More Ethanol Needed North of the Border

With its new Clean Fuels Regulation in place, Canada is calling for more domestically produced biofuels while leaving the door open to record amounts of U.S. ethanol.
By Luke Geiver | October 14, 2022

Canada has made its thoughts about ethanol clear. In July, its federal government put in place a long awaited and anticipated new Clean Fuels Regulation framework. The revised CFR framework increases incentives for the adoption of clean fuels, technologies and processes. The regulations also require liquid fossil fuel suppliers to reduce the carbon intensity (CI) of the gasoline or diesel they supply over time. The new plan necessitates the use of renewable fuels, namely ethanol and biodiesel. Both biofuels offer near- and long-term options for Canadian fuel suppliers in need of solutions that can help them lower the carbon intensity score of the products they sell. Starting in July, 2023, suppliers must use more ethanol.

The CFR sets CI limits for gasoline at 91.5 grams of carbon dioxide equivalent per megajoule (gCO2e/MJ) in 2023. The CI limit steadily becomes more stringent through 2030, when the limit is set at 81 gCO2e/MJ. For diesel, the limit starts at 89.5 gCO2e/MJ in 2023 and intensifies to 79 gCO2e/MJ in 2030 and thereafter. Canada’s government estimates that approximately 2.2 billion liters (581.18 million gallons) of additional low-CI diesel and 700 million liters (185 MMgy) of additional ethanol will be needed in 2030 under the CFR.

Renewable Industries Canada, one of the main industry groups working to make the CFR possible starting in 2017, said the the new framework “will be instrumental in sending a clear signal to investors that Canada is ready for more clean and more cost-effective low-carbon fuels, like ethanol and biomass-based diesel.”

Based on future projections from the federal government, combined with statements like that from RICanda, it’s clear how important ethanol will be to the country, and why U.S. producers need to take note.
 
Six Years In the Making
Mackenzie Boubin is the relatively new director of global ethanol export development for the U.S. Grains Council, overseeing the development and execution of the USGC’s global ethanol program including strategy development, program implementation, public affairs and strategic partnerships. Picking up where her predecessor left off, Boubin helped in a collaborative effort responsible, in part, for making Canada’s historic CFR happen.

“It’s been a great year for ethanol exports,” Boubin says, “and the CFR has been a great story.”

For the past six years, Boubin and other members of the team at the U.S. Grains Council have worked with groups like RICanada, and others, to get in the offices of Canadian decision makers and advocate for the use and greater role of ethanol. Their work was instrumental in helping Canada work through drafts of the CFR and integrate the role of biofuels into the long-term framework.

“Our collective work demonstrates the power of having multiple stakeholders in the room,” Boubin says. More importantly to the ethanol sector, she adds, “This shows that biofuels are perceived well in Canada.”
 
Canada Needs More Ethanol
Of all the things that the CFR does, Boubin points to the message it sends. “The CFR really supplies a demand signal to ethanol producers,” she says.

Isabelle Ausdal, USGC manager of global ethanol policy and economics, agrees. “Combined with ambitious provincial greenhouse gas reduction goals, it is a great case study on complementary policies working together to increase national blending of ethanol successfully,” she says.

The structure of the framework proves her point. Currently, Canada blends ethanol into gasoline at 7 percent. Estimates from the framework show that in seven years, Canada will have to average at least a 15 percent ethanol blend to meet the requirements of the CFR. Already the top destination in the world for U.S. ethanol exports, the country will only continue its strong demand for ethanol from its southern neighbor, Boubin says. In the marketing year 2021/2022, Canada imported nearly 413 million gallons of ethanol (roughly $1.2 billion worth) from the U.S., up over 80 million gallons from the previous marketing year, making it the highest ever export volume to Canada on record. Canada has averaged 330 million gallons of ethanol per year for more than five years running.

