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 









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                 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. 









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              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, 









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              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. 











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            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