Canada Gazette

The purpose of the proposed Regulations Amending the Sulphur in Diesel Fuel Regulations (hereinafter referred to as the "proposed Regulations") is to reduce harmful emissions from diesel-powered engines and equipment used in off-road, rail and marine applications. (see footnote 1) To accomplish this, the proposed Regulations will establish limits for sulphur levels in diesel fuel produced, imported or sold for these uses. Under the existing Sulphur in Diesel Fuel Regulations, published in Part II of the Canada Gazette on July 31, 2002, such limits exist for diesel fuel used for on-road purposes but not for off-road, rail or marine applications.

The existing Regulations limit the level of sulphur in on-road diesel fuel to a maximum of 500 milligrams per kilogram (mg/kg) until 2006, when the limit will be reduced to 15 mg/kg. The proposed Regulations will introduce the same 500 mg/kg requirement for off-road, rail and marine diesel fuels (see footnote 2) starting in 2007, reducing to 15 mg/kg in 2010 for off-road diesel fuel and in 2012 for rail and marine diesel fuel. These amendments are necessary to further contribute to the protection of the environment and human health through the reduction of harmful emissions from diesel-powered engines and equipment.

The second step of the proposed Regulations reducing the sulphur limit to 15 mg/kg in 2010 for off-road diesel fuel is necessary to ensure that the level of sulphur in diesel fuel used in off-road engines and equipment in Canada will not impede the effective operation of advanced emission-control technologies. Introduction of these technologies is anticipated in model year 2011 in order to comply with stringent new exhaust emission standards in the United States (called Tier 4 standards).

Environment Canada has adopted a policy of aligning Canadian engine emission and fuel quality requirements with those of the United States. As part of this policy, Canadian regulations that align with existing U.S. Environmental Protection Agency (EPA) standards for new off-road diesel engines are being developed. Similarly, the proposed Regulations will introduce specific levels and timing for reducing sulphur in off-road, rail and marine diesel fuels in Canada that are based on the U.S. Clean Air Nonroad Diesel Rule, (see footnote 3) passed in May 2004. In developing the proposed Regulations, Environment Canada relied heavily upon the considerable work undertaken by the EPA in support of this rule.

As with the EPA rule, under the proposed Regulations, diesel fuel for use in locomotives and marine vessels will be subject to the 500 mg/kg limit in 2007. As of 2012, rail and marine diesel fuel will be subject to a 15 mg/kg sulphur limit for production and imports, while the 500 mg/kg sulphur limit will remain for sales. The higher sales limit for rail and marine diesel fuel provides a sales outlet for fuel potentially contaminated during distribution from the refinery or point of import to the point of final sale.

The proposed Regulations will come into force under the authority provided by sections 140 and 330 of the Canadian Environmental Protection Act, 1999 (CEPA 1999).

— as of June 1, 2007, sulphur in off-road, rail and marine diesel fuels that are produced or imported for use or sale in Canada will be limited to a maximum of 500 mg/kg;

— as of October 1, 2007, sulphur in off-road, rail and marine diesel fuels that are sold or offered for sale in Canada will be limited to a maximum of 500 mg/kg;

— as of June 1, 2010, sulphur in off-road diesel fuel that is produced or imported for use or sale in Canada will be limited to a maximum of 15 mg/kg;

— as of September 1, 2010, sulphur in off-road diesel fuel that is sold or offered for sale in Canada will be limited to a maximum of 15 mg/kg;

— as of June 1, 2012, sulphur in off-road, rail and marine diesel fuel that is produced or imported for use or sale in Canada will be limited to a maximum of 15 mg/kg; diesel fuel that is sold or offered for sale for use in locomotives or marine vessels will remain subject to the 500 mg/kg sales limit; and

— in the Northern Supply Area (as defined in the Sulphur in Diesel Fuel Regulations), the 500 mg/kg limit for sales of off-road rail and marine diesel fuels will come into effect on December 1, 2008, while the 15 mg/kg limit for sales of off-road diesel fuel will come into effect after November 30, 2011. (see footnote 4)

Air pollution is a serious problem in Canada, and the fuel used in off-road, rail and marine engines and equipment is a major contributor to this problem. The combustion of diesel fuel in engines and equipment results in the emission of harmful pollutants, including sulphur dioxide (SO₂), sulphates (SO₄), particulate matter (PM), nitrogen oxides (NO_x), volatile organic compounds (VOCs), carbon monoxide (CO), and toxic substances. These substances contribute to the potential health risk to Canadians posed by air pollution.

Considerable progress has been made in North America and other jurisdictions in reducing emissions from on-road vehicles; however, less progress has been made in limiting emissions from off-road, rail and marine engines. Canadian emissions of NO_x and VOCs from off-road, rail and marine engines are projected to become greater than emissions from on-road vehicles in the 2003 to 2007 time frame, while emissions of PM₁₀ (respirable particulate matter less than or equal to 10 microns) from those sources already exceed those from on-road vehicles. (see footnote 5) Steps, such as the proposed Regulations, are being taken to address this divergence between on-road and off-road, rail and marine emissions.

In recent years, the federal government, in co-operation with provincial governments, has been putting in place a comprehensive program to reduce emissions from vehicles and engines. On February 17, 2001, the federal government published a comprehensive 10-year Federal Agenda on Cleaner Vehicles, Engines and Fuels (the Federal Agenda) in the Canada Gazette. As part of the Federal Agenda, Environment Canada is developing regulations under CEPA 1999 that align Canadian emission standards for a broad range of on-road and off-road vehicles and engines with those of the U.S. EPA. For instance, regulations under development will introduce standards for off-road diesel engines that align with existing Tier 2 and Tier 3 EPA emission standards. Environment Canada also plans to align with the EPA's Tier 4 standards.

As part of the Federal Agenda, Environment Canada developed a federal policy on aligning fuel standards with other jurisdictions. The policy states, in part, that "Environment Canada plans to continue its approach of generally aligning Canadian environmental fuel requirements with those of the U.S., while taking into consideration environmental standards developed by the European Union." This policy on alignment, widely supported by stakeholders, underpins the approach to the proposed Regulations, which introduce levels and timing for off-road, rail and marine diesel fuels in Canada that are the same as those proposed in the EPA's rule.

The EPA Administrator signed the U.S. rule on May 11, 2004. It includes new requirements for off-road engine emission standards (Tier 4) as well as new diesel fuel requirements. This combination under the U.S. rule is in recognition of the fact that the development of effective policies and programs to reduce emissions must consider the fuels and equipment/engine as an integrated system, and, in some cases, the performance of emission control systems can be impaired without the right fuels. For example, the EPA has determined that the Tier 4 off-road diesel engine emission standards will not be feasible without the accompanying fuel changes.

