Canada’s push toward cleaner gasoline and diesel has exposed a significant cross-border dependency. In 2025, approximately 67% of compliance credits generated from supplying lower-carbon fuels came from imported fuel, predominantly from the United States, according to newly published federal figures.
The disclosure comes as Ottawa seeks to strengthen Canada’s domestic biofuel industry while maintaining its commitment to reducing greenhouse gas emissions. Although Canadian production capacity has expanded, imported fuels continue to play a major role in meeting domestic demand.
With American tax incentives giving U.S. producers another competitive advantage, the federal government is proposing changes that would make Canadian-made low-carbon fuels more financially attractive. The challenge is finding a balance between protecting domestic jobs, ensuring reliable fuel supplies, and maintaining the environmental benefits of the regulations.
What Ottawa’s 67% Figure Actually Reveals
The figures published in the October 31, 2026, Canada Gazette provide a clearer picture of how heavily the country relies on foreign-produced clean fuels. Environment and Climate Change Canada reported that approximately 67% of compliance credits created through the supply of low-carbon-intensity fuels in 2025 came from imports, while Canadian-produced fuels accounted for the remaining 33%. These credits are generated through activities such as supplying ethanol, biodiesel, and renewable diesel. Importantly, the 67% figure refers specifically to credits from low-carbon fuel supply, rather than every type of credit issued under the federal program.
That distinction matters because the regulations also allow credits from other activities, including emissions-reduction projects and electricity supplied to electric vehicles. Nevertheless, low-carbon fuel supply accounts for more than 87% of credits created under the program to date, making imported fuels a substantial part of the overall system. Ottawa previously reported an import share of 73% for this category in 2024. The newer figures suggest some improvement, but they also confirm that Canada remains dependent on foreign production for much of its clean-fuel compliance market.
How Canada’s Clean-Fuel Credit System Works
Canada’s Clean Fuel Regulations require companies that produce or import gasoline and diesel to progressively reduce the life-cycle carbon intensity of those fuels. This measurement includes emissions associated with extracting raw materials, processing fuel, transportation, and eventual consumption. The carbon-intensity requirements took effect in July 2023 and are designed to become progressively stricter through 2030, when suppliers must achieve a reduction of 14 grams of carbon dioxide equivalent per megajoule compared with the regulatory baseline. Rather than prescribing one specific technology, the regulations allow companies to choose among several methods of reducing their compliance obligations.
Under the existing framework, one compliance credit represents one tonne of life-cycle greenhouse gas emissions reductions. Companies can earn credits by supplying lower-carbon fuels, investing in qualifying emissions-reduction projects, or providing electricity and hydrogen for transportation. Credits can also be purchased from other market participants. This creates a financial incentive for businesses capable of reducing emissions more efficiently. Federal rules separately require gasoline to contain at least 5% low-carbon fuel and diesel to contain at least 2%. The credit market provides additional flexibility beyond these minimum fuel-content requirements, helping explain why imported biofuels have become so important.
Canada’s Ethanol Production Cannot Keep Up With Demand
One of the main reasons Canada imports so much clean fuel is that domestic production has struggled to keep pace with consumption. According to federal regulatory figures, the country’s 12 ethanol facilities have a combined annual production capacity of approximately 1.87 billion litres. They produced around 1.78 billion litres in 2025, with many facilities operating at more than 90% of capacity in recent years. Natural Resources Canada estimates that domestic ethanol production supplied approximately 40% of Canadian consumption in 2025. The remainder came largely from imports, particularly from the United States, leaving limited room to replace foreign supplies simply by increasing output at existing plants.
Renewable diesel presents a somewhat different picture. Canada has six biodiesel facilities and three hydrogenation-derived renewable diesel facilities, with new production capacity emerging in British Columbia, Alberta, and Newfoundland and Labrador since late 2023. However, theoretical production capacity does not necessarily translate into actual domestic supply. Facilities experience maintenance downtime, changing operating economics, and competing export opportunities. For Canadian fuel distributors, imports provide access to essential supplies when domestic production falls short. For manufacturers and agricultural producers, those same imports represent an opportunity to develop a larger Canadian industry capable of meeting more of the country’s future energy requirements.
