Proposed Clean Fuel Regulations
Another leg of Canada’s Climate Plan is the Clean Fuel Regulations (CFR). First proposed in late 2020, the CFR is complementary to the OBPS. According to the Government of Canada: “The goal of the Clean Fuel Standard is to significantly reduce pollution by making the fuels we use everyday cleaner over time. The Clean Fuel Standard will require liquid fuel suppliers to gradually reduce the carbon intensity of the fuels they produce and sell for use in Canada over time, leading to a decrease in the carbon intensity of our liquid fuels used in Canada by 2030.”
The proposed CFR is not yet resolved; however, regulations are expected to be finalized and published in the Canada Gazette, Part II by late 2021. This is another regulatory approach with the aim of reducing Canada’s greenhouse gas (GHG) emissions through increased use of lower-carbon fuel sources.
A new regulatory credit market for compliance credits will be established under the proposed CFR, where producers/importers who surpass the minimum clean fuel standard are rewarded with credits which may then be purchased by other producers/importers to achieve compliance. This regulation works by upping the carbon intensity reduction target every year between 2022 – 2030.
Canadian average lifecycle carbon intensity was defined by using a model developed by Environment and Climate Change Canada (ECCC). In 2016, the Canadian Government’s calculations indicated that GHG emission reductions will be achieved at a central estimated net societal cost of carbon (SCC) of $94/tonne. More recently published literature estimates the net SCC value in 2020 that ranges between $135 and $440/tonne.
Under the proposed CFR, primary suppliers of fossil fuels (including refineries, upgraders, and fuel importers) create or acquire compliance credits to satisfy their emissions reductions. Optionally, primary suppliers can pay into a compliance fund to acquire credits at a price of $350/tonne. Although, credits acquired from the compliance fund can only be used to satisfy a maximum of 10% of their annual reduction obligation. The CFR also considers a credit clearance mechanism (CCM) to assist the exchange of credits whereby a credit seller may pledge their available credits to be sold at or below a price ceiling of $300/tonne pursuant to the CCM.
Given that the CFR is not currently legislated and is not expected to be finalized until late 2021, the CFR compliance credit market value remains uncertain. However, the future market value will be directly correlated to the implementation of projects that generate or utilize these credits, CCUS included, and may mirror the OBPS value to some degree.
CANADIAN CARBON TAX IMPACTS TO RESERVES & ESG REPORTING
In practice, carbon taxes and compliance credits based on existing legislation ought to be included in all economic evaluations to understand the commercial impact on existing and future projects within the energy industry.
In a reserves evaluation report, carbon tax burdens are included as an operating cost ($/boe) within the economic cash flows and is quantified from the carbon taxes defined in the corporate and property lease operating statements. Carbon tax burdens will consider existing legislation surrounding the carbon market value through the OBPS scheme and incorporating the proposed accelerated OBPS and CRF compliance obligations when legislated. Carbon credits associated with approved CCUS projects are determined on a project phase basis, based on the emissions reductions from permanently storing CO2 within geological formations. This is summarized in a reserves report as a reduced operating cost or, in the case of excess compliance credits, as an “Other Income” stream within the economic cash flows related to a CCUS project.
In ESG reporting of emissions, both the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB), the two most widely used frameworks for reporting, require reporting gross emissions before any offsets, credits, trades or any other mechanisms that have reduced or compensated for emissions. A disclosure available in the GRI framework, 305-5, reduction of GHG emissions, requires GHG emissions reduced as a direct result of reduction initiatives, specifically calling for any reduction from carbon offsets to be reported separately.
Where carbon offsets and credits are often discussed in ESG reporting is in scenario analysis, as required for SASB reporting and as part of the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) reporting. SASB specifically requires reporting the sensitivity of hydrocarbon reserve levels to future price projection scenarios that account for a price on carbon emissions. The TCFD recommends undertaking scenario analysis as a method for developing strategic plans and positioning a company to address climate-related risks and opportunities. Companies, as part of their scenario analysis, may consider how they will address increases in carbon price through use of carbon credits and other programs.