To achieve these fuel changes, the United States has developed a complex rule with various provisions in addition to the main requirements. These requirements include a first step in 2007 that sets a maximum level of 500 mg/kg of sulphur in diesel fuel for use in off-road, rail and marine engines and equipment. The second step takes effect in 2010, when the sulphur limit is further reduced to 15 mg/kg for off-road diesel fuel. In 2012, the sulphur limit for rail and marine diesel fuel is also reduced to 15 mg/kg. It should be noted that diesel fuel produced or imported for use in locomotives and marine vessels is subject to the 15 mg/kg limit, whereas the sale of diesel fuel for these uses is subject to a 500 mg/kg limit. The difference is because contamination of some diesel fuel will occur in the distribution system, and a sales outlet for such volumes is needed. The EPA rule also includes provisions for banking and trading of sulphur credits, and special considerations for small refiners.

Other jurisdictions, including within the United States and the European Union, have or will require low-sulphur diesel fuel for off-road use. In the United States, some individual states, such as California and New York, are considering requiring diesel fuel with less than 15 mg/kg of sulphur for all uses (on-road and non-road) in advance of the federal proposal (e.g., in 2006, when the sulphur in on-road diesel fuel is reduced). The European Union finalized its directive in March 2003 to mandate the use of zero sulphur gasoline and diesel fuel by 2009. This mandate for on-road diesel fuel will be reviewed by 2005 to determine if the on-road fuel specifications will apply to the off-road sector by 2009. (see footnote 6)

The regulated requirement to limit sulphur in diesel fuel for use in on-road vehicles has resulted in two sulphur-differentiated grades of diesel fuel being marketed in Canada. These are low-sulphur diesel fuel, with a regulated maximum limit of 500 mg/kg, and regular grade diesel fuel, which is not regulated but has a maximum sulphur specification of 5 000 mg/kg under the voluntary commercial standards of the Canadian General Standards Board. Major petroleum producers and importers indicate that they voluntarily comply with these commercial standards.

The level of sulphur in the two grades of diesel fuel varies, with notable regional differences across the country. In 2001, the average sulphur level for the 20.6 billion litres of low-sulphur diesel fuel produced in or imported into Canada was 340 mg/kg. The average sulphur level for the remaining diesel pool of 3.5 billion litres, which is used in off-road equipment, was 2 490 mg/kg. (see footnote 7) The sulphur levels in regular diesel fuel range from 760 mg/kg in the Atlantic region to 2 890 mg/kg in Ontario. (see footnote 8)

In Canada, both the federal and provincial governments regulate some aspects of fuel quality. Gasoline, diesel fuel and other refined fuels are currently subject to the following federal regulations:

— Fuels Information Regulations, No. 1 (1978) require fuel producers to report the sulphur content and the types of additives in liquid fuels;

— Gasoline Regulations (1990) establish limits on lead and phosphorous contents for both leaded and unleaded gasoline;

— Contaminated Fuel Regulations (1991) prohibit the import or export of contaminated fuels, except for lawful destruction, disposal or recycling;

— Benzene in Gasoline Regulations (1997) limit the level of benzene in gasoline;

— Sulphur in Gasoline Regulations (1999) limit the level of sulphur in gasoline to an average of 30 mg/kg by 2005, with an interim average level of 150 mg/kg from July 2002; and

— Sulphur in Diesel Fuel Regulations (2002) limit the level of sulphur in diesel fuel for use in vehicles designed for on-road use to a maximum of 500 mg/kg, with a further reduction to 15 mg/kg in June 2006.

The City of Montréal also has a limit of 500 mg/kg for both on-road and off-road diesel fuel.

The Canadian petroleum products industry is composed of petroleum refining, product distribution and marketing operations. In 2002, 10 companies operated 19 refineries in Canada that produce diesel fuel. Production at 15 of those 19 facilities includes regular diesel fuel having a sulphur concentration of more than 500 mg/kg (i.e. only suitable for use in off-road equipment). The diesel fuel and other petroleum products are sold through a distribution network consisting of about 13 000 retail outlets, although off-road diesel fuel is often sold directly to the final customer from wholesale facilities such as terminals and bulk plants. The petroleum products industry employs more than 150 000 people, with approximately 13 000 working in refineries and the remainder in product distribution and marketing operations. Estimates indicate that for every refinery job, up to seven jobs in associated industries are created, and one to two jobs are created for every distribution and retail job.

Canada's imports and exports of diesel fuel are relatively small compared to its consumer demand and production levels. Canadian demand for diesel fuel in 2001 was approximately 22.7 billion litres, while approximately 722 million litres of diesel fuel was imported into Canada. The majority of imports (approximately 65 percent) come from the United States, while the remainder comes from Algeria, Venezuela and several other countries. Canada produced approximately 25.8 billion litres of diesel fuel in 2001. Of this, close to 3.2 billion litres was exported, with almost all of it being sold to the United States.

Despite the relatively low level of cross-border trading activity between Canada and the United States with respect to diesel fuel, the petroleum market is global in nature. Canadian refiners must purchase their crude on the world market and face a competitive domestic retail market. Refinery margins and company profits are affected by factors such as production standards, feedstock cost, the control of operating costs, economies of scale, competition from imported products, and the ability to process different types of crude oils. Global refinery margins have fluctuated in recent years, and competitive pressures have resulted in a rationalization within the industry. In Canada, 17 of 36 refineries have closed since 1980, and in 2003, Petro-Canada announced that it will close its Oakville refinery and expand production at its Montréal refinery. Continued competitive pressures and technological advancement may lead to further rationalization within the Canadian petroleum industry in the future.

During the process leading to the decision to introduce the proposed Regulations, a number of alternatives were considered. These alternatives can be subdivided into two categories: alternative policy options, and alternative implementation mechanisms.

The option of taking no action to reduce the current level of sulphur in off-road, rail and marine diesel fuels was rejected because it would not ensure reduced emissions from diesel engines and equipment. The EPA has determined that sulphur in diesel fuel significantly inhibits the effective operation of advanced emission-control technologies, such as those to be introduced on future off-road diesel engines in order to comply with Tier 4 emission standards. Failure of advanced emission-control technology due to poor fuel quality would undermine the intended results of these standards by allowing higher emissions of air pollutants. In addition, the introduction of lower-sulphur off-road, rail and marine diesel fuels will also reduce emissions from current technology engines. Given the adverse environmental and health impacts of these emissions, continuation of current sulphur levels in off-road, rail and marine diesel fuels was not considered to be appropriate.

A second option is to require the complete removal of sulphur from off-road, rail and marine diesel fuels (0 percent sulphur content). This option would ensure the use of sulphur-free diesel fuel for such purposes in Canada, and result in environmental and health benefits from reduced emissions.