To maintain its momentum with ethanol while developing other low-carbon energy options, the government of Canada plans to invest nearly $1.1 billion U.S. dollars ($1.5 billion CAN) in the clean fuels sector through the CFR. Regulators believe the new framework and announced investment dollars will provide a market signal that will increase the demand for low-CI fuels in Canada. The investment dollars will be used to build new or expand existing clean fuel production facilities in Canada. Because the CI value given to domestic production will likely be lower than those gallons that are imported, regulators also said there should be an incentive for more domestic production.  
 
The Full Framework
In addition to the demand for ethanol exported from the U.S., the CFR establishes a credit market. Each credit will represent a lifecycle emission reduction of one metric ton of CO2. For each compliance period (usually a calendar year), a primary supplier will demonstrate compliance with their reduction requirement by creating credits or acquiring credits from other creators.

Compliance credits can be created in three ways. Under the first compliance category, credits can be generated from projects that reduce the lifecycle carbon intensity of liquid fossil fuels. Examples of such projects include, but are not limited to: carbon capture and storage, on-site renewable electricity or co-processing. Through the second compliance category, credits can be generated from supplying low carbon fuels, specifically ethanol or biodiesel. And for the third compliance category, supplying fuel or energy to advanced vehicle technology (electricity or hydrogen in vehicles) will work for compliance.

The overall goal is to get major energy suppliers to reduce their CI score with credits they generate. But there's another option: compliance funds. According to the plan, as an additional interim compliance option, primary suppliers may meet up to 10 percent of their annual CI reduction obligation through payments into a registered compliance fund at a set price per ton of CO2 (the equivalence of one credit). The price will start at $350/tCO2. The credits that are secured that way cannot be traded and must be used in the same compliance period.

“Canada will maintain a list of approved compliance funds. Eligible funds must use the contributions to finance projects and activities in Canada that support the deployment or commercialization of technologies or processes that will reduce CO2 emissions in the short term,” the CFR states.
“Though just one of several compliance options available to primary suppliers under the CFS, the compliance fund mechanism will likely increase for emissions-reducing technologies in Canada,” according to the CFR.

Parties not considered primary suppliers can participate in the credit market as voluntary credit creators. Ethanol producers can be credit producers, even if they are not located in Canada. “Facilities in jurisdictions outside of Canada have a mechanism to have their projects recognized,” the framework states. Canada will work with other jurisdictions to make sure projects that can comply with one of the three compliance methods are recognized. Eligible projects must reduce the CI of a liquid fossil fuel along its lifecycle, achieve incremental GHG emission reductions and must have begun to reduce, sequester or use CO2 emissions on or after July 1, 2017.

In order to create credits, a low CI fuel producer or foreign supplier is required to obtain an approved CI value for each low CI fuel they produce. The framework regulations require the use of either the fuel life-cycle assessment model to calculate facility-specific CI values using facility-specific data, or the use of default values available in the regulations. According to the framework, fuel producers and foreign suppliers are able to use the model to determine CI values once they have 24 months of operating data. They may, however, use a provisional CI value using the model with only 3 months of data, until 24 months of data is available.

Regulators believe the new framework and announced investment dollars will provide a market signal that will increase the demand for low-CI fuels in Canada. The investment dollars will be used to build new or expand existing clean fuel production facilities in the country. Because the CI value given to domestic production will likely be lower than those imported, regulators also said there should be an incentive for more domestic production.

There will be a cost to blenders. Economic impact work done to prepare the framework for release shows that blending facilities may have to spend up to $10 million (CAN) per site. There are roughly 87 primary terminals in Canada, 43 of which have blending capacity. Overall, through the combination of blending facilities, terminal upgrades and several other areas, supplying low-carbon fuels under the new CFR is estimated to cost roughly $7.9 billion (CAN) between 2022 and 2040.

By 2030, the plan will reduce GHG emissions in Canada by 26.6 million metric tons, create an average ethanol blend of 15 percent, and keep Canada importing as much as any country in the world.
“Both Canada and other global entities can see that ethanol is a right here-right now solution to climate goals,” Boubin says. “We can always point to this as a great message.”

Author: Luke Geiver
Contact: [email protected]