In May 2016, the Federal Court of Appeal decided unanimously that Parliament was within its authority to enact the Renewable Fuels Regulations (known in the industry as the RFS, for “renewable fuels standard”) with a stated purpose of reducing greenhouse gas (GHG) emissions. Syncrude had challenged the regulations, which require producers to include renewable fuel in diesel products. The court said Parliament can prescribe how a party must meet the goal of a statute — in this case, the Canadian Environmental Protection Act — and that a party cannot substitute its own plan for meeting the objective. The result is that Syncrude will likely continue to import renewable diesel from outside Canada to blend into its domestically produced diesel, even though, as the court acknowledged, this process will actually increase the total GHG emissions associated with the use of its diesel.
The legal logic is sound. The court noted that “it is well established doctrine that ‘the wisdom or efficacy of the statute’ is not relevant to determining its pith and substance.” Parliament doesn’t have to be right about the actual outcome of the laws it passes. It has the supreme authority to enact laws on issues within its jurisdiction with the intention of achieving an objective. It is not a defence to say you have achieved (or exceeded!) the objective through a different means if you are violating the statute or regulation that establishes it.
Since the Syncrude decision, Ottawa has announced a new approach to reducing emissions from fuels. In November 2016 it released a discussion paper about the Clean Fuel Standard (CFS), which it intends to implement in 2019. In contrast to the RFS, which has no reduction target, the CFS has a stated goal of reducing GHGs by 30 megatonnes by 2030. The government has not, thus far, prescribed how that will happen.
To be clear, a goal of 30 Mt reduction is a very high bar. It represents a 10 percent reduction in the GHG impact of combusting fossil fuels. This is without a doubt the most ambitious carbon emissions reduction program focused on fuels proposed anywhere in the world. No other jurisdiction has proposed to include industrial fuel use as part of its clean fuel standard, and both California and British Columbia have specifically decided to exclude it.
If it is implemented as proposed, the CFS will touch every single joule of nonrenewable energy that is used in Canada. The paper rightly states that “the Renewable Fuels Regulations play an important role in providing demand certainty and supporting the development of the biofuels industry in Canada, [and their] role under a broader Clean Fuel Standard may need to be adjusted.” The paper then asks: “Should the Renewable Fuels Regulations be maintained or phased-out?” But the question seems predicated on the unstated assumption that the CFS would replace the regulations by obviating the need for their primary justification: to reduce GHG emissions.
In my view, the right answer is to phase out the RFS. There is no doubt that the use of certain renewable fuels can reduce GHGs. However, the record of the federal RFS in achieving that goal is doubtful at best. The regulations do not require fuel suppliers to demonstrate that the renewable fuels they add to their products are better than petroleum-based fuels from a GHG life cycle perspective. In fact, it is possible that some renewables can contribute to increasing GHGs on a full life cycle basis. This is why the CFS, which sets a target but does not dictate ways to reach it, is a welcome policy change.
Let’s be frank: the actual goal of the federal RFS and provincial renewable content regulations was the creation of a domestic renewable fuels industry. Any other benefit was ancillary at best. The federal RFS was a factor in building up a domestic ethanol industry; operating subsidies that are now expiring also helped. Yes, some facilities were built without these incentives, and some have closed despite them. The bottom line is that, as a result of the policies of the last government, Canada is very close to having enough ethanol made domestically to meet the requirements of the RFS. Unfortunately, the same cannot be said for renewable diesel. Canada continues to import the overwhelming majority of the biofuel content required by the RFS. We have Canadian renewable diesel producers, but they export their product south because of favourable tax programs in the US.
It is undeniable that the renewable-content requirements in the RFS are helpful in persuading institutional lenders to take the risks associated with building plants in an uncertain market. But that is not, nor should it be, the role of a regulation — and it certainly isn’t an appropriate use of the federal criminal law power, which is the authority under which the government enacted the Renewable Fuels Regulations.
Provincial rules and regulations add a layer of complication for producers. Some observers say the provinces saw the federal regulation coming and scrambled to implement their own to benefit their local interests; others think the provinces got out in front to show environmental or agricultural leadership. Regardless of motive, the result is an inefficient patchwork of varying regulations that carves up Canada’s national fuel market into many smaller markets. If the federal regulations are phased out, the provinces should have a very hard look at their own renewable fuel regulations as well.
If the federal RFS is eliminated, would the Canadian renewable fuel industry dry up? Absolutely not. These plants are fully capitalized and are expanding their operations and product offerings. They needed the boost over the past 10 years to ensure that they got off the ground. Do they still need it? There are other technical barriers to entry into the Canadian market that protect established domestic suppliers against foreign competition: one factor is the inferior GHG performance of imported products, when compared with the output from what are arguably the most efficient ethanol plants in the world. Under the CFS, the Canadian plants, with their superior GHG performance, can become preferred suppliers in the ethanol market. Producing these fuels in Canada much more effectively delivers on the GHG emissions-reduction goal at the core of the CFS.
Without the federal RFS, would fuel providers still use renewable fuels? That choice would be influenced by market prices, but it is very likely that ethanol and renewable diesel will be the primary tools that petroleum companies use to comply with a CFS. In fact, levels of renewables being blended in would likely increase as fuel suppliers look to make use of their existing blending infrastructure to achieve the most cost-effective compliance with the proposed CFS. The CFS should be designed to achieve its goal: reduce GHGs. The government should use its power to set the target, apportion it appropriately and then let the industry comply through the most cost-effective way possible — namely, largely through biofuel blending. The volume-based approach of the RFS frustrates efficient achievement of that goal, and the only people who will pay for it are Canadian consumers.
There is nothing wrong with ethanol and renewable diesel as fuels or performance-driven fuel additives. But they should be simply options, not mandated requirements. Petroleum companies should be able to continue to cost-effectively and competitively supply individual consumers and industry with the fuels that meet their needs. If there is a market for these fuels based on the requirements of the CFS, then companies should have the right to seek them out and choose them. The federal government should not have used the criminal law power to support industrial expansion, and now it has the opportunity to correct that mistake.
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