Although it may be technically possible to remove all sulphur from diesel fuel, given the current state of technology, such a strict standard would likely impose considerable costs on industry. These increased costs could negatively impact both Canadian producers and consumers. Accordingly, the option to ban sulphur in off-road, rail and marine diesel fuels was not given further consideration at this time.

A third option is to model Canada's reduction of sulphur in diesel fuel after the European Union's approach. In effect, this would mean requiring "zero" sulphur diesel fuel (defined as sulphur content of less than 10 mg/kg) in Canada.

The EPA found that compliance with the 2011 model year engine standards can be achieved with diesel fuel having a maximum sulphur content of 15 mg/kg. These standards are planned for introduction in Canada as part of the policy of aligning fuel and engine standards with those of the U.S. in recognition of the integrated North American engine and fuels market. Given this integration, a more stringent fuel standard in Canada than the U.S. could adversely impact the competitiveness of Canadian industry. Since the current environmental and health goals of the proposed Regulations can be achieved with the 15 mg/kg standard, the extra cost of attaining a stricter standard under this option was deemed unwarranted at this time.

Another option is aligning Canadian action to reduce sulphur in off-road, rail and marine diesel fuels with the proposed steps in the U.S. Legislative differences between Canada and the U.S. prevent the introduction of a measure in Canada that has all of the provisions of the proposed U.S. rule, such as special considerations for small refiners. Nevertheless, the Government of Canada's objectives will be achieved by aligning the proposed Regulations with the required sulphur levels and implementation timing proposed under the EPA rule.

This is considered the best approach to achieve the desired objectives of the proposed Regulations. It follows the federal government's policy of alignment, developed through the Federal Agenda on Cleaner Vehicles, Engines and Fuels, that considers the highly integrated North American market. Aligning fuel quality within this market will help maintain a competitive Canadian refining industry, while improving the environment and the health of Canadians. Furthermore, stakeholders strongly supported the federal government's policy of alignment. In October 2003, in response to Environment Canada's consultations on reducing sulphur in off-road, rail and marine diesel fuels, the Canadian Petroleum Products Institute (CPPI) restated that they "fully endorse the principle of alignment of Canadian engine emission and fuel quality requirements with those of the U.S., our major trading partner."

Regarding implementation timing, matching the time frame proposed in the U.S. rule is considered the best approach. Given the long lead times needed to design and install the required desulphurization equipment, earlier adoption of the standards could be technically difficult and lead to higher than necessary compliance costs. This, in turn, could place Canadian firms at a competitive disadvantage in the North American market. The potential loss of environmental and health benefits associated with delayed implementation makes adopting the standards after the U.S. undesirable. Furthermore, sufficient lead time is needed to ensure that the new fuel is widely available in time for the introduction of the new emission-control technology expected to be introduced on off-road diesel engines in 2011.

In October 1993, Environment Canada signed Memoranda of Understanding (MOUs) with most of the suppliers of diesel fuel, in an attempt to introduce a 500 mg/kg maximum level for sulphur in on-road diesel fuel. However, the MOUs did not achieve the desired outcome, and the result was the promulgation of the Diesel Fuel Regulations on February 4, 1997. (see footnote 9)

The introduction of a voluntary measure, such as the MOUs that were developed between the Government and diesel suppliers in 1993, was considered as an alternative to the proposed Regulations. However, given the unfavourable results of the 1993 experience, as well as concerns with the potential damage to the emissions-control equipment resulting from misfuelling of off-road equipment and engines, it was determined that a voluntary approach would not guarantee sufficient availability and use of low-sulphur diesel for off-road, rail and marine equipment.

It is interesting to note 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 can ensure 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. Canada's major global trading partners have also generally used regulations as the tool of choice for implementing measures to improve the environmental quality of fuels.

A trading system, such as proposed in the U.S. rule designed to reduce the level of sulphur in off-road, rail and marine diesel fuels, was considered for the proposed Regulations. Such a system would allow sulphur credits to be traded or sold among participants. In an effort to outline a system that would achieve the desired policy objective, several different approaches were considered, such as national versus regional caps and trading, as well as inter- versus intra-company trading.

There are several difficulties with adopting a trading system as an alternative to the proposed Regulations. In the case of a national trading scheme, a situation could arise whereby, through the trading of credits, the supply of lower-sulphur diesel fuel becomes inconsistent across the country. This could cause considerable equipment misfuelling problems, as well as result in significant regional differences in fuel prices and environmental and health benefits. Trying to overcome these problems by limiting the trading to specific regions, as is proposed in the U.S., is not practical for Canada given the small number of refineries and companies that could participate. A relatively large number of participants are needed for trading to work efficiently.

Furthermore, the trading program in the U.S. is intended to be in effect for a relatively short transition period of four years, and will result in multiple sulphur-differentiated grades of diesel fuel. The existence of multiple grades of off-road diesel fuel requires complex and administratively burdensome provisions to ensure enforceability of the Regulations. These provisions include dying, product transfer documentation, and provisions to ensure segregation of the grades. These provisions will increase the cost of compliance for firms.

Finally, feedback from stakeholders on the August 2003 discussion document on the proposed Regulations indicated a strong preference for a simple rule without the added intricacies that a more flexible trading system will require. The CPPI, representing many of the companies most likely to be affected by a trading system in Canada, stated that "The more flexible sulphur credit trading option was considered and seen to offer some potentially attractive investment optimization opportunities... In spite of these advantages, the simple straightforward Option 1 was still preferred." Option 1 in the discussion document referred to the requirement to meet the 500 mg/kg and 15 mg/kg sulphur levels in 2007 and 2010, respectively, without the flexibility mechanisms contained in the U.S. rule.

Fiscal instruments have been used in some jurisdictions 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 an effective means of encouraging or facilitating the introduction of lower-sulphur diesel fuel in Canada. However, unless the tax advantage is very high, there may be uncertainty as to whether all suppliers across the country will undertake the appropriate action within the desired time frame. This circumstance could result in an inconsistent regional supply of lower-sulphur off-road, rail and marine diesel fuels with similar misfuelling problems to those described earlier, and subsequent damage to emission-control equipment.

Due to the issues and concerns outlined above, neither a trading system nor fiscal instruments were incorporated into the proposed Regulations.

The introduction of a regulation under CEPA 1999 was considered and selected as the most appropriate approach to reducing the level of sulphur in off-road, rail and marine diesel fuels.

