In pursuit of greenhouse gas (GHG) emissions reductions, policymakers in some Canadian provinces are contemplating a low-carbon fuel standard (LCFS), a regulation that would require transportation fuel providers to distribute a mix of fuel that, on average, emitted a declining amount of GHG per unit of energy produced. This report examines the drawbacks of the LCFS concept and suggests that economy-wide measures would be a better way to reduce GHG emissions.economic growth and innovation, cap-and-trade, transportation fuel providers

Benjamin Dachis

English

Research Papers in Economics

e-brief
Low-Carbon Fuel Standards: 
Driving in the Wrong Direction
By
Benjamin Dachis
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May 26, 2009
 Many Canadian provinces are considering a low-carbon fuel standard (LCFS).
An LCFS would require transportation fuel providers to distribute a mix of fuel
that, on average, emitted a declining amount of greenhouse gas emissions per
unit of energy produced, measured on a lifecycle basis. 
 An LCFS has numerous problems: administrative complexity, scientific
uncertainty – owing to the difficulty of measuring all emissions from fuel
consumption and production, and the possibility that there will be little net
reduction in total emissions. 
 An economy-wide cap-and-trade system would be more economically efficient
and more certain to reduce greenhouse gas emissions.
The author would like to thank Frank Wolak of Stanford University for his considerable contribution to the original draft
and for comments received throughout the drafting of this paper, and to Colin Busby and Finn Poschmann for their helpful
suggestions. The author assumes sole responsibility for the paper.
1 Transportation’s contribution ranges from a high of 41 percent in Quebec to a low of 15 percent in Alberta (Canada 2008).
In 2007, gasoline and diesel powered 87.3 percent and 12.3 percent, respectively, of kilometres travelled by fuelled vehicles
(Cansim Table 405-0066).
2 In British Columbia, such a plan is referred to as a low-carbon fuel regulation.
Transportation is a major contributor to Canada’s greenhouse gas (GHG) emissions, accounting for 26
percent of the total.
1 A number of technologically feasible low-carbon fuels exist that could reduce these
emissions. The leading candidates are electricity, hydrogen, and biofuels, although there is uncertainty about
the future market shares of these fuels and about what other technologies will emerge.
One policy tool that has been suggested for increasing the market share of low-carbon fuels, without
regulating what specific types of fuels should meet reduction targets, is a low-carbon fuel standard (LCFS).
2
Under an LCFS, fuel suppliers – refiners, importers, and blenders of passenger vehicle fuels – would be
required to ensure that the mix of fuel they sell has a maximum GHG emissions content, measured in CO2-
equivalent grams per gigajoule (GJ), that is based on all emissions from resource extraction, refining,
transportation to market, and, ultimately, consumption. The maximum allowable emissions content would be
reduced over time to encourage producers continually to reduce the GHG intensity of fuels they sell.
Suppliers that reduced the average carbon content of the fuels they sell below the standard would receive
credits that they could sell to other suppliers.An LCFS is, however, a complex means of reducing GHGs, given the uncertainties about lifecycle emissions
associated with fuel production and consumption and the lack of good information with which to resolve these
uncertainties. Further, such a regulation, which would apply only to a single sector of the economy and would simply
regulate emissions intensity, as opposed to total emissions, might not be effective in curbing total emissions of GHGs. 
How an LCFS Would Work
One goal of an LCFS would be to reduce the GHG emissions intensity of passenger vehicle fuels by at least 10 percent by
2020. One pioneer in this regard is California, which, in January 2007, established an LCFS for transportation fuels sold
in that state (California 2007b). Since that time, Ontario has signed a memorandum of understanding with California to
implement a similar LCFS program (California 2007a), while 11 other US states, as well as the European Union and
British Columbia, have adopted LCFS policies.
3
One way of comparing the GHG intensity of different fuels is to look at the GHGs each type of fuel emits per kilometre
of travel. If one uses as a baseline the total lifecycle emissions of gasoline produced from conventional oil (the top
horizontal line in Figure 1) and fuel providers had to meet a 10 percent lower average emissions content (the lower
dashed line), they would need to reduce their reliance on gasoline and sell more of their energy product in the form 
of, for example, biodiesel or electricity from low-GHG-emitting power plants.
Thus, an LCFS would create a larger, mandated demand for fuels with GHG content below a given level of GHG
intensity while increasing the relative cost of fuels with GHG content above the benchmark, including gasoline and some
types of ethanol. Fuel suppliers would have to charge higher prices for the higher-carbon fuels, while suppliers of low-
carbon fuels would be able to charge a lower price than they otherwise would have – thus creating a larger market for
their products – to meet the overall GHG emissions intensity standard.
One concern with such a policy, however, is that producers and consumers of alternative low-carbon fuels such as
biofuels, electricity, natural gas, and propane tend to be more sensitive to price changes than are producers and
consumers of gasoline (Holland, Knittel, and Hughes 2009). If the LCFS did not cover all petroleum products and
geographic markets, incentives for other consumers to switch to more GHG-intensive fuels could offset fully the reduced
emissions in the transportation sector. For example, if more drivers used natural gas instead of gasoline, it would drive
up the price of natural gas in the entire economy, encouraging consumers of natural gas in regions or sectors not
