Exclusive-Canada's clean energy lobby groups call for changes to draft Clean Fuel Standard

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By Nia Williams

CALGARY, Alberta (Reuters) -One of Canada's flagship pieces of climate regulation has run into criticism from clean fuel lobby groups as Prime Minister Justin Trudeau prepares to start his third term in office https://www.reuters.com/world/americas/clock-starts-ticking-canadas-trudeau-after-bid-majority-fails-2021-09-21, with industry advocates arguing it is out of step with Canada's goals to achieve net-zero emissions.

The Clean Fuel Standard is set to come into force in December 2022, and was envisaged as a pillar of Canada's carbon emissions reduction plan. But a coalition of 26 clean fuel trade associations, producers and climate think tanks are now warning that the regulation in its current form will delay rather than incentivize the adoption of low-carbon fuels.

"The CFS as the draft is now proposed shouldn't go ahead," said Ian Thomson, president of Advanced Biofuels Canada, one of the organisations calling for a change.

"It has the potential to be a great regulation ... but the messaging right now is essentially going to defer by a decade the adoption of fuels that are critical to net-zero future."

Advanced Biofuels Canada and other industry groups have been lobbying the government privately for months to toughen up the regulation. They said so far the government has shown little inclination to do so, and risks missing an opportunity to boost Canada's clean fuel industry.

Criticism of the CFS from some key stakeholders underlines how Trudeau's Liberal government is being pushed to take tougher action to deliver on climate promises ahead of the COP 26 international climate summit https://www.reuters.com/business/environment/eu-countries-struggle-agree-approach-cop26-climate-talks-2021-09-23 in the United Kingdom in November.

Major Liberal environmental policies include the CFS, a carbon tax and a pledge to cut greenhouse gas emissions to 40-45% below 2005 levels by 2030. But Canadian emissions have grown in the six years Trudeau has been in power, and research coalition Climate Action Tracker this month rated Canada's polices and actions as "highly insufficient" in tackling the climate crisis.

Canada's Environment ministry did not immediately respond to a request for comment.

UPSTREAM VS DOWNSTREAM CREDITS

The CFS is modelled on similar regulations in the European Union and California and was first proposed in 2016.

It requires producers and importers of gasoline and diesel to reduce the amount of carbon in their product, and was meant to cut Canadian emissions by 20 megatons annually by 2030, although critics say the cut will be more like 15.5 megatons.

The clean fuel lobby says the regulation puts too much emphasis on giving credits for emissions cut during the "upstream" oil production and refining process, and does not incentivize fuel suppliers to switch to lower-carbon sources of energy like biofuels, hydrogen and electricity.

It wants the government to introduce a limit to how much fuel suppliers can rely on upstream credits to meet their CFS obligations, similar to EU regulations.

Around three-quarters of the full life-cycle emissions of a barrel of oil come from being burned in a combustion engine, known as downstream emissions. The transportation sector accounts for 25% of Canada's greenhouse gas output.

"Downstream emissions are the elephant in the room and the CFS is not tackling that," Thomson said.

A recent slew of carbon capture and storage announcements from Canada's oil patch, which would allow producers to meet emissions targets by burying carbon underground rather than reducing oil output, increases the likelihood that upstream CFS credits will dominate the market, critics say.

If fuel suppliers can buy or generate cheap credits to meet their obligations, they may not switch to using lower-carbon fuels. That could in turn dent investment in Canada's clean fuel industry, said Bora Plumptre, senior analyst at the Pembina Institute clean energy think-tank.

"It's really fair for clean fuel organisations to question whether there will be a market signal for their products. That's the misalignment I'm worried about, and the government does not appear to appreciate that concern," he added.

A 2021 Advanced Biofuels Canada report estimates the clean fuel industry could add 21,000 new jobs and grow to a C$15.2 billion ($12.01 billion) industry by 2030, from C$5.2 billion in 2020.

($1 = 1.2652 Canadian dollars)

(Reporting by Nia Williams in CalgaryEditing by Denny Thomas and Matthew Lewis)

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