Canada Clean Fuels Regulation’s First Report: playing out as expected

Articles
Canada Clean Fuels Regulation’s First Report: playing out as expected

CA LCFS

Friday, 28th June 2024

Bikash Maharaj

Key Takeaways

Environment And Climate Change Canada (ECCC) released its much anticipated first report on the Canada Clean Fuels Regulation that covers 2022 and 2023. As expected, biofuels have been the highest credit generators. Ethanol leads the way followed by renewable diesel.
Based on cCarbon analysis of the data, ethanol has reached a blend rate of 10% in Canada’s gasoline pool and renewable diesel is at a blend rate of 8% of the diesel pool. Most of the liquid clean fuels (71% by volume) have been imported into Canada.
cCarbon’s model had predicted the 2023 credit generation to be higher than what has been reported and the released data provides the first solid data-points to help us refine our model.
ECCC report has indicated price transfers in the range of CAD 127.30 and 141.80. This is in line with the cCarbon model predictions and lower than several current quotes in the market. This is still a market in its infancy.

For a deep-dive on the Canada CFR, join our webinar “Navigating the future of Canada Clean Fuel Regulation (CFR)” on July 31^st https://www.ccarbon.info/webinar/navigating-the-future-of-canada-clean-fuel-regulation-cfr/

Context

The Canada Clean Fuels Regulation (CFR) which went live in 2002, is emerging as a key driver for the clean fuel market in North America. It has almost doubled the size of the clean fuels market, as fuel supplied to over 35 million vehicles is covered by it. By 2030 Canada CFR aims to reduce the Carbon Intensity of fuels by 15% (below 2016 levels). Environment And Climate Change Canada (ECCC) released its first report on the program that mainly covers credit generation, credit transfers and volumes of clean fuels. Details on deficits and obligations have not yet been released.

Biofuels lead in credit generation: Ethanol leads and Renewable Diesel surprises

As expected, biofuels lead in credit generation. Ethanol leads in volume with nearly 4 million cubic meters of volume being reported (approximately 4000 million liters or 1058 million gallons) in 2023. This is more than double the volume supplied in 2022. Based on cCarbon estimates of total volume of gasoline for 2023, Ethanol has already reached a blend rate of 10%.

Renewable diesel (RD) volumes are a bit of a surprise. The total volume reported was 0.5 million cubic meters (approximately 500 million liters or 132 million gallons) in 2022. And the volumes for 2023 reached 1.2 million cubic meters (approximately 1200 million liters or 317 million gallons). Based on the above, cCarbon estimates that the renewable diesel blend in diesel pool is already over 8% (from 2.6% in 2022).

71% of the liquid clean fuels in 2023 were imported into Canada. 58% of Ethanol was imported and nearly all the RD has been imported. We expect more RD to come from the US into the Canadian market and also see domestic production. Tidewater (3000 bpd) and Brayafuels (18000 bpd) came up recently.

We have projected a few scenarios on RD penetration in our past modeling that we will update based on this new information. We will also be looking to assess transportation pathways and regions where RD will make headway over the next couple of years.

Table: Compliance Category 2 – Fuel consumption reported in Canada CFR

Advanced fuels and usage of charging infrastructure

The total volume of advanced category fuel reported increased from 24.6 million cubic meters to 122.01 million cubic meters. Most of it has come from Compressed Natural Gas and Liquified natural gas. Electricity consumption for electric vehicles has come mainly from General Public charging.

Table: Compliance Category 3- Usage reported in Canada CFR

11.3 million credits reported under different compliance categories: dominated by Ethanol and Renewable Diesel

Expectedly, most early credits have come from liquid fuels. Ethanol and Renewable Diesel make up nearly 54% of all credits generated in the two year period. Electricity charging has made up 4.6% of the credits. Under Compliance Category 1, 6 projects around co-processing, enhanced oil recovery and other improvement projects contributed 9.9% of the credits.

Table: Total volume of credits reported by source in Canada CFR in 2022 and 2023

cCarbon’s model

Table: Total volume of credits reported by source in Canada CFR in 2022 and 2023

* indicates that ECCC has aggregated 2022 and 2023 data for confidentiality reasons.

cCarbon predicted a total of 7.3 million credits in 2023, which was around 70% accurate (not bad for a model that was created before any program data was released?). With this new data, we expect to update our model assumptions and reclaim our 95-99% accuracy for long term models.

One key takeaway seems to be our higher estimates during the early crediting period: whether the market was not ready, or the protocols/ systems were not there, remain to be seen. While the market is still taking off it will be interesting to watch how the market will evolve in the coming months.

A total of 170 pathways have been reported in Canada CFR

Unsurprisingly, Ethanol has the highest number of approved pathways, with 62 approved pathways and a median carbon intensity of 42 gCO2/MJ. Renewable Diesel and Biodiesel together have a total of 60 registered pathways. Renewable Diesel has a median carbon intensity of 36 gCO2/MJ, while Biodiesel has a median carbon intensity of 21 gCO2/MJ. Interestingly, the reported median carbon intensity for Renewable Natural Gas (RNG) is 31 gCO2/MJ- implying that bulk of the RNG may be coming from Landfill.

Table: Different pathways reported in Canada CFR and their carbon density

Canada CFR credit price – which direction are they heading?

The ECCC summary report, represents the first official indication on pricing of credit transfers. Average credit prices were CAD 141.8 in 2022 and CAD 127.3 in 2023. Nearly 25% of the credits generated between 2022 and 2023 exchanged hands; and most likely went to deficit generators. As mentioned earlier, data on deficits was not shared at this point. cCarbon has modeled the bank to be building up at this stage in our earlier reports and will be sharing an updated model soon.

Table. Canada CFR prices as reported in the credit summary

Secondary market prices from the cCarbon data-partners have indicated a range of CAD 225 to CAD 250 albeit with limited volumes. At the same time, our long range forecast from our model had anticipated prices to be between CAD 153 and CAD by end 2023.

Chart: Canada CFR Secondary Market Prices, sourced by cCarbon

Chart: Canada CFR prices projected earlier from cCarbon’s CFR.CarbonOutlook model (which will be revised based on this fresh data received)

We expect price discovery to happen more actively in the coming months, now that we have this data signal from ECCC. Our analyst team will be tracking this market closely and if you wish to learn more about our coverage please reach out to us.