Aldyen Donnelly: How the Canadian government should respond to the US Renewable Fuel Standard

I believe there is at least one policy/regulatory response that the government of Canada and provinces must mobilize as both an offence and defence against the US measures I outline below.  But I have not seen–to date–evidence that the officials in Environment Canada or most of the provinces understand these issues or the need for a strategic Canadian response.

The US Renewable Fuel Standard

The Renewable Fuel Standard (RFS) outlines how biofuel producers qualify to become "Renewable Identification Number" or "RIN" owners.  A RIN is a serialized electronic certificate where one RIN represents one US gallon of renewable fuel.  Under US law, a unit of biofuel that is shipped without a RIN is rated conventional gasoline.

This procedure is fully integrated in other pre-existing regulations.  For example, the US passed a "Reformulated Gasoline Standard" ("RFG") into law in 1993.  That standard obliges states to ensure that only RFG is sold in certain US airsheds.  RFG is conventional gasoline blended with ethanol.  

At the same time the RFS was made law in September 2007, the RFG was amended to stipulate that gasoline is only RFG when it is shipped with RINs equal to the required ethanol content for RFG.  So if RFG is shipped into the US that physically meets the required ethanol content requirement, but is not shipped with RINs, then that RFG is rated as conventional gasoline and is not marketable as RFG in the US.

This RIN procedure that was extended back into the US RFG regulation will also extend forward into US greenhouse gas (GHG) and renewable power markets.  RINs will also be fully integrated into any Low Carbon Fuel Standards that are finally promulgated in the US.

For example, if/when Congress passes a US "Renewable Energy Standard" ("RES") into law—which will impose on US electricity retailers certain obligations to meet "renewable power" targets as a % of total sales—that standard will define "renewable electricity, heat of steam" to include biomass-derived power, heat or steam when the biomass originates at a "renewable or recurring source".  

The RES markets, governments or the private sector issue "Renewable Energy Credits" or "RECs" to operators of renewable energy production facilities.  The regulations require electricity distributors to acquire and surrender RECs equal to their regulated renewable energy content mandates.  The RES regulation will stipulate that to be certified as "renewable" and receive RECs, a biomass-to-energy project (whether foreign or domestic) will be required to surrender RINs representing their claimed biomass feedstock volumes.  

The RIN count will determine the renewable credits that will be assigned to any US electricity and biofuel production and imports for purposes of determining compliance with the RES mandates.  Electricity imports that can be physically demonstrated to rely on biomass feedstocks but are not shipped with RINs will be deemed to be fossil-based energy.

Going further, to the extent that the final US GHG rules will certify foreign biomass-to-energy projects and projects that can earn US international offset credits (which credits will be applicable towards compliance with US GHG caps), those projects will be required to apply to be "RIN owners" under the RFS as a prerequisite to qualify for US international offset credits.  The foreign project owners will be obliged to apply for US approval to generate and remit RINs along with evidence they have retired their foreign offset credits to the US EPA administrator, in exchange for US international offset credits.  

At this time, the Waxman-Markey bill allows only developing nation projects to qualify to exchange foreign credits for US international offset credits. Unless there is a change in that position, Congress is not currently proposing to exchange any offset credits that might originate in Canada for US  compliance units.
Note, in the RFS regulation, that:

•    "Responsible parties. Parties collectively responsible for attainment of the standard in paragraph (b) of this section are refiners (including blenders) and importers of gasoline." Note: "gasoline", not "transportation fuels" or "petroleum products".
•    "A fuel produced by a renewable fuel producer that is used in boilers or heaters is not a motor vehicle fuel and therefore is not a renewable fuel."  This provision means that while black liquor blended with diesel fuel qualifies for the biofuel subsidies under other US legislation, black liquor does not earn "Renewable Identification Numbers" or "RINs" under this RFS.  A batch of fuel that is not shipped with RINs is not deemed "renewable" fuel under the RFS.
•    ‘‘The term ‘cellulosic biomass ethanol’ means ethanol derived from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis, including: (i) Dedicated energy crops and trees; (ii) Wood and wood residues; (iii) Plants; (iv) Grasses; (v) Agricultural residues; (vi) Animal wastes and other waste materials, and (viii) Municipal solid waste.’’  

