Reducing the Level of Sulphur in Canadian On-road Diesel Fuel

A discussion paper on designing Canadian regulations to align with the new U.S. standard

Table of Contents

1. Introduction
   1. Background
   2. Consultations to date on the Canadian regulations
2. Summary of the U.S. Final Rule on Sulphur in On-road Diesel Fuel
   1. Supply safety valve provisions
   2. Other flexibility provisions
   3. Downstream requirements
3. Findings by the EPA
   1. Benefits and Cost
   2. Diesel supply
   3. Refining technology
   4. Lubricity
   5. Pipeline management
4. Issues and Options for Canada
   1. Regulatory issues
   2. Non-regulatory issues
5. Questions for Stakeholders
6. Path Forward
7. Appendices
   1. Comparison of Canadian and U.S. Health Benefits
   2. Estimation of Canadian Refinery Costs
   3. Possible Framework for a Canadian Regulations

Environment Canada is developing new requirements for the allowable level of sulphur in diesel fuel that is used in on-road vehicles. In alignment with requirements recently passed by the U.S. Environmental Protection Agency (EPA), Canadian on-road diesel fuel would be restricted to a maximum of 15 parts per million (ppm) commencing in mid-2006. This paper discusses options for the approach and design of the new Canadian diesel fuel regulations.

Specifically, Environment Canada is soliciting the views of interested parties on the design and approach of Canadian regulations to reduce the level of sulphur in on-road diesel fuel to 15 ppm, starting in 2006. Specific issues on which Environment is seeking views are listed in section 5.

The basic options for the Canadian regulations can be reduced to:

1. simple regulations requiring all Canadian on-road diesel fuel to meet a 15 ppm limit starting June 1, 2006; or
2. complex EPA-style regulations providing for some flexibility for a small portion of the on-road diesel fuel pool to exceed the 15 ppm limit during for a short transition period.

In conjunction with the new requirements for low-sulphur on-road diesel, Environment Canada also intends to develop new regulations for heavy-duty engines and vehicles.

1.1 Background

Emissions from vehicles and engines are the largest contributor to air pollution in Canada. The resulting air pollution has significant negative health impacts on Canadians, contributing to premature mortalities, cardiovascular ailments and respiratory distress.

In cooperation with provincial governments, the federal government is putting in place a comprehensive cleaner vehicles and fuels program to reduce harmful emissions from vehicles. Actions over the past several years include federal regulations to reduce the allowable level of exhaust, evaporative and refueling emissions from new on-road vehicles, to control the sulphur content of diesel fuel, to reduce the amount of benzene in gasoline and to limit the dispensing rate of gasoline dispensing pumps. In addition regulations passed in 1999 will reduce the amount of sulphur in gasoline starting in 2002, with full implementation complete by the end of 2004. Most provinces control gasoline vapour pressure, and some are developing or have already introduced vehicle inspection and maintenance programs and scappage programs.

As part of the cleaner vehicles and fuels program, the federal Minister of 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 U.S., both for level and timing. On December 7, 2000, this commitment was reiterated when the governments of Canada and the United States signed an agreement on reducing transboundary movement of smog-causing pollutants (the Ozone Annex¹ ). 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."

On December 21, 2000, the U.S. released its final rule setting emission standards for heavy-duty engines and vehicles and requirements for sulphur in on-road diesel fuel² . The EPA program will reduce emission levels of particulate matter and nitrogen oxides by 90 percent and 95 percent respectively from the standard levels in effect today. Emissions of carbon monoxide, sulphur dioxide, and toxics such as benzene, 1,3-butadiene, formaldehyde, acetaldehyde, acrolein and dioxin will also be reduced.

The U.S. final rule sets a maximum level of 15 parts per million (ppm) for sulphur in diesel fuel that is used in on-road vehicles. The 15-ppm limit comes into effect on June 1, 2006. The U.S. rule is lengthy and complex, since it includes "safety valve" provisions to allow a small part of the US on-road diesel pool to meet the existing 500-ppm limit for a short period of time.

1.2 Consultations to date on the Canadian Regulations

In April 2000, Environment Canada invited stakeholders to participate in developing the federal government’s approach to cleaner vehicles, engines and fuels. The list of issues included the level and timing of any requirements for sulphur in on-road diesel fuel.

Consultations through this process showed near universal support by stakeholders for Canada to align with US requirements for sulphur in on-road diesel. 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 want sulphur levels to be lower than 15 ppm (e.g., Volkswagen and Friends of the Earth). Husky Oil, while supporting harmonization with US fuel standards and timing, noted that it is "unable to meet the contemplated 15 PPM sulphur in diesel mark without making significant capital investment", and recommended a level of 50 PPM

In a letter to Environment Canada dated December 13, 2000, the Canadian Petroleum Products Institute reiterated its "commitment to our position of general alignment with the US [on-road diesel standard], including the end point for sulphur content".

On February 17, 2001, the federal Minister of Environment published the agenda for cleaner vehicles, engines and fuels as a Notice of Intent in Part I of the Canada Gazette³ . The Notice of Intent states that "Environment Canada intends to align with the final US level and timing for sulphur in on-road diesel fuel… The Canadian regulatory process will be initiated shortly with a discussion paper soliciting views from stakeholders on the need for and the form of "safety valve" provisions similar to those in the US final rule." (This document is that discussion paper.)

The US rule⁴ reduces the current 500-ppm limit for sulphur in on-road diesel fuel to 15-ppm. The 15-PPM limit comes into effect on June 1, 2006 at refineries and points of import. To allow for the diesel fuel produced or imported just prior to this date to flow through the distribution system, the effective date is July 15, 2006 at diesel bulk storage terminals and September 1, 2006 at retail and wholesale facilities. The US rule exempts exports of diesel fuel and diesel fuel used in research and some military applications from the sulphur requirements. Diesel used in Guam, American Samoa, and the Northern Mariana Islands is also exempt.

2.1 Supply safety valve provisions

The EPA’s challenge in setting the diesel requirements was to ensure that 15-PPM diesel fuel will be widely available in all parts of the US while maintaining adequate overall supply of on-road diesel fuel. To this end, the EPA provided some flexibility for a small portion of the on-road diesel pool during a 3½ to 4 year transition period. In 2010, at the end of the transition period, all on-road diesel fuel must meet the 15 PPM limit.

The key flexibility provisions, the so-called "safety valve", allow a refiner or importer between June 2006 and December 2009 to have up to 20% of their annual on-road diesel pool with a sulphur level above 15 PPM during the transition period. (Such volumes must meet the current 500-PPM sulphur limit.) In addition, a refiner or importer may run up to a 5% deficit (e.g., produce up to 25% of its on-road diesel fuel with a sulphur level above 15 PPM) in a year but must make up the deficit the following year (e.g., by producing less than 15% of its on-road diesel fuel with a sulphur level above 15 PPM).

A regional banking and trading program for sulphur credits is an important complement to the EPA’s "20%" provision. Between June 2006 and December 2009, refiners and importers can generate one sulphur credit for each gallon of 15-PPM on-road diesel fuel that is in excess of 80% of their on-road diesel pool. In addition to the above, sulphur credits can be generated between June 2005 and May 2006 for each gallon of 15-PPM diesel sold as 15-PPM diesel, and between June 2001 and May 2005, for each gallon of 15-PPM diesel used in an engine or vehicle meeting the 2007 emission requirements (this latter provision is very restrictive and unlikely to generate many credits).

Sulphur credits can be banked for later use or traded to other parties. Until December 2009, sulphur credits can be used to comply with the 80% pool requirement for 15-PPM diesel, including making up any deficit. Credits can also be used to extend production or importation of 500-PPM diesel fuel until May 2010. Credits can only be traded twice (so that the EPA can effectively track the credits) and are restricted to be used in the same PADD⁵ (petroleum supply) region of the US as they are generated in. All credits expire on June 1, 2010.

2.2 Other flexibility provisions

In addition to the safety valve provisions, the US rule includes a number of other flexibilities during the transitional period. These are primarily targeted at small refineries.

Flexibility Provision for Small Refining Companies

The US diesel rule, consistent with the US gasoline sulphur rule, defines small refining companies as those having less than 1500 employees corporate-wide and a corporate-wide crude oil processing capacity of less than 155,000 barrels per day. Refineries owned by a company meeting this definition have the option of:

• deferring the 15-PPM requirement for on-road diesel fuel until June 1, 2010 and generating sulphur credits for any 15-PPM diesel produced during the transition period; or
• delaying compliance with the US gasoline sulphur rule for up to two years if they produce 100% 15-PPM diesel fuel starting June 2006.

Flexibility Provision for Refineries in the Rocky Mountain States

Under the US gasoline sulphur rule (passed in December 1999), refineries in seven Rocky Mountain states were allowed extra time to meet the sulphur in gasoline requirements. Consequently, without special provisions in the new US diesel rule, these refiners would have had to reduce sulphur in both gasoline and diesel fuel at nearly the same time. The US diesel rule, therefore, allows Rocky Mountain refineries an extra two years to meet the US gasoline requirements provided that they produce 100% 15-PPM diesel starting June 2006.

It should be noted that Canadian requirements for sulphur in gasoline will be fully implemented by the end of 2004 and thus do not overlap with the 2006 implementation date for 15-PPM diesel fuel.

Flexibility Provision for Alaska

In Alaska, unlike other states, only a small amount (about 5%) of the total distillate pool is used in on-road diesel vehicles. Alaska is currently exempt from the federal limit of 500 PPM for sulphur in on-road diesel fuel.

Alaska will be subject to the new 15-PPM limit. However under the US rule, the Alaskan government may apply to be subject to a special state-developed program for the introduction of 15-PPM diesel. The provisions of the US federal diesel rule will apply in Alaska unless the state applies for a special program by April 2002 and the EPA approves the application.

Flexibility Provision for extreme finance hardship

Under the US rule, any refiner claiming that it would suffer extreme finance hardship because of the requirements on sulphur in diesel fuel can apply to the EPA for additional flexibility during the transition period. In such applications, refiners must open their financial books to the EPA. If the EPA approves an application, the refiner can delay meeting the 15-PPM diesel fuel requirement until the date approved by the EPA, which can be no later than June 2010. The EPA expects that less than 1% of the US on-road diesel pool would be covered by this provision.

The table below summarizes the dates associated with the various flexibility provisions during the transition period:

Short-term exemptions for unforeseen circumstances

In addition to the above provisions which apply only during the transitional period, the US diesel rule also provides for temporary, short-term exemptions for unforeseen circumstances (i.e., Acts of God). A refiner granted such an exemption must make-up any air quality deficit and pay back to the government any economic benefits derived as a result of the waiver. Similar waiver provisions are also included in the EPA’s rule on sulphur in gasoline.

The economic component that is part of the US waiver provisions is important in preventing potential abuses by companies and consequently affecting the competitive balance in the market. California did not include any economic penalties in its waiver provisions when it introduced 500-PPM diesel in 1993, and it found that the provisions were misused. Subsequently, California included a penalty of 15 US cents per gallon for gasoline produced under a waiver in its 1996 regulations for Phase 2 gasoline. To date, the one refiner that was granted a waiver (or "variance" as it is called in California) did not use it, because the refiner found other ways to supply gasoline and thus avoid the financial penalty.

2.3 Downstream Requirements

The EPA regulations will result in two grades of on-road diesel fuel (i.e., 15 PPM and 500 PPM) coexisting in the US marketplace during the transitional period. The 15 PPM diesel fuel must be used in new (i.e. post-2007 model year) vehicles. Consequently, the US rule includes numerous and complex requirements to prevent vehicle misfuelling and contamination of 15 PPM diesel fuel. The US rule requires segregation of the two grades and tracking (through Product Transfer Documents) of each batch of diesel through the fuel distribution system.

The US rule includes provisions to handle contamination of 15-PPM diesel fuel that may occur in the diesel distribution system. The rule allows "downgrading" in the distribution system of 15-PPM diesel fuel to 500-PPM diesel fuel through re-designation of a batch in its accompanying documentation. Under the US rule, a person may downgrade up to 20% of the volume of diesel fuel that the person handles in a year. There is also a 2 PPM measurement tolerance that is allowed at points downstream of the refinery and point of import.

To reduce potential incidents of misfuelling new vehicles with high sulphur diesel fuel, the rule also specifies (in some detail) labeling requirements for dispensing pumps. All pumps must correctly identify the grade of diesel fuel as one of low-sulphur, high-sulphur or off-road diesel. The EPA decided not to require nozzle size restrictions, fuel dying or other "refueling" requirements (at least at this time). Instead, the EPA decided to rely on misfuelling disincentives for vehicle operators (e.g., damage to equipment, warranty issues, liabilities, costs) to minimize misfuelling.

Overall, by allowing an extra grade of diesel fuel to exist in the on-road diesel market during the transitional period, the US rule necessarily became complex and lengthy in order to handle downstream issues.

Notes:
¹ Protocol between the Government of Canada and the Government of the United States of America amending the "Agreement between the Government of Canada and the Government of the United States of America on air quality". December 7, 2000.
² US Government. "Control of air pollution from new motor vehicles: heavy-duty engine and vehicle standards and highway diesel fuel sulfur control requirements; final rule". USFederal Registry, vol. 66, no. 12, pp. 5001-5194, January 18, 2001. www.epa.gov/fedrgstr/EPA-AIR/2001/January/Day-18/a01a.htm
³ Minister of Environment. A Federal Agenda for Cleaner Vehicles, Engines and Fuels. Canada Gazette, Part I, February 17, 2001, pp. 452-457.
⁴ The US rule and supporting documents can be accessed at: www.epa.gov/otaq/diesel.htm
⁵ Petroleum Administrative Defense Districts: 1 - East Coast, 2 - Midwest, 3 - Gulf Coast, 4 - Rocky Mountains, 5 - West Coast.