American Tax Incentives Are Making Competition More Difficult
The competitive landscape changed significantly when the United States introduced its Section 45Z Clean Fuel Production Credit in January 2025. Unlike the previous biodiesel blenders tax credit, which could benefit qualifying imported fuels blended in the United States, the newer incentive focuses on fuel produced at American facilities. Legislation enacted in July 2025 extended the program through 2029 and established eligibility conditions involving feedstocks grown or produced in the United States, Canada, or Mexico. Consequently, qualifying American producers can benefit from federal financial support while selling their products into Canada’s clean-fuel market, creating a difficult competitive environment for domestic manufacturers.
The impact extends beyond an ordinary disagreement over trade policy. Ottawa’s regulatory assessment indicates that, assuming comparable input costs and production efficiency, American incentives could allow U.S. producers to sell competing fuels at lower prices. Canadian biodiesel and renewable diesel facilities have already experienced operational challenges and temporary shutdowns amid changing market conditions. That creates uncertainty for employees, agricultural suppliers, and communities connected to fuel manufacturing. A Canadian plant reducing production may also purchase fewer domestic agricultural feedstocks, affecting businesses far beyond the facility itself. The concern is particularly relevant to canola, which provides an important raw material for renewable diesel and biodiesel production.
Ottawa Proposes Giving Canadian-Made Fuels More Credits
Rather than banning imported fuels, the federal government wants to change the financial incentives that influence where clean fuels are produced. Under proposed amendments published on October 31, qualifying Canadian-made low-carbon fuels would generate additional compliance credits through a multiplier system. Ethanol would receive a multiplier of 1.3, biodiesel and co-processed low-carbon diesel would receive 1.4, hydrogenation-derived renewable diesel would receive 1.5, and sustainable aviation fuel would receive 1.8. This means that qualifying Canadian ethanol production could generate 30% more credits than the same amount of imported ethanol with an equivalent carbon intensity. Those additional credits could be sold to companies seeking to satisfy their regulatory obligations.
However, the proposal includes important conditions. For most liquid fuels, the additional credits would apply only to the portion produced from feedstocks originating and processed in North America, with a proposed exemption for Newfoundland and Labrador. If finalized as drafted, the multiplier would cover qualifying production dating back to January 1, 2026. Imported fuels would remain eligible for ordinary compliance credits, but without the domestic production bonus. The additional credits also could not replace the physical fuel needed to satisfy minimum blending requirements. Ultimately, Ottawa is attempting to make Canadian production more competitive without completely disrupting the existing market for imported supplies.
Canadian Farmers and Manufacturing Jobs Have a Major Stake
The economic implications extend beyond fuel producers and petroleum refiners. Natural Resources Canada estimates that the country’s liquid biofuels sector contributed approximately $5.9 billion to Canadian GDP in 2025 and supported around 11,600 jobs. The industry also creates demand for Canadian agricultural commodities, particularly canola, corn, and wheat. For farmers supplying these feedstocks, a stable domestic biofuel industry represents an additional market beyond food production and traditional agricultural exports. Manufacturing facilities also support employment in transportation, processing, maintenance, and other services. When a production plant reduces operations, the economic consequences can spread across communities that depend on those activities.
Several provincial governments have already introduced measures intended to protect Canadian producers. British Columbia established domestic renewable-fuel requirements covering 8% of diesel and 5% of gasoline, while Ontario introduced Canadian-content rules for renewable fuel components, including a 75% domestic sourcing requirement for diesel’s bio-based content beginning in 2026. Ottawa has also established a Biofuels Production Incentive worth up to $372 million to support qualifying domestic biodiesel and renewable diesel production during 2026 and 2027. Together, these measures illustrate the growing importance governments place on maintaining Canadian manufacturing capacity and reducing vulnerability to changes in international fuel markets.