The Government's approach to controlling fuel quality was broadly consulted on when the Minister developed the Federal Agenda on Cleaner Vehicles, Engines and Fuels in 2001. This resulted in the publication in the Canada Gazette of the Government's policy of generally aligning fuel requirements with those of the EPA. This specific initiative was also consulted on through that process, and the Federal Agenda published in the Canada Gazette states that Environment Canada plans to recommend a regulatory limit for sulphur in off-road diesel. This was universally supported by stakeholders.

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. The best method of undertaking this is to amend the existing Sulphur in Diesel Fuel Regulations.

The proposed Regulations represent a major policy initiative that is expected to result in a net benefit to society. However, the distribution of the benefits and costs among stakeholders could vary between groups and from region to region.

There will be benefits associated with the proposed Regulations with respect to engine/equipment-fuel compatibility. By adopting the 15 mg/kg fuel standard, new off-road diesel engines will be able to meet emission standards comparable to those of on-road vehicles with advanced emission-control equipment when such technology is introduced to off-road engines. At the same time, with the new fuel, these engines will provide better fuel economy, lower greenhouse gas emissions, and lower evaporative emissions than gasoline-operated equipment. In addition, there will be benefits, in the form of cost savings, to operators of diesel engines when low-sulphur diesel fuel is used. Under the new standard, the cost of maintaining diesel engines will be reduced, due to less corrosion wear and reduced engine deposits. These benefits are difficult to estimate, but the EPA found that these maintenance savings can be equal to 40 percent of the estimated increased unit cost of producing the diesel fuel.

Quantitatively determining the environmental and health benefits from the reduction of sulphur in off-road, rail and marine diesel fuels is extremely difficult. In 1996-1997, benefits were estimated for an off-road diesel fuel scenario as part of work undertaken by independent expert panels to assess the appropriate level of sulphur in gasoline and diesel fuel. Following this work, these estimates were extrapolated to all of Canada by the 1998 Government Working Group on Setting a Sulphur Level for Sulphur in Gasoline and Diesel (GWG). (see footnote 10) Based on the work of these two sources, estimates of the health benefits resulting from the 500 mg/kg and 15 mg/kg maximum limits that will be required under the proposed Regulations were extrapolated.

Both the Atmospheric Science Panel and the Health and Environmental Impact Assessment Panel developed the estimates made in 1996-1997. A methodology called the "damage function approach" was utilized, where the damages refer to the adverse effects on the environment and on human health caused by the activity. The benefits are the reductions of those damages as a result of taking the regulatory action.

The methodology underlying the damage function approach consists of four key stages. First, estimate the change in emissions and then the change in ambient air quality. From here, estimate the environmental or health impacts and then estimate the value of these impacts. The Atmospheric Science Panel provided estimates of the first two stages in the above methodology as input into the assessment of the last two stages by the Health and Environmental Impact Assessment Panel.

The Atmospheric Science Panel evaluated improvements expected in air concentrations of specific substances (PM_2.5, sulphate and SO₂) from reductions in the level of sulphur in off-road diesel fuel in seven urban centres (Vancouver, Edmonton, Winnipeg, Toronto, Montréal, Saint John and Halifax). One scenario assessed by the expert panel (Scenario 7) was based on a standard of 500 mg/kg maximum for sulphur in off-road diesel fuel. (see footnote 11)

The Atmospheric Science Panel found that the introduction of this lower-sulphur off-road diesel fuel will 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 will be reduced by 1 864 tonnes and emissions of sulphates by 57 tonnes. The resulting reduction in ambient levels of pollutants in Toronto was estimated to be 12 percent for SO₂, 4 percent for sulphates, and 0.8 percent for total fine PM. These reductions are three to four times larger than the estimated reductions of SO₂ and sulphates from reducing sulphur in on-road diesel fuel from 500 mg/kg to 15 mg/kg. (see footnote 12)

The Health and Environmental Impact Assessment Panel took these results and estimated the associated health benefits. Their report indicated that, for the seven Canadian cities studied, reducing the level of sulphur in off-road diesel fuel to the 500 mg/kg maximum standard will result in considerable health benefits in the form of avoided health cases, as a result of reduced air pollutants. These benefits were extrapolated by the GWG for all of Canada and are presented in Table 2 below. (see footnote 13) Reduced health impacts will also be expected to result in indirect benefits, such as lower health care costs and increased labour productivity as a result of fewer employee sick days.

Table 2 summarizes the estimated health benefits of the proposed Regulations. These estimates are extrapolated from the work undertaken by the independent expert panels in 1996-1997, as well as the follow-up work by the GWG in 1998. Columns 1 and 2 of Table 2 are from the GWG report. Column 3 linearly extrapolates the column 2 values from 2 400 mg/kg of sulphur to the actual regional values in regular diesel fuel in Canada's regions in 2001. (see footnote 14) Column 4 is a linear extrapolation of column 3 using the regional sulphur values in 2001, based on the fact that the introduction of lower-sulphur off-road diesel fuel will reduce emissions of SO₂ and sulphates proportionally to the reductions in the level of sulphur in the fuel. Column 5 is the sum of columns 3 and 4, providing an estimate of the health effects of reducing 2001 regional off-road diesel sulphur levels to 15 mg/kg. This estimate of Canadian health benefits can be compared to one-tenth of the U.S. benefits, found in column 6, that were estimated by the EPA for its new off-road, rail and marine diesel fuel and off-road engine rule.

^* Based on 1998 GWG Work (Scenario 7) for year 2020.
^** Based on Estimates for EPA's Fuel & Engine Rule for year 2030.

In the EPA analysis of the final U.S. rule, the total benefits examined included a number of monetized and qualitative categories. By far the most significant of the former was premature mortality among adults 30 and over. This category accounted for roughly 91 percent of total monetary benefits. Chronic bronchitis among adults aged 26 and over, and recreational visibility, were next in importance, accounting for roughly 4 percent and 3 percent of the total monetary benefits, respectively.

The Johns Hopkins University recently identified a statistical flaw in certain air quality studies, suggesting that the health benefits associated with reduced air pollution may be overestimated. However, the studies used by the EPA to calculate the health effects of PM on mortality for the final off-road diesel rule are unaffected by these statistical software issues.

Studies to estimate cost and competitiveness impacts were carried out for one off-road and two on-road diesel fuel scenarios as part of work undertaken to assess the appropriate level of sulphur in gasoline and diesel fuel. As part of that process, the Cost and Competitiveness Assessment Panel engaged a consultant to carry out cost analyses. Based on the results of those analyses for diesel fuel scenarios and work done by the EPA, estimates were extrapolated for the costs associated with the 500 and 15 mg/kg requirements under the proposed Regulations for off-road, rail and marine diesel fuels.

Note that the consultant's cost study indicated that compliance costs will be borne unequally among Canada's refineries, with some refiners facing economic challenges in meeting the low-sulphur diesel requirements and others expected to profit. This situation also likely applies to the costs associated with the proposed Regulations.

