Vol. 136, No. 16 — July 31, 2002

Registration
SOR/2002-254 17 July, 2002

CANADIAN ENVIRONMENTAL PROTECTION ACT, 1999

Sulphur in Diesel Fuel Regulations

P.C. 2002-1232 17 July, 2002

Whereas, pursuant to subsection 332(1) of the Canadian Environmental Protection Act, 1999 (see footnote a) , the Minister of the Environment published in the Canada Gazette, Part I, on December 22, 2001, a copy of the proposed Sulphur in Diesel Fuel Regulations, substantially in the form set out in the annexed Regulations, and persons were given an opportunity to file comments with respect to the proposed Regulations or to file a notice of objection requesting that a board of review be established and stating the reasons for the objection;

And whereas the Governor in Council is of the opinion that the proposed Regulations could make a significant contribution to the prevention of, or reduction in, air pollution;

Therefore, Her Excellency the Governor General in Council, on the recommendation of the Minister of the Environment, pursuant to sections 140 and 330 of the Canadian Environmental Protection Act, 1999 (see footnote b) , hereby makes the annexed Sulphur in Diesel Fuel Regulations.

SULPHUR IN DIESEL FUEL REGULATIONS

INTERPRETATION

1. (1) The following definitions apply in these Regulations.

"Act" means the Canadian Environmental Protection Act, 1999. (Loi)

"authorized official" means

(a) in respect of a corporation, an officer of the corporation who is authorized to act on its behalf;

(b) in respect of any other person, that person or a person authorized to act on behalf of that person; and

(c) in respect of any other entity, a person authorized to act on its behalf. (agent autorisé)

"batch" means an identifiable quantity of diesel fuel with a single concentration of sulphur as measured in accordance with section 4. (lot)

"diesel fuel" means petroleum fuel that can be evaporated at atmospheric pressure, that boils within the range of 130°C to 400°C and that is for use in diesel engines, or any fuel that is sold or represented as diesel fuel. (carburant diesel)

"northern supply area" means the area corresponding to the following geographical areas:

(a) that part of Yukon that is north of latitude 67°N;

(b) the Northwest Territories, except

(i) those areas within 1 km of the centre line of

(A) Highways 2 to 7, and
(B) that portion of Highway 1 south of Fort Simpson, and

(ii) those areas within the municipalities of Yellowknife, Detah, Hay River, Fort Simpson, Rae, Edzo, Entreprise, Fort Resolution, Fort Smith and Fort Liard;

(c) Nunavut;

(d) those parts of Manitoba, Ontario and Quebec within 50 km from the coast of Hudson Bay or James Bay;

(e) that part of Quebec north of latitude 51°N if west of longitude 63.5°W, and north of latitude 50°N if east of longitude 63.5°W; and

(f) Newfoundland and Labrador, except the island of Newfoundland. (zone d'approvisionnement du Nord)

"on-road vehicle" means a self-propelled vehicle designed for transporting persons, property, material or permanently or temporarily affixed apparatus on a common or public road, street, avenue, parkway or highway. (véhicule routier)

(2) Any standard or method that is incorporated by reference in these Regulations is incorporated as amended from time to time.

APPLICATION

2. These Regulations do not apply to diesel fuel if

(a) the fuel is in transit through Canada, from a place outside Canada to another place outside Canada, and is accompanied by written evidence establishing that the fuel is in transit;

(b) the fuel is produced or sold for export and is accompanied by written evidence establishing that the fuel will be exported;

(c) the fuel is being imported for use in on-road vehicles, its concentration exceeds the concentration referred to in subsection 3(1) and the fuel is accompanied by written evidence establishing that the fuel will meet the requirements of these Regulations before the fuel is used or sold; or

(d) the fuel is being imported in a fuel tank that supplies the engine of a conveyance that is used for transportation by water, land or air.

MAXIMUM CONCENTRATION OF SULPHUR

3. (1) For the purposes of section 139 of the Act, the concentration of sulphur in diesel fuel produced or imported for use in on-road vehicles shall not exceed

(a) 500 mg/kg until May 31, 2006; and

(b) 15 mg/kg after May 31, 2006.

(2) Subject to subsection (3), for the purposes of section 139 of the Act, the concentration of sulphur in diesel fuel sold for use in on-road vehicles shall not exceed

(a) 500 mg/kg until August 31, 2006; and

(b) 15 mg/kg after August 31, 2006.

(3) For the purposes of section 139 of the Act, the concentration of sulphur in diesel fuel sold in the northern supply area for use in on-road vehicles shall not exceed

(a) 500 mg/kg until August 31, 2007; and

(b) 15 mg/kg after August 31, 2007.

ANALYSIS

4. (1) Until December 31, 2003, the concentration of sulphur in diesel fuel referred to in section 3 shall be measured in accordance with the National Standard of Canada method CAN/CGSB-3.0 No. 16.0-95, Methods of Testing Petroleum and Associated Products, Sulphur in Diesel Fuel by Energy Dispersive X-ray Fluorescence Spectrometry (EDXRF).

(2) After December 31, 2003, the concentration of sulphur in diesel fuel referred to in section 3 shall be measured in accordance with the American Society for Testing and Materials method ASTM D 5453-00, Standard Test Method for Determination of Total Sulfur in Light Hydrocarbons, Motor Fuels and Oils by Ultraviolet Fluorescence.

REPORTS

5. (1) Every person who produces or imports diesel fuel shall submit to the Minister for each calendar quarter during which diesel fuel is produced or imported, within 45 days after the end of each quarter.

(a) a report of the total volume of diesel fuel, in m³, with a concentration of sulphur that was less than or equal to 500 mg/kg until May 31, 2006 or that was less than or equal to 15 mg/kg after May 31, 2006 that was sold in each province by the producer or importer, and

(b) a report for each facility where the person produces diesel fuel and for each province into which the person imports diesel fuel that contains the information set out in Schedule 1.

(2) For the purposes of the report referred to in paragraph (1)(b), the concentration of sulphur in diesel fuel shall be calculated using

(a) the method referred to in subsection 4(2);

(b) until December 31, 2003, the American Society for Testing and Materials method ASTM D 6428-99, Test Method for Total Sulfur in Liquid Aromatic Hydrocarbons and Their Derivatives by Oxidative Combustion and Electrochemical Detection;

(c) until December 31, 2003, the American Society for Testing and Materials method ASTM D 2622-98, Standard Test Method for Sulfur in Petroleum Products by Wavelength Dispersive X-ray Fluorescence Spectrometry;

(d) until December 31, 2003, the method referred to in subsection 4(1);

(e) until December 31, 2003, the American Society for Testing and Materials method ASTM D 1266-98, Standard Test Method for Sulfur in Petroleum Products (Lamp Method); or

(f) after December 31, 2003, an equivalent method to the one specified in paragraph (a) on the condition that

(i) the equivalency of the method be validated in accordance with the American Society of Testing and Materials method ASTM D 4855-97, Standard Practice for Comparing Test Methods, and
(ii) the producer or importer proposing to use the method sends the Minister, by registered mail or courier at least 60 days before using the method, a description of the method and evidence that demonstrates that it provides results equivalent to those provided by the method specified in paragraph (a).

(3) The methods referred to in paragraphs (2)(b), (c), (e) and (f) are to be used for reporting purposes only and shall not be used for the purpose of determining compliance with the concentration requirements referred to in section 3.

(4) Every person who produces or imports diesel fuel shall submit a report to the Minister that contains the information set out in Schedule 2 by the later of

(a) 60 days after the day on which these Regulations come into force, and

(b) 15 days before the person produces or imports diesel fuel for the first time.

(5) The person identified in subsection (4) shall notify the Minister in writing of any change in the information in the report submitted under that subsection, except for changes in the information on typical annual volumes, no more than five days after the change.

(6) Each report referred to in subsections (1) and (4) and the notice referred to in subsection (5) shall be signed by an authorized official.

(7) A copy of each report referred to in subsections (1) and (4) and of the notice referred to in subsection (5) shall be maintained, for a period of five years after the report is signed, at the production facility in Canada or at the place of business of the importer in Canada as identified in the information submitted under subsections (4) and (5).

RECORDS

6. (1) Every person who produces or imports diesel fuel shall keep a record of each batch of diesel fuel produced or imported that indicates the volume of the batch and,

(a) until May 31, 2006, whether the concentration of sulphur of the batch exceeded 500 mg/kg; and

(b) after May 31, 2006, whether the concentration of sulphur of the batch exceeded 15 mg/kg.

