BILL ANALYSIS Ó
AB 768
Page 1
Date of Hearing: April 4, 2011
ASSEMBLY COMMITTEE ON NATURAL RESOURCES
Wesley Chesbro, Chair
AB 768 (Gatto) - As Amended: March 14, 2011
SUBJECT : California Global Warming Solutions Act of 2006: Low
Carbon Fuel Standard
SUMMARY : Requires the Air Resources Board (ARB) to allow out of
state producers of "renewable natural gas" (i.e. biomethane) to
generate credits for compliance with the Low Carbon Fuel
Standard (LCFS), notwithstanding the ARB's adopted requirement
that regulated parties demonstrate a physical pathway for
delivery of the fuels to California.
EXISTING LAW :
1)Pursuant to the California Global Warming Solutions Act (AB
32), requires ARB to adopt a statewide greenhouse gas (GHG)
emissions limit equivalent to 1990 levels by 2020 and to adopt
rules and regulations to achieve maximum technologically
feasible and cost-effective GHG emission reductions. AB 32
also required ARB to adopt early action measures (EAM) to
reduce GHG emissions prior to this date.
2)Pursuant to the Governor's Executive Order S-01-07, sets a
statewide goal to reduce the carbon intensity of California's
transportation fuels by at least 10% by 2020. The order
required ARB to consider adopting a LCFS to implement this
goal, either as an EAM or in another regulatory proceeding.
In 2009, ARB adopted the LCFS as a regulation. The LCFS
permits producers of certain alternative fuels, including
biomethane, that inherently meet the 2020 standards to opt in
to LCFS regulation for the purpose of generating credits,
which can be banked and used for compliance, sold to other
regulated parties, and purchased and retired by regulated
parties. In addition, LCFS credits can be exported to other
GHG emissions reductions programs, including possibly the
overall cap and trade program ARB has proposed under AB 32.
Entities that opt in are subject to LCFS requirements,
including the requirement to demonstrate a physical pathway
for delivery of the fuels to California to ensure that low
carbon fuels produced outside of California are actually the
source of fuels used in the state.
AB 768
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THIS BILL requires ARB to allow a regulated party that has opted
in to the LCFS to generate credits through the sale of
biomethane produced out of state, but distributed to consumers
in the state through "displacement trade contracts" (i.e. gas
swaps), thereby exempting these parties from the physical
pathway demonstration.
FISCAL EFFECT : Unknown
COMMENTS :
1)Background. In 2007, Governor Schwarzenegger issued Executive
Order S-1-07, calling for a reduction of at least 10 percent
in the carbon intensity of California's transportation fuels
by 2020. The Order instructed the California Environmental
Protection Agency to coordinate activities between the
University of California, the California Energy Commission and
other state agencies to develop and propose a draft compliance
schedule to meet the 2020 target.
Furthermore, the Order directed ARB to consider initiating
regulatory proceedings to establish and implement the LCFS.
In response, ARB identified the LCFS as an early action item
and adopted a regulation in 2009, to be implemented beginning
in 2010. The adopted LCFS regulation includes provisions
permitting credits to be generated from certain alternative
fuels and requiring that all fuels, including those used to
generate credits, demonstrate a physical pathway into the
state. Credits are awarded based on fuel performance that
exceeds a regulatory standard. Credits can be banked
indefinitely and used for compliance, sold to other regulated
parties, and exported to other GHG emissions reduction
programs. To ensure that low carbon fuels produced outside of
California are actually the source of fuels used in the state,
the LCFS requires regulated parties to demonstrate that a
physical pathway exists by which the fuel is expected to
arrive in California, including any combination of truck
delivery routes, rail tanker lines, gas/liquid pipelines,
electricity transmission lines, and any other fuel
distribution routes.
The LCFS recognizes that certain alternative fuels, including
biomethane, inherently meet the 2020 standards and allows them
to opt in to LCFS regulation for the purpose of generating
AB 768
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credits. The anaerobic digestion of biodegradable organic
matter produces biogas, which consists of methane, carbon
dioxide, and other trace amounts of gases. Depending on where
it is produced, biogas can be categorized as landfill gas or
digester gas. Landfill gas is produced by decomposition of
organic waste in a municipal solid waste landfill. Digester
gas is typically produced from livestock manure, sewage
treatment, or food waste. Like natural gas from fossil
sources, methane derived from these sources can be compressed
or liquefied, or converted to hydrogen, and used as a
transportation fuel.
2)The Clean Energy example. Clean Energy is a supplier of
natural gas transportation fuels. According to the company's
website:
Clean Energy owns and operates a landfill gas processing
facility in Dallas, Texas that produces renewable
biomethane that is currently delivered into the nation's
gas pipeline network and displaces conventional natural
gas. The McCommas Bluff landfill gas operation is one of
the largest biomethane landfill gas operations in the
United States. The landfill, owned by the City of Dallas,
is not scheduled to close until 2042 and it is estimated
that biogas will continue to be produced for approximately
30 years after the landfill closes... Clean Energy has the
ability to transport biomethane from its McCommas Bluff
operations or other biomethane production sites to its
national network of CNG and LNG fueling stations for use as
a vehicle fuel. Clean Energy is actively pursuing
additional opportunities to develop biomethane production
sites and acquire biomethane for sale as a vehicle fuel to
its customers.
Clean Energy has indicated that it is possible to demonstrate
a physical pathway via pipeline from its source in Texas to
California, but gas utility pipeline tariffs make proving
delivery of the same gas to California uneconomic, so it can't
meet all of ARB's physical pathway criteria. The use of
displacement trades, swapping the gas it injects into
pipelines in Texas for gas withdrawn from pipelines in
California, overcomes the commercial barriers, but is not
recognized in the LCFS rules as an acceptable alternative to
physical delivery. An additional issue is the fact that the
gas withdrawn from the pipeline is not "renewable," so it
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would be less valuable as a source of LCFS credits.
Clean Energy points to the Renewables Portfolio Standard for
electricity, which permits limited trading of unbundled
renewable energy credits (RECs) from sources located anywhere
in the interconnected western transmission grid, as an example
in support of this bill. In theory, the REC example is
analogous, although the RPS rules limit trading of unbundled
RECs and impose a stringent tracking system to assure credits
originate from eligible sources and aren't counted more than
once. An additional distinction is that the western
electricity transmission grid is generally west of the Rockies
and does not extend to Texas.
Given that Clean Energy has indicated that it can demonstrate
a physical pathway, but wants to use displacement trades for
commercial reasons, the bill appears broader than necessary to
meet the stated objective. If the author and the committee
wish to revise the LCFS to require ARB to recognize
displacement trades, it may be appropriate to amend the bill
to confirm that the regulated entity is able to demonstrate a
physical pathway to California through the pipeline system.
This would avoid the unintended consequence of forcing ARB to
recognize fuels from far off sources that provide no benefit
in terms of displacing high carbon fuels in California.
REGISTERED SUPPORT / OPPOSITION :
Support
Cambrian Energy
Clean Energy
Opposition
None on file
Analysis Prepared by : Lawrence Lingbloom / NAT. RES. / (916)
319-2092