covered by the LCFS to search for substitutes, including coal and gasoline, which could lead to higher overall emissions
elsewhere (Holland, Knittel, and Hughes 2009). Likewise, a regulation that did not cover all provinces could lead
producers to sell their most GHG-intensive fuel products in non-complying jurisdictions. 
Implementation Problems
Several problems are inherent in the implementation of an LCFS. One is how to determine conclusively the total amount
of emissions created during the production of a fuel – this cannot be done simply by burning the fuel in a test facility, for
example. As another example, in determining the relative carbon intensity of ethanol and gasoline, scientifically
defensible differences in modelling assumptions of the effect of land use change and the emission reductions credited to
co-products
4 can yield sizable differences in emissions estimates for each stage of the full fuel cycle (Pimentel and
Patzek 2005, 2007; Plevin and Mueller 2008; Farrel et al. 2006). Moreover, estimates of baseline carbon emissions of
INDEPENDENT REASONED RELEVANT
| 2 e-brief
3 See “Eleven states plan Low Carbon Fuel Standard,” Canadian Driver, January 6, 2009; available at website:
http://www.canadiandriver.com/2009/01/06/eleven-states-plan-low-carbon-fuel-standard.htm. An LCFS has also been a component of
eight US federal climate policy bills, but none was passed (Yacobucci 2008). 
4 Co-products are items produced during the ethanol production process that have a market value and that displace competing products
that require energy (and produce emissions).0
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Conventional
gasoline
Oil sands gasoline Petroleum diesel 10 percent corn
ethanol
5 percent canola
biodiesel
Plug-in electric
vehicle in Quebec
Plug-in electric
vehicle in Alberta
Fuel Type
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Emissions during production Tailpipe emissions
INDEPENDENT REASONED RELEVANT
e-brief /3
Figure 1: Estimated Lifecycle Greenhouse Gas Emissions per kilometre by Type of Fuel, 2008
Note: Emissions from biofuels during production includes CO2 sequestration.
Source: Author’s calculations from GHGenius, version 3.14b, tables 57a-c.
5 For example, power consumed in Ontario might be produced from clean hydro in Quebec at night but from coal in the United States
during the daytime.
6 British Columbia’s low-carbon fuel regulation will be calculated based on the pooled amount of energy from all fuel types that a fuel
provider sells, which should encourage consumers to switch to diesel. California has set separate standards for emissions reductions for
diesel and gasoline of 71 grams and 92 grams of CO2-equivalent, respectively; moreover, sellers must meet the emissions reduction goals
for these fuels separately, meaning that gasoline sellers cannot receive credits from selling diesel in place of gasoline (Ontario 2008).
fuel must also take into account regulations – such as renewable fuel and electricity standards – that already exist but that
are not yet binding and whether simply complying with them would be sufficient to meet the new standard.
Another problem arises with respect to hybrid-electric or plug-in hybrid vehicles. Because the emissions intensity of
electricity consumed at a given location depends on the type of power plant and can vary dramatically by time of day,
5
regulators would have to determine the specific times at which people recharge their vehicles at millions of possible
charge points. In this sense, plug-in hybrids, if they are the future of transportation, would present a daunting challenge
for LCFS regulators. 
A further issue is that, since diesel-powered vehicles are more efficient than gasoline vehicles, lower CO2-equivalent
emissions result when consumers switch from gasoline to diesel (United States 2005),
6 but only if the switch is measured
from “well-to-wheel” rather than “well-to-tank,” since it is the vehicle, not the fuel, that reduces emissions intensity
(General Motors Corporation et al. 2001). Hence, translating these savings into LCFS credits and determining whether to
allocate these credits to vehicle manufacturers or other parties would be administratively challenging.| 4 e-brief
INDEPENDENT REASONED RELEVANT
Finally, when an LCFS is integrated with a cap-and-trade system, firms in the rest of the economy can find ways 
to offset or find cheaper emissions reductions, but the transportation firms cannot seek reductions outside the
transportation sector. So an LCFS would increase compliance costs if lower-cost carbon reductions are available outside
the transportation sector. Yet, one tonne of CO2-equivalent GHG emissions causes the same environmental damage
regardless of its source. This logic implies that the price of one tonne of CO2-equivalent GHG emissions should be the
same for all fuels. This could be achieved by setting an overall cap on all GHG emissions. Once in place, suppliers 
would then pass on the cost of meeting this overall GHG emissions cap to consumers and trade credits for exceeding
targets, thus ensuring that total emissions were reduced. 
Conclusion
Imposing a single-sector, carbon-intensity-based regulation such as an LCFS is less likely to reduce total GHG emissions
than would a comprehensive cap-and-trade system. Furthermore, an LCFS would face implementation challenges – with
respect to emissions calculations and technology-specific difficulties, for example – that a cap-and-trade system would
avoid. Policymakers thus should focus on broader carbon-pricing tools.INDEPENDENT REASONED RELEVANT
e-brief /5
This e-brief is a publication of the C.D. Howe Institute.
Benjamin Dachis is a Policy Analyst at the C.D. Howe Institute.
For more information call Benjamin Dachis at 1-416-865-1904.
This e-brief is available at www.cdhowe.org.
Permission is granted to reprint this text if the content is not altered and proper attribution is provided.
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Low-Carbon Fuel Standards: Driving in the Wrong Direction

Low-Carbon Fuel Standards: Driving in the Wrong Direction

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