Recently, the European Union released its 2030 Framework for Climate and Energy. Buried in the details was an indication that the EU is rethinking its proposed Fuel Quality Directive (FQD) – a regulation with the stated objective of reducing the carbon intensity of European motor fuel in 2020 by 6% relative to 2010 levels. This is welcome news for Canada and ironically, for the European environment (though not for European environmentalists), since the current FQD proposal contains some major flaws.
First, the FQD is contrary to EU international trade obligations, as well as the UN Climate Change Convention principle that “measures should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade”. Most notably, there is no justification for the decision to assign two emissions values for diesel fuel and gasoline -- one for fuel made from conventionally-produced crudes and a second higher score for fuel made from “natural bitumen feedstock source”.
A second major problem is that the FQD won’t achieve its stated 2020 objective. As a result of flawed data and methodology, literally all imported conventional crudes (80% of EU consumption) will enter the EU market with an assigned value that is substantially lower than their actual emissions, particularly those crudes produced with significant gas flaring. As the level of crude imports rises (to replace rapidly-depleting “cleaner” North Sea oil), the FQD will show no increase in carbon intensity for statistical purposes, even as it continues to rise in fact. Meanwhile, global GHG emissions will rise due to higher transportation emissions world-wide caused by “market shuffling”.
A third problem is that the FQD, as currently designed, will either backfire on Europe or miss everyone altogether.
For various reasons, the EU consumes more diesel fuel while the US consumes more gasoline. As a result, Europe exports surplus gasoline to the United States and imports diesel fuel to meet its requirements, especially ultra-low sulfur diesel fuel (ULSD) that allows the application of newer emissions control technologies to reduce particulate emissions. Since an excellent feedstock for use in the production of ULSD is Canadian bitumen, the FQD could have unintended consequences on not only global GHG emissions, but European air pollution, as “clean diesel fuel” from the United States is blocked in the name of “dirty oil”.
This self-inflicted wound is possible, but not certain, since the FQD contains an embarrassing “glitch” that could mean it won’t hit anyone! Canadian “dilbit” and synthetic crude made from Canadian bitumen are classified under tariff number 2709. In their zeal to justify different treatment for “natural bitumen feedstock”, the FQD authors have defined it as refinery feedstock falling under tariff heading 2714 -- the category for paving/sealant byproducts of the fuel refining process.
EU officials appreciate that the FQD is more about politics than public policy, and that it will trigger a counter-productive trade dispute with both the US and Canada. Like good public servants everywhere, they should have a face-saving rescue plan ready for their well-intentioned political “masters and mistresses”.
Step one was giving notice in the 2030 Framework that the Commission will not set a new intensity target for transport fuel after 2020, citing the inability to reduce intensity due to the new limits on the use of first generation biofuels. This has infuriated the green NGOs (who lobbied for such limits).
Step two will likely be a move to a single value for all diesel fuel (and gasoline), whether made from conventional or unconventional crude, with the different carbon intensities of the various crude blends used to formulate the trade-weighted single score. This move – called “Option 0” in the ongoing consultations -- would begin to defuse the ticking trade bomb (the devil will be in the details) while allowing the tariff definition screw-up to disappear quietly into the night.
The next step in eliminating the potential trade dispute with the US and Canada would be to use more accurate and credible data (perhaps the data collected by the California Air Resources Board), and to assign an elevated default value for unknown crude values to prevent “free riders”.
And a solid fourth step would be ending unilateral European action, and instead participating within the regulatory cooperation mechanisms already formed between Canada and the US, in the process of being formed by Canada and the EU, and likely to be formed by the EU and US. Embarking on a cooperative process that will allow officials from both sides of the Atlantic to develop a standard that will not only be consistent with international trade and climate change principles, but also more effective in terms of environmental protection.
What is certain is that well-intentioned, determined environmental activists who have always viewed the FQD less as a regulatory tool and more as a weapon in the war against “the Tar Sands”, will fight each and every attempt by EU officials to change the current course, without regard to the consequences.