Gazette I Publication of the Proposed Sulphur in Diesel Fuel Regulations

Nine parties submitted comments addressing specific issues associated with the northern regions of Canada. These issues were summarized in a discussion paper and discussed with parties on a teleconference on July 31, 2001 (see Appendix B). The comments and a discussion of each issue are presented below.

Point-of-Sale Requirements in the North

• "Industry Canada recommends that, for the Arctic, fuel shipped after June 1, 2006 should meet the 15 ppm level, but that there should be no requirement for a point-of-sale sulphur level."
• NRCan recommended "that compliance be regulated no further downstream than the regional shipper or point of importation into the Arctic".
• "CPPI believes that it will prove to be more practical to defer "point of sale" issues for the Arctic."

Reply: The Diesel Fuel Regulations would be made under the Fuels sections of the Canadian Environmental Protection Act, 1999 (CEPA). Regulations under these provisions set out the requirements for a fuel. The prohibition on sales, as well as on production and importation, is actually set out in section 139(1) of CEPA. The Act itself sets out the prohibition that "no person shall produce, import or sell a fuel that does not meet the prescribed requirements".

Therefore, there is no flexibility in the Diesel Fuel Regulations regarding the setting of point-of-sale sulphur levels in the Arctic.

Northern Fuel Quality Issues

Concerns were raised by Industry Canada, the Government of Northwest Territories and the Northern Transportation Company Limited as to whether the quality of 15-ppm diesel fuel would be satisfactory under Arctic conditions. Industry Canada also raised the issue of understanding the implications of 15-ppm sulphur distillate that may be used for other uses, particularly aviation fuel.

• The Northern Transportation Company Limited stated that an "already challenging minimum viscosity at 500 ppm of sulphur, may present insurmountable manufacturing/sourcing problems at such a low sulphur level as 15 ppm and thus supplies may not be guaranteed".
• Industry Canada noted "It will be important to fully understand the implications of 15 ppm sulphur on these other uses, particularly on aviation fuel, prior to finalizing the regulation.".
• The NWT indicated that it has "engaged a consultant to explore whether or not the reduced sulphur levels will have any impact on the usefulness of the fuel for heating and other purposes."

Reply: Low sulphur diesel fuels have been and will continue to be used in arctic regions. Since the early 1990's, low sulphur diesel (10 ppm) has been used successfully in Finland and Sweden which, like the Canadian Arctic, face severe climatic conditions.

In 1998, the European Union passed a directive that sets the maximum limit for sulphur in on-road diesel fuel at 50 ppm in 2005. In May 2001, the European Union proposed to go further and to introduce "zero" sulphur (defined as less than 10-ppm sulphur) gasoline and on-road diesel fuel in every member state commencing January 1, 2005.

Lubricity is one property of low sulphur diesel that was reviewed by the U.S. EPA who decided not to include any requirements for lubricity in its low-sulphur diesel rule, but instead to rely on a voluntary approach. The U.S. EPA found that:

"[It is] uncertain about the potential impacts of the 15-ppm sulfur standard on fuel lubricity. There is evidence that the typical process used to remove sulfur from diesel fuel - hydrotreating - can impact lubricity depending on the severity of the treatment process and characteristics of the crude. Because refiners will likely rely on hydrotreating to achieve the proposed sulfur limit, there may be reductions in the concentration of those components of diesel fuel which contribute to adequate lubricity. As a result, the lubricity of some batches of fuel may be reduced compared to today's levels, resulting in an increased need for the use of lubricity additives in highway diesel fuel."

As noted in the May discussion document on the design of the regulations, one oil company (BP-Arco) has stated that "lubricity is addressed in all our products. We continue to work on optimizing lubricity for both performance and cost." It is expected that other companies will make similar efforts for lubricity, as well as the other needs of the fuels that they sell.

It is possible that the State of Alaska could end up proposing a state program. This type of state program could possibly include other fuel quality issues, in addition to sulphur, to reflect arctic conditions. In the event that this happens, areas with northern regions in Canada may want to consider imposing similar requirements to ensure the fuel quality meets their needs. At this time, Environment Canada is not considering regulating any additional requirements for on-road diesel.