(2) Every person who produces or imports diesel fuel with a concentration of sulphur exceeding the concentration referred to in paragraph (1)(a) or (b) shall, prior to the dispatch of that fuel from the production facility or the importation of that fuel, identify in a record any batch to be dispatched or imported as "not suitable for use in on-road vehicles", along with the date of dispatch or importation of the batch.

(3) Every record made in accordance with subsections (1) and (2) shall be maintained, for a period of five years after the record is made, at the production facility in Canada or place of business of the importer in Canada as identified in the information submitted under subsections 5(4) and (5).

REPEAL

7. The Diesel Fuel Regulations (see footnote 1)  are repealed.

COMING INTO FORCE

8. These Regulations come into force on January 1, 2003.

SCHEDULE 1
(Paragraph 5(1)(b))

QUARTERLY REPORT OF SULPHUR CONCENTRATION IN DIESEL FUEL

1. Calendar quarter __________________________________

2. Year____________________________________________

3. Name of producer or importer ________________________

4. Name of the facility in Canada producing diesel fuel or the province of import____________________________________________

5. Street address (and mailing address if different) of the facility in Canada producing diesel fuel or of the importer's place of business in Canada
_________________________________________________
_________________________________________________
_________________________________________________

6. Volume of diesel fuel, in m³

(a) Diesel fuel with a concentration of sulphur that was less than or equal to 500 mg/kg until May 31, 2006 or that was less than or equal to 15 mg/kg after May 31, 2006

(i) Produced at the facility ________________________
(ii) Imported into the province _____________________

(b) Diesel fuel with a concentration of sulphur that exceeded 500 mg/kg until May 31, 2006 or exceeds 15 mg/kg after May 31, 2006

(i) Produced at the facility________________________
(ii) Imported into the province_____________________

7. (1) Sulphur concentration (mg/kg, or percent by weight if the units are identified), reported separately for diesel fuel produced and diesel fuel imported

(a) Diesel fuel with a concentration of sulphur that was equal to or less than 500 mg/kg until May 31, 2006 or that was equal to or less than 15 mg/kg after May 31, 2006

(i) Highest _________________________________
(ii) Lowest _________________________________
(iii) Volume-weighted average___________________

(b) Diesel fuel with a concentration of sulphur that exceeded 500 mg/kg until May 31, 2006 or exceeded 15 mg/kg after May 31, 2006

(i) Highest ________________________________
(ii) Lowest________________________________
(iii) Volume-weighted average_________________

(2) Method used (for reporting purposes) to measure sulphur concentration _________________________________

8. Authorized official

Name ______________________________________

Title ________________________________________

Signature and date _____________________________

Telephone number (_____)______________________

Fax number (_____) ___________________________

SCHEDULE 2
(Subsection 5(4))

REPORT BY PRODUCERS AND IMPORTERS OF DIESEL FUEL

1. Name of producer or importer __________________

2. Mailing address of producer or importer
___________________________________________
___________________________________________
___________________________________________

3. Registration number(s), if any were provided by the Minister under section 7 of the Benzene in Gasoline Regulations
___________________________________________

4. Indicate if one or more of the following apply

[ ] Producer in Canada of diesel fuel for use in on-road vehicles

[ ] Producer in Canada of diesel fuel for any use other than in on-road vehicles

[ ] Importer of diesel fuel for use in on-road vehicles

[ ] Importer of diesel fuel for any use other than in on-road vehicles

5. For each facility producing diesel fuel in Canada

(a) Name and street address (and mailing address if different) of the facility
__________________________________________
__________________________________________

(b) Typical annual volume, in m³, of diesel fuel produced

(i) for use in on-road vehicles_____________________
(ii) for any use other than in on-road vehicles _________

6. For importers

(a) Street address (and mailing address if different) for place of business in Canada where records and reports will be kept
_________________________________________
_________________________________________

(b) Each usual port of entry in Canada and usual mode of importation (e.g., ship, rail, truck, pipeline, etc.)
_________________________________________
_________________________________________

(c) For each usual port of entry in Canada, typical annual volume, in m³, of diesel fuel imported

(i) for use in on-road vehicles _______________________
(ii) for any use other than in on-road vehicles ___________

7. Authorized official

Name ___________________________________________

Title ____________________________________________

Signature and date__________________________________

Telephone number (_____) ____________

Fax number (_____) _________________

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Description

The goal of the Sulphur in Diesel Fuel Regulations (hereinafter referred to as the Regulations) is to ensure that the level of sulphur in diesel fuel used in on-road vehicles in Canada will not impede the effective operation of advanced emission control technologies planned to be introduced on 2007 and later model year vehicles (i.e., in mid-2006) to comply with stringent new exhaust emission standards. This is accomplished by reducing the maximum allowable limit for sulphur in on-road diesel fuel to 15 milligrams per kilogram of the fuel, which is equivalent to 15 parts per million (p.p.m.), commencing June 1, 2006.

On March 30, 2002, the federal government published the proposed On-Road Vehicle and Engine Emission Regulations in the Canada Gazette, Part I, with the objective of phasing-in new emission standards for on-road vehicles and engines beginning in the 2004 model year. The vast majority of on-road diesel engines in Canada are used to propel heavy-duty vehicles (e.g., trucks and buses). Low sulphur diesel fuel is required to enable the efficient operation of advanced exhaust emission control technologies needed to comply with new heavy-duty diesel vehicle emission standards that are planned to come into effect for the 2007 model year. The Regulations combined with the planned new vehicle emission standards will reduce SOx, NOx, VOCs and PM emissions from new heavy-duty diesel engines by about 90, 90, 89 and 90 percent respectively. The low sulphur diesel fuel will also be necessary to enable diesel-fuelled light-duty vehicles and light-duty trucks to use similar advanced technologies as a means of meeting more stringent emission standards that are planned to be phased in over the 2004 through 2009 model years.

Finally, the reduction in the sulphur content of diesel fuel will reduce emissions of sulphur dioxide and sulphate from all diesel-fuelled vehicles manufactured before the above-discussed vehicle emission standards come into effect.

Under paragraph 140(1)(a) of the Canadian Environmental Protection Act, 1999 (CEPA, 1999), the Governor in Council has the authority to make regulations respecting "the concentrations or quantities of an element, component or additive in a fuel". In addition, under paragraph 140(2)(b), such a regulation can only be made where the Governor in Council is of the opinion that the regulation "could make a significant contribution to the prevention of, or reduction in, air pollution resulting from [...] the fuel's effect on the operation, performance or introduction of combustion or other engine technology or emission control equipment". Furthermore, under section 330 and with respect to a substance, the Governor in Council may prescribe "the minimum, average or maximum quantity or concentration of the substance" and "the method of determining such a quantity or concentration" and, a regulation made under section 140 "may be made applicable in only a part or parts of Canada".

In summary, the key elements of the Regulations are as follows:

• The Regulations will revoke and replace the present Diesel Fuel Regulations and set a maximum limit of 15 p.p.m. for sulphur in on-road diesel fuel that is produced or imported for use or sale in Canada and for on-road diesel fuel that is sold or offered for sale. (The present maximum is 500 p.p.m.)
• The compliance date to meet the 15 p.p.m. level for on-road diesel fuel that is produced in or imported into Canada is June 1, 2006. The compliance date for sales of 15 p.p.m. on-road diesel fuel is September 1, 2006. In northern Canada, where the distribution and turnover of diesel fuel is much slower, the compliance date for sales of on-road diesel fuel is September 1, 2007.
• The Regulations will require importers and producers of diesel fuel to submit one-time registration information (i.e., name, location, typical volumes) to the Minister of the Environment by the later of 60 days after the Regulations come into force on January 1, 2003, or 15 days before the person starts to produce or import diesel fuel.

Timing

The Regulations introduce a level and timing for on-road diesel fuel in Canada that are similar to those required by the United States Environmental Protection Agency (EPA) regulations that were passed in December 2000. The Regulations ensure that 15 p.p.m. on-road diesel fuel will be available in Canada beginning in June 2006. As well, the timing provides the affected industry with adequate time to plan and undertake the necessary capital and operational changes necessary to meet the new requirements for diesel fuel.

As noted earlier, on March 30, 2002, the Minister of the Environment published the proposed On-Road Vehicle and Engine Emission Regulations in the Canada Gazette, Part I. Under the proposed On-Road Vehicle and Engine Emission Regulations, new emission requirements applicable to on-road vehicles and engines are to be phased in beginning with the 2004 model year. The feasibility of complying with the more stringent emission standards that are to be in place for diesel-fuelled vehicles of the 2007 and subsequent model years and the effective operation of anticipated advanced emission control technologies under in-use conditions will require a maximum limit of 15 p.p.m. for sulphur in on-road diesel fuel in Canada.