A consultant's cost study entitled The Costs of Reducing Sulphur in Canadian Gasoline and Diesel (see footnote 15) provides an understanding of the technical changes and associated capital and operating costs that will be required at Canadian refineries to meet various fuel standards. This includes direct input on cost estimates from 15 of Canada's refineries, with capital and operating costs 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. The resulting estimated refinery costs for reducing sulphur in off-road diesel fuel to meet a 500-mg/kg maximum standard are outlined in Table 3 below. (see footnote 16)

^* Based on 7.9 billion litres needed to be desulphurized, and in 1995 dollars.
^** Range of uncertainty is ± 40 percent for capital costs, and ± 25 percent for operating costs.

The above estimates are in 1995 dollars, and assumed that 7.9 billion litres of diesel fuel needed to be desulphurized for off-road use. However, the volume of regular-grade diesel fuel has decreased significantly since 1995. Currently, much of the non-road diesel fuel pool is desulphurized to levels below 500 mg/kg, primarily because of limitations in the diesel fuel distribution system. Therefore, the above estimates must be corrected for this. The adjusted results are presented in Table 4 below.

^* Based on 3.5 billion litres needed to be desulphurized, and in 2002 dollars.
^** Range of uncertainty is ± 40 percent for capital costs, and ± 25 percent for operating costs.

For comparison, a second methodology can be used. In Table 7.2.2-4 of the U.S. Regulatory Impact Analysis, (see footnote 17) the average capital cost per refinery is estimated as US$8.6 million and the average operating cost per year per refinery as US$4.9 million. Assuming that Canadian refinery average costs are the same as for U.S. refineries, the Canadian costs can be estimated. When the average refinery costs are multiplied by the 15 refineries in Canada that make regular-grade diesel fuel and converting to Canadian dollars, the estimated capital cost in Canada is $184 million and the annual operating cost is $104 million.

The regulatory impact analysis statement for the Sulphur in Diesel Fuel Regulations estimated the costs of reducing sulphur in on-road diesel from 500 mg/kg to 15 mg/kg (based on various extrapolations from the original consultant's 1997 estimates). These estimates were $1.25–$2.3 billion in capital costs, and $86–$159 million per year in operating costs. These resulted in unit costs of 1.7–3.1 cents per litre.

These estimates were based on the 1995 volume of on-road diesel fuel. Currently, much more diesel fuel is desulphurized than is required for just on-road use. This is primarily because of limitations in the diesel distribution system, which will continue to exist after on-road diesel fuel is reduced to 15 mg/kg in 2006. By dividing the current volume of regular diesel fuel (3.5 billion litres in 2001) by the 1995 volume of on-road diesel fuel (16.9 billion litres), a factor can be computed to adjust the 1995 cost estimates for on-road diesel fuel to reflect current volumes of non-road diesel fuel. The factor equals 0.21. Using this factor, the estimate for reducing off-road diesel fuel from 500 mg/kg to 15 mg/kg is $263–$483 million in capital costs and $18–$33 million per year in operating costs.

In its final regulatory analysis for reducing sulphur in off-road, rail and marine diesel fuel, the EPA noted that there will likely be extensive use by refineries of newer desulphurization technology. The EPA estimates that these technologies will reduce capital costs by 15 percent and operating costs by 23 percent, resulting in a reduction of unit costs by about 18 percent. Applying these estimates that reflect the use of newer desulphurization technology to the previous cost estimates results in revised estimates of $224–$411 million in capital costs, $14–$25 million per year in operating costs, and unit costs of 1.4–2.5 cents per litre. Converting to 2002 dollars, the estimated costs become $257–$472 million in capital costs, $16–$29 million per year in operating costs, and unit costs of 1.6–2.9 cents per litre.

A second approach to estimating the cost of reducing sulphur in off-road diesel fuel is to use average U.S. refinery costs applied to Canadian refineries. In Table 7.2-44 of the U.S. regulatory impact analysis, the estimated average capital cost per refinery for reducing sulphur in off-road diesel fuel from 500 mg/kg to 15 mg/kg is US$34 million, and the average operating cost per year per refinery is US$9 million. Assuming that Canadian refinery average costs are the same as for U.S. refineries, the Canadian costs can be estimated. Multiplying the average refinery costs by the 15 refineries in Canada that make regular-grade diesel and converting to Canadian dollars, the estimated capital cost in Canada is $730 million, and the estimated annual operating cost is $200 million. The preceding analyses are summarized in Table 5 below.

Table 5: Cost Estimates for Reducing Sulphur in Off-road, Rail and Marine Diesel Fuels

The estimated additional cost to Government of the proposed Regulations, over the existing Sulphur in Diesel Fuel Regulations, is estimated to amount to about $10,000 per year for sampling and analyzing activities by Environment Canada. This is in addition to the annual cost of $232,000–$282,000 per year that was identified for compliance monitoring and enforcement activities (inspections, sampling and sampling analysis) of the Sulphur in Diesel Fuel Regulations as originally passed in 2002. Those costs will continue under the amended Regulations.

It is very difficult to quantify benefits and costs in a way that enables a net benefit calculation (benefits minus costs) related to the proposed Regulations in Canada. However, the EPA found that, for the United States, the benefits of the non-road engines/ equipment and low-sulphur diesel fuel program outweighed the costs by more than a 40 to 1 ratio. (see footnote 18) Given the similar characteristics of Canadian off-road equipment and engines, and the adoption of a Canadian vehicle, engines and fuels program that aligns closely with that of the United States, the proposed Regulations for Canada are expected to result in a comparably positive cost-benefit ratio.

Distributional and competitive impacts do not affect production or consumption within society as a whole, but can affect their distribution or composition. Such impacts of the proposed Regulations have been considered. These include the implications for domestic refiners, independent suppliers, as well as individual Canadians.

In the absence of refinery-specific cost data, it is not possible to either conduct a detailed assessment or provide meaningful results on the potential competitive impacts of the new standards for individual refineries. However, with the proposed Regulations aligning Canadian requirements for off-road, rail and marine diesel fuels with those of the United States, a level playing field for firms on both sides of the border will be maintained. Therefore, no long-term competitive changes to the Canadian refining sector as a whole are expected to arise as a direct result of the introduction of the new sulphur in diesel fuel standards. Nevertheless, individual refiners are expected to be impacted differently by the requirements of the proposed Regulations, depending on their ability to make the necessary investments in production technology and the extent to which they can pass on the costs to their customers within the marketplace.

