BILL ANALYSIS Ó AB 1532 SENATE COMMITTEE ON ENVIRONMENTAL QUALITY Senator S. Joseph Simitian, Chairman 2011-2012 Regular Session BILL NO: AB 1532 AUTHOR: Pérez, John A. AMENDED: June 18, 2012 FISCAL: Yes HEARING DATE: July 2, 2012 URGENCY: No CONSULTANT: Peter Cowan SUBJECT : CALIFORNIA GLOBAL WARMING SOLUTIONS ACT: GREENHOUSE GAS REDUCTION ACCOUNT SUMMARY : Existing law , under the California Global Warming Solutions Act of 2006 (CGWSA): 1) Requires the California Air Resources Board (ARB) to determine the 1990 statewide greenhouse gas (GHG) emissions level and approve a statewide GHG emissions limit that is equivalent to that level, to be achieved by 2020, and to adopt GHG emission reduction measures by regulation, and sets certain requirements in adopting the regulations. ARB may include the use of market-based mechanisms to comply with these regulations. (Health and Safety Code §38500 et seq.). 2) Requires ARB to prepare and approve a scoping plan by January 1, 2009, for achieving the maximum technologically feasible and cost-effective reductions in GHG emissions from sources or categories of sources of GHGs by 2020. ARB must evaluate the total potential costs and total potential economic and noneconomic benefits of the plan for reducing GHGs to the state's economy and public health, using the best economic models, emission estimation techniques, and other scientific methods. The plan must be updated at least once every five years. (§38561). 3) Authorizes ARB to adopt a schedule of fees to be paid by GHG emission sources regulated under CGWSA, to be deposited into the Air Pollution Control Fund and available upon appropriation by the Legislature for carrying out the AB 1532 Page 2 CGWSA. (§38597). This bill : 1) Establishes the Greenhouse Gas Reduction Account (the account) within the Air Pollution Control Fund and requires that all moneys excluding penalties and fines collected pursuant to the CGWSA be deposited in the account and available upon appropriation by the Legislature for the purposes of carrying out the CGWSA. 2) Requires no measure or programs be approved using money appropriated from the account unless it is determined that the use is consistent with the requirement of the use of moneys derived from valid regulatory fees, as established by the California Supreme Court in Sinclair Paint Co. v. State Bd. of Equalization (1997). 3) Requires that moneys must be used to facilitate the achievement of feasible and cost-effective reductions of greenhouse gas emissions in this state and the following complementary goals: a) Maximize economic, environmental, and public health benefits to the state. b) Foster job creation by promoting in-state GHG emission reduction projects carried out by California workers and businesses. c) Complement efforts to improve air quality. d) Direct investment toward the most disadvantaged communities and households in the state. e) Provide opportunities for small businesses, schools, affordable housing developers, water agencies, local governments, and other community institutions to participate in and benefit from statewide efforts to reduce GHG emissions. 4) Provides that funds appropriated from the account may be allocated for the purpose of reducing greenhouse gas AB 1532 Page 3 emissions in this state through investments that include, but are not limited to, investments in: a) Clean and efficient energy including: i) Industrial and manufacturing investment in energy efficiency, energy storage, and clean and renewable energy project. ii) Public universities, schools, water agencies, and other public facilities and fleets to reduce GHG emissions by investment in energy and water use efficiency, energy storage, and clean and renewable energy and fuel projects. iii) Single-family and multifamily residential and commercial distributed generation and energy efficiency programs. iv) Waste reduction and low-carbon recycled-content processing and manufacturing, including market development activities. b) Low-carbon transportation and infrastructure, including: i) Public transportation and sustainable transportation and infrastructure development. ii) Programs for clean vehicles and the advancement of transportation technologies. iii) Advanced transportation and fueling infrastructure. iv) Local and regional sustainable development efforts that are, to the extent applicable, consistent with the sustainable communities strategies or alternative planning strategies. v) Low-carbon goods movement and freight vehicle technologies and infrastructure, including, but not limited to, locomotives and heavy-duty trucks. AB 1532 Page 4 c) Natural resource protection, including: i) Natural resource management programs and projects. ii) Land conservation and restoration. iii) Development and implementation of sustainable agriculture, forestry, and related water, land, and resource management practices. d) Research, development, and deployment of innovative technologies, measures, and practices related to programs and projects funded pursuant to this part; and specified categories for each of these investment areas. 5) Specifies ARB and any other state agency identified by the Legislature are the administering agencies and are required to carry out programs to allocate moneys appropriated by the Legislature using financial mechanisms, such as competitive grants, loans, or other specified mechanisms. 6) Requires ARB to adopt guidelines, pursuant to the Administrative Procedure Act, to provide state agencies, potential funding applicants and the public guidance regarding the allocation and allowable uses of moneys. The guidelines must, at a minimum, do all of the following: a) Establish minimum criteria for receiving funding and additional criteria, as specified, that the state agencies shall take into account in establishing preferences for awarding moneys. b) Provide a process to verify the qualifications of recipients. c) Provide for the monitoring and, as deemed necessary, the audit of expenditures and outcomes. 7) Requires any state agency that allocates moneys as described above adopt guidelines that meet the requirements of #6. AB 1532 Page 5 8) Requires ARB to develop and adopt, beginning April 1, 2013, three investment plans for the time periods: 2013 to 2014, 2015 to 2017, and 2018 to 2020. Requires that each investment plan identify, for the specified time period, the anticipated expenditures of moneys appropriated from the account. Each investment plan must establish priorities for the allocation of moneys, identify specific categories of programs and projects, identify proposed levels of expenditures for each category, and identify the state agencies best qualified to implement the programs. 