Problem Definition

Air pollution is a serious problem in Canada and the combustion of fuels to power on-road vehicles is a major contributor to this problem, particularly in urban areas. Air pollution has major impacts on the environment and health of Canadians. Health studies indicate that air pollution contributes to numerous adverse health impacts including premature mortality. While emissions of some pollutants have declined over the past two decades, air pollution continues to be one of Canada's highest environmental priority and health challenges.

The combustion of diesel fuel in on-road vehicles results in emissions of pollutants, including sulphur dioxide, sulphates, particulate matter, nitrogen oxides, volatile organic compounds, carbon monoxide and toxic substances. These emissions occur where people live and work, thereby contributing to the potential health risk to Canadians of air pollution from diesel vehicles.

On May 27, 2000, Environment Minister David Anderson and Health Minister Allan Rock jointly announced that respirable particulate matter less than or equal to 10 microns (PM₁₀) was being declared "toxic" as defined by section 64 of CEPA, 1999. Similarly, on July 15, 2000, the Ministers announced their intention to declare the principal substances that form PM₁₀ "toxic" under CEPA, 1999. Secondary particulate matter is formed when sulphur dioxide, nitrogen oxides, ammonia and volatile organic compounds combine in the atmosphere. Emissions from diesel-fuelled vehicles are a significant source of both PM₁₀ and several of its precursors. Reducing sulphur in on-road diesel fuel will reduce direct emissions of PM₁₀ and, by enabling the use of advanced vehicle and engine emission control technologies, will also contribute to reducing emissions of substances that cause the secondary atmospheric formation of PM₁₀.

In recent years, in co-operation with provincial governments, the federal government has been putting in place a comprehensive program to reduce emissions from vehicles and engines. Federal actions to date include new vehicle emissions standards, the existing Diesel Fuel Regulations, benzene in gasoline and sulphur in gasoline regulations. Provincial initiatives include: gasoline regulations in British Columbia; requirements to reduce Reid vapour pressure during summer months in Ontario, Quebec and the Lower Fraser Mainland (British Columbia); and inspection and maintenance programs in areas of British Columbia and Ontario. While these actions have resulted in significant improvements to the emission performance of on-road vehicles, continued efforts are required to reduce emissions.

In view of the above, on February 17, 2001, the federal government published a comprehensive ten-year Federal Agenda on Cleaner Vehicles, Engines and Fuels (the Agenda) in the Canada Gazette which lays out a series of planned measures and actions to reduce emissions from vehicles and engines. As set out in the Agenda, Environment Canada is developing regulations under CEPA, 1999 to align Canadian emission standards for a broad range of on-road and off-road vehicles and engines with those of the EPA.

On December 21, 2000, the United States released its final rule setting emission standards for heavy-duty engines and vehicles and requirements for sulphur in on-road diesel fuel. The EPA determined that:

• in order to meet the 2007 heavy-duty vehicle emissions standards, engine manufacturers would have to "employ exhaust emission control devices that require low-sulphur fuel to ensure proper operation";
• misfuelling with high sulphur fuel "could seriously degrade the emission performance of sulphur-sensitive exhaust emission control devices, or perhaps destroy their functionality altogether"; and
• "if such (2007 heavy-duty) vehicles were fueled with 500 p.p.m. diesel fuel, the emission control systems could be irreversibly damaged and any benefit of the new emission standards could be eliminated."

The U.S. final rule sets a maximum level of 15 p.p.m. for sulphur in diesel fuel that is used in on-road vehicles. The 15 p.p.m. limit comes into effect on June 1, 2006. The EPA regulation includes interim provisions until 2010 for banking and trading of credits and special consideration for small refineries.

It should be stressed that the Federal Agenda was developed in recognition that the quality of fuels plays an important role in reducing the impacts of vehicle emissions. In some cases, the performance of vehicle emission control systems can be impaired without the right quality fuel. Therefore, the development of effective policies and programs to reduce emissions must consider the fuels and vehicle/engine as an integrated system. Low sulphur diesel fuel is required to enable the introduction and effective operation of advanced emission control systems for on-road diesel engines. These Regulations which reduce the allowable level of sulphur in on-road diesel fuel to 15 p.p.m. are therefore essential to accompany the new On-Road Vehicle and Engine Emission Regulations that are expected to be phased-in beginning in the 2004, with emission standards dependent on low sulphur diesel to be in place in the 2007 and later model years.

As part of the Federal Agenda on Cleaner Vehicles, Engines and Fuels, the Minister of the Environment announced in May 2000, and again in February 2001, that Canadian standards for sulphur in on-road diesel fuel would be aligned with requirements that were being developed by the United States, both for level and compliance dates. On December 7, 2000, this commitment was reaffirmed when the governments of Canada and the United States signed an agreement on reducing transboundary movement of smog-causing pollutants ("the Ozone Annex"). This international agreement commits Canada to develop and implement "a regulation under the Canadian Environmental Protection Act, 1999 to reduce the allowable level of sulphur in on-road diesel fuel to align with future U.S. standards". The Regulations will meet this commitment.

Background

Sulphur Levels in Canada and Other Jurisdictions

In 1997, Canada promulgated the Diesel Fuel Regulations, which limit the level of sulphur in diesel fuel for use in on-road vehicles, including light-duty vehicles, light-duty trucks and heavy-duty vehicles, to a maximum of 500 p.p.m. The Diesel Fuel Regulations came into effect on January 1, 1998. In 2000, the average sulphur level for the 20.2 billion litres of low-sulphur (less than 500 p.p.m.) diesel fuel produced in or imported into Canada was 330 p.p.m. There were notable regional differences within the country, ranging from 270 p.p.m. in the West to 410 p.p.m. in Quebec and Atlantic Canada. Ontario averaged 350 p.p.m. The average sulphur level for the remaining diesel pool of 4.2 billion litres, which is used primarily in off-road vehicles and engines, was 2 170 p.p.m. for the same year.

Other jurisdictions, including the United States, Mexico and the European Union, have or will require low-sulphur diesel fuel for on-road vehicle applications. Since 1993, a 500 p.p.m. maximum level of sulphur has been in effect for on-road diesel fuel in the United States. In December 2000, EPA published its final rule for on-road diesel fuel quality. The rule sets a maximum level of 15 p.p.m. for sulphur in on-road diesel, effective June 1, 2006. The EPA rule includes provisions for banking and trading of sulphur credits and special considerations for small refineries. Mexico requires a maximum of 500 p.p.m. sulphur in its on-road diesel fuel, as do a number of Asian nations including Japan, Singapore, South Korea and Thailand. Furthermore, Japan will be requiring 50 p.p.m. starting in 2007.

In 1998, the European Union passed a directive that set the maximum limit for sulphur in on-road diesel fuel at 50 p.p.m. in 2005, with an interim level of 350 p.p.m. starting in 2000. Seven countries of the Organization for Economic Co-operation and Development, including Great Britain, Sweden and Finland have introduced tax incentives to accelerate the introduction of cleaner diesel fuel, and four more are seriously considering such measures. The result has been that most of the diesel fuel in those countries now has sulphur levels below 50 p.p.m. Germany plans to introduce a tax incentive to promote sulphur levels in diesel below 10 p.p.m. in 2003.

In May 2001, the European Union proposed to go further and to introduce "zero" sulphur (defined as less than 10 p.p.m. sulphur) gasoline and on-road diesel fuel in every member state commencing January 1, 2005. From 2011, the use of zero sulphur gasoline and diesel would be mandatory. However, the 2011 deadline for zero sulphur diesel fuel is to be reviewed by the end of 2006.

It is clear that, in general, there are considerable efforts in other jurisdictions to reduce sulphur levels in diesel fuel. The Regulations will align Canadian requirements for the allowable level of sulphur in on-road diesel fuel with those of the United States, thereby supporting a consistent North American market. It will also bring Canada in line with existing requirements or future initiatives in Europe, Japan and other progressive nations.

Overview of the Petroleum Industry

The Canadian petroleum products industry is comprised of petroleum refining, product distribution and marketing operations. In 2000, thirteen companies operated twenty refineries in Canada that produce diesel fuel. Eight of those twenty facilities produced only diesel fuel having a sulphur concentration of less than 500 p.p.m. (i.e., suitable for use in on-road vehicles), one produced only diesel fuel with a sulphur concentration in excess of 500 p.p.m. (i.e., off-road diesel), and eleven produced both types of diesel fuel. Diesel fuel and other petroleum products are sold through a distribution network consisting of about 13 000 retail outlets.