It is important to note that the investments necessary to meet standards for off-road, rail and marine diesel fuels will be made in the same general time frame as those required to meet similar fuel standards, such as the 30 mg/kg average sulphur in gasoline standard set by the Sulphur in Gasoline Regulations, and the 15 mg/kg maximum sulphur in on-road diesel standard set by the Sulphur in Diesel Fuel Regulations. These standards will necessitate substantial capital outlays, and the additional investment associated with meeting the standards under the proposed Regulations, which were widely consulted on and supported by the petroleum refining industry, will likely have been factored into a company's long-term planning along with these other "stay in business" investments. Therefore, refineries making a large capital investment to meet the sulphur in gasoline and on-road diesel fuel standards are not expected to shut down due to the sulphur in off-road, rail and marine diesel fuels requirement.

In addition to domestic refiners, importers of off-road, rail and marine diesel fuels will be affected by the proposed 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 diesel fuel standards for sulphur.

If independent suppliers have more difficulty obtaining supplies of lower-sulphur diesel fuel domestically (e.g. because of rationalization of Canadian refineries) and/or from foreign sources (i.e. unable to obtain volumes of a suitable product at a competitive price), then the economic viability of some suppliers could be put at risk. However, with the requirements of the proposed Regulations aligning closely with those in the United States and Europe, the availability of low-sulphur diesel fuel to importers and blenders should not be greatly affected. Therefore, the long term viability of independent suppliers should not be threatened.

Individual Canadians will be affected by the proposed Regulations as members of the labour force and 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. If a refinery were to close, the local impacts could be significant, depending on the location and timing of a refinery's closure. However, for the reasons outlined above, it is unlikely that a firm will shut down as a result of the requirements imposed by the proposed Regulations.

Furthermore, expenditures by the petroleum refining industry to meet the new specifications outlined by the proposed Regulations will generate economic activity in Canada. This will generate additional activity in the construction sector and new business to companies supplying professional services and equipment to the petroleum refining industry. Although the net impact of this economic activity on the overall Canadian economy is expected to be quite small, the regional and local impacts may be more significant.

The impact of the proposed Regulations on consumers will depend on the ability of firms to pass on the cost of production in the marketplace. 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 mg/kg final standard, if all capital and operating costs plus a 10 percent return on capital is recovered by the industry in the marketplace, the price of diesel fuel can be expected to increase by between 3.5 and 4.9 cents per litre. This translates on average to about $400–$650 annually in fuel costs for the average bulldozer, and to about $150–$225 per year for the typical agricultural tractor. The U.S. Regulatory Impact Analysis estimates the fuel cost increase to be US$0.07 per U.S. gallon (about 2.7 Canadian cents per litre) for the fully implemented off-road, rail and marine program, which includes refining, distribution and additive costs. (see footnote 19) Prices to the consumer could be higher or lower than these estimates, depending on market conditions. However, these increased costs would be offset, at least partially, by the reduction in the cost of maintaining engines due to the improved fuel.

The reduction of sulphur in off-road, rail and marine diesel fuel will also have an indirect impact on Canadian consumers through its impacts on the transportation, construction, agricultural and other off-road sectors. Diesel fuel is an important input in the production and distribution of goods and services in Canada. The extent of the impact on consumers will also depend on the degree to which the principal diesel-fuel-using sectors are able to pass their incremental operating costs (or savings) on to consumers in the form of higher (or lower) prices for goods and services.

The direct and indirect impacts of higher diesel fuel prices on consumer spending will vary spatially and between groups. However, the proposed Regulations are expected to have a relatively small impact on refiners, retailers and consumers as a whole.

The issue of sulphur in off-road, rail and marine diesel fuels has been addressed through the federal government's overall cleaner vehicles and fuels program. Comprehensive consultations on the issue have taken place through the Minister of the Environment's process to

— develop a federal Notice of Intent on cleaner vehicles, engines and fuels (2000-01); and

The Notice of Intent was published by the Minister of the Environment in Part I of the Canada Gazette on February 17, 2001, following extensive public consultations. Consultations through this process showed near universal agreement by stakeholders that the level of sulphur in off-road diesel fuel is too high. Stakeholders supporting alignment with U.S. requirements for off-road diesel fuel included the Canadian Petroleum Products Institute, Imperial Oil, and the Engine Manufacturers Association. Husky Oil recommended a limit of 500 mg/kg, while Friends of the Earth recommended that off-road diesel fuel be "sulphur free" by 2010.

Environment Canada released a discussion document on the design of the proposed Regulations in August 2003. Twenty-two comments from provinces and stakeholders were received in response to this discussion document. The feedback indicated a strong preference for straightforward Regulations starting in 2007, without the flexibilities provided in the U.S. regulations for a small part of its off-road, rail and marine diesel fuels pool. There was also strong support for a regulatory approach over voluntary or economic approaches because it is considered to be the only way to ensure that all fuel meets the specification (which is very important because, as determined by the EPA, high-sulphur diesel fuel will damage the emission control equipment) and will provide for a level playing field for fuel suppliers in what is a competitive market.

There was also wide support expressed during the consultations for alignment with the U.S. requirements. The CPPI, representing most Canadian refiners, indicated that "Canada should align future actions on off-road diesel with the level and timing that will emerge from the current process in the USA." In October 2003, in response to Environment Canada's consultations on reducing sulphur in off-road diesel, the members of CPPI restated that they "fully endorse the principle of alignment of Canadian engine emission and fuel quality requirements with those of the U.S., our major trading partner." They further stated that they "support Environment Canada's current initiative to design regulations for off-road engine emission standards and sulphur in off-road diesel fuel that align with the proposed U.S. requirements."

In its comments on the proposed Regulations, the St. Lawrence Ship Operators urged a postponement of the regulatory process to permit broader dissemination of the regulatory proposal among ship operators. The proposed requirements have been subsequently discussed with the Canadian Marine Advisory Council, and no other comments were received from ship operators.

A number of other stakeholders provided comments on reducing sulphur in rail and marine diesel fuel. The Ontario Ministry of the Environment, Saskatchewan Environment, Toronto Board of Health, Ville de Montréal, Manufacturers of Emission Controls Association, Canadian Trucking Alliance, Ontario Public Health Association, Ronald Tharby, and Saint John Citizens Coalition for Clean Air encouraged Environment Canada to require the 15 mg/kg sulphur limit for rail and marine diesel. The Quebec Ministère des Ressources naturelles, de la Faune et des Parcs, CPPI, and Ultramar Ltd. were in favour of alignment with the final U.S. standards. John C. Clark commented that the limit for rail and marine diesel fuel should be set at 500 mg/kg. The Engine Manufacturers Association believed that the 15 mg/kg limit should be deferred until required for emission control requirements. The proposed amendments to the Sulphur in Diesel Fuel Regulations include a 15 mg/kg limit for imports and production of diesel fuel for rail and marine use. However, recognizing that contamination of some diesel fuel may occur in the distribution system, the sales limit for diesel fuel for rail and marine applications is 500 mg/kg, providing a sales outlet for such volumes. These requirements align with those of the United States.

