BILL ANALYSIS Ó AB 523 SENATE COMMITTEE ON ENVIRONMENTAL QUALITY Senator S. Joseph Simitian, Chairman 2011-2012 Regular Session BILL NO: AB 523 AUTHOR: Valadao AMENDED: June 6, 2012 FISCAL: Yes HEARING DATE: June 18, 2012 URGENCY: No CONSULTANT: Rebecca Newhouse SUBJECT : ALTERNATIVE FUELS: ETHANOL SUMMARY : Existing law : 1) Requires the State Energy Resources Conservation and Development Commission (CEC), in partnership with the ARB, and in consultation with specified state agencies, to develop and adopt a state plan to increase the use of alternative fuels, including ethanol, on or before June 30, 2007 (pursuant to Health and Safety Code §43865 et seq.). 2) Under the California Alternative and Renewable Fuel, Vehicle Technology, Clean Air, and Carbon Reduction Act of 2007 (§44270 et seq.): a) Requires the CEC to administer the Alternative and Renewable Fuels and Vehicle Technology Program (ARFVT program) to provide grants, revolving loans, loan guarantees, loans, or other appropriate measures to specified persons and entities to develop and deploy alternative and renewable fuels and advanced transportation technologies to help attain the state's climate change policies. Under the program, projects to develop and improve specified alternative and renewable fuels, including ethanol, are eligible for funding. In implementing the program, the CEC established the California Ethanol Producers Incentive Program (CEPIP). b) Requires that biorefiners receiving loans from the CEPIP meet certain specified requirements and that those AB 523 Page 2 specified requirements will become inoperative July 1, 2013, and repealed on January 1, 2014, unless a later enacted statute deletes or extends those dates. This bill specifies that projects for the production of ethanol from edible portion of corn plants are not eligible for funding under the ARFVT program on and after July 1, 2013. COMMENTS : 1) Purpose of Bill . According to the author, "AB 523 would amend the Health and Safety Code by eliminating future funding for ethanol derived from corn after July 1, 2013, when the California Ethanol Producer Incentive Program (CEPIP) expires. As the Legislature continues to work to bridge the budget deficit, and California families and businesses continue to struggle with the ongoing economic downturn, it is fiscally irresponsible to subsidize any future industry that negatively impacts food supplies and price, other major California employers, and has shown little if any positive environmental benefit. AB 523 will level the playing field for all interested parties invested in ethanol and will not provide below market rate for their investments after 2013. Since close to 40% of corn in the United States goes to ethanol it causes the price of food and feed to go up. AB 523 will allow the Energy Commission to decide where to spend or use the $6 million that will be saved once this bill is enacted by protecting the people of California from future state subsidies spent on corn-based ethanol." 2) Background . AB 118 (Núñez), Chapter 750, Statutes of 2007, created the Alternative and Renewable Fuel and Vehicle Technology Program, which the CEC administers to provide funding for eligible persons and projects to help attain the state's climate change policies. Existing law provides, upon appropriation by the Legislature, approximately $100 million annually through 2015 for this program. The CEC, through a competitive process, allocates these funds to alternative fuel and vehicle technology projects. To set priorities for the allocation of funds, the CEC must develop an investment plan in consultation with a wide array of stakeholders. AB 523 Page 3 The CEC created the CEPIP, pursuant to AB 118, and began accepting applications for the CEPIP in June of 2010. The program provides operators of existing corn-based ethanol production plants in California with temporary financial assistance during periods of tough economic times that would be repayable under favorable market conditions. According to the CEC, this program is intended to stimulate operational improvements at existing ethanol facilities and the use of advanced process technology to convert cellulose and other low carbon feedstock, with the objectives to increase statewide biofuel production, retain and create California jobs and reduce greenhouse gas emissions. The CEPIP is available only to owners and/or operators of existing corn ethanol production facilities in California that have an ethanol production capacity of at least 10 million gallons per calendar year. Currently, the maximum funding available for the CEPIP is $6 million. Incentives provided to California ethanol producers enrolled in the CEPIP are based upon the "ethanol crush spread" (ECS) or the difference between monthly ethanol and corn price averages. If the ECS drops below 55 cents per gallon, eligible producers receive up to 25 cents per gallon. Repayment of up to 20 cents per gallon from the ethanol producer to the CEPIP is required if the ECS rises above $1.00 dollar per gallon. Ethanol producers enrolled in the CEPIP must comply with one of two Biorefinery Operational Enhancement Goals and either reduce the carbon intensity of the fuel they produce by 10% or displace a minimum of 20% of the existing feedstock with a waste based and/or alternative feedstock in a timeframe specified by the CEC. 3) Impacts of corn-based ethanol . An article published in the journal Science in 2008 asserts that, although life-cycle assessments have indicated greenhouse gases can be moderately reduced by replacing gasoline with ethanol, those studies have failed to account for the land use changes that occur when farmers convert forests and grasslands for use to replace diverted grain. According to their model, which factors in worldwide land use change, AB 523 Page 4 switching to ethanol may actually double greenhouse gas emissions over 30 years. According to the Senate Transportation and Housing Committee Analyses, the CEC acknowledges potential harm associated with corn-based ethanol resulting from land use change, commodity price increase and greater water use and indicates that it intends to make no more AB 118 awards to corn-based ethanol producers. 4) Future of the CEPIP . Because the CEPIP incentive is based on the ECS, the program is designed for corn-based ethanol projects. Passage of AB 523 would essentially halt the CEPIP program and modifications to the CEPIP, including the development of formulas to capture costs and revenue streams specific to non-corn ethanol production processes, would be required to accommodate and provide incentives to ethanol producers using cellulosic feedstock (wood, grasses, or non-edible parts of plants) or sugarcane. According to the CEC, there are currently no California facilities producing ethanol from cellulosic sources or sugar cane in excess of 10 million gallons per year of capacity. 5) Support concerns . Supporters say that corn-based ethanol diverts approximately 40% of the corn produced in the US and directs it to an industry that already has benefits from a renewable portfolio standards as well as significant federal financial subsidies and tax credits. They also contend that ethanol has shown little promise as an environmentally sound alternative, and that by subsidizing ethanol derived from corn, funding is diverted from other alternate fuel sources that possess greater potential to reduce greenhouse gas emissions. They also assert that increased demand and competition for corn has significantly driven up the price of corn, negatively affects California families and businesses, and disproportionally impacts California poultry, dairy and cattle producers that provide more than 500,000 California jobs. They also add that the subsidies are fiscally irresponsible at a time when California faces a $26 billion budget deficit. AB 523 Page 5 SOURCE : Assemblymember Valadao SUPPORT : Agricultural Council of California Alliance of Western Milk Producers Association of California Egg Farmers California Cattlemen's Association California Dairy Campaign California Dairies, Inc. Californians Against Waste California Poultry Federation Center on Race, Poverty & the Environment Central Coast Fryers/Fulton Valley Farms Coalition for Clean Air Dairy Farmers of America-Western Area Council Diestel Turkey Ranch Environment California Foster Farms Hilmar Cheese Company Land O' Lakes Milk Producers Council Pacific Egg & Poultry Association Pittman Farms Sierra Club Squab Producers of California Union of Concerned Scientists Western United Dairymen Zachy Farms OPPOSITION : None on file