Reducing Emissions in the Transportation Sector

Cooper Robinson:

I think these programs are one piece of a bigger picture that I see in the global transition. Which is sort of the convergence of climate and finance, treating carbon emissions more and more like a currency to be managed, and traded, and valued. And ultimately that's the motivation, like these are good business decisions.

Michael Torrance:

Welcome to Sustainability Leaders. I'm Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic, and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment business practices and our world.

Disclaimer:

The views expressed here are those of the participants and not those of Bank of Montreal, it's affiliates or subsidiaries.

Christine VanDerwill:

Welcome back to our two-part series on reducing carbon emissions in the transportation sector, with a focus on how auto dealers are working to help drive the transition in net-zero. I'm Christine VanDerwill, an associate with BMO Radicle. In today's episode, we'll be exploring some of the challenges and opportunities with reducing emissions in the automotive sector. Plus we'll touch on the leadership of other transportation centric industries that are transitioning their fleets and equipment in the drive to net-zero. We'll be looking at novel policy instruments that are propelling cleaner fuels, and investments in electric vehicle infrastructure across North America. More specifically, we'll take a deeper dive into the new low carbon fuel programs to aim to reduce the carbon intensity of transportation fuels, innovative businesses, transportation hubs and cities continue to be at the forefront of the transition. And there are now more financial rewards to support the path forward.

We have Cooper Robinson Director Innovation Lead at BMO Radicle, as well as Brad Neff, Director Innovation Low Carbon Fuels joining us today to share the complex dynamics at play and the regulatory landscape of low carbon fuel programs. For over a decade, both Cooper and Brad have tackled some of the most complicated issues facing energy companies. Including operationalizing government carbon credit markets, the use of offset credits for compliance and voluntary purposes, and implementing new and changing low carbon fuel regulations. Brad and Cooper have a shared passion for tackling emissions in hard to abate sectors. So with that, let's jump right in. Welcome Cooper and Brad, and thanks for joining us today.

Cooper Robinson:

Thanks, Christine. Pleasure to be here.

Brad Neff:

Yeah, thank you Christine. Happy to be here.

Christine VanDerwill:

So for starters, Cooper, could you give us a primer on BMO Radicle? And speak to what BMO Radicle offers in the context of helping businesses and organizations in their journeys towards net-zero?

Cooper Robinson:

Absolutely. Thanks, Christine. So Radicle has been a leader in the carbon markets for about 15 years now. One way that I'd describe what we do is to use a spectrum of point A to point B. And point A could be the start of your journey. What can I do to reduce my emissions? Am I eligible for any type of carbon credit revenues? What are the project types that I could do in order to generate some of those revenues? And those types of questions will help clients answer. And point B, I would describe at the end of the journey, maybe you've operationalized a program. You've got carbon credits on the registry, you're looking to sell them for the best price. Or you're looking to purchase credits to count against some of your commitments, and so on.

And wherever clients are in their journey from point A to point B, we're trying to move them forward. We've developed well over 10 million metric tons of CO2 equivalent in carbon credits in collaboration with our clients. We've traded hundreds of millions of dollars worth of carbon credits. We've inventoried or measured tens of millions of tons as well. And we've served over 4,000 clients in that journey over the last 15 years. In December of 2022, we were thrilled to join BMO and to support the bank's ambition to be a lead partner to businesses in the transition to a net-zero world.

Christine VanDerwill:

Thank you so much, Cooper. As we've worked at BMO Radicle with companies across a diversity of sectors to measure and reduce their carbon emissions, we've found that transportation-related emissions can be especially difficult to address. Can you share some of the traditional ways of regulating greenhouse gas emissions? And why the transportation sector poses a particular challenge for regulators? Let's start with you Cooper.

Cooper Robinson:

Sure, Christine, thanks. One of the most common ways is to apply a price signal to those greenhouse gas emissions. And that removes them from the world of being an externality and allows us to make business decisions while considering our greenhouse gas emissions. Carbon taxes, of course, a simple way of doing that, and another way of doing it is with a carbon market. There was some research done a few years ago by International Emissions Trading Association and some of their academic partners. That showed that trading, and specifically they were looking at international trading of emissions under Article 6 of the Paris Agreement, trading could enable greater ambition at significantly lower cost. And so this is one of the reasons that we're big fans of carbon markets. They enable that flexibility, companies and individuals, to address some of the lowest hanging fruit right away, and move forward into some of those harder to abate sectors.

So within carbon markets, there's a few different flavors as well. And the transportation sector has generally been regulated with either renewable fuel standards, or low carbon fuel standards. And those are carbon policies designed to get more alternative fuels, more electrification, and more lower carbon intensity or renewably derived fuels, into the market and into the use by end consumers. Transportation is particularly difficult because the sources of emissions, and usually we say about 75% of the lifecycle carbon emissions associated with transportation fuels, does come from the tailpipe. And so it's a mobile source. It's a relatively small but numerous type of source. And that makes it particularly challenging, relative to say large individual emitters that are often regulated in different ways.

