Final Report on the Government Working Group on Sulphur in Gasoline and Diesel Fuel Setting a Level for Sulphur in Gasoline and Diesel Fuel

July 14, 1998

Summary and Options/Recommendations

In 1995, the Canadian Council of Ministers of the Environment (CCME) directed Environment Canada to lead in the development and implementation of a regulated minimum national standard for gasoline. The CCME directed that the standard should set requirements for sulphur at the lower of a level compatible with low-emission vehicle (LEV) technologies or a level that cost-effectively takes into account the health and environmental benefits of the sulphur reduction(s).

A government working group (GWG), made up of representatives from several provinces and federal departments, was formed to recommend appropriate actions on sulphur in gasoline and diesel fuel. The GWG worked through 1997 and 1998 assessing relevant information obtained from Expert Panel reports, supplemental studies and stakeholders consultations. The GWG developed several options, but was not able to reach consensus on a single recommendation as to the appropriate sulphur level for future Canadian gasoline. As a result, the Final Report of the Government Working Group on Sulphur in Fuels identifies two sulphur in gasoline options (and two variations of Option A) for consideration by the Minister of the Environment, and summarizes the results of the analysis undertaken in support of these options. As well, the report makes recommendations on future action with respect to on-road and off-road diesel fuel.

The Issue

Sulphur occurs naturally in crude oil. Its level in fuel products depends on the source of the crude oil and on the extent to which it is removed during the refining process. Sulphur levels in Canadian gasoline are amongst the highest in the world. High sulphur levels increase emissions of a number of pollutants from vehicles and contribute significantly to air pollution. The resulting air pollution adversely affects the health of all Canadians, particularly those living in urban areas. Some Canadians suffer severe respiratory and cardiac ailments and a small number die prematurely from increased air pollution.

Emissions from gasoline and diesel-powered vehicles are a major source of air pollution, on a national basis contributing 70% of carbon monoxide, 50% of nitrogen oxide, 30% of VOCs, 25% of carbon dioxide and 65% of benzene emissions. In urban areas the vehicle contribution to air pollution is higher. Vehicles also emit sulphur dioxide and fine particulate matter. Reducing the level of sulphur in fuels would decrease emissions of a number of pollutants from vehicles, such as carbon monoxide (CO), nitrogen oxide (NOx), volatile organic compounds (VOCs), sulphur dioxide (SO₂), sulphate particulates and benzene.

Sulphur adversely affects the operation of vehicle emission control systems and the effect of sulphur on low-emission vehicles is greater than on existing vehicles. Also, high sulphur fuels can be a barrier to the introduction of some new high efficiency engine technologies that are likely to be an important component of Canada's efforts to control its greenhouse gas emissions. As a result, lower sulphur levels would help current and future vehicle emission control technologies realize their full benefits in Canada.

The federal government and provinces are putting in place a comprehensive and stringent cleaner vehicles and fuels program to reduce air pollution from vehicles. Reducing sulphur in gasoline and diesel is an integral component of this comprehensive plan. The provinces control gasoline vapour pressure and some are developing or have already introduced vehicle inspection and maintenance programs. For example, B.C. introduced on-road diesel fuel regulations in 1995, new gasoline regulations in 1996 and an inspection and maintenance program in 1992. The federal government has already introduced requirements for low sulphur diesel fuel, low benzene gasoline and new vehicle emissions standards which equal the most stringent national standards in the world.

Canadian Sulphur Levels

In 1997, the national average sulphur level in Canadian gasoline was 360 ppm. However, since 1988 the national average sulphur level in gasoline has increased by approximately 42%, from 254 ppm to 360 ppm. Over the past four years, the national average has remained fairly constant.

As illustrated by the following figure, historically there has been considerable regional variations in the sulphur level of gasoline. Of particular note is the substantial increase of sulphur levels in gasoline in Ontario of approximately 140% from 1988 to 1997.

In 1993, the average sulphur level for the total diesel pool in Canada was 1800 ppm. By 1997, the average level was reduced to 1200 ppm. This reduction was brought about by a memorandum of understanding between Environment Canada and most domestic refiners on providing low sulphur diesel fuel for on-road uses at the retail level. The implementation of the federal Diesel Fuel Regulations (1997), which became effective in 1998 for all on-road uses, is expected to further reduce that average. In 1997, the average sulphur level for on-road diesel and regular (off-road) diesel were 300 ppm and 2400 ppm respectively.