Diesel is a significant source of fuel for road transportation in Canada, in particular for heavy-duty vehicles such as trucks and buses. In 2000, more than 20.2 billion litres of diesel with a sulphur level less than 500 p.p.m. were produced in or imported into Canada. The petroleum products industry employs over 150 000 people, with approximately 13 000 working in refineries and the remainder in product distribution and marketing operations. Each refinery job has been estimated to generate up to seven jobs in associated industries, while one to two jobs are created for every distribution and retail job. The export of petroleum products is a contributor to Canada's favourable balance of trade. The financial performance of the industry has improved following a period of low rates of return in the early part of the 1990s.

Approximately three percent of the total Canadian demand for diesel fuel is imported. The majority of imports (i.e., 65 percent) come from the United States while the remainder comes from Algeria, Venezuela and several other countries. Although a small proportion of the total market, imports can play a role in determining the consumer price of diesel fuel in Canada. Canada exports about two billion litres of diesel fuel, almost all of it to the United States.

Major petroleum producers and importers voluntarily comply with standards developed by the Canadian General Standards Board. As well, both the federal and provincial governments regulate some aspects of fuel quality. Gasoline, diesel and other vehicle fuels are currently subject to the following federal Regulations:

• the Fuels Information Regulations No. 1 (1978) require fuel producers to report the sulphur content and the types of additives in liquid fuels;
• the Gasoline Regulations (1990) establish limits on lead and phosphorous contents for both leaded and unleaded gasoline;
• the Contaminated Fuel Regulations (1991) prohibit the import or export of contaminated fuels, except for lawful destruction, disposal or recycling;
• the Diesel Fuel Regulations (1997) limit the level of sulphur in diesel fuel for use in light-duty vehicles, light-duty trucks and heavy-duty vehicles to a maximum of 500 p.p.m.;
• the Benzene in Gasoline Regulations (1997) limit the level of benzene in gasoline; and
• the Sulphur in Gasoline Regulations (1999) limit the level of sulphur in gasoline to 30 p.p.m. by 2005, with an interim level of 150 p.p.m. effective July 2002.

The Montreal Urban Community also has a limit of 500 p.p.m. for both on-road and off-road diesel.

Canadian refineries are price takers (e.g., Canadian wholesale prices are strongly influenced by U.S. and European prices) with respect to both crude purchases and, to a lesser extent, product sales. Accordingly, refinery margins and company profits are heavily influenced by access to low-cost feedstocks, the ability to process inexpensive heavy sour crude, economies of scale, the control of operating costs and competition from imported products.

Competitive pressures and subsequent rationalization have affected both the production and distribution components of the industry. Since 1980, 16 of 36 refineries in Canada have closed. This has led to increased refinery utilization rates on a scale comparable with facilities in the northern United States. Utilization rates now stand at about 95 percent, which is generally considered to be full capacity. However, continued competitive pressures and technological advancement may lead to further rationalization of fuel production and supply in Canada in the near future.

Future environmental requirements faced by the petroleum industry are anticipated to be more numerous and costly than in the past. However, analysis by Industry Canada has suggested that, on a unit basis, Canadian refiners' environmental costs are less than those in the United States by a factor of two to three. The same work also indicates that environmental costs which affect product specifications are more likely to be recoverable in the marketplace than environmental costs needed for local site operations. This is partly due to the fact that all refiners, domestic and foreign, would be required to meet fuel specification requirements.

The compliance costs and competitiveness impacts of a 15 p.p.m. maximum level of sulphur in diesel fuel will vary considerably from one supplier to another, and between petroleum refiners and diesel fuel importers. A discussion of the cost and competitiveness implications of a lower-sulphur in diesel standard is outlined in the section on costs below.

Alternatives

During the process leading to the decision to introduce the Regulations, a number of alternatives were considered. These alternatives can be subdivided into two categories: alternative policies and alternative implementation mechanisms. Assessment of the alternatives was conducted as an iterative process, with several policies, mechanisms and combinations of the two being considered at various stages in the process. For the sake of simplicity, the two categories are presented separately.

The purpose of assessing alternatives is to identify the policy option and mechanism that most effectively and efficiently achieves the environmental objective.

Alternative Policy Options

There are two basic policy options: (1) to maintain the status quo, and (2) to take action to reduce the level of sulphur in on-road diesel fuel. In the case of the latter, it is necessary to address questions of timing, level and application, as well as to evaluate alternative implementation mechanisms.

1. Status Quo

The option of no action to reduce the current level of sulphur in on-road diesel fuel was rejected because it would not ensure the quality of diesel fuel in Canada needed to enable advanced emission control technologies on future diesel engines. Lower-sulphur on-road diesel fuel will reduce emissions from current technology vehicles. However, the EPA has already determined that sulphur in diesel fuel significantly inhibits the effective operation of advanced diesel emission control technologies, resulting in significantly higher emissions of air pollutants. Given the resulting adverse environmental and health impacts, continuation of the status quo was not considered to be appropriate.

2. Complete Ban of Sulphur in Diesel Fuel

A second option is to require the complete removal of sulphur from on-road diesel fuel in Canada (zero percent sulphur content). This option would ensure that zero sulphur diesel was used for on-road purposes in Canada and a high level of environmental and health benefits would be achieved. While it may be technically possible to remove all sulphur from diesel fuel, the direct costs to industry would result in a greater upheaval within the petroleum refining sector. Diesel fuel customers would likely face larger price fluctuations from supply disruptions. While a zero percent level of sulphur in diesel fuel would likely further enhance the ability of engine manufacturers to meet future stringent emission standards, the EPA has found that compliance with the 2007 model year standards is feasible with diesel fuel having a maximum sulphur content of 15 p.p.m. Accordingly, this option was not given further consideration.

3. Reduce the Level of Sulphur in On-road Diesel Fuel Before the United States

A third option is to require lower-sulphur on-road diesel fuel in Canada at a date in advance of the June 2006 date that is specified in the United States. This option would ensure that lower-sulphur diesel was used for on-road purposes in Canada and that a higher level of environmental and health benefits would be achieved. However, the main objective of the Regulations is to ensure that the level of sulphur in diesel fuel used for on-road purposes in Canada does not impede the effective operation of new vehicle emission control technologies that will be required to comply with new emission standards for 2007 and later model year vehicles and engines, via the On-road Vehicle and Engine Emission Regulations, proposed under CEPA 1999. Accordingly, it is more appropriate that the mandated introduction of lower-sulphur on-road diesel fuel coincide with the planned 2006 introduction of new vehicle emission control technologies that would be needed to comply with 2007 model year emission standards. This option was therefore rejected.

4. Reduce the Level of Sulphur in On-road Diesel Fuel After the United States

A fourth option is to require lower-sulphur on-road diesel fuel in Canada at a date later than the June 2006 date that is specified in the United States. This option would provide industry with more time to make the necessary capital investment. However, as already stated, the effective operation of new emission control technologies for the 2007 and later model year diesel vehicles requires lower sulphur diesel fuel. This option would not ensure that lower-sulphur diesel was available for on-road purposes, thereby increasing the potential for widespread misfuelling of new diesel-fuelled vehicles. The EPA has found that use of high sulphur fuels in heavy-duty post-2006 model year vehicles "could seriously degrade the emission performance of sulphur-sensitive exhaust emission control devices, or perhaps destroy their functionality altogether" and that "the emission control systems could be irreversibly damaged and any benefit of the new emission standards could be eliminated". As such, this option would compromise the emissions performance of new diesel vehicles, resulting in higher emissions and consequential environmental and health impacts. Therefore, delaying action in Canada until after sulphur in diesel fuel is reduced in the United States was rejected.

5. Align Canada's Reduction of Sulphur in Diesel With the U.S. Program

A fifth option is to align action in Canada to reduce sulphur in on-road diesel fuel with that of the United States. The Federal Agenda on Cleaner Vehicles, Engines and Fuels, published by the Minister of the Environment on February 17, 2001, sets out a policy of "generally aligning Canadian environmental fuel requirements with those of the United States, while taking into consideration environmental standards developed by the European Union". This option is consistent with the policy that was developed in consultation with stakeholders.

As stated earlier, the EPA has already passed requirements for a maximum of 15 p.p.m. sulphur in on-road diesel fuel, coming into effect June 1, 2006. The United States rule incorporates trading of sulphur credits until 2010 and includes special provisions for small refiners. Due to legislative differences between Canada and the United States, it is not possible to introduce a program in Canada that is identical to that in the United States. However, by aligning the level for sulphur and the implementation timing with the EPA program, the Government will be able to fulfill its objective as stated above. It should also be noted that a 15 p.p.m. limit on sulphur in on-road diesel fuel aligns closely with the "zero sulphur" (less than 10 p.p.m.) limit that has been proposed by the European Union. Since this approach meets the objective to the greatest degree of success, it was chosen for reducing sulphur in Canada's on-road diesel fuel.

