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 ----------------------------------------------------------------- |ASSEMBLY: |45-30|(June 3, 2009) |SENATE: |21-19|(September 11, | | | | | | |2009) | ----------------------------------------------------------------- ----------------------------------------------------------------- |ASSEMBLY: |44-29|(September 12, 2009) | | | | | ----------------------------------------------------------------- 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 Page 2 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 Page 3 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 Page 4 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. AB 1404 Page 5 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 FN: 0003405