses, are expected to pass on higher costs from more expensive inputs and an increased regulatory burden to those who purchase their products. This means individual Canadians and businesses will shoulder the cost of the CFS, via higher energy prices.

Canada must think more carefully about the design of the Clean Fuel Standard. A badly structured and rushed approach that doesn’t weigh costs versus benefits, fails to consider the full economic impacts, and overlooks the risk of unintended consequences is not smart policy.

As proposed, the CFS will do 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 migrate away from Canada to other jurisdictions, and undermine Canadian energy security.

That seems a stiff price to pay for something that will bring meagre environmental gains.

Jock Finlayson is executive vice-president of the Business Council of British Columbia. Denise Mullen is director of environment and sustainability at the Business Council of B.C.

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