The Proposed Changes Could Come With an Environmental Trade-Off
While the federal government argues that stronger domestic production could improve long-term energy security, its own analysis identifies a significant environmental compromise. The proposed credit multipliers are expected to create approximately 26.9 million additional compliance credits between 2026 and 2035. However, these additional credits would not necessarily represent new emissions reductions. Instead, they could replace other compliance activities that would otherwise have delivered measurable reductions in greenhouse gases. Ottawa estimates that approximately 26.9 million tonnes of carbon dioxide equivalent in emissions reductions could be forgone over the decade compared with the regulatory baseline. This represents a difference between policy scenarios, rather than a forecast of an equivalent absolute increase in national emissions.
The federal cost-benefit analysis estimates approximately $9.1 billion in avoided compliance costs during that period, compared with roughly $8.3 billion in estimated costs associated with forgone emissions reductions. That produces an estimated net benefit of approximately $900 million, expressed in present-value terms. Government officials argue that protecting Canadian production today could prevent larger environmental setbacks if foreign supplies become unreliable in the future. Nevertheless, the analysis raises an important question about the balance between industrial competitiveness and climate policy. A system designed to reduce emissions must also demonstrate that the financial rewards it creates continue to encourage meaningful environmental improvements.
Will Canadian Drivers See Lower Gasoline and Diesel Prices?
For everyday motorists, one of the most important questions is whether changes to the Clean Fuel Regulations will translate into lower prices at the pump. Ottawa’s regulatory analysis suggests that providing additional credits to domestic producers could reduce compliance costs for gasoline and diesel suppliers. Some of those savings could eventually be passed along to consumers, although the government acknowledges that the impact depends on competition and market conditions. The proposal does not guarantee a specific reduction in gasoline prices. For families commuting to work or businesses operating delivery vehicles, lower industry compliance costs would only provide meaningful financial relief if they translate into lower fuel expenses.
Other proposed changes could also influence the market. Fuel suppliers would be allowed to satisfy up to 15% of their emissions-reduction obligations through contributions to registered funding programs, compared with the existing 10% limit. Ottawa also wants to improve transparency in credit trading, noting that more than half of recorded credit transfers have reported prices of zero dollars. Under the proposed rules, certain transactions involving credits transferred at no cost or below fair market value would require additional explanations. Better transparency could make the market easier to assess, although retail fuel prices would continue to depend on many other factors, including crude oil prices, refining costs, taxes, and competition.
What Happens Next for Canada’s Clean-Fuel Industry?
The proposed amendments remain subject to public consultation and further government approval. The October 31, 2026, Canada Gazette publication opened a 75-day consultation period scheduled to conclude on January 14, 2027. Fuel producers, petroleum companies, agricultural organizations, environmental groups, and other interested parties can provide feedback before the federal government determines the final regulations. An earlier consultation generated 124 submissions, with stakeholders disagreeing over whether Canada should introduce credit multipliers, mandatory domestic fuel-content requirements, or a combination of both. These differences reflect the competing priorities of protecting Canadian manufacturing, preserving affordable fuel supplies, and maintaining measurable emissions reductions.
Industry reactions already demonstrate those tensions. The Canadian Fuels Association welcomed the proposed amendments as a potential incentive for domestic investment, while Renewable Industries Canada argued that the proposed 1.3 multiplier for ethanol falls short of the 1.4 minimum it has requested. Some analysts have also warned that awarding more credits for existing fuel production could reduce demand for additional low-carbon fuel compared with the current regulatory approach. If finalized, the amendments would take effect upon registration, with the proposed multiplier covering eligible production dating back to January 1, 2026. Ultimately, Canada’s challenge will be reducing its reliance on imported clean fuels without sacrificing the environmental objectives that created the credit market in the first place.