•  "(1) Any United States Environmental Protection Agency inspector or auditor must be given full, complete and immediate access to conduct inspections and audits of the foreign RIN owner’s place of business. (i) Inspections and audits may be either announced in advance by EPA, or unannounced…"

•  "(2) An agent for service of process located in the District of Columbia shall be named, and service on this agent constitutes service on the foreign RIN owner or any employee of the foreign RIN owner for any action by EPA or otherwise by the United States related to the requirements of this subpart."

•  "(6) The foreign RIN owner, or its agents or employees, will not seek to detain or to impose civil or criminal remedies against EPA inspectors or auditors, whether EPA employees or EPA contractors, for actions performed within the scope of EPA employment related to the provisions of this section."

•  "(d) Sovereign immunity. By submitting an application to be a foreign RIN owner under this subpart, the foreign entity, and its agents and employees, without exception, become subject to the full operation of  administrative and judicial enforcement powers and provisions of the United States without limitation based on sovereign immunity, with respect to actions instituted against the foreign RIN owner, its agents and employees in any court or other tribunal in the United States for conduct that violates the requirements applicable to the foreign RIN owner under this subpart…"

•  "(1) The foreign entity shall post a bond of the amount calculated using the following equation:
Bond = G * $0.01,


Bond = amount of the bond in U.S. dollars.
G = The total of the number of gallon-RINs the foreign entity expects to sell or transfer during the first calendar year that the foreign entity is a RIN owner, plus the number of gallon-RINs the foreign entity expects to sell or transfer during the next four calendar years.

After the first calendar year, the bond amount shall be based on the actual number of gallon-RINs sold or transferred during the current calendar year and the number held at the conclusion of the current averaging year, plus the number of gallon-RINs sold or transferred during the four most recent calendar years preceding the current calendar year. For any year for which there were fewer than four preceding years in which the foreign entity sold or transferred RINs, the bond shall be based on the total of the number of gallon-RINs sold or transferred during the current calendar year…"

In section 1501 of the EPAct2005, the President required the US EPA to implement a mechanism to enforce the following renewable fuel contents for gasoline:

Applicable volume of renewable fuel
“Calendar year          Total Renewable fuel Requirement (in billions of gallons):
2006                      4.0
2007                      4.7
2008                      5.4
2009                      6.1
2010                      6.8
2011                      7.4
2012                      7.5.

In May 2009 the US EPA published proposed new renewable fuel targets for the legally-required comment period. The proposed new targets, which would replace those listed above, are:

Renewable Fuel Volume Requirements for RFS2 (billion gallons) 

Year    Cellulosic biofuel requirement  Biomass-based diesel requirement        Advanced biofuel requirement    Total renewable fuel requirement
2008    n/a                                n/a                                         n/a                                9.0
2009    n/a                                0.5                                         0.6                                11.1
2010    0.1                                0.65                                       0.95                               12.95
2011    0.25                              0.80                                       1.35                               13.95
2012    0.5                                1.0                                         2.0                                15.2
2013    1.0                                a                                            2.75                               16.55
2014    1.75                              a                                            3.75                               18.15
2015    3.0                                a                                            5.5                                20.5
2016    4.25                              a                                            7.25                               22.25
2017    5.5                                a                                            9.0                                24.0
2018    7.0                                a                                            11.0                               26.0
2019    8.5                                a                                            13.0                               28.0
2020    10.5                              a                                            15.0                               30.0
2021    13.5                              a                                            18.0                               33.0
2022    16.0                              a                                            21.0                               36.0
2023    b                                   b                                            b                                  b

a To be determined by EPA through a future rulemaking, but no less than 1.0 billion gallons.
b To be determined by EPA through a future rulemaking. 

Waxman-Market and International GHG Offsets

The W-M bill establishes US GHG budget set-asides for domestic and international offset credits.  There is a fixed limit on the US regulated entities’ rights to rely on offset credits to comply with their regulated GHG caps, which limit changes over time.  

At the outset, roughly 1 MM TCO2/year are set aside for US domestic offset projects and 1 MM TCO2e/year are set aside for international projects.  The foreign project proponent remits evidence that they, the host nation, has permanently retired 1 to 1.25 foreign offset credits to the US administrator.  Then the US administrator issues 1 US international offset credit for each 1 to 1.25 retired foreign project credit.  