Alternative Implementation Mechanisms

A number of alternative implementation mechanisms were considered to achieve the policy objective, the national introduction of lower-sulphur diesel fuel by June 1, 2006.

Voluntary Measures

The introduction of a voluntary measure, such as the Memoranda of Understanding (MOUs) that were developed between the Government and diesel suppliers in 1993, was considered but rejected on the grounds that it would not necessarily lead to the widespread availability and use of lower-sulphur diesel for on-road vehicles.

In October 1993, Environment Canada signed MOUs with most of the suppliers of diesel fuel in an attempt to introduce a 500 p.p.m. maximum level for sulphur in on-road diesel. However, the MOUs did not achieve the desired outcome and the result was the promulgation of the Diesel Fuel Regulations on February 19, 1997. For more details, the reader is referred to those regulations and the associated Regulatory Impact Analysis Statement.

It should be noted that in subsequent discussions with the Government, the petroleum refining industry has consistently favoured a regulatory rather than a voluntary approach to address environmental fuel quality issues. This position is largely based on the fact that a regulatory approach is more effective at ensuring that all fuel suppliers are subject to the same requirements and that there is a "level playing field" (i.e., no competitive advantage) for all suppliers.

Economic Instruments

A trading scheme to reduce the level of sulphur in on-road diesel fuel, whereby sulphur credits could be traded or sold amongst participants, was considered. Several different approaches were considered (e.g., national versus regional caps and trading; inter- versus intra-company trading) in an effort to outline a system that would achieve the stated policy objective.

A difficulty with trading in the context of this initiative is that it might not ensure that all of the policy objectives were achieved satisfactorily. First, in the case of a national trading scheme, a situation could arise whereby through the trading of credits the supply of lower-sulphur diesel becomes inconsistent across the country. This could cause considerable vehicle misfuelling problems as well as result in significant regional differences in fuel prices and environmental and health benefits. Second, if regional trading programs were used, there would only be a small number of participants, leading to a relatively controlled and inefficient market. Finally, intra-company trading would be of use only to larger suppliers with more than one operation.

Other jurisdictions have successfully used fiscal instruments to accelerate the early introduction of lower-sulphur diesel fuel. The introduction of a fiscal instrument, such as a charge or tax on the level of sulphur, to encourage the availability and use of lower-sulphur diesel fuel was considered. There is no authority in CEPA, 1999 to impose taxes or charges, although such authority could be found under other federal legislation.

The introduction of a fiscal incentive, disincentive or a combination of the two may be a very effective means of encouraging or facilitating the introduction of lower-sulphur diesel fuel in Canada. However, unless the tax advantage was very high, there would be uncertainty that all suppliers across the country would undertake the appropriate action within the desired time frame. This circumstance could result in an inconsistent regional supply of lower-sulphur on-road diesel fuel with similar problems to those described earlier.

In the final analysis, both trading and fiscal instruments have not been accepted because of the reasons discussed above.

Regulations Under CEPA, 1999

The introduction of a regulation under CEPA, 1999 was considered and accepted as the most appropriate approach to reducing the maximum level of sulphur in on-road diesel fuel to 15 p.p.m..

The introduction of a regulated national standard will achieve the stated policy objective to the greatest extent when compared to the other available implementation mechanisms. For these reasons, a regulation under CEPA, 1999 was determined to be the most appropriate implementation mechanism.

Benefits and Costs

The Regulations represent a major policy initiative that will result in significant net benefits to society. The distribution of the benefits and costs among stakeholders will vary considerably from one group to another and from region to region.

Benefits

Vehicle-Fuel Compatibility

As noted earlier, the Government recognizes that the development of effective policies and programs to reduce emissions must consider the fuels and vehicle/engine as an integrated system and that, in some cases, the performance of vehicle emission control systems can be impaired without the right fuels. In 1999, the Government made amendments to the Canadian Environmental Protection Act which specifically enabled the making of regulations to set fuel specifications where the fuel has adverse effects on the operation, performance or introduction of combustion or other engine technology or emission control equipment.

In developing these Regulations, Environment Canada has relied largely on the considerable work undertaken by the EPA to support its recently announced final rule on sulphur in on-road diesel fuel. The EPA's findings on the issue of vehicle-fuel compatibility are summarized in the following paragraphs.

Diesel engines provide advantages relative to gasoline engines in terms of fuel economy, durability, and evaporative emissions. Diesel vehicles also have lower exhaust emissions of hydrocarbons and carbon monoxide. However, controlling NOx emissions from diesel engines is a greater challenge, primarily because of the ineffectiveness of three-way catalytic converters (i.e., such as those used in gasoline vehicles) in the oxygen-rich and relatively cool diesel exhaust environment. Similarly, PM₁₀ emissions, which are inherently low with properly operating gasoline engines, are more difficult to control with diesel engines because the diesel combustion process tends to form soot particles. Since traditional diesel NOx control approaches tend to increase PM₁₀ emissions, and vice versa, effectively reducing both pollutants has presented a particular challenge over the years.

Considerable improvements have been made in the emissions performance of diesel engines used in on-road vehicles since the early 1970s. Over this period, the control of emissions from diesel engines has largely focused on strategies to reduce engine-out emissions rather than the use of exhaust aftertreatment. The emission standards adopted by the EPA for 2007 and later model year on-road heavy-duty diesel vehicles/engines will reduce allowable levels of NOx and PM₁₀ by 95 percent and 90 percent, respectively, relative to today's standards. In order to meet these standards, the EPA believes that engine manufacturers will, for the first time, have to incorporate the widespread use of high efficiency exhaust aftertreatment systems such as NOx adsorber catalysts and catalyzed particulate filters. This is analogous to the introduction of catalytic converters on cars in the 1970s. It is also expected that diesel engines used in light-duty vehicle and light-duty truck applications will also need to be equipped with these advanced technologies in order to comply with the final Tier 2 emission standards expected to be in place in the 2007 model year time frame.

The EPA determined that sulphur in diesel fuel significantly inhibits the ability of advanced emission control technologies to effectively reduce emissions of harmful air pollutants and the ability of diesel vehicles and engines to meet future emission standards. The EPA determined that the sulphur content of diesel fuel must be limited to a maximum of 15 p.p.m. in order to enable the use of high efficiency exhaust emission control devices and to ensure the feasibility of meeting the stringent 2007 model year emission standards for on-road diesel vehicles/engines.

In view of the above, the Regulations are integral to enabling the introduction of advanced exhaust emission control technologies on on-road diesel engines in Canada. The Regulations will ensure that the sulphur content of on-road diesel fuel in the Canadian marketplace will be compatible with the new emission control technologies that will be introduced on new vehicles beginning in the 2007 model year and will allow these vehicles to maintain their low emission design levels under actual in-use conditions. As a result, diesel vehicles will be able to achieve gasoline-like exhaust emission levels, while at the same time providing better fuel economy, lower greenhouse gas emissions and lower evaporative emissions than gasoline.

Environmental and Health Benefits

Environmental and health benefits were estimated for two on-road diesel fuel scenarios as part of work undertaken in 1996-1997 by independent expert panels to assess the appropriate level of sulphur in gasoline and diesel fuel. Based on the results for these scenarios, it is possible to extrapolate estimates of the benefits resulting from the 15 p.p.m. maximum limit that would be put in place by the Regulations.

The work undertaken in 1996-1997 by the Health and Environmental Impact Assessment Panel (the Panel) employed a methodology called the "damage function approach". The damages refer to the adverse effects on the environment and human health caused by the activity. The benefits are the reductions of those damages resulting from the regulatory action or, in other words, the avoided adverse environmental and health effects. The methodology consists of four key stages:

• estimate the change in vehicle emissions;
• estimate the change in ambient air quality;
• estimate the environmental or health impacts; and
• estimate the value of the environmental and health impacts.

The Atmospheric Science Panel evaluated improvements expected in air concentrations of specific substances (fine particulate matter — PM_2.5; sulphate — SO₄; and sulphur dioxide —SO₂) from reductions in the level of sulphur in on-road diesel fuel in seven urban centres (Vancouver, Edmonton, Winnipeg, Toronto, Montréal, Saint John and Halifax). Scenario 9 assessed by the expert panel was based on a standard of 50 p.p.m. average / 100 p.p.m. maximum for sulphur in on-road diesel fuel, resulting in an assumed in-use average sulphur level of 45 p.p.m. The Panel found that the introduction of this lower-sulphur on-road diesel fuel would reduce emissions of SO₂ proportionally to the reductions in the level of sulphur in the fuel, thereby leading to a significant reduction of air pollution in Canada. For example, during the first year in Toronto, emissions of SO₂ would be reduced by 623 tonnes, and of SO₄ by 19.1 tonnes. The resulting reduction in ambient levels of pollutants in Toronto was estimated to be 4 percent for sulphur dioxide, 1 percent for sulphate and 0.2 percent for total fine particulate matter.

