BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 768
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          Date of Hearing:  May 2, 2011

                        ASSEMBLY COMMITTEE ON TRANSPORTATION
                               Bonnie Lowenthal, Chair
                     AB 768 (Gatto) - As Amended:  April 25, 2011
           
          SUBJECT  :  California Global Warming Solutions Act of 2006:  Low 
          Carbon Fuel Standard

           SUMMARY  :  Requires the California 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 
          regulatory requirement that affected parties demonstrate a 
          physical pathway for delivery of the fuels to California.  
          Specifically,  this bill  :  

          1)Requires ARB to allow out of state producers of "renewable 
            natural gas" (i.e. biomethane) to generate credits for 
            compliance with the LCFS, notwithstanding the ARB's adopted 
            regulatory requirement that affected parties demonstrate a 
            physical pathway for delivery of the fuels to California.  

          2)Establishes that allowed credits be generated through the sale 
            of renewable natural gas produced out of state, but 
            distributed to consumers in the state through displacement 
            trade contracts (i.e. gas swaps).  

           EXISTING LAW  :

          1)Pursuant to the California Global Warming Solutions Act (AB 
            32), Nunez, Chapter 455, Statutes of 2006, 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 








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            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 adopted 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.  

          3)Requires, through the LCFS regulation, the Executive Officer 
            of ARB to complete and present to the ARB two reviews of the 
            LCFS regulation; the first by January 1, 2012, and the second 
            by January 1, 2015.  The regulation requires the Executive 
            Officer to establish an advisory panel for these reviews.  

           FISCAL EFFECT  :  Unknown

           COMMENTS  :

           Background  :  In 2007, Governor Schwarzenegger issued Executive 
          Order S-1-07, calling for a reduction of at least 10% 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 








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          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 
          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.  

           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 








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          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 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.  

           ARB regulation review  :  The LCFS regulatory law requires the 
          Executive Officer of ARB to complete and present to the ARB two 
          reviews of the LCFS regulation; the first by January 1, 2012, 
          and the second by January 1, 2015.  The regulation also requires 
          the Executive Officer to establish an advisory panel for these 
          public reviews.  The reviews will address a broad range of 
          implementation topics and may include recommended amendments to 
          the LCFS regulation.  A final staff report is expected to be 
          completed by the end of 2011.  Accordingly, one can question why 
          this legislation is necessary and should precede the advisory 
          panel reviews that are currently underway.  
           
            Double referral  :  This bill is double-referred and passed out of 
          the Assembly Committee on Natural Resources on April 11, 2011.  
           
          REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          Cambrian Energy
          Clean Energy
          Coalition for Clean Air








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           Opposition 
           
          None on file

           
          Analysis Prepared by  :   Ed Imai / TRANS. / (916) 319-2093