BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 1404
                                                                  Page  1

          GOVERNOR'S VETO
          AB 1404 (De Leon, Carter, and V. Manuel Perez)
          As Amended  September 4, 2009
          2/3 vote

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          |ASSEMBLY:  |45-30|(June 3, 2009)  |SENATE: |21-19|(September 11, |
          |           |     |                |        |     |2009)          |
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          |ASSEMBLY:  |44-29|(September 12, 2009)                           |
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           Original Committee Reference:    NAT. RES.  

           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), Chapter  
          488, Statutes of 2006.

           The Senate amendments  :

          1)Require the Air Resources Board (ARB), in consultation with  
            local air districts and other stakeholders, to identify  
            communities disproportionately impacted by air pollution.

          2)Clarify the definition of compliance offset and make other  
            technical and clarifying changes.

          3)Add chaptering language to resolve a conflict with SB 104  
            (Oropeza).

           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.








                                                                  AB 1404
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          3)Requires any direct regulation or market-based compliance  
            mechanism to achieve GHG reductions that are real, permanent,  
            quantifiable, verifiable and enforceable by ARB.
           
          AS PASSED BY THE ASSEMBLY  , this bill:

          1)Defined "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)Required 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)Imposed 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.

          4)Required 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 ARB.  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.








                                                                  AB 1404
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          5)Required ARB to use the fees authorized by AB 32 to administer  
            the compliance offset program and prohibited the use of  
            General Fund revenues to administer the program.

           FISCAL EFFECT :  According to the Senate Appropriations  
          Committee, costs of $500,000 in 2009-10 and $300,000 thereafter  
          from the Air Pollution Control Fund for oversight, ultimately  
          offset with fees.

           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%), 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.  ARB's pledges to ensure California's program meets all  
          applicable AB 32 requirements for market-based mechanisms.

          Within this 20%, this bill would limit the use of compliance  
          offsets representing reductions from outside of a regulated  
          sector to 10%.  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, has been invented by ARB without  








                                                                  AB 1404
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          any statutory guidance.  While ARB has indicated a 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.  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.

           GOVERNOR'S VETO MESSAGE  :

                This bill limits a regulated entity's use of  
                greenhouse gas (GHG) emission compliance offsets to  
                no more than ten percent of its GHG reductions  
                achieved through market mechanisms during any given  
                compliance period.

                This bill is premature and restricts the design  
                approaches the Air Resources Board (ARB) is  
                considering for cap-and-trade under the Climate  
                Change Scoping Plan.

                ARB is working diligently to craft the proper  
                balance of regulatory and market mechanisms to  
                achieve mandated emission reductions while  
                protecting and enhancing California's economy.  To  
                that end, ARB has convened a panel of nationally  
                recognized economic and financial experts to serve  
                on the Economic and Allocation Advisory Committee to  
                help design market-based compliance mechanisms as  
                part of AB 32 (Chapter 488, Statutes of 2006)  
                implementation.








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                A balanced approach is of vital importance and this  
                bill would only serve to foreclose the opportunity  
                to consider more options and fully vet the State's  
                design of an effective compliance offset program.


           Analysis Prepared by  :  Lawrence Lingbloom / NAT. RES. / (916)  
          319-2092 


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