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Federal Environment Minister Catherine McKenna argues that Canada must proceed with a long-term transition to a lower-carbon economy, and will reap economic benefits by doing so.Andrew Vaughan/The Canadian Press

The Liberal government is proposing regulations that would force marketers of gasoline and home-heating fuels to reduce the carbon content of the energy products they sell, as part of the national effort to reduce greenhouse gas emissions.

In a newly released discussion paper, Environment and Climate Change Canada said the clean-fuel standard would come on top of the national carbon-price system to be introduced next January and in addition to existing federal and provincial regulations that require ethanol to be added to gasoline.

The fuel standard was included in the pan-Canadian climate agreement that Prime Minister Justin Trudeau signed with 11 of 13 provinces and territories in December. Saskatchewan and Manitoba premiers refused to sign that accord. The Liberal government expects the fuel regulation will reduce greenhouse gas emissions by 30 megatonnes a year by 2030, an amount equal to Nova Scotia and New Brunswick's current combined GHG emissions.

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"We understand Canadians want to see new action on climate change and that's why we are proceeding with next steps," Caitlin Workman, press secretary for Environment Minister Catherine McKenna, said Monday.

Ottawa is plowing ahead with climate-change policies that will drive up energy costs despite concerns being expressed in the business community about the potential to reduce Canada's competitiveness with the United States. U.S. President Donald Trump has promised to reverse key environmental regulations, including climate-change rules put in place by his predecessor, Barack Obama.

Ms. McKenna argues Canada must proceed with a long-term transition to a lower-carbon economy, and will reap economic benefits by doing so. The fuel standard will "modernize the way we produce and consume fuels" and result in "more innovation, more jobs and healthier communities," she said in an emailed statement Monday.

The clean-fuel standard – to take effect in three years – would cover refiners and marketers of gasoline, diesel and home-heating fuel, natural-gas distributors and large industrial users, and require them to reduce the carbon emissions from the fuel they sell or use by between 10 per cent and 15 per cent. They could do that by expanding use of electricity and natural gas in home-heating and industrial processes, and electricity, biofuels, natural gas and hydrogen in transportation.

However, the standard will not differentiate between gasoline made from oil sands bitumen and product made from lighter crude, even though extracting and refining the bitumen is a more GHG-intensive process.

The Liberal government is also promising to pass legislation this year to institute a national carbon price next January. The federal levy would apply in provinces that refuse to implement their own tax or cap-and-trade system.

It is also working on regulations that would force the oil and gas companies to reduce emissions of methane – a powerful greenhouse gas – from their operations. Mr. Trump's director of the Environmental Protection Agency, Scott Pruitt, said on the weekend that he intends to roll back federal methane regulations passed by the Obama administration, though environmentalists say they will fight that move in the courts.

Industry spokesmen warned Monday that the additional environmental regulations could hurt energy-intensive Canadian industries that compete with U.S. rivals, particularly as Mr. Trump is also pledging to cut corporate taxes.

"There is no question that divergent Canadian and U.S. climate policies could have significant consequences for Canadian competitiveness," said Peter Boag, president of Canadian Fuels Association, which represents the country's refiners.

He said his members compete directly against American refiners, particularly in the U.S. Gulf Coast, and a significant cost differential could shift activity south of the border.

The GHG-reduction target in the clean-fuel standard "is a very large order, there is no question about that," Mr. Boag said. "When you're talking reductions in the 10- to 15-per-cent range, that's very aggressive in what is a pretty short time period."

Environment Canada is promising to allow the flexibility for industry to meet its targets, including the ability to purchase emission-reduction credits, he noted. And he said his members want to see Ottawa and the provinces work together to ensure there is one national approach replacing a hodgepodge of federal and provincial measures covering the fuel sector.

The natural-gas industry sees both opportunity and risks in the regulations, said Timothy Egan, president of the Canadian Gas Association. On the one hand, cleaner-burning natural gas can be used to displace oil-based fuels. But natural-gas distributors will have to reduce their own GHG emissions by, among other things, increasing the use of landfill gas and other renewable sources.

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