BILL ANALYSIS AB 1404 Page 1 ASSEMBLY THIRD READING AB 1404 (De Leon, Carter, and V. Manuel Perez) As Amended June 1, 2009 Majority vote NATURAL RESOURCES 5-3 APPROPRIATIONS 12-5 ------------------------------------------------------------------- |Ayes:|Skinner, Brownley, |Ayes:|De Leon, Ammiano, Charles | | |Chesbro, | |Calderon, Davis, Fuentes, | | |De Leon, Hill | |Hall, John A. Perez, Price, | | | | |Skinner, Solorio, | | | | |Torlakson, Krekorian | | | | | | |-----+--------------------------+-----+----------------------------| |Nays:|Gilmore, Knight, Logue |Nays:|Nielsen, Duvall, Harkey, | | | | |Miller, | | | | |Audra Strickland | ------------------------------------------------------------------- SUMMARY : Limits the use of "compliance offsets," as defined, to 10% of the greenhouse gas (GHG) emission reductions expected from market mechanisms used to meet the GHG reduction goals of the Global Warming Solutions Act of 2006 [AB 32 (Nunez and Pavley), Chapter 488, Statutes of 2006]. Specifically, this bill: 1)Defines "compliance offset" as the quantified reduction of GHG emissions used as a substitute for direct compliance with a greenhouse gas reduction regulation or market mechanism. A compliance offset is based on emission reductions occurring outside of the sector or sectors covered by the greenhouse gas regulation. 2)Requires the Air Resources Board (ARB) to limit the use of compliance offsets to no more than 10% of the GHG emission reductions expected from market mechanisms during any compliance period. 3)Imposes detailed conditions on ARB approval of compliance offsets to assure the offsets represent GHG emission reductions that are real, permanent, quantifiable, verifiable and enforceable by ARB, and otherwise meet the requirements for GHG emission reductions established by AB 32. AB 1404 Page 2 4)Requires ARB to establish incentives or guidelines to prioritize the use of compliance offsets in the following order: a) Compliance offsets that result in air quality benefits to California communities disproportionately impacted by air pollution, as determined by the state board. A preference shall be made for compliance offsets that benefit air quality in the same air pollution control district or air quality management district where the facility claiming the offset credit is located; b) Compliance offsets that direct investment toward the most disadvantaged communities in California and provide an opportunity for small businesses, schools, affordable housing associations, and other community institutions to participate in and benefit from statewide efforts to reduce GHG emissions; and, c) Compliance offsets that result in co-benefits to public health and the environment anywhere in the state. 5)Requires ARB to use the fees authorized by AB 32 to administer the compliance offset program. ARB may not use General Fund revenues to administer this program. EXISTING LAW : 1)Requires ARB to adopt a statewide GHG emissions limit equivalent to 1990 levels by 2020 and adopt regulations to achieve maximum technologically feasible and cost-effective GHG emission reductions. 2)Authorizes ARB to use market-based compliance mechanisms to comply with GHG reduction regulations. 3)Requires any direct regulation or market-based compliance mechanism to achieve GHG reductions that are real, permanent, quantifiable, verifiable and enforceable by ARB. FISCAL EFFECT : According to the Assembly Appropriations Committee, one-time special fund costs of approximately $500,000 to ARB to establish a program for third-party verifier AB 1404 Page 3 certification, offset use protocols, incentives, and guidelines, and a database to track offsets; ongoing annual special fund costs of about $300,000 to approve and track offsets. COMMENTS : The AB 32 Scoping Plan is a description of the specific measures ARB and others must take to meet the objective of AB 32: reduce statewide GHG emissions to 1990 levels by 2020. The reduction measures identified in the Scoping Plan must be proposed, reviewed, and adopted as individual regulations by January 1, 2011, to become operative by January 1, 2012. According to ARB, a total reduction of 174 million metric tons (MMT), or 30%compared to business as usual, is necessary to achieve the 2020 limit. The major sources of GHG emissions that must be cut are the transportation and electricity sectors, as well as high global warming potential (GWP) products. According to the Scoping Plan, reductions of approximately 140 MMT (~80%) will be achieved through identified "regulatory" measures. Of the regulatory measures, more than 54% of the tons come from four measures in the transportation and electricity sectors. ARB proposes to achieve an additional 34.4 MMT (~20%) reductions necessary to meet the 2020 limit through a cap-and-trade program that links with other states participating in the Western Climate Initiative (WCI) to create a regional market. ARB's pledges to ensure California's program meets all applicable AB 32 requirements for market-based mechanisms. Within this 20%, this bill would impose a 10% limit the use of compliance offsets representing reductions from outside of a regulated sector. Within the limited amount of offsets permitted, this bill would further impose priorities to favor offsets from local sources. This is intended to maximize environmental and public health benefits within California. AB 32 makes no mention of offsets, instead focusing on direct GHG emission reductions and only permitting market-based mechanisms to the extent they produce equivalent results. The potential use of offsets for compliance with AB 32, as envisioned in the Scoping Plan and the WCI, has been invented by ARB without any statutory guidance. While ARB has indicated a AB 1404 Page 4 heavy reliance on offsets, citing an opportunity for low-cost reductions, it has not spelled out how these offsets might meet AB 32's requirements or otherwise produce benefits in California. This bill explicitly authorizes the use of compliance offsets, albeit subject to very stringent constraints that significantly diminish their value in the eyes of offset proponents. For those that might view offsets as a low-cost, "outsourced" alternative to investing in direct GHG emission reductions at home, this bill essential defeats that purpose. The bill limits offsets in three main ways - by percentage, criteria and location. The 10% limit is significantly lower than the 49% limit envisioned in the Scoping Plan and WCI proposal. The criteria limits generally are consistent with AB 32's requirement that market-based mechanisms produce real emission reductions equivalent to direct regulatory measures. The location limits, in the form of priority for offsets from sources near in-state sources of pollution, operate to further constrain the limited range of offset sources that would qualify under the first two limits. Analysis Prepared by : Lawrence Lingbloom / NAT. RES. / (916) 319-2092 FN: 0001282