Northern communities when planning their fuel supply should consider whether or not 15-ppm diesel fuel that will be required for on-road diesel fuel will continue to be suitable for other uses. The Government of Northwest Territories has engaged a consultant to explore whether the reduced sulphur levels will have any impacts on the usefulness of the 15-ppm fuel for heating and other purposes.

It can be noted that the commercial specification for diesel in Canada (which companies in Canada voluntarily comply with) has specific requirements for diesels used in low-temperature operations. The vehicle manufacturers' World-Wide Fuel Charter provides for relaxation of minimum limits of some properties of low-sulphur diesel fuels including cetane number, cetane index, density and viscosity for low ambient temperatures (below -30ºC).

Costs in Northern Canada

The Governments of Northwest Territories and Nunavut presently purchase only low-sulphur (500-ppm) diesel fuel because of their limited infrastructure which cannot support multiple grades. This is also true in most other northern communities where they purchase one grade of multi-purpose distillate fuel (less than 500-ppm sulphur content) to meet their heating, transportation and power generation needs. Less than 5% of diesel supplied is for on-road consumption. In some communities, the on-road consumption may be less than 1% of the total diesel usage.

• NWT indicated that
  • "The introduction of 15 ppm standard will mean additional incremental costs to consumers in the magnitude of some $185,000 per year."
  • If it "needs to segregate its diesel….The cost of the new infrastructure is estimated at $1.2 million."
• Nunavut indicated that it would "have to invest significant amount of dollars to comply by 2006 as additional tankage would have to be built to segregate the diesel product."
• The Northern Transportation Company Limited considered that "the cost of pursuing such a specification if indeed feasible, could be unreasonably punitive to the people of the Arctic regions given that 95% of consumption is non-road."

Reply: In 1998, when the Diesel Fuel Regulations came into force, businesses and communities throughout Canada had to make decisions as to how they would handle the logistics of transporting, handling and storing a low-sulphur grade of diesel fuel. At that time, Arctic communities chose to purchase one grade of distillate fuel instead of the more costly option of building additional storage tanks.

With new requirements for lower levels of sulphur in on-road diesel fuel now forthcoming, Arctic communities may want to once again assess the same issue of purchasing cleaner low-sulphur diesel fuel for all distillate uses versus building of additional storage tanks. There are also some other considerations that communities may want to keep in mind as they assess their supply options:

• Once requirements for 15-ppm on-road diesel fuel are in place, 500-ppm diesel fuel may not be available as it will no longer be a standard commercial product; and
• The requirement to control sulphur in off-road diesel fuel can be expected in the 2006 to 2010 time frame at a level expected to be set somewhere between 15 ppm and 500 ppm (and more likely at the low end of the range).

Implementation Timing for Point-of Sales Limits in Northern Regions

Fuel shipments to northern communities take place from mid-May to September along the Mackenzie River and the Arctic Coast. In mid-winter, the fuel is shipped to sites which are only accessible by ice roads. Because fuel shipments are infrequent, turnover of tank volumes is often slow.

• The Northern Transportation Company Limited suggested that "there should be a lag for imposition of any new specification for the Arctic of at least two years behind a general application."
• The Government of Northwest Territories stated that "if we do not have to segregate our diesel fuel then additional time to blend down existing diesel stocks to meet the requirements of the new regulation will be required. It is anticipated that this would take about 2 years to accomplish".
• The Government of Northwest Territories indicated that, even with segregation of fuels, "refiners will need to have the 15 ppm product available for us as early as January, 2006. … If the product is not available to coincide with our resupply strategy then [NWT's Petroleum Products Division] will need a waiver from Environment Canada, allowing us to comply by September 2007."
• The Government of Nunavut asked whether they would "be given an option to apply to Environment Canada for 15 ppm diesel transition program as EPA has given this option to Alaska".
• Alberta Environment stated that "the issues of restricted fuel delivery schedules and residual fuel in storage tankage need to be considered in determining practical and appropriate compliance time schedules for low sulphur diesel fuel destined for Arctic areas."