Sulphur Levels in Other Jurisdictions

Other jurisdictions have or will require low sulphur gasoline. Presently, Japan and California have low sulphur (30 ppm average) gasoline, and the European Union has recently set a similar requirement (50 ppm maximum) in 2005 (with an interim step of 150 ppm maximum in 2000). The U.S. is currently assessing the need for national or regional sulphur in gasoline standards to be implemented coincidentally with Tier 2 vehicle emission standards, which are expected to be introduced for the 2004 vehicle model year.

According to a 1996 survey of average international gasoline sulphur levels conducted by Solomon Associates Inc., France and Latin America have sulphur levels higher than Canada (about 430 ppm and 600 ppm respectively). The United States and Britain have average levels somewhat lower than Canada (about 310 ppm and 340 ppm respectively), while the rest of Europe, Asia (excluding Japan) and Australia have average levels considerably lower than Canada (160 to 230 ppm).

Process

In 1996 and 1997, a multi-stakeholder Steering Committee with representatives from the petroleum refining and automotive industry associations, other federal departments, one environmental group, and the provinces directed a fact-finding process. This process was carried out by Expert Panels of recognized professionals and by consultants (Purvin and Gertz Inc. and Kilborn Engineering Inc.) proficient in appropriate fields and representing divergent views and interests. The membership of the expert panels were reviewed and approved by all Steering Committee representatives. The work of the three Expert Panels was coordinated by the Chair of Studies, Dr. David Johnston, Centre for Medicine Ethics and Law, McGill University.

The work of the expert panels focused primarily on sulphur in gasoline scenarios, although sulphur levels in on-road and off-road diesel were also assessed. As well, a report was produced on the potential impact of sulphur on motor vehicle emission control and monitoring technologies by a fact-finding group consisting of representatives for the auto and oil industries and the federal government.

The Government Working Group on Sulphur in Fuels (GWG) was subsequently tasked by Environment Canada in mid-1997 to analyze the expert panel reports and develop recommendations as to the appropriate levels of sulphur in gasoline and diesel. Chaired by Environment Canada, the GWG consisted of representatives from four other federal departments (Health Canada; Industry Canada; Transport Canada; and Natural Resources Canada) and six provincial governments (Ontario; Québec; New Brunswick; Nova Scotia; British Columbia; and Alberta).

The GWG based its deliberations primarily on the work of the expert panels and the fact-finding group on vehicle/fuel compatibility, but also considered some additional information. It developed a series of options as to the appropriate level of sulphur in gasoline, and recommendations for on-road and off-road diesel fuel. A Preliminary Report of the Government Working Group on Sulphur in Fuels, was distributed to more than 250 stakeholders on April 3, 1998. Stakeholders were asked for their views with supporting rationale on an appropriate level of sulphur in gasoline. Stakeholder responses were received by mid-May and considered by the GWG. Subsequently, this Final Report of the Government Working Group on Sulphur in Fuels was completed in July, 1998.

Health Benefits of Reducing Sulphur Levels

The potential health benefits of reducing the level of sulphur in gasoline are significant. The Health and Environmental Impact Assessment Panel Report estimated that over the 20-year period of analysis (2001-2020), for seven Canadian cities, reducing sulphur levels in gasoline to 30 ppm would result in approximately 1352 avoided premature deaths, 58,429 avoided respiratory cases in children, 2,086,511 fewer acute asthma symptom days and a large reduction in other respiratory problems.

The expert panel indicated that the methodology they used would likely underestimate the health benefits. A Health Canada study published in the Canadian Journal of Public Health in June, 1998,⁽¹⁾ supports the expert panel's conclusion. While definitive conclusions cannot be drawn on the basis of a single study of this nature, the Health Canada study estimates that the potential benefits of reducing sulphur in gasoline may be an order of magnitude higher than those estimated by the Health Panel.

