The Canadian Clean Fuel Regulations (CFR) program, enabled under the Canadian Environmental Protection Act, is designed to reduce vehicle emissions of greenhouse gases (GHGs) by reducing the average carbon intensity (CI)[1] of transportation fuels used in Canada. The regulations seek to promote the use of renewable fuels, stimulate investment in low-carbon technologies, and encourage sustainable practices across the fuel sector.
Beginning July 1, 2023, the CFR requires gasoline and diesel suppliers to reduce the CI of the fuels they produce and sell for use in Canada by 14 grams of CO2 equivalents per megajoule (gCO2e/MJ or, simply, g/MJ) below the regulatory baseline (about a 14.7% reduction for gasoline and a 15.1% reduction for diesel) by 2030.[2] The CI reduction schedule specified under the CFR is displayed in Table 1.
Table 1. CFR Annual CI Limits[3]
Source: SOR/2022-140 § 5
The CFR is a low carbon fuel (LCF) program similar to the California Low Carbon Fuel Standard (LCFS), which was implemented in 2011, and the British Columbia LCFS (BC-LCFS), which began in 2013. Although it is a nationwide program, the CFR differs significantly in its concept and application from the nationwide U.S. program, the Renewable Fuel Standard (RFS) which is a volumetric requirement for renewable fuels usage that lacks incentives for increasing reductions in the CIs of fuels.[4] The CFR is managed by Environment and Climate Change Canada (ECCC). The first compliance period for obligated parties was 2023-2024.
Primary Sources of Credit and Deficit Generation
The CFR is a market-based system with demand for credits (generated by fuels with CIs below the annual standard) to offset deficits (generated by fuels with CIs greater than the annual standard). Currently, the deficit-generating fuels are the petroleum portions of gasoline and diesel. Other fuels may become deficit-generating in future years as the CFR standards are reduced below those fuels’ CIs.
Like other LCF programs, the underlying rationale of the CFR is that, by providing a structure which allows the market to pick the mix of fuels used to comply with the regulations, the mandated CI reduction targets can be achieved at the lowest cost. As shown in Figure 1, the near-term is dominated by the mix of fuels which can be utilized by vehicles already in service in Canada. Compliance and program success in the longer term will depend on fleet turnover to vehicles with technologies capable of utilizing a different, lower-CI mix of fuels.
Figure 1. Credit Generation by Fuel as a Percentage of Total Low-Carbon Fuel Credits (2023)
Source: Environment and Climate Change Canada, Stillwater analysis
In 2023, the contributions of credit-generating fuels include a mix of ethanol (69.3%), renewable diesel (20.1%), biodiesel (10.1%), and renewable natural gas (0.5%).
Figure 2 below shows the historical trend in the percentage of liquid fuel energy supplied by renewable sources from January 2022 through November 2024. Since the implementation of the CFR in the third quarter of 2023, there is a continuation in the slow growth trend for ethanol which predated the start of the CFR. Over the same time, there has been little material change in the contribution of biomass-based diesel (biodiesel and renewable diesel) with seasonal factors appearing to outweigh CFR requirements. Accordingly, the CFR targets do not appear to be materially impacting biofuels blending for the program to date.
Figure 2. CFR Renewable Fuel as % of Liquid Transportation Fuel Energy
Source: Statistics Canada, Stillwater analysis
Historic Credit and Deficit Balance Trends
To date, ECCC has only published annual credit generation data; the first compliance reports from deficit generators, covering 2023 and 2024, are due later in 2025. Although the program officially began July 1, 2023, parties were able to start generating credits in 2022, and unused credits from the Renewable Fuel Regulation (RFR, which was replaced by the CFR) were allowed to carry over. Figure 3 illustrates the CFR program’s historical annual and accumulated credits. As can be seen, Canada’s accumulated credits have grown over the first two years of reporting.
Figure 3. CFR Credit Generation Annual and Cumulative
Source: Environment and Climate Change Canada, Stillwater analysis
Historic Credit Price Trends
Although the Canadian fuels market is about the same size as the California market, the CFR is a much newer program with fewer participants (through June 2024, ECCC reports 49 credit transferors and 33 credit transferees compared with 599 regulated parties and 101 registered brokers under the California LCFS through January 2024), resulting in less liquidity and lower transparency in market prices. Figure 4 shows the CFR average credit prices as reported by ECCC.[5] As can be seen, prices have trended slightly downward since its inception.
Figure 4. Historic CFR Credit Pricing (2022-2023)
Sources: Environment and Climate Change Canada, Bank of Canada exchange rates, Stillwater analysis
Note: Prices do not include transfers automatically executed on credit creation or transfers reported with zero or near-zero prices.
Interaction with Provincial Programs
Given Canada’s size and the diversity in both geography and population across the provinces, some regions have more advanced infrastructure and investment in clean technologies, while others may struggle to meet the stringent CFR requirements. This is recognized in the regulation as Newfoundland and Labrador are exempt from the CFR due to their sparse population and logistical challenges. This inconsistency could foster regional variability in compliance and may hinder national progress towards emissions reduction targets.
British Columbia is of particular interest concerning provincial differences. The BC-LCFS, which predates the CFR by over a decade, complements the CFR by providing an additional layer of regulation to encourage the production and use of low-carbon fuels in British Columbia. Suppliers operating both inside and outside of BC may find opportunities for CFR compliance by suppling credit-generating fuels to BC and receiving credits in both programs. The ability to layer the value of both the BC-LCFS and the CFR programs should drive innovation in clean technology and fuel production in BC.
Looking Ahead
Canada’s CFR is still in its infancy, and we expect there to be ongoing changes to both scope and reduction schedule as the program matures. The ultimate success of the CFR will depend on collective efforts from government authorities, industry players, and the public. The adaptability and resilience of the CFR will determine its effectiveness in creating a sustainable energy future. Ongoing challenges related to compliance, technological advancement, and economic implications must be addressed to ensure the program’s success and sustainability in the coming years.
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