Reduced emissions from diesel-fuelled vehicles would result in significant health benefits for Canadians. The Health and Environmental Impact Assessment Panel Report estimated that for the seven Canadian cities studied, over the 20-year analysis period, reducing the level of sulphur in on-road diesel fuel to the 50 p.p.m. average / 100 p.p.m. maximum standard would result in considerable health benefits (as estimated by avoided health cases). The reduced health impacts would be expected to result in reductions in health care costs and increased labour productivity as a result of fewer employee sick days.

The estimates developed by the independent expert panel on environmental and health impacts were extrapolated to all of Canada by the 1998 Government Working Group on Setting a Sulphur Level for Sulphur in Gasoline and Diesel (GWG). Column 3 of the table below shows the GWG estimates. Column 4 shows the GWG estimates adjusted to reflect the change in sulphur level that is now being considered.

This estimate of Canadian health benefits can be compared to one-tenth of the U.S. benefits (i.e., scaling for the relative population of the two countries) that were estimated by the EPA for its new diesel fuel and heavy-duty vehicle program.

The resulting health benefits are summarized in the following table.

Comparison of Canadian and U.S. Health Benefits
Reduction in annual number of cases, based on 1998 GWG Work
HEALTH EFFECTS AVOIDED	SEVEN CITY 2020 (475 to 50 p.p.m.)	Canada 2020 (475 to 50 p.p.m.)	Canada 2020 (actual 1999 regional levels to 10 p.p.m.)	1/10 of U.S. Benefits 2030 based on EPA Estimates (*)
Premature mortality	19	30	24	830
Hospital admissions	22	35	28	710
Emergency room visits	61	97	77	240
New cases of chronic bronchitis	67	107	85	550
Respiratory illness in children (Canada)/ New cases of bronchitis in children (United States)	843	1 340	1 060	1 760
Asthma symptom days (Canada)/ Asthma attacks (United States)	29 578	47 000	37 200	36 000
Restricted activity days	14 025	22 300	17 600	n/a
Acute respiratory symptoms (Canada)/ Respiratory symptoms in children (United States)	101 100	160 700	127 000	38 600
Lost Working days	n/a	n/a	n/a	150 000
(*) The U.S. estimates include the combined effect of the new vehicle emission standards and the new fuel standard; the Canadian estimates consider only the effect of the new fuel standard.

It is important to note that the work of the Expert Panels that has been discussed was based only on the reduction of sulphur in the fuel and did not include the effects of new 2007 model year heavy-duty vehicle emission standards. The Regulations will enable new heavy duty diesel vehicle emissions standards that are slated to come into effect for model year 2007. The future vehicle emission standards, not reflected in column 4 above, will reduce the allowable levels of emissions from new diesel heavy-duty vehicles by about 90 percent for NOx, by 89 percent for VOCs, and by 90 percent for PM₁₀ relative to current regulated limits. Without the lower sulphur diesel fuel, these emission reductions could not be achieved.

The Health and Environmental Impact Assessment Panel report used sulphate as an index of the mixture of vehicle pollutants since there is a large body of literature linking sulphate and various health endpoints. The report notes that "...the use of this one index will result in a conservative estimate of many of the health benefits".

Of particular relevance in this regard is the analysis conducted by the EPA in support of its regulations which were passed in January 2001. The EPA determined that a 15 p.p.m. level of sulphur in diesel fuel is necessary to enable the effective operation of new emission control technologies required to achieve the 2007 model year heavy-duty vehicle emission standards. The EPA found that for the United States, the benefits of the heavy duty vehicle / low sulphur diesel fuel program outweighed costs by a ratio of over 16 to 1 (net benefits of $66.2 billion US). Given the similar characteristics of the Canadian vehicle fleet, and the adoption of a Canadian diesel vehicle and fuels program that aligns with that of the United States, the benefits in Canada are expected to produce a comparable benefit to cost ratio.

The total benefits examined by the EPA included a number of monetized and unmonetized categories. By far the most significant of the former was premature mortality among adults 30 and over. This category accounted for roughly 89 percent of total benefits. In terms of monetary significance, recreational visibility, chronic bronchitis among adults aged 26 and over and agricultural damage were next in importance accounting for roughly 4.5 percent, 3.5 percent and 1.6 percent respectively of the total benefits.

Other categories that were monetized included hospital admissions, lost work days, minor restricted activity days and upper respiratory symptoms among children. The EPA identified a number of categories of benefits that were not monetized but that could provide significant welfare benefits. These included:

• asthma attacks;
• residential visibility;
• household soiling damage;
• material damage;
• nitrogen deposition to estuaries;
• commercial forest damage; and
• other health effects.

In June 2002, John Hopkins University published a revised analysis of the health effects of particulate matter on mortality. This new information suggests that the above health benefits associated with reducing emissions from diesel powered vehicles may be overestimated. The scientists who identified the statistical flaw in certain air quality studies, emphasized that "the key cause-effect relationship between pollution and premature death" remains unquestioned.

Costs

Studies to estimate cost and competitiveness impacts were carried out for two on-road diesel fuel scenarios as part of work undertaken in 1996-1997 to assess the appropriate level of sulphur in gasoline and diesel fuel. As part of that process, the Cost and Competitiveness Assessment Panel engaged consultants to carry out cost and competitiveness analyses. Based on the results of those analyses for on-road diesel fuel scenarios, it is possible to extrapolate estimates for the 15 p.p.m. maximum limit.

Compliance Costs

The consultant's cost study entitled Sulphur in Gasoline and Diesel Study. The Costs of Reducing Sulphur in Canadian Gasoline and Diesel provides an understanding of the technical changes and associated capital and operating costs that would be required at refineries in Canada to meet various fuel standards. This includes direct input on cost estimates from 15 of Canada's refineries. Capital and operating costs were modelled for the remainder. In both cases, the cost estimates were based on existing sulphur reduction technologies and existing refinery configurations. The consultant verified the information submitted by the refineries for technical consistency. The cost information was aggregated by region in order to ensure confidentiality.

Estimated refinery costs for reducing sulphur in on-road diesel fuel to meet a 50 p.p.m. average / 100 p.p.m. maximum standard are outlined in the following table. Details on the calculation of these estimates can be found in the consultant's report (i.e., Tables 4.1, 4.2 and 4.6).

region	Capital ($ millions)	Operating ($ millions per year)	Capital and Operating Recovery (cents per litre)
Atlantic Region and Quebec	431	18.3	1.47
Ontario	374	25.7	2.67
West	348	35.3	1.16
Canada	1 153	79.3	1.56
Note: Range of uncertainty is ± 40 percent for capital costs and ± 25 percent for operating costs

Cost estimates for the specific 15 p.p.m. requirement of the Regulations can be developed using a number of methodologies. For simplicity, two are outlined below that provide a useful range of estimates.

The first is to extrapolate the estimated costs of a 15 p.p.m. scenario from the costs developed by the consultant for the 50 p.p.m. average / 100 p.p.m. maximum scenario (No. 9 in the Panel's and subsequent reports) assuming a linear relationship between costs and sulphur reduction. Based on this assumption, the compliance costs of introducing a 15 p.p.m. level of sulphur in diesel fuel standard would be approximately 108 percent of those found for the 50 p.p.m. scenario, specifically $1.25 billion capital and $86 million operating. Total capital and operating recovery costs would be approximately 1.7 cents per litre.

It is recognized that the relationship between sulphur reduction and costs below 50 p.p.m. is not linear. As a result, this estimate will likely understate the compliance costs to the refining industry to some degree.

A second approach is to develop a "ballpark" estimate of the costs based on the finding by the American Petroleum Institute (API) that it expects the costs of introducing a 15 p.p.m. standard to be approximately double the costs of implementing a 50 p.p.m. standard. This method results in an estimated cost for the Canadian refining industry of approximately $2.3 billion in capital costs and $159 million per year in operating costs, representing 3.1 cents per litre capital and operating recovery.

It is reasonable to assume that an aggregate of individual refinery costs based on a rigorous technical analysis would yield a result somewhere between the application of the API's approach (i.e., $2.3 billion) and the extrapolation for a 15 p.p.m. scenario from the consultant's estimates for a 50 p.p.m. scenario (i.e., $1.25 billion). Thus, the average unit cost would likely be between 1.7 and 3.1 cents per litre, and probably close to the EPA's estimate of 2.0 cents per litre.