Reply: This is one of the main issues that was addressed during a July 30, 2001 teleconference with parties. As proposed during the teleconference, the regulations provide an additional 12 months in northern regions of Canada for implementation of the 15 ppm limit for sales of on-road diesel fuel.

Imports from Alaska

Under the U.S. EPA regulations, the State of Alaska can make an application to the U.S. EPA for its own 15-ppm diesel transition program. There is the possibility, that Alaska could have a different 15-ppm program in effect during an interim period.

• Industry Canada recommended that "Beginning in June 2006, shipments from Alaska should meet the regulation in the same way that domestic suppliers will be required to meet the regulation."
• "CPPI would suggest that supplies of diesel imported from Alaska be treated no differently than supplies imported from any other jurisdiction or supplied from Canadian refineries."
• Natural Resources Canada stated that "Imports from Alaska to the Yukon also highlight the need to maintain alignment with the U.S. … As Alaska must declare its intent by April 2002, Canadian regulations concerning product specifications in the Yukon should not be finalized until after this date."
• Regarding imports from Alaska, Irving Oil noted "that providing exemptions or extensions serves to penalize compliant companies".
• "Pollution Probe does not believe that the Canadian regulations should permit companies to produce or import even small amounts of on-road diesel that does not meet the 15-ppm requirement after June 2006."

Reply: Alaska will be subject to the new 15-ppm limit. It is expected that, even under a state program, there would be a significant portion of Alaska on-road diesel fuel production meeting the 15-ppm level on the same timing than the rest of the U.S. (although presumably less than the 80% portion in the rest of the U.S.). Under the U.S. rule, the State of Alaska has until April 2002 to make an application to the U.S. EPA for its own 15-ppm diesel transition program. The U.S. EPA would likely take several months or more to evaluate the proposed Alaska program. It should be noted that Canadian refiners have informed Environment Canada that the timing for the publication of the final regulation (tentatively scheduled for the summer or fall of 2002) is just sufficient lead time for them to design, install and test the necessary equipment.

There are some very limited authorities under CEPA to provide for a separate program in environmentally-sensitive or health-sensitive regions of Canada on the condition that such programs are more stringent than in the rest of Canada.

The proposed regulations do not provide any special treatment for Alaskan imports.

Dyeing Requirements

• The Government of Northwest Territories indicated a preference that "15-ppm diesel not to be dyed".

Reply: The proposed regulations do not set any requirements for dyeing of diesel fuel. (Dyeing is a provincial requirement for off-road diesel fuel and is related to provincial taxation of the on-road diesel fuel.)

Definition of Northern Supply Area

• Cree Regional Authority (James Bay) noted in a later communication with Environment Canada that a number of coastal communities in northern Ontario and Quebec around James Bay get their diesel via barges through Hudson Bay (see Appendix B). These communities are not covered by the definition of Northern Supply Area in the Benzene in Gasoline Regulations, yet face the same difficulties as other communities in the North.

Reply: The proposed diesel regulations have modified the definition of Northern Supply Area to include these coastal areas around James Bay and Hudson Bay.

Comments on Test methods for Sulphur Levels

• The CVMA, Irving Oil, and Tharby Technology Consultants recommended ASTM D5453 test method.
• the Government of Northwest Territories indicated that "The Canadian General Standards Board specification, CAN/CGSB 3.517-93 for Automotive Low Sulphur Diesel recommends three methods for testing the level of sulphur. They are ASTM D 4294, ASTM D 1266 or ASTM D 2622. If any of these methods are acceptable for testing to 15 ppm then they should be maintained."
• Ford recommended, "as per the Worldwide Fuel Charter, ASTM D2622-94, ISO 4260-87 and JIS K2541-96."
• Natural Resources Canada indicated that the "ASTM D-6428-99 was developed for determining sulphur levels in chemical streams, not diesel fuel, and no precision statement is available on its accuracy in diesel fuel."
• CPPI recommended that "the Middle Distillate Committee of the Canadian General Standards Board be asked to advise on the most appropriate method or methods to use."
• Irving Oil suggested that "Alternative methods should always be considered for the purposes of record keeping and reporting."