Consistent with the requirements of CEPA 1999, the Minister of the Environment offered to consult on a draft of the proposed Regulations with the governments of provinces and members of the CEPA National Advisory Committee who are representatives of Aboriginal governments. Only one province provided comments, and it was supportive of the proposed Regulations.

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 has determined that a reduction in the level of sulphur in off-road, rail and marine diesel fuels to a maximum of 500 mg/kg commencing June 1, 2007, with a final level of 15 mg/kg commencing June 1, 2010, for off-road diesel fuel and June 1, 2012, for rail and marine diesel fuel is warranted. The mechanism to implement this decision is the Regulations Amending the Sulphur in Diesel Fuel Regulations. The proposed Regulations will align Canadian requirements for a lower-sulphur diesel fuel standard with the diesel fuel program to be implemented by the United States.

Since the Regulations are promulgated under CEPA 1999, enforcement officers will, when verifying compliance with the Regulations, apply the Compliance and Enforcement Policy implemented under the Act. The Policy outlines measures designed to promote compliance, including education, information, promoting of technology development, and consultation on the development of regulations. The policy also sets out the range of possible responses to violations: warnings, directions, environmental protection compliance orders, 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 violation). In addition, the policy explains when Environment Canada will resort to civil suits by the Crown for costs recovery.

When, following an inspection or an investigation, an enforcement officer discovers an alleged violation, the officer will choose the appropriate enforcement action based on the following factors:

— 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 with no further repetition of the violation. Factors to be considered include the violator's history of compliance with the Act, willingness to co-operate with enforcement officers, 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.

Mr. Bruce McEwen, Oil, Gas and Energy Branch, Air Pollution Prevention Directorate, Environment Canada, Gatineau, Quebec K1A 0H3, (819) 953-4673 (telephone), (819) 953-8903 (facsimile), bruce.mcewen@ec.gc.ca (electronic mail); and Ms. Céline Labossière, Regulatory and Economic Analysis Branch, Economic and Regulatory Affairs Directorate, Environment Canada, Gatineau, Quebec K1A 0H3, (819) 997-2377 (telephone), (819) 997-2769 (facsimile), celine.labossiere@ec.gc.ca (electronic mail).

Notice is hereby given, pursuant to subsection 332(1) of the Canadian Environmental Protection Act, 1999 (see footnote a), that the Governor in Council proposes, pursuant to sections 140 and 330 of that Act, to make the annexed Regulations Amending the Sulphur in Diesel Fuel Regulations.

Any person may, within 60 days after the date of publication of this notice, file with the Minister of the Environment comments with respect to the proposed Regulations or a notice of objection requesting that a board of review be established under section 333 of that Act and stating the reasons for the objection. All comments and notices must cite the Canada Gazette, Part I, and the date of publication of this notice, and be sent to the Chief, Fuels Division, Air Pollution Prevention Directorate, Environmental Protection Service, Department of the Environment, Ottawa, Ontario K1A 0H3.

A person who provides information to the Minister may submit with the information a request for confidentiality under section 313 of that Act.

1. (1) The definition of "diesel fuel" in subsection 1(1) of the Sulphur in Diesel Fuel Regulations (see footnote 20) is replaced by the following:

"diesel fuel" means a fuel that can evaporate at atmospheric pressure, that boils within the range of 130 ºC to 400 ºC and that is for use in diesel engines or any fuel that is sold or represented as diesel fuel or as biodiesel fuel. (carburant diesel)

(2) Subsection 1(1) of the Regulations is amended by adding the following in alphabetical order:

"locomotive" means a self-propelled vehicle designed to run on rails and for moving or propelling railway cars that are designed to carry freight or other equipment or passengers, but which itself is not designed to carry freight or other equipment or passengers (other than those operating the locomotive), but does not include equipment that is designed to run both on roads and rails, specialized railroad equipment for maintenance, construction, post-accident recovery of equipment and repairs or vehicles propelled by engines with rated horsepower of less than 750 kW. (locomotive)

"locomotive engine" means an engine installed in a locomotive to move or propel it or to provide auxiliary power. (moteur de locomotive)

"machine" means anything, including a vehicle, device, appliance or implement, powered by an engine. (machine)

"off-road engine" means a diesel engine, except for aircraft engines, locomotive engines, vessel engines and engines used to propel on-road vehicles, that is used or designed to be used

(a) by itself and that is designed to be or is capable of being carried or moved from one location to another; or

(i) is designed to be or is capable of being carried or moved from one location to another,

(ii) is self-propelled,

(iii) serves a dual purpose by both propelling itself and performing another function, or

(iv) is designed to be propelled while performing its function. (moteur hors route)

"vessel" means a boat, ship or craft designed, used or capable of being used for navigation in, on or through water that is not designed for self-propulsion out of water. (bateau)

"vessel engine" means a diesel engine that is installed on a vessel to move or propel that vessel through the water or to direct its movement or to provide auxiliary power. (moteur de bateau)

(c) the fuel is being imported for a use referred to in subsection 3(1), (4) or (7), the fuel's sulphur concentration exceeds the concentration referred to in that subsection 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

3. Section 3 of the Regulations is amended by adding the following after subsection (3):

(4) For the purposes of section 139 of the Act, the concentration of sulphur in diesel fuel produced or imported for use in off-road engines shall not exceed

(5) Subject to subsection (6) and for the purposes of section 139 of the Act, the concentration of sulphur in diesel fuel sold for use in off-road engines shall not exceed

(6) 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 off-road engines shall not exceed

(7) For the purposes of section 139 of the Act, the concentration of sulphur in diesel fuel produced or imported for use in vessel engines or locomotive engines shall not exceed

(8) Subject to subsection (9) and for the purposes of section 139 of the Act, the concentration of sulphur in diesel fuel sold for use in vessel engines or locomotive engines shall not exceed 500 mg/kg after September 30, 2007.

(9) 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 vessel engines or locomotive engines shall not exceed 500 mg/kg after November 30, 2008.

4. 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 5453-03a, Standard Test Method for Determination of Total Sulfur in Light Hydrocarbons, Motor Fuels and Motor Oils by Ultraviolet Fluorescence.

