canada’s clean fuels regs: the arbitrage window

12-Jul-25

              +------------------+
              |  FEEDSTOCKS      |  corn · canola · tallow
              +------------------+
                        |
                        v
         +-------------------------------+
         |  FUEL MAKER (refinery / SAF)  |
         |  • burns hydrogen, cleans CI  |
         +-------------------------------+
                        |
                        | low-carbon fuel sent to pumps & jets
                        |
     +-----------------------------------+     EVs & CCS bypass fuel
     | CARBON CREDITS = CI SAVED         |<---- charging, H₂ stations
     |  (baseline CI minus pathway CI)       |<---- industrial CO₂ capture
     +-----------------------------------+
                        |
                        v
          +-----------------------------+
          |  MARKET PRICE               |  proxies
          |  • BC LCFS VWAP             |
          |  • AB TIER fund $60/t       |
          +-----------------------------+
                        |
                        v
      +----------------------------------+
      |  DEMAND (DEFICIT)                |
      |  • 15 % CI cut by 2030           |
      |  • fuel sales stats (StatCan)    |
      +----------------------------------+
                        |
                        v
      +----------------------------------+
      | SUPPLY PIPELINE                  |
      |  • new plants (Clean Fuels Fund) |
      |  • offset projects (CSA)         |
      +----------------------------------+
                        |
                        v
      +----------------------------------+
      |  CREDIT PRICE OUTLOOK            |
      |  = demand gap minus future supply|
      +----------------------------------+

How it works

  1. Feedstocks (corn, canola, tallow) are turned into renewable diesel or SAF.
  2. Fuel maker lowers carbon intensity (CI) versus fossil baseline.
  3. For every tonne of CO₂e avoided, credits are issued. Same happens when EVs use clean electricity or when a plant captures CO₂ (CCUS).
  4. Credits trade; you track price with proxies (BC’s VWAP or Alberta’s fund price).
  5. Demand/deficit is fixed by law (15% CI cut by 2030) and grows with fuel sales.
  6. Supply pipeline (new plants + offset projects) adds future credits.
  7. Price outlook is basically gap between demand and coming supply; that’s what the model forecasts.

Market snapshot

Projected Deficit: ~3Mt by 2030 (26Mt mandate vs 23Mt pipeline)

Credit Trading: Average $148/t, peak $166/t (Q2 2024)

Federal SAF Gap: $0 production incentive vs US $1.75/gal

Compliance Fund: $330/credit (2024$), ~$345 by 2025 at 2% CPI

Capital Support: 30% Clean Technology ITC (20% if labour rules unmet)

The arbitrage

Canada rewards every gram of CO₂ reduced through linear crediting; the US requires 50% improvement for any 45Z support. LanzaJet’s CEO recently advocated lowering US thresholds to 30%⁶ because mainstream corn ethanol-to-jet achieves only ~22% reduction after energy inputs and indirect land-use change (ILUC, JRC 2023)⁷.

Key insight: Those same fuels could earn $0.31-1.02/gallon in Canada.

Combined credit value & revenue analysis

100MM gal/year Renewable Diesela

Metric 20% CI Reduction 50% CI Reduction
CO₂ saved 2.45 kg/galb 6.13 kg/galb
CFR Credits $0.36-0.41/gal @ $148-166/t $0.91-1.02/gal @ $148-166/t
BC LCFS $0.69/gal @ $280/t avg⁸ $1.72/gal @ $280/t avg⁸
Product Premium $0.05-0.15/gal $0.05-0.15/gal
Total Potential $1.10-1.25/gal $2.68-2.89/gal

a Baseline: 95 gCO₂e/MJ × 129 MJ/gal

b 2.45 kg = 0.00245 t/gal; 6.13 kg = 0.00613 t/gal

BC LCFS range: $207/t (Q1 2024) to $350/t (Q4 2024)⁸

Actionable pathways

Deploy now

  • BC Renewable Diesel: Stack federal + provincial despite LCFS volatility
  • Alberta CCUS: 60% capture, 50% transport, 37.5% storage ITC⁹
  • Ethanol Optimization: Bolt-on CCS for immediate credit generation

Position for 2026

  • Credit Aggregation: 3Degrees Canadian platform launch H2 2025¹⁰
  • Fleet Charging: Category 3 credits for commercial operators

Monitor

  • SAF Production: Industry lobbying for 50% ITC¹¹
  • New Provincial LCFS: Ontario, Quebec frameworks in consultation

Critical factors

Assumptions:

  • 23Mt from NRCan tracker, excludes projects announced post-Dec 15, 2024¹
  • All listed projects reach COD by 2027
  • Credit prices volatile: CFR and LCFS moved ±25%+ since inception

Market Risks:

  • Provincial credit volatility (BC: $470→$280 in 18 months)
  • Policy reversal risk as governments change
  • ILUC methodology updates affecting eligibility
  • Labour requirements for full ITC rates

The window

Linear crediting may create what appears to be a 24‑ to 36‑month opportunity. The projected deficit could sustain elevated pricing if no additional supply emerges. Even at conservative assumptions ($100 CFR, $200 LCFS), structured projects could achieve 15%+ returns.

Q1 2025 catalysts: Federal budget, ECCC liquidity updates, Clean Fuels Fund Round 2

References

  1. NRCan Clean Fuels Fund Project List, Dec 15 2024 (23Mt capacity, excludes post-date announcements)
  2. ECCC Credit Market Report 2024, Table 2 (average & peak prices)
  3. IRA §45Z vs CFR
  4. CFR compliance fund provisions (2024$) + CPI escalator
  5. Budget 2023 s.127.45 (failure to meet labour rules reduces to 20%)
  6. Bloomberg, “LanzaJet Eyes Lower US SAF Threshold,” July 10, 2024
  7. Prussi et al., JRC Science for Policy Report 2023
  8. BC MEMLI LCFS Market Report Q4 2024 (quarterly price range)
  9. Federal CCUS-ITC rates (wage-adjusted)
  10. 3Degrees Investor Presentation, Dec 2024, slide 14
  11. CRFA pre-budget submission 2025