9) Requires the Public Utilities Commission (PUC) to develop and send to ARB an investment plan to be included in each investment plan adopted by ARB. The plan must include its requirements on how investor-owned utilities (IOUs) may use moneys they might collect from allowance auctions pursuant to cap-and-trade. 10)Requires ARB, prior to adopting each investment plan, to consult with the PUC to ensure the investment plan is coordinated with, and does not conflict with or unduly overlap with, any expenditure plan PUC might adopt. 11)Requires ARB receive input from an advisory body that includes the secretaries for the Natural Resources Agency, the California Environmental Protection Agency, the Department of Food and Agriculture, and the Business, Transportation and Housing Agency; and to hold at least two public workshops in different regions of the state and one public hearing prior to adopting any investment plan. The advisory body must participate in each public workshop on an investment plan and provide testimony to the ARB on each investment plan. 12)Requires ARB to submit to the budget committees of both houses each of the following 30 days prior to adoption, each proposed investment plan; any amendment to an adopted investment plan that would, in the aggregate, modify the adopted investment plan by $5 million or more; or any significant amendment to an adopted investment plan that would augment or reduce an allocation specified in the adopted investment plan by 50% or by at least $2 million. Any minor or technical amendment to an adopted investment AB 1532 Page 6 must be submitted 90 days prior to adoption. 13)Exempts an investment plan adopted pursuant to the above provisions from the California Environmental Quality Act (CEQA), and specifies that individual projects funded consistent with the investment plan are not exempt. 14)Requires ARB to provide to the Governor a plan consistent with the relevant investment plan detailing proposed appropriations from the Account and that the Governor include proposed appropriations as part of the annual January budget proposal. 15)Requires ARB to submit an annual report no later than December to the appropriate committees of the Legislature on the status of projects and their outcomes and any changes ARB recommends to the investment plan and declares legislative intent that the appropriations required for implementation of these changes be included in the annual Budget Act for the subsequent fiscal year. COMMENTS : 1) Purpose of Bill . According to the author, "there is no current statutory direction as to the expenditure of the revenue from Ýcap-and-trade allowance] auctions, whether for eligible investments or criteria to use to differentiate between potential projects, a process the State should use to develop plans and programs for investment or direction on how to ensure legislative oversight on the use of the funds? AB 1532 addresses the above issues by creating the Greenhouse Gas Reduction Account, establishing the criteria and requirements for use of the auction revenue, establishing the program categories eligible for funding and defining a process that the ARB shall use to develop an investment plan and the role of the legislature in reviewing it." 2) Brief background on cap-and-trade . The adopted cap-and-trade regulation imposes a cap on the aggregate GHG emissions allowed from "capped sectors." The entities covered within these sectors constitute approximately 85% of all statewide GHG emissions. Each year the cap AB 1532 Page 7 declines, thus resulting in a reduction in GHG emissions over time. To comply with the cap, covered entities must surrender to the state a number of "compliance instruments" equal to the amount of their GHG emissions, as expressed in the equivalent metric tons of CO2. The regulations describe two types of compliance instruments: a) an "allowance" to emit GHGs, all of which are generated by the state in an amount equal to the cap and; b) an "offset" resulting from an emissions reduction achieved in an uncapped sector and generated by third party pursuant to a protocol adopted by ARB. Under the cap-and-trade regulation many of the allowances are freely allocated to the covered entities, some are held in a price containment reserve, and the remainder auctioned. Allowances received or purchased can be traded, thus creating an emissions market which according to ARB minimizes compliance costs and encourages businesses to invest in GHG emissions reductions. ARB plans to hold auctions quarterly starting in November 2012, and moneys collected for allowances sold at auction are deposited into the Air Pollution Control fund, with the exception of allowances sold on behalf of Investor Owned Utilities (IOUs). In fiscal year 2012-2013 ARB plans to auction over 60 million tons of allowances at a floor price of $10 per ton. The amount of allowances auctioned declines in fiscal year 2013-2014, before expanding as transportation fuels and natural gas are brought into the cap-and-trade program. Barring a change in the regulation as many as 230 million tons of allowances will be auctioned in fiscal year 2015-2016 which will decline in subsequent years as the state approaches its 2020 limit. IOUs and publicly owned utilities (POUs) are allocated free allowances to cover the majority of their emissions in order to lessen impacts of CGWSA implementation on electricity ratepayers. ARB requires IOUs to auction them all; POUs are permitted, but not required, to offer their allowances auction. The revenues from these auctions are then returned to the IOUs to be used for ratepayer benefit in accordance with an ongoing rulemaking at the PUC. AB 1532 Page 8 3) Cap-and-trade revenues in the budget . The Governor's budget proposal estimated that fee revenues from the first set of auctions will be $1 billion in the 2012-13 Budget, with auctions planned for November 2012, February 2013, and May 2013. Actual revenues cannot be known until the auctions have been completed. The proposal does not contain a specific plan for expenditure of