Costs and Competitiveness Implications

The costs to produce low sulphur gasoline are also expected to be significant. The reports of the Cost and Competitiveness Panel estimate it would cost industry $1.8 billion in capital expenditures and $119 million per year in operating expenses to reduce sulphur in gasoline to 30 ppm. The costs would be borne unequally amongst the 17 Canadian refineries. A varying proportion of the total costs of about one cent per litre is expected to be passed on to consumers. Those refineries experiencing higher costs and less capability to recover those costs in the marketplace may face economic challenges. Likewise, independent suppliers of gasoline will also face challenges as they try to obtain supplies of low sulphur gasoline.

In its original analysis, Purvin & Gertz indicated that 1 to 3 refineries could have their economic viability threatened at the 150/200 ppm level and 3 to 4 at the 30/80 ppm level. As well, the challenges to the refining industry and the threat of refinery closures increase as sulphur specifications become more stringent.

New analysis provided by the Canadian refining industry as part of its stakeholder's comments indicates that the potential to recover compliance costs in the marketplace are improved from the original Purvin & Gertz report if the United States also reduces sulphur levels in gasoline. Assuming no refineries shut down, the analysis indicated that the best opportunities to pass costs onto consumers exist when product specifications are similar in Canada and the United States. In its presentation to the GWG, Purvin & Gertz supplied the results of their analysis of one scenario that considered the impact of refinery closures on price increases for the remaining Canadian refineries. That scenario, which assumed industry rationalization with a number of refinery shutdowns, would result in "prices ris[ing] to secure large volume[s] of imports".

Given the inter-relationships between potential price uplift, refinery viability and who eventually pays to reduce sulphur in gasoline, this new information suggests that under the assumptions used in the second analysis, the refining industry will be able to pass a greater proportion of the compliance costs on to consumers via an increase of gasoline prices. Under these conditions, a fewer number of refineries may have their economic viability threatened and the impact on independent suppliers may be lessened to some degree.

Over the past two decades, there has been significant rationalization of refining capacity in Canada. Potentially large investments to reduce sulphur in gasoline or diesel could cause a refiner to minimize investments and operating costs by consolidating operations, making arrangements to buy product from other domestic refiners, or by importing.

Stakeholders' Views

The submissions by stakeholders clearly identified two schools of thought with respect to a decision on sulphur in gasoline. The majority of the respondents, including the Ontario Medical Association, the Montreal Urban Community, several cities in Ontario, and vehicle manufacturers (CVMA and AIAMC), favoured reducing sulphur in gasoline to 30/80 ppm, citing the potential health benefits and/or the vehicle/fuel compatibility issues as the reasons for immediate action. The second perspective, offered by the petroleum products industry, considered the costs and competitiveness considerations to be too severe to warrant unilateral action by Canada. Instead, the petroleum industry favoured matching standards in Canada with those to be established in the United States for conventional gasoline under the EPA's Tier 2 vehicle emissions program. This position was also supported by several independent suppliers, whose major concern was their continued access to low-priced products in the future.

Options/Recommendations:

Sulphur in Gasoline

The GWG did not reach consensus on a single recommendation for the appropriate level of sulphur in gasoline. However, the GWG did agree that action should be taken to reduce the level of sulphur in gasoline in Canada from its current level. The GWG identified two sulphur in gasoline options (and two variations of Option A) for consideration by the Minister of the Environment.

As an over-riding consideration, regardless of the option selected, the GWG recommends that future action to reduce sulphur levels in gasoline in the United States to a level lower than outlined in the following options should be matched by comparable action in Canada over a similar time frame.

1) Option A.1 - 30/80 ppm Standard:

A 30 ppm annual average and 80 ppm maximum level of sulphur in gasoline is mandated in all of Canada effective January 1, 2002.

The introduction of low sulphur gasoline as the national standard in Canada results in the highest level of health benefits but also the highest compliance costs. Due to the compliance costs and possible market changes, the option places the greatest degree of pressure upon refineries and independent suppliers of gasoline. Based on analysis by the GWG the national benefits are twice the costs, but there are significant differences between the regions. The majority of the benefits are in Ontario and Québec (largest urban populations) while the costs are fairly evenly distributed amongst the regions. If the benefits increase by an order of magnitude, as suggested by a recent Health Canada study (June, 1998), benefits would exceed costs in all regions of Canada.

