Question Period Note: CLEAN FUEL REGULATIONS

Q1 – Will the Clean Fuel Regulations increase costs to Canadian farmers? Q2 – Are the Clean Fuel Regulations another ‘carbon tax’? Q3 – What is the Government of Canada doing to help Canadian biofuel producers stay competitive? Q4 – What about the sustainability of agriculture-based biofuels?

R.1 - The Regulations represent an opportunity for increased demand for agriculturally-derived biofuels, providing market stability and diversification, and reducing reliance on exports for crops such as canola. R.2 - The Regulations are not a tax and are a market-based mechanism designed to spur innovation of clean technologies and expand the use of less polluting fuels throughout the economy. R.3 - As outlined in Budget 2024, the Government of Canada will invest nearly $1.8 billion to support the growth of the biofuels industry in Canada. R.4 - The Land Use and Biodiversity Criteria aim to ensure that the biofuels that are used to generate credits under the Regulations will support our goals to protect biodiversity and the environment.

The Land Use and Biodiversity Criteria recognizes the strong sustainability record of Canadian farmers.

Biofuels are an important source of market diversity for Canadian farmers, particularly for corn and canola. Biofuels create economic opportunities for the Canadian agricultural sector while helping mitigate climate change by reducing transportation-related greenhouse gas (GHG) emissions. Ethanol, biodiesel, and renewable diesel are the main low carbon intensity liquid biofuels in commercial production today.

Canadian production of grains and oilseeds was 90.5 million metric tons (MMT) in the 2022/23 crop year. According to AAFC calculations, about 6.2% of that total, or 5.6MMT of grains and oilseeds, went into Canadian biofuels production in 2022/23. Approximately 4.0MMT of corn (28% of production) and 0.5MMT of wheat (1.3% of production) were used to produce ethanol, while approximately 0.8 MMT (4.1% of production) of canola and 0.4MMT (6.3% of production) of soybeans were used to produce biodiesel.

In 2022, domestic biofuel production was approximately 1.8 billion litres of ethanol and 400 million litres of biodiesel while biofuel consumption in Canada was approximately

4 billion litres. Canada currently has no production of renewable diesel, though multiple projects have been announced. Canada imports 45% of its ethanol consumption, most of which is from the US. Meanwhile, due largely to favourable US tax incentives, Canada exports 88 to 99% of domestic biodiesel production to the US, while importing US biodiesel and renewable diesel for consumption in Canada.

AAFC supports biofuel-related science, research, and adoption of low-carbon biofuels through departmental research, and the Agricultural Clean Technology and AgriScience programs.

Agriculture and the Clean Fuel Regulations

The Clean Fuel Regulations (CFR) were announced as part of the strengthened climate plan, A Healthy Environment and a Healthy Economy, on December 11, 2020, and were published in Canada Gazette, Part II, on June 21, 2022. Additional components of the strengthened climate plan include a $1.5 billion investment – led by Natural Resources Canada – in a Clean Fuels Fund to increase the production and use of low-carbon fuels. AAFC is also delivering $429.4 million over seven years through the Agricultural Clean Technology-Adoption and Research and Innovation Streams to support research, development and adoption of clean technologies in the agriculture sector.

Under the CFR, as of July 01, 2023, fossil fuel producers or importers are required to reduce the carbon intensity of liquid fuels they provide. The CFR uses lifecycle analysis to assess the carbon intensity of various fuels, with a view to incenting those that offer the deepest carbon reduction potential for the cost. The CFR is not a tax and is a market-based mechanism designed to spur innovation of clean technologies and expand the use of less polluting fuels throughout the economy. The actual price impacts will depend on the choices of oil refiners, who have the flexibility to find the most cost-effective and innovative approaches that work best for them, whether investing in cleaner production or more affordable fuels for their customers.

There are three ways to comply with the CFR: 1) improvements to conventional fossil fuel production that reduce the lifecycle carbon intensity of fuels, 2) blending of low-carbon fuels, like those derived from agricultural production, and 3) end-use fuel switching, such as electrification. The CFR is anticipated to create a significant increase in demand for renewable fuels, including agriculturally-derived biofuels, as a method for regulated parties to comply with the standard through compliance option two. The CFR will reduce up to 26.6 million tonnes (Mt) of GHG emissions in 2030. ECCC modelling projects that this will include more biofuel blending, delivering up to 6.7 Mt in annual GHG reductions, beyond existing blend mandates. Despite the focus on liquid fuels, gaseous and solid fuel production and use can still be used to fulfill CFR requirements, or generate CFR credits, within certain parameters. An example would be production of biogas from anaerobic digestion of agricultural material.

The CFR are anticipated to increase the cost of gasoline and diesel. In 2030, Canadians who drive fossil fuel-powered vehicles may see an increase of between $0.06 to $0.13 per litre for gasoline and $0.07 to $0.16 per litre for diesel (2021 dollars). Fuel prices are the result of several market factors, including distribution constraints, market share competition, refinery capacity and production, and fuel demand. Given the variability in fuel prices paid at the pump, increases in fuel costs due to the CFR may not be noticeable by most consumers, including farmers. The Government of Canada is aware that the CFR impacts will be higher in some provinces than in others as some regions may have fewer credit creation opportunities. Some farm fuel prices will increase more than others, impacting producers differently based on type of farming activity and part of the country.

Agricultural stakeholders have been engaged in the design of the Regulations. Agricultural and renewable fuels stakeholders have advocated for the CFR to send a clear and direct demand signal for increased production of biofuels, including biodiesel derived from canola. Stakeholders are concerned about sustainability requirements for fuels and feedstocks called “Land Use and Biodiversity Criteria”. This includes requirements to provide field-level GPS coordinates in declarations, that follow the feedstock through the supply chain from harvest to biofuel production. In November 2023, ECCC announced a compliance pathway to address these concerns for Canadian and U.S. agricultural feedstocks.The Criteria came into force on January 1, 2024.

AAFC is continuing to work with ECCC on aspects of the CFR including future versions of the Fuel Life Cycle Assessment Model.

Budget 2024: Securing the Canadian Biofuels Industry

As outlined in Budget 2024 the Government of Canada will invest nearly $1.8 billion to support growing the biofuels industry including:

$776.3M to retool the Clean Fuels Fund until 2029-30.

Up to $500 million per year from the Clean Fuel Regulations compliance payment revenues to support biofuels production in Canada. More details will be announced in the 2024 Fall Economic Statement.

At least $500 million invested by the Canada Infrastructure Bank in biofuels production under its green infrastructure investment stream.

The Clean Fuel Regulations will accelerate the production and use of low-carbon fuels, including agricultural biofuels.

The production of low-carbon biofuels represents an important opportunity for farmers to find new customers for their products and will help the agricultural sector contribute to Canada’s climate change commitments.

The Regulations will drive demand for biofuels made from agricultural products like grains and oilseeds, wastes, and residues.