Brad Neff:

Yeah. And Cooper, I would just jump in there that when you take a perspective from the regulator's point of view, it really becomes unmanageable to regulate a lot of different point sources. And you can look at almost any industry. And if we look at food safety for example, and we are in an environment and a perspective that that is the food provider's responsibility to ensure food safety of the food that they sell us. But if you were to flip that model around and say, "Well, it's the consumer's responsibility to make sure their food is safe. And we've got a regulatory body that makes sure that consumer's run tests, and do whatever they need to do." That just becomes completely unmanageable. And so there's this balance that a regulator needs to find as to how much they can do and who they should regulate at what point along the value stream, so that they can have the biggest impact with the least amount of burden. And be successful in what they're doing.

And I think we're all trying to reduce those emissions and find the point to do that. And so regulating the source of fuels becomes much more manageable for a regulator, than regulating every tailpipe and every consumer. And having all those mobile point sources of emissions makes managing and regulating emissions from transportation very difficult.

Christine VanDerwill:

When we talk about a low carbon fuel crediting system, we often describe it as a very dynamic, albeit complex policy. To get something that ends up looking similar to tax, or a rebate, or a grant program, but without government actually getting in the middle of the transaction. I'd love to have you explain how the low carbon fuel programs work in your own words as well.

Brad Neff:

Yeah, I'm happy to jump in there, Christine. Because I find the low carbon fuel standards, and clean fuel standards or regulations, are innovative government programs that have a very targeted focus on reducing the carbon intensity of the fuels we use in transportation. And I want to be very clear about that, because what they're trying to do is physically reduce the carbon content, the GHD emissions, that are being emitted as we satisfy our needs for transportation. And so what that looks like is the government setting a target that starts up at about where gasoline and diesel carbon intensity is for fuel. And steps down year by year, getting tighter and tighter. And those fuel providers in that jurisdiction that provide a fuel that is higher carbon intensive than that standard, than that point that the government has decided on, they incur obligations or deficits within this program that need to be satisfied with credits at the end of each compliance period in order to be in compliance with the regulation.

And so it sets up this penalty for selling high carbon fuels into the market, which we still do need a lot to satisfy our transportation needs. But it helps us to transition to a lower carbon world by giving an incentive for those who are providing fuels that are below that line. And so electricity being one of those, and one that we're keenly focused on creating those credits for those who are investing in charging infrastructure, particularly within jurisdictions that have such programs. And these innovative programs and set up a carrot and a stick, if you will. A carrot for those who can introduce lower carbon alternative fuels into the transportation sector, and a stick for those who are providing those higher carbon fuels.

Cooper Robinson:

Brad, I want to point out maybe a couple of the features of low carbon fuel, or clean fuel standards, that make them a little bit unique. One of them, that carrot and stick structure that you mentioned is really important. And especially because relative to the type of carbon market that's referred to as a cap and trade, these regulations are usually set up on an emissions intensity basis. And that allows the overall volume or the overall sort of economic activity to float up or down as it will within that jurisdiction, but still maintains that solid price signal on the intensity of those fuels. And so whether it's in times of economic growth or in times of recession, you still have maintained that same consistent price signal. You also see that generally governments have laid out much longer time periods when it comes to what those targets are.

It's generally, you've got at least a sort of a 10-year forecast, if you will, of where the standard's going to be in the next 2, 4, 6, 8, 10 years. Even longer in some cases. And that's really important when it comes to industry making investments to actually affect that reduction, as far as the carbon intensity. And the other thing that's different, so this time maybe comparing to something like a renewable fuel standard. Which just says, the fuel entering the market has to be derived from a feedstock that is renewable, or sometimes we refer to it as biogenic. Low carbon fuel, or clean fuel regulations, are agnostic as to the feedstock or the technology. Everything like you said, comes down to that carbon intensity score. So it really does just depend on the science. And those carbon intensity scores are calculated to sort of extreme precision, 2 decimal places generally in the unit's grams of CO2 equivalent per megajoule of fuel energy. So that's an extremely precise unit of measure that they use in order to characterize the different fuels coming into the system.

Christine VanDerwill:

From what you have both described. In essence, low carbon fuel programs enable a business to earn a revenue stream from carbon credits as it electrifies its fleet, and invest in EV charging infrastructure. Brad, you had mentioned specific low carbon fuel programs that are applicable to businesses in Canada and the US. Could you give us a breakdown for listeners here today, which specific low carbon fuel programs they might be able to participate in, in both Canada and the US?

Brad Neff:

There are two programs in Canada that reward the electrification of transportation. The low carbon fuel standard in BC, which was implemented back in 2011, 2012. And the Canadian Clean Fuel Regulation, that was passed just last year into law. And these programs provide an ongoing incentive for individuals and entities that invest in EV charging infrastructure, by allowing them to generate the low carbon fuel credit from the power that they are supplying to vehicles within the program's jurisdiction. This electricity then essentially in an electric vehicle becomes the fuel source for that vehicle.