The Competitiveness Panel Report (May 1997) concluded that with an average price uplift of approximately 0.4 cents/litre, up to four refineries in Canada could have their economic viability threatened. The new information, based on a study commissioned by the CPPI and submitted to the GWG, indicates a higher potential to recover compliance costs in the marketplace if the U.S. also takes action to reduce sulphur levels. Increased cost recovery could reduce the threat to refinery viability as the industry is able to pass a greater share of the costs onto consumers via gasoline price increases.

Low-emission vehicles (LEVs) are designed to operate on 30/80 ppm gasoline. Therefore, requiring a 30/80 ppm standard would allow Canadians, who pay for this technology, to receive the full emission reduction benefits from their vehicles' emissions control systems. Also, this option would facilitate the introduction of some advanced technology vehicles capable of achieving significant reductions of greenhouse gas emissions.

Finally, under this option the refining industry will not risk incurring stranded investment as a result of "middle of the road" interim requirements.

2) Variation A.2 - Different Regional Timing:

A 30 ppm annual average and 80 ppm maximum level of sulphur in gasoline is mandated in Québec and Southern Ontario⁽²⁾ effective January 1, 2002.

A 30 ppm annual average and 80 ppm maximum level of sulphur in gasoline is mandated in the rest of Canada effective January 1, 2005.

This variation of the first option is a two-staged phase-in of a low sulphur gasoline standard. Immediate action is taken first in priority areas by introducing the 30/80 ppm standard in Québec and Southern Ontario. B.C. provincial requirements will result in a decline of sulphur levels in the Lower Fraser Valley to levels below the rest of Canada in the interim period. Variation A.2 achieves 98% of the benefits at 95% of the costs of Option A.1, with the difference being due to the later implementation date in the rest of Canada.

The three-year delay of the introduction of the 30/80 ppm standard in the rest of Canada could ease the burden on the refining industry and on independent suppliers. Companies with refineries in more than one region will have the opportunity to stagger their capital investments. Refineries outside of Québec and Southern Ontario whose economic viability may be threatened will have an additional three years to comply with the new standard, thereby allowing them to benefit from emerging technologies and from the experiences in Ontario and Québec.

3) Variation A.3 - Different Regional Levels:

A 30 ppm annual average and 80 ppm maximum level of sulphur in gasoline is mandated in Québec and Southern Ontario^2_ effective January 1, 2002.

A 30 ppm annual average and 80 ppm maximum level of sulphur in gasoline is mandated in the Lower Fraser Valley effective January 1, 2004.

A freeze of the sulphur levels at 1994 levels is implemented in the rest of Canada. Further action on sulphur levels in gasoline for the rest of Canada is delayed until the determination of sulphur standards in the United States (decision expected by the end of 1999). Sulphur standards in the rest of Canada will be equivalent to the least restrictive sulphur in gasoline requirements in the lower 48 states of the United States, and will be effective at the same time as the U.S. standard.

A 30/80 ppm standard is introduced in the priority areas. In an effort to reduce the burden to the refining industry of more stringent measures in areas where air quality problems are less severe, the decision in the rest of Canada is delayed until:

- sulphur in gasoline standards have been formulated in the United States in conjunction with the Tier 2 vehicle standards process;

- health information indicating more severe effects than those estimated by the expert panel in its report (June 1997) becomes available; or,

- definitive information is available with respect to vehicle/fuel compatibility and the recoverability of emission control systems under in-use conditions.

Variation A.3 achieves approximately 93% of the benefits at 66% of the costs of Option A.1 but results in two-tiered fuel standards in Canada, at least until the U.S. Tier 2 vehicle standards process is completed and possibly beyond.

Under this variation, emissions from low-emission vehicles would be higher than their design levels in some areas of Canada unless lower sulphur levels are required at some future date. In addition, uncertainty concerning other vehicle/fuel compatibility issues and the potential for permanently degrading the emission performance of low-emission vehicles would remain until the issues surrounding sulphur levels are resolved. This option may also limit the availability of advanced technology vehicles in certain parts of Canada for a period of time. In fact, all options other than Option A.1 would have similar vehicle compatibility implications to varying degrees.

Variation A.3 delays the introduction of a 30/80 ppm standard in the Lower Fraser Valley until 2004. This is due to the fact that the Province of British Columbia introduced new gasoline regulations in 1996 which effectively reduced the level of sulphur in gasoline. In recognition of the progress already made by B.C., and to minimize the potential for stranded investment by the refining industry, the GWG suggests that if Variation A.3 is selected, no further action be taken in B.C. with respect to reducing the level of sulphur in gasoline prior to January 1, 2004.