The US international offset credits are issued to a US entity designated by the foreign offset project proponent or government that originated the retired foreign offset credits.  This part of the W-M plan is subject to continuing debate, but at this time it is proposed that the administrator will be permitted to issue US international offset credits only to US entities that are regulated entities under part 722 of the act–i.e. only to entities that own GHG sources that are under the US legally binding cap.  

Foreign project developers, brokers or market makers cannot technically acquire US international offset credits other than by purchasing them from US GHG-regulated entities.  This procedure is an attempt to end-run brokers and aggregators’ abilities to artificially inflate the market prices of international offset credits.

The US Administrator is permitted to issue up to 1 million international offset credits in exchange for foreign credits if US offset projects prove to have the capacity to generate 1 M TCO2e/ year or more.  If the US offset market is unable to generate 1 M TCO2e, the administrator is permitted to dip into the offset credit set aside for domestic products to increase the supply of US international offsets up to a ceiling of 1.5 MTCO2e.

Waxman-Markey is not just important in respect to the signals it sends regarding what kinds of foreign offset credits the US intends to allow into the US compliance market.  W-M also posits baseline-setting procedures for crediting reforestation activities.  

Canadian negotiators and firms should anticipate that the final baseline-setting procedure for offshore reforestation crediting will also be the procedure for determining whether or not forest biomass originates in a "renewable or recurring source" under the domestic renewable energy, RFS and domestic offset programmes.  

Most Canadian project developers should reasonably assume that biomass that originates in forests whose net emissions exceed the baseline/emission trajectory outlined in W-M (excerpts below) is unlikely to be rated "renewable" under future US cap and trade regulations.

Excerpts from Waxman-Markey

Waxman-Market specifically says:


‘‘(1) IN GENERAL.—The Administrator, in consultation with the Secretary of State, may issue international offset credits in exchange for instruments in the nature of offset credits that are issued by an international body established pursuant to the United Nations Framework Convention on Climate Change, to a protocol to such Convention, or to a treaty that succeeds such Convention. The Administrator may issue international offset credits under this subsection only if, in addition to the requirements of subsection (b), the Administrator has determined that the international body that issued the instruments has implemented substantive and procedural requirements for the relevant project type that provide equal or greater assurance of the integrity of such instruments as is provided by the requirements of this part."

where subsection (b) says…

"OFFSET CREDITS.—The Administrator may issue international offset credits only if—‘(A) the United States is a party to a bilateral or multilateral agreement or arrangement that includes the country in which the project or measure achieving the relevant greenhouse gas emission reduction or avoidance, or greenhouse gas sequestration, has occurred; (B) such country is a developing country…"


"(B) FACTORS.—In determining the sectors and countries for which international offset credits should be awarded only on a sectoral basis, the Administrator…shall consider…(iii) Whether the comparable sector of the United States economy is covered by the compliance obligation under section 722…‘‘(v) Whether the relevant sector provides products or services that are sold in internationally competitive markets…"

The provisions in subsection (B) above position but do not oblige the Administrator to discriminate against foreign offset credits that originate in plants/projects where products are produced that compete with US manufacturers in the international marketplace when those manufacturers’ GHGs are capped under the US cap and trade system.

Moving on specifically to forestry…


‘‘(1) REQUIREMENTS.—The Administrator…shall issue international offset credits for greenhouse gas emission reductions achieved through activities to reduce deforestation only if, in addition to the requirements of subsection (b)—(A) the activity occurs in— (i) a country listed by the Administrator…and (B)…(6) the quantity of the international offset credits is determined by comparing the national emissions from deforestation relative to a national deforestation baseline for that country established, in accordance with an agreement or arrangement described in subsection (b)(2)(A),  pursuant to paragraph (4); ‘(C) the reduction in emissions from deforestation has occurred before the issuance of the international offset credit…"

where the prescribe baseline-setting method is:

"‘‘(C) STATE-LEVEL OR PROVINCE-LEVEL DEFORESTATION BASELINE.—A state-level or province-level deforestation baseline shall— (i) be consistent with any existing  nationally appropriate mitigation commitments or actions for the country in which the activity is occurring, taking into consideration the average annual historical deforestation rates of the state or province  during a period of at least 5 years, relevant drivers of deforestation, and other factors to ensure additionality; (ii) establish a trajectory that would result in zero net deforestation by not later than 20 years after the state-level or province-level deforestation baseline has been established; and (iii) be designed to account for all significant sources of greenhouse gas emissions from deforestation in the state or province and adjusted to fully account for emissions leakage outside the state or province…‘(D) PHASE OUT.—Beginning in 2017, the Administrator shall issue no further inter-national offset credits for eligible state-level or province-level activities to reduce deforestation pursuant to this paragraph…"

I should repeat that these baseline-setting procedures apply only to developing nation projects in the current version of the Waxman-Market bill.  But it is unlikely that Congress will establish one baseline-setting process for developing nation offset projects and a less stringent baseline-setting process for qualifying Canadian biofuel, bio-energy and forest product exports as originating in "renewable and recurring" sources.

The US Assessment of Canada’s Offset System in the Determination of Whether Canadian GHG Allowances Can be Marketed into the US Compliance Market

While Congress does not propose to accept all imports of Canadian (any developed nation’s) GHG Offset Credits into the US cap and trade market, W-M clearly states that the design of Canada’s domestic offset system will be one of four key factors that will be considered in the US’s determination of whether Canadian GHG Allowances will be accepted as US compliance units.

Note that the W-M cap and trade bill assigns GHG reporting, limits and reduction obligations to US distributors of carbon intensive energy and commodities.  Then W-M freely allocates US GHG allowances to certain special interest groups, including US manufacturers of the regulated energy and commodities.  

Under the law as drafted, therefore, US importers of Canadian electricity and petroleum products (starting in 2012); natural gas (starting in 2014); cement, aluminum, iron & steel, paper, wood products, industrial chemicals and any other commodity (between 2016 and 2020) will not receive any free US GHG quota and are required to acquire GHG quota in the US market to cover foreign upstream and US consumption GHGs associated with their annual imports and US sales.  

Canadian manufacturers and exporters of regulated products will seek to have Canadian GHG allowances certified as US compliance units to partially mitigate the cost of acquiring US GHG allowances to maintain US market share.  Whether the governments of Canada should actually allow corporate entities to export perpetually bankable Canadian GHG quota–an essential public resource–is another question.

But US compliance market approval/acceptance of Canadian GHG allowances is conditional on those allowances being part of a larger system that meets with US approval in its entirety.  First, W-M in combination with other pre-existing measures indicate that US will not recognize or approve any Canadian GHG certificates and will assign an overly conservative GHG allowance acquisition obligations–starting in 2012– to all Canadian carbon-based (including biomass) exports if our national facility-level GHG reporting regime is not massively overhauled.  

Congress has also communicated through W-M that if Canada’s cap and trade and offset systems are less stringent than the final US system–or, if in the US State department’s view, Canada uses our domestic  offset system to generate new public subsidies for certain sectors (with US sensitivity greatest in respect of forest and paper products)–Canadian GHG allowances will not be accepted in exchange for US compliance units.  

The other key questions determining the acceptability of Canadian quota in the US market are: (1) whether or not Canada’s facility level GHG reporting regime is deemed by the US to be comparable to the US reporting rules—which it is not, and (2) whether or not the US deems our absolute national GHG limit appropriate.

W-M explicitly states that the US can and will discriminate against imports from sectors that are covered by mandatory caps under US rules but are left either uncovered or receive offset credits under the host/exporting developed nations’ GHG regulations.  

This week, Environment Canada published a proposed offset system regulation for public comment.  The Canadian national regulator posits the following four initial offset project types, and proposes a procedure for approving additional new project proposals.  

It appears that 2 of the 4 Environment Canada offset project types would be deemed acceptable to the US regulations, but 2 would not.  Landfill gas capture and flaring is mandated in the US under more stringent regulations than exist at this time in Canada.  Landfill gas-to-energy and wind energy projects are covered under the proposed binding US Renewable Energy Standard.  These renewable power projects will not receive GHG offset credits under either the US federal climate change bill or existing or proposed California state legislation.

Four offset projects:

Afforestation—creation of a forest where none has existed since at least 1990.

Landfill Gas Capture—capture and destruction of methane from landfill and combustion sites.

Reduced or no-tillage—reduction in the amount of tillage on farmland.

Wind—generation of electricity from wind energy.

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