Cooper Robinson:

It's probably worth mentioning. We're focused, of course on carbon credit programs. We are not a tax shop, but there are tax credits in both Canada and the US that are available for this type of activity as well.

Christine VanDerwill:

Against this backdrop specific to the automotive sector, we've recognized that the OEMs aspirations to sell millions of electric vehicles in the coming decades, and to really go all in in an electric future is trickling down to dealerships. And if these electric vehicle goals are to become a reality, EV charging infrastructure must expand rapidly. And these incentives and low carbon fuel standard programs will be critical to enabling dealerships to really play a role in building out the EV charging infrastructure which is needed. We think there is an opportunity in particular for dealerships across Canada to participate in these low carbon fuel programs that can really help them with payback costs. And as the charging stations that they're installing in their dealerships are used more and more, the return on that investment can actually grow as the credit generation and monetization grows. And Brad, in addition to the automotive sector, what sectors do you see particularly benefiting from low carbon fuel programs in Canada? And where are you seeing uptake?

Brad Neff:

Yeah. Thanks, Christine. One of the interesting things about these programs is that they're designed to transition away from fossil fuels, primarily gasoline and diesel fuels. So in any application where you're using gasoline or diesel, and transitioning to a renewable or other low carbon alternative fuel, there's an opportunity there within that value chain to generate credits. So it's not a one-size-fits-all, but I would say there are lots of opportunities. In shipping, cargo handling equipment that you see around a port is very good candidate for electrification. And there again, as we're replacing gasoline or diesel fuels with electricity, there are big opportunities in that space as well.

Christine VanDerwill:

Yeah, I really appreciate that you mentioned the maritime sector in particular. Because in fact, two of our first clients to work with us are maritime businesses. A tugboat operator in Canada, and then also one of Canada's largest marine terminal operators. And the co-benefits that you touched upon of electrification in the maritime sector is really the cleaner air quality around ports, which is also a priority in terms of regulation. And then also, just wanting to be a better community partner. We've also worked with construction companies and public sector organizations, including school districts. And Brad, we oftentimes speak of one of our longstanding clients. Their CFO started to transition their fleets several years ago, seeing the co-benefits of reducing fuel costs and maintenance costs, while also supporting their climate action goals.

Cooper Robinson:

Brad, I've heard you say successful companies don't get there by leaving money on the table. And really, I think these programs are one piece of a bigger picture that I see in the global transition, which is sort of the convergence of climate and finance. And treating carbon emissions more and more like a currency to be managed, and traded, and valued. And ultimately, that's the motivation, like these are good business decisions. At the end of the day, businesses are making decisions based on financial and economic drivers. And that's really where these programs come in. They provide that economic incentive, and they align the sustainable decision with the right business decision. And that's one of the reasons I think they're so powerful.

Christine VanDerwill:

And Brad, for our listeners, can you paint a picture of how EV infrastructure has grown under California's low carbon fuel standard?

Brad Neff:

Yeah. Thanks, Christine. It's fun to think back a decade ago or 15 years ago in California, and what we thought of electric vehicles then. And as I reflected on the path that we've come down, and looking at what California has successfully done so far in electrifying transportation, it really is incredible. One point of reference is that 41% of EVs in the United States are in California. And we only have 12% of the population. So there's a lot to learn from the experience of California. And I can't attribute all of this growth and all of these things to one particular program. There are many programs, and having Tesla here in the state I think also influences, just the mindset. And having the tech industry and a lot of first adopters here has really added to this. But all of this combined, I think if you look back to 2011 when the LCFS regulation was passed, California sold just under 7,000 EVs. And last year that number was 345,000, 346,000.

That's 50X in 2011. And putting this in context, if you would've put a thousand dollars in the bank in 2011 with that kind of growth, you'd be able to buy a mid-size battery electric vehicle today. The public charging sector has not grown quite as fast, but as chargers get faster and uptime improves for chargers, we don't need as many chargers to support the same number of electric vehicles. So we've grown from about 5,000 to 135,000 across California in that same time period. It's just been an incredible ride to see the proliferation of electric vehicles on the road.

Cooper Robinson:

I agree with you, Brad, that we always say correlation does not equal causation. And certainly the existence of Tesla in California likely contributed to the proliferation of EVs there. But BC, we see a similar trend in Canada that majority of the electric vehicles, or certainly a higher proportion, are going to be BC where they have had the longer standing low carbon fuel standard. And do not have Tesla as the local manufacturer. So I think there's definitely some contribution that the existence of these programs makes to the significant growth in electrification.

Christine VanDerwill:

That brings us to the end of today's episode. Thank you both, Brad and Cooper, for joining today and really painting a picture of what lies ahead in decarbonizing transportation.

Cooper Robinson:

Thanks, Christine.

Brad Neff:

Thank you, Christine. It was a pleasure.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider. And we'll greatly appreciate a rating and review, and any feedback that you might have. Our show and resources are produced with support from BMO's Marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

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