4) Option B (REVISED)⁽³⁾ - 150/200 ppm Standard/Harmonization with U.S. Gasoline

A 150 ppm annual average and a 200 ppm maximum level of sulphur in gasoline is mandated in all of Canada effective September 1, 2003.

If the U.S. EPA determines that a lower (than 150/200 ppm) sulphur in gasoline standard is warranted, Canada on a national basis will implement a lower sulphur standard that is equivalent to the maximum allowable (least restrictive) sulphur level for gasoline in the lower 48 states, effective at the same time as the U.S. standard.

Option B results in 68% of the benefits and 51% of the costs of Option A.1. This option represents a course of action that would satisfy the minimum standard for vehicle/fuel compatibility that may be established for certain parts of the United States. The 150/200 ppm standard is similar to the current B.C. provincial and U.S. RFG requirements, and is approximately the same as levels expected in Europe in 2000, but is well above those required in Europe in 2005. One to three refineries may have their economic viability threatened by a 150/200 ppm national standard. There is potential for stranded investment if a sulphur standard of less than 150/200 ppm is subsequently required. The risk of stranded investment may be reduced somewhat by the later implementation date (September 1, 2003 as compared to January 1, 2002).

Under the 150/200 ppm scenario, emissions from low-emission vehicles will be higher than their design capabilities and the availability of advanced technology vehicles capable of significant greenhouse gas emission reductions may be limited.

In addition to a 150/200 ppm national standard, Option B includes a provision for a further reduction of the level of sulphur in gasoline if the United States introduces a lower sulphur standard in the 49-States (i.e. U.S. excluding California). In this event, Canada would introduce an equivalent standard to be effective at the same time as the standard in the United States. If the U.S. adopts a regional approach to sulphur standards, Canada would adopt either the 150/200 ppm standard or the maximum allowable (least stringent) sulphur standard for U.S. gasoline, whichever is lower. In effect, this provision would only come into effect if all 49-States were subject to a sulphur standard less than 150/200 ppm.

Sulphur in Off-Road Diesel Fuel

Within three months of the endorsement of this recommendation, it is recommended that Environment Canada request from the suppliers of off-road diesel fuel the volume and sulphur level of the products combusted in each of the major cities studied by the expert panels, and in cities of comparable size.

It is also recommended that the costs and benefits of reducing the sulphur level in off-road diesel fuel be revised to be consistent with the new volumetric and quality data. The costs and the benefits are to be established for consistent geographical areas. They are to recognize good supply and distribution practices and seek to minimize the costs while maximizing the benefits.

It is further recommended that Environment Canada, in consultation with provinces and stakeholders, determine an appropriate sulphur level for off-road diesel fuel as soon as possible. In the case of off-road diesel fuel used in heavily populated urban areas, a sulphur standard similar to the one for on-road diesel fuel should be considered since the health and environmental effects of the emissions of both fuels per litre should be similar.

Sulphur in On-Road Diesel Fuel

The analysis of the benefits and costs resulting from further sulphur reductions for on-road diesel fuel suggest that a lower priority be assigned to further reductions of sulphur for that fuel. However, a lower sulphur limit may be necessary to protect Canadians against the adverse health effects of diesel fuel combustion or to support future diesel engine technologies. The GWG recommends that all the emissions from the combustion of diesel fuels be examined further to determine their impact on the health of Canadians.

1. Dr. Rick Burnett, Dr. Sabit Cakmak and Dr. Jeffrey Brook. "The Effect of the Urban Ambient Air Pollution Mix on Daily Mortality Rates in 11 Canadian Cities." Canadian Journal of Public Health, Vol. 89, No. 3, 1998: 152-156.

2. For the purposes of this report, Southern Ontario is defined as the Ontario portion of CGSB Region No. IV. This definition approximately includes that part of Ontario south of 46°N latitude.

3. Option B (REVISED) replaces the previous Options B and C that were presented in the Preliminary Report of the Government Working Group on Sulphur in Gasoline and Diesel, March 27, 1998. The previous Option C was dropped because the GWG agreed that action on reducing sulphur in gasoline was warranted regardless of whether or not the U.S. acted.