The consultant's cost study indicated that compliance costs would be borne unequally amongst Canada's refineries. Some refineries will face economic challenges in meeting the low sulphur diesel requirements while others will be expected to profit. The consultant's competitiveness study noted that experience shows that cost estimates developed during the regulatory process are frequently high, whereas actual costs borne by the industry are much less than anticipated. Likewise, the experience in the United States on reformulating fuels shows that compliance costs are usually less, and sometimes much less, than first estimated.

Competitiveness Implications

The Regulations will align Canadian requirements for on-road diesel fuel with those of the United States. Throughout recent consultations on fuel quality issues, the petroleum refining industry, as represented by the Canadian Petroleum Products Institute (CPPI), has consistently stated that it supported a policy of alignment with the United States.

Such a policy provides the Canadian industry with the most favourable situation with respect to competitiveness (i.e., level playing field) of any of the sulphur reduction options. Furthermore, the advantages of an alignment policy have been substantiated in studies on competitiveness of the Canadian refining industry that were produced as part of the Sulphur in Gasoline Regulations process.

The competitiveness impacts of the Regulations on individual refineries will depend largely on three general factors: first, the capital and operating costs to meet the 15 p.p.m. standard; second, the ability of the refinery to respond to these new financial commitments within the context of market conditions and its parent company's corporate strategy; and third, the regulatory requirements facing diesel-producing competitors abroad, in particular in the United States and Europe.

As previously mentioned, the distribution of the aggregate capital and operating costs amongst individual refineries will vary considerably from one refinery to another. In the absence of refinery-specific cost data, it is not possible to conduct a detailed assessment nor provide meaningful results on the potential competitive impacts of the new standards for individual refineries.

It is very important to note that the capital (and operating) expenditures necessary to meet the 15 p.p.m. sulphur in on-road diesel standard will be incurred by refiners after those made to meet the 30 p.p.m. sulphur in gasoline standard set by the Sulphur in Gasoline Regulations. Refinery modifications to meet the sulphur in gasoline standard are expected to be underway by no later than mid-2002 while modifications for the sulphur in diesel standard may be deferred to 2004. It is very unlikely that a refinery making a large capital investment to meet the sulphur in gasoline standard would subsequently shut down because of the sulphur in diesel requirement. In short, a refinery investing to reduce sulphur in gasoline is likely to remain in operation over the medium to long-term.

Based on analysis conducted in 1997, reducing sulphur concentrations in on-road diesel fuel to 50 p.p.m. would not be expected to directly result in shutdowns of existing facilities. The vast majority of on-road diesel fuel produced in Canada is sold and used domestically, thereby limiting the potential trade implications of any price increases. Moreover, the limits and timing outlined by the Regulations parallel those being introduced in the United States and are similar to those in Europe. Since all refiners currently marketing diesel fuel in Canada will be required to meet the same regulatory requirements, a "level playing field" will be established regarding the level of sulphur in on-road diesel fuel. No long-term competitive changes to the Canadian refining sector are expected to arise as a direct result of the introduction of the new sulphur in on-road diesel fuel standard. Individual refiners will, however, each make their own business decisions about how best to meet the new requirements. Some may, for example, decide to concentrate on supplying diesel fuel for the off-road market, rather than for on-road uses.

One consequence of aligning with the United States is that Canadian refiners will be competing for specialized engineering and construction resources with the U.S. refiners. The Canadian refiners have indicated that they expect this implementation issue to be manageable, but that it is difficult to predict with absolute certainty several years in advance. Environment Canada will monitor this situation over the years prior to 2006 to see if any serious widespread difficulties arise.

Independent Suppliers

In addition to domestic refiners, importers of on-road diesel fuel will be affected by the Regulations. Currently, fuel suppliers import diesel fuel primarily from the United States when the price differential is sufficient to offset the transportation costs. These companies will have to ensure that their product meets the new on-road diesel fuel standard for sulphur.

If independent suppliers have more difficulty obtaining supplies of lower-sulphur diesel domestically (e.g., because of rationalization of Canadian refineries) and/or from foreign sources (i.e., unable to obtain volumes of product at a competitive price), then the economic viability of some suppliers could be put at risk. Both factors could increase the competitive pressure on the independent suppliers sector.

The volume of domestically produced lower-sulphur diesel fuel could fluctuate over the short-term, or change over the long-term as individual refiners adjust to new market conditions. It is expected that although independent suppliers in Canada may face a degree of increased competitiveness in the marketplace during and after the implementation of the new sulphur in diesel standard, a sufficient supply of product will be available in the domestic or U.S. market.

In the case of suppliers that rely heavily on imported product, the introduction of a unique Canadian standard for sulphur in on-road diesel fuel would have reduced the number of sources from which importers could have purchased product, thereby affecting the competitiveness of those independents. However, the requirements of the Regulations closely align with those in the United States, and are similar to the standard in Europe. Hence, the availability of lower-sulphur diesel fuel to importers and blenders should not be greatly affected. Therefore, the long-term viability of independent suppliers should not be threatened, although the impacts of supply and price changes over the short and medium-term will affect individual importers to a varying degree.

Socio-economic Impacts and Consumer Prices

Individuals will be affected by the Regulations in two ways: one, as part of the labour force; and two, as consumers of diesel fuel.

A typical refinery employs approximately 350 persons directly (range 100 to 800) and supports another 1 500 to 3 000 indirect jobs. As discussed above, it is unlikely that a refinery where investments have been made for low sulphur gasoline would shut down as a result of the requirement to reduce the level of sulphur in on-road diesel.

Expenditures by the petroleum refining industry to meet the new specifications outlined by the Regulations will generate economic activity in Canada. It is estimated that more than 50 percent of the $2 billion of capital expenditures will be made in Canada. This will generate additional activity in the construction sector and business to companies supplying professional services and equipment to the petroleum refining industry. The vast majority of this increased activity will occur in the two to three-year period leading up to the June 1, 2006 compliance date. The net impact of this economic activity on the Canadian economy is expected to be very small at the macro-level, although regionally and locally the impacts may be more significant.

Even in an extreme case (i.e., closure of one or more refineries), the macro-economic impact of the Regulations on employment is expected to be minimal. In the short-term, employment losses resulting from a refinery closure would be largely offset by increased opportunities in other sectors (e.g., construction; metal manufacturing). However, depending on the location and timing of a refinery's closure the local impacts could be significant.

All suppliers will attempt to recover their costs and a return on their investment from consumers via a diesel fuel price increase. For the 15 p.p.m. standard, if all capital, operating costs, plus a 10 percent return on capital were recovered by the industry in the marketplace, the price of diesel fuel would be expected to increase by between 1.7 (EPA estimate applied to Canada) and 3.1 cents per litre (API estimate applied to Canada). This translates on average to about $240 to $470 annually in fuel costs for heavy-duty on-road diesel-fuelled vehicles, and to about $22 to $40 per year for light-duty diesel vehicles. Prices to the consumer could be higher or lower than these estimates, depending on market conditions. As well, during the implementation of the Regulations, larger short-term fluctuations in price could be expected.

Diesel fuel is an important input in the production and distribution of goods and services in Canada. The reduction of sulphur in on-road diesel fuel will have an indirect impact on the Canadian consumers through its impacts on the trucking, urban transit and agricultural sectors. The extent of the impact on consumers will depend on the degree to which the three principal diesel fuel-using sectors are able to pass their incremental operating costs on to consumers in the form of higher prices for goods and services.

The direct and indirect impacts of higher diesel fuel prices on consumer spending will vary spatially and between groups. The Regulations are expected to have a small impact on the market structure among refiners, retailers and consumers. The rate of change in the demand for diesel fuel may decline slightly and price fluctuations could result in a small, one-time impact on inflation, but the net impact on the economy from a macroeconomic perspective is expected to be very small.

Interrelationship Between Refiners, Independents and Consumers

It is important to note that the impacts on refiners, independent suppliers and consumers (i.e., diesel fuel prices) are very interrelated. Independent suppliers partially limit the dominant influence of petroleum refiners in setting consumer fuel prices. If independents have more difficulty in accessing supplies of diesel fuel, then refiners are in a better position to recover a greater proportion of their costs via higher domestic diesel fuel prices. The interrelationship between the three can vary over time. As a general rule, action that improves conditions for the refiners adversely affects the position of independent suppliers and leads to higher prices for diesel fuel, and vice versa.

Cost to the Government

The Regulations will not result in any additional requirements as related to the existing inspection and sampling activities from Environment Canada.

A cost of $232 to $282 thousand per year was identified for compliance monitoring and enforcement activities (inspections, sampling and sampling analysis) of the Diesel Fuel Regulations that these Regulations revoke and replace. Those costs will continue under the new regulations. As a result, the incremental cost of the Regulations for inspection activities, sampling and sampling analysis is zero.

