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A tug boats guides the oil tanker Eternal Sunshine out of Portland Harbor while fisherman Bruce Hodge waits for a fish to bite on June 10, in Portland, Maine. Crude oil is pumped from Maine to Quebec, Canada, via the 236-mile Portland-Montreal Pipe Line.Robert F. Bukaty/The Associated Press

The federal government has toughened a contentious aspect of its new regulation to reduce greenhouse gas emissions from transportation fuels consumed in Canada, raising the bar for oil producers to comply.

The changes are contained in the final version of the Clean Fuel Standard, which after long delays is set to be published on Wednesday.

After taking effect in 2023, the regulation will require gasoline and diesel providers to meet increasingly stringent requirements for lowering the life-cycle carbon intensity of their products. They will be able to do so either by reducing emissions from their own production and refining processes, or by buying credits from producers of lower-emitting fuel sources – meaning the regulation is supposed to help bolster emerging sectors such as biofuels and electric-vehicle charging.

However, environmental groups and clean-fuel associations had complained that a major perceived loophole in previous drafts of the rules stood to make it too easy for oil companies to achieve requirements. It would have allowed those companies to earn compliance credits by reducing production emissions on Canadian oil that is exported, even though the regulation is otherwise squarely focused on fuels sold domestically.

The government has now explicitly ruled out that option in the latest edition of the regulation, a copy of which was obtained by The Globe and Mail.

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It’s a move that could get the Clean Fuel Standard closer to the roughly 20 megatonne reduction in Canada’s annual greenhouse gas emissions by 2030 it is supposed to achieve, but also raise opposition from a fossil-fuel sector that has, to this point, been publicly muted on the policy.

The sector lobbied for exports to be included among the credits-generating options, along with other ways of giving companies flexibility in compliance.

Its representatives have suggested that rewarding reduced emissions during all domestic oil production, not just when the end product is sold in Canada, would help spur investment in technologies such as carbon capture.

Some of them have also cautioned that onerous new rules will cause price increases for consumers, although the increases are likely to be modest at first because the stringency of the regulation’s carbon-intensity requirements will rise gradually.

The government seems to have rejected those arguments partly on the basis of the industry’s current revenue boom, especially oil refiners that are most directly targeted by the regulation.

“Refining margins on gasoline in Canada have more than doubled between June, 2019, and June, 2022 – up by over 113 per cent,” Environment Minister Steven Guilbeault’s office said in a statement. “As oil and gas companies make record profits, there’s no doubt there is the capacity to invest in clean options.”

More fundamentally, Ottawa appears to have ultimately agreed with advocates for a stringent CFS who argued that allowing credits to be accumulated on exports – which typically account for more than 75 per cent of all crude oil extracted in Canada – would mean little necessary investment in cleaning up fuels used domestically.

According to the climate and energy modelling company Navius Research Inc., which was commissioned by the Pembina Institute, the most recent draft version of the regulation would, at best, have achieved about six megatonnes in annual GHG reductions by 2030.

Even with the newly tight rules on exports, environmental groups and renewable-fuel associations will likely keep pointing at other perceived weaknesses in the CFS that could cause it to fall short of its intended role in hitting Canada’s international climate commitments and building new clean industries. They argue it’s weaker than comparable policies already in place at the provincial level in British Columbia, and elsewhere in jurisdictions such as California.

The most common remaining concern seems to be the central requirement for how much the carbon intensity of fossil fuels needs to drop this decade.

Over the course of the regulation’s development, the government has upped that mandated reduction from 12 to 14 grams of carbon dioxide per megajoule of energy.

Critics contend that’s not enough of an increase to account for the many other climate policies, including carbon pricing, the government has implemented since it first promised the CFS. That means, they say, a significant share of the required GHG cuts might now be happening regardless, running the risk of double counting with those other policies and blunting the impact of the new rules.

Another complaint involves a second alleged loophole in the rules critics were calling on the government to fix, but which Ottawa left the same as previous versions. It apparently allows fossil-fuel producers to earn credits for emissions-intensity reductions to oil used for an array of domestic purposes, such as plastics and asphalt, even though the regulation only covers transportation fuels otherwise.

Other questions have also been raised about components of the policy’s administration outside the regulation itself. The group Renewable Industries Canada, for instance, has flagged the modelling system Ottawa will use to determine products’ life-cycle emissions – an essential baseline for awarding credits – as being out of step with comparable systems in other jurisdictions and needing improvements.

Government officials have acknowledged the CFS will likely need to be adjusted along the way, once there is evidence of how it functions in practice, and it’s likely these and other concerns – including those of the fossil fuel industry – will remain live issues.

For now, there appears to be relief among proponents who have pushed for the policy that the government is finally getting it out the door, and in a somewhat more stringent form.

While calling the CSR “still not as ambitious as it might have been,” Electric Mobility Canada research director Bora Plumptre – who has been tracking the regulation for environmental groups through its development – nevertheless considers its passage through the federal cabinet a major milestone.

“The real-world impact of the policy can only start to be known as the compliance market begins to operate,” Mr. Plumptre said, but its finalization “will change the fundamental regulatory paradigm for fuels in Canada in a highly consequential, climate-positive direction.”

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