Reply: Environment Canada has consulted the Chairs of the Canadian General Standards Board's Middle Distillate Working Group and its Petroleum Test Methods Committee regarding appropriate test methods. Based on the advice received and further analysis by Environment Canada, the proposed regulations specify ASTM Test Method D5453-00 as the reference method for the 15-ppm standard, with ASTM 6428-99 and ASTM 2622-98 also allowed for reporting purposes only. For the existing 500-ppm limit, the methods allowed under the existing Diesel Fuel Regulations will continue to be allowed until the 15-ppm limit comes into effect in June 2006.

Incentives for Early Introduction of Low Sulphur Diesel Fuel

A number of parties commented on the potential use of economic instruments to promote the early introduction of low sulphur on-road diesel fuel.

• Friends of the Earth and the Lung Association indicated that "Once the target date for compliance with the regulation is set, the government should provide incentives for the marketplace to move quickly to sell and buy sulphur-free diesel."
• The New Brunswick Lung Association supported "the implementation of tax reduction incentives for fuels meeting or exceeding the standards prior to compliance deadlines"
• Pollution Probe indicated that "additional non-regulatory mechanisms and incentives to speed up this timeline, or to go to lower concentrations would prove even more beneficial to the health of Canadians."
• The City of Toronto recommended that Environment Canada "develop tax differentials to promote the early introduction of on-road diesel with 15 ppm of sulphur".
• CVMA believed " that any instruments or incentives that encourage the early introduction of low sulphur diesel should be given serious consideration by the government of Canada. CVMA would also support the concept of incentives to equalize the pump prices of current diesel fuel and the 15-ppm sulphur fuel prior to full implementation by January 1, 2006."
• Ford indicated that it supported "the idea of a reduction in the federal excise tax on low-sulphur diesel (15 ppm or lower) to promote the introduction of low sulphur diesel fuel in the Canadian marketplace ahead of regulation."
• CPPI believed that "the use of fiscal instruments to stimulate an early introduction of some quantity of ULSD will face the same kind of logistical barriers as short-term two grade diesel system."
• Irving Oil recommended that "The use of the excise tax to establish a differential between regular diesel (up to 500 ppm) and ultra-low sulphur diesel (<15 ppm) in advance of regulations should be adopted."
• The CTA believed that a "UK-style incentive could bring this product to market quicker, along with the attendant environmental benefits. … A similar tax benefit for the purchase of cleaner engines (which is driving the push for cleaner diesel fuel) is something CTA has long argued for, and should be considered as well."
• Industry Canada indicated that " There may be merit to considering the use of such incentives in this case, provided enough lead time is available to refiners so they can make effective use of the incentive."
• Natural Resources Canada, while supporting the use of economic instruments "as useful approaches to encourage emission reductions" expressed some concerns regarding the ability of the distribution network in Canada to delivering the low sulphur diesel fuel. It suggested that "a better understanding of the distribution network in Canada is required in order to determine the potential outcome of the incentives, and to ensure that ULSD can be delivered to the consumer."
• The MNR indicated that any other measures that could affect the market forces or principles of fairness by creating unique cases should not be used.
• Sunoco believed that "while fiscal incentives might encourage some early production of ULSD, the issue of having a two-fuel distribution system would likely prevent 15-ppm sulphur diesel from reaching the marketplace. Also, and perhaps more importantly, the expected timing of the final regulation and the expected implementation date of mid-2006 does not really allow sufficient time for early introduction, given the lead time required for engineering, procurement and construction of the required facilities."

Reply: Environment Canada has worked with the National Round Table on the Economy and the Environment (NRTEE), which has explored opportunities to apply fiscal instruments to complement the vehicles and fuels agenda, including the early introduction of low-sulphur diesel prior to 2006. The Cleaner Transportation Working Group under the NRTEE was not able to reach agreement on a recommendation regarding the use of a tax differential to accelerate the introduction of low-sulphur diesel. Many stakeholders including the governments, industries and non-governmental organizations were involved in this process.

The RIAS accompanying the regulations indicates that:

"In the final analysis, both trading and fiscal instruments have not been accepted … Nevertheless, the use of instruments, including fiscal instruments, as complements to regulations are being explored by the government as a way of promoting earlier availability and use of low-sulphur diesel."