Consultation

The issue of sulphur in on-road diesel fuel has been addressed through the federal government's overall cleaner vehicles and fuels program. Comprehensive consultations on the issue have taken place through:

• the Task Force on Cleaner Vehicles and Fuels of the Canadian Council of Ministers of the Environment (CCME) (1994-95);
• the development of the Diesel Fuel Regulations (1996-97);
• the Environment Canada process to set a level for sulphur in gasoline and diesel fuel (1997-98);
• the Minister of the Environment's process to develop a federal Notice of Intent on cleaner vehicles, engines and fuels (2000-01); and
• the Minister of the Environment's process to consult on the design of the on-road diesel Regulations, including follow-up discussions on the special circumstances of northern Canada (2001).

The Notice of Intent was published by the Minister of the Environment in the Canada Gazette, Part I, on February 17, 2001, following extensive public consultations. Consultations through this process showed near universal support by stakeholders for Canada to align with the U.S. requirements for sulphur in on-road diesel fuel. Stakeholders supporting alignment included the Canadian Petroleum Products Institute, Imperial Oil, Sunoco, Petro-Canada, North Atlantic Refining, the Greater Vancouver Regional District, the Manufacturers of Emission Controls Association, Toronto Board of Health, Canadian Trucking Alliance, and the Canadian Vehicle Manufacturers' Association. A few stakeholders wanted sulphur levels to be lower than 15 p.p.m. (e.g., Volkswagen and Friends of the Earth). Husky Oil, while supporting harmonization with U.S. fuel standards and timing, noted that it is "unable to meet the contemplated 15 p.p.m. sulphur in diesel mark without making significant capital investment", and recommended a level of 50 p.p.m.

Environment Canada released a discussion document on the design of the Regulations on May 1, 2001. Stakeholders universally indicated their preference for a simple, straightforward regulation starting in 2006, without the flexibilities (and complications) provided in the U.S. regulations for a small part of its on-road diesel pool.

In July 2001, a teleconference with interested parties was held to address concerns specific to northern Canada. It was concluded that because of logistical concerns, northern regions of Canada require a later implementation date than the rest of Canada for the 15 p.p.m. limit on sales of on-road diesel fuel. The Regulations therefore specify an implementation date of September 1, 2007, for the sales limits in northern regions, 12 months later than for the rest of Canada.

Consistent with the requirements of subsection 145(2) of CEPA, 1999, the Minister of the Environment offered to consult on a draft of the Regulations with the governments of provinces and members of the CEPA National Advisory Committee who are representatives of aboriginal governments. None of the parties took up the offer to consult within 60 days of the offer being made.

Based on the results of the extensive consultations with stakeholders and the information that was made available from the process in the United States, the federal government determined that a reduction in the level of sulphur in on-road diesel fuel to a maximum of 15 p.p.m. on June 1, 2006, was warranted. The mechanism to implement this decision is the Sulphur in Diesel Fuel Regulations. The Regulations will align Canadian requirements for a lower-sulphur diesel fuel standard with the diesel fuel program to be implemented by the United States.

The proposed regulations were published in the Canada Gazette, Part I, on December 22, 2001. Environment Canada received comments on the proposed regulations from 22 parties. Almost all parties, including the Canadian Petroleum Products Institute and fuel producers, expressed support for the regulations.

Six parties (Enbridge Pipelines Inc., Trans Mountain Pipeline Company, Trans-Northern Pipelines, Imperial Oil, Shell Canada Products and the Canadian Petroleum Products Institute) raised concerns regarding potential contamination of low sulphur diesel fuel in the distribution system. Pipeline distribution companies indicated that there could be substantial cost impact for shippers and consumers associated with pipeline distribution of low sulphur diesel fuels and possibly other fuels products. Accordingly, Natural Resources Canada, in consultation with other federal and provincial government departments and industry, is now considering the structure and terms of reference of a study to investigate the potential constraints of the existing distribution system and the possible effects in terms of distillate supply.

The Canadian Trucking Alliance indicated concerns as to how Environment Canada arrived at the Gazette's additional cost estimate per truck to operate on ULSD fuel — $240 to $470 annually. The Canadian Trucking Alliance's own cost projections vary from $1,017 to $3,714 annually per tractor. Environment Canada recognizes that cost estimates vary depending on factors such as the cost of the fuel, the distance travelled, size of engine and the fuel consumption rate of the engine. Environment Canada's cost estimate is based on the EPA estimate which is an average cost of vehicles ranging from light heavy-duty trucks to heavy heavy-duty trucks and urban buses.

Some parties suggested minor or technical refinements to the regulations. Based on comments received from stakeholders several minor refinements were made to the regulations. These include:

• changing the delineation of the "northern supply area", to take into account the need for the availability of low-sulphur diesel on major routes in the North;
• allowing for alternative test methods for reporting purposes that have been demonstrated by the regulatee to provide equivalent results to the reference test method;
• setting an earlier date for use of the reference method ASTM D-5453; and
• adjusting reporting requirements for sales of diesel fuel.

Other submissions suggested the following:

• setting the sulphur level at an average level of 15 p.p.m. with maximum concentration of 30 p.p.m.;
• including flexibility provisions in the regulations to address the possibility of unforeseen circumstances that could delay the introduction of low sulphur diesel fuel;
• adding a 120-day phase-in of amendments to methods and standards incorporated by reference in the regulations;
• removing the date of compliance at the point of production or import;
• for and against the use of fiscal instruments to promote the early introduction of low sulphur on-road diesel fuel;
• specifying other diesel parameters such as cetane number, aromatics, lubricity, density and distillation; and
• setting sulphur limits for off-road diesel.

Changes were not made to the regulations to address the above comments. As set out in the Minister's Notice of Intent on Cleaner Vehicles, Engines and Fuels, the regulations set a limit of 15 p.p.m. coming into effect in June 1, 2006. For off-road diesel fuel, the Notice of Intent specifies that a regulatory limit for sulphur will be established in the same time frame that the EPA plans for developing limits for sulphur in U.S. off-road diesel.

Environment Canada does not intend to regulate other properties of diesel fuel at this time. Under the Notice of Intent, Environment Canada stated it would gather data on diesel fuel properties under a voluntary survey with refiners and importers. Properties addressed in the survey include cetane, aromatics, and polycyclic aromatic hydrocarbons. The survey commenced in July 2001.

Compliance and Enforcement

Since the Regulations will be promulgated under the Canadian Environmental Protection Act, 1999, the Compliance and Enforcement Policy implemented under the Act will be applied by CEPA enforcement officers. The policy outlines measures designed to promote compliance, including education, information, promoting of technology development and consultation on the development of regulations.

When verifying compliance with the Regulations, CEPA enforcement officers will abide by the Compliance and Enforcement Policy, which also sets out the range of possible responses to violations: warnings, directions and environmental protection compliance orders issued by enforcement officers, ticketing, ministerial orders, injunctions, prosecution, and environmental protection alternative measures which are an alternative to a court trial after the laying of charges for a CEPA, 1999 offense. In addition, the policy explains when Environment Canada will resort to civil suits by the Crown for costs recovery.

If, following the inspection, investigation or report of a suspected violation, a CEPA enforcement officer confirms that a violation has been committed, the enforcement officer will select the appropriate response, based on the following criteria:

• Nature of the alleged violation: This includes consideration of the damage, the intent of the alleged violator, whether it is a repeat violation, and whether an attempt has been made to conceal information or otherwise subvert the objectives and requirements of the Act.
• Effectiveness in achieving the desired result with the alleged violator: The desired result is compliance within the shortest possible time and with no further repetition of the violation. Factors to be considered include the violator's history of compliance with the Act, willingness to cooperate with enforcement officials, and evidence of corrective action already taken.
• Consistency: Enforcement officers will consider how similar situations have been handled in determining the measures to be taken to enforce the Act.

Contacts

Bruce McEwen
Oil, Gas and Energy Branch
Air Pollution Prevention Directorate
Department of the Environment
Ottawa, Ontario
K1A 0H3
Tel.: (819) 953-4673
FAX: (819) 953-8903
E-mail: bruce.mcewen@ec.gc.ca

Céline Labossière
Regulatory and Economic Analysis Branch
Economic and Regulatory Affairs Directorate
Department of the Environment
Ottawa, Ontario
K1A 0H3
Tel.: (819) 997-2377
FAX: (819) 997-2769
E-mail: celine.labossiere@ec.gc.ca

Footnote a 

S.C. 1999, c. 33

Footnote b 

S.C. 1999, c. 33

Footnote 1 

SOR/97-110

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