5. Subsections 5(1) to (4) of the Regulations are replaced by the following:

5. (1) Every person who produces or imports diesel fuel, other than diesel fuel imported in a fuel tank that supplies an off-road engine, 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 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 subsection (1), the concentration of sulphur in diesel fuel shall be calculated using

(b) 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 (Reapproved 2002), Standard Practice for Comparing Test Methods, and

(ii) the producer or importer proposing to use the method sends to 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 method referred to in paragraph (2)(b) is 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, other than diesel fuel imported in a fuel tank that supplies an off-road engine, shall submit to the Minister a report that contains the information set out in Schedule 2

(a) within 60 days after January 1, 2006, if a report containing the information set out in Schedule 2, as it read before January 1, 2006, was submitted before that date; and

(i) 60 days after January 1, 2006, and

(ii) 15 days before the day on which the person produces or imports diesel fuel for the first time.

6. (1) The portion of subsection 6(1) of the Regulations before paragraph (b) is replaced by the following:

6. (1) Every person who produces or imports diesel fuel, other than diesel fuel imported in a fuel tank that supplies an off-road engine, shall keep a record of each batch of diesel fuel produced or imported that indicates the volume of the batch and

(2) Subsections 6(2) and (3) of the Regulations are replaced by the following:

(2) Subject to subsection (4), every person who produces or imports diesel fuel, other than diesel fuel imported in a fuel tank that supplies an off-road engine, with a concentration of sulphur exceeding 500 mg/kg from January 1, 2006 until May 31, 2006 and 15 mg/kg from June 1, 2006 until May 31, 2010 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) Subject to subsection (4), every person who produces or imports diesel fuel, other than diesel fuel imported in a fuel tank that supplies an off-road engine, with a concentration of sulphur exceeding 15 mg/kg from June 1, 2010 until May 31, 2012 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 or off-road engines", along with the date of dispatch or importation of the batch.

(4) Every person who produces or imports diesel fuel, other than diesel fuel imported in a fuel tank that supplies an off-road engine, with a concentration of sulphur exceeding 500 mg/kg from June 1, 2007 until May 31, 2012 and 15 mg/kg after May 31, 2012 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, off-road engines, locomotive engines or vessel engines", along with the date of dispatch or importation of the batch.

(5) Every record made in accordance with subsections (1) to (4) 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).

7. Schedule 1 to the Regulations is amended by replacing the reference "(Paragraph 5(1)(b))" after the heading "SCHEDULE 1" with the reference "(Subsection 5(1))".

8. Sections 6 and 7 of Schedule 1 to the Regulations are replaced by the following:

(a) Diesel fuel with a concentration of sulphur that was less than or equal to 15 mg/kg

(i) Produced at the facility _________

(ii) Imported into the province _________

(b) Diesel fuel with a concentration of sulphur that exceeded 15 mg/kg and was less than or equal to 500 mg/kg

(i) Produced at the facility _________

(ii) Imported into the province _________

(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 less than or equal to 15 mg/kg

(i) Highest _________

(ii) Lowest _________

(iii) Volume-weighted average _________

(b) Diesel fuel with a concentration of sulphur that exceeded 15 mg/kg and was less than or equal to 500 mg/kg

(i) Highest _________

(ii) Lowest _________

(iii) Volume-weighted average _________

(i) Highest _________

(ii) Lowest _________

(iii) Volume-weighted average _________

10. Paragraph 5(b) of Schedule 2 to the Regulations is replaced by the following:

(i) for use in on-road vehicles _________

(ii) for use in off-road engines _________

(iii) for use in vessel engines _________

(iv) for use in locomotive engines _________

(v) for any other use (specify) _________

11. Paragraph 6(c) of Schedule 2 to the Regulations is replaced by the following:

(i) for use in on-road vehicles _________

(ii) for use in off-road engines _________

(iii) for use in vessel engines _________

(iv) for use in locomotive engines _________

(v) for any other use (specify) _________

Such as in the use of construction, agricultural, and industrial equipment, locomotives or marine vessels.

An adjustment to the definition of diesel fuel is also proposed to clarify that biodiesel falls under the scope of the proposed Regulations.

U.S. EPA. Control of Emissions of Air Pollution From Nonroad Diesel Engines and Fuel. Federal Register, Vol. 69, No. 124 (June 29, 2004): pp. 38958–39273 (www.epa.gov/nonroad-diesel/2004fr.htm).

This provision is to allow for the slower distribution and turnover in the Canadian Arctic and is similar to provisions adopted for the reduction of sulphur in on-road diesel fuel.

SENES Consultants Ltd. & Air Improvements Resource Inc. (for Pollution Data Branch of Environment Canada). On-road data from Updated Estimate of Canadian On-road Vehicles Emissions for the Years 1995-2020, revised December 18, 2002. Off-road Data from Transportation Systems Branch of Environment Canada via the NONROAD model, October 2002.

Directive 2003/17/EC of the European Parliament and the Council of March 3, 2003 amending Directive 98/70/EC relating to the quality of petrol and diesel fuels, L 76/14, Article 9, paragraph 2.

It is estimated that an additional 9 billion litres of diesel fuel with a sulphur level less than 500 mg/kg was also used in the off-road sector in 2001.

Diesel Fuel Regulations. SOR/97-110. Canada Gazette, Part II, Vol. 131, No. 4 (February 19, 1997), pp. 614– 616.

Government Working Group on Sulphur in Gasoline and Diesel Fuel. Setting a Level for Sulphur in Gasoline and Diesel Fuel (final report of Working Group). July 14, 1998.

The study assumed an in-use average sulphur level of 400 mg/kg for the 500 mg/kg standard, and 10 mg/kg for the 15 mg/kg standard.

Atmospheric Science Expert Panel. Sulphur in Gasoline and Diesel Fuels Panel report. August 14, 1997.

Health and Environmental Impact Assessment Panel. Sulphur in Gasoline and Diesel Fuels Panel report. June 25, 1997 (revised March 1998).

Regional levels in 2001 were 2 620 mg/kg for Western Canada, 2 890 mg/kg for Ontario, 2 620 mg/kg for Quebec, and 760 mg/kg for Atlantic Canada. Source: Environment Canada's Sulphur in Liquid Fuels report for 2001.

Kilborn Inc. The Cost of Reducing Sulphur in Canadian Gasoline and Diesel — Phase III. March 1997.

Details on the calculation of these estimates can be found in Tables 4.1, 4.2 and 4.6 of The Cost of Reducing Sulphur in Canadian Gasoline and Diesel — Phase III.

U.S. EPA. Final Regulatory Analysis: Control of Emissions from Nonroad Diesel Engines. EPA420 R 04-007 (May 2004): 7–162.

Using a 3 percent discount rate, the $2,000 net present value of the benefits in 2004 of the U.S. rule is approximately US$780 billion over a 30-year period.

EPA. Final Regulatory Analysis: Control of Emissions from Nonroad Diesel Engines. EPA420-R-04-007 (May 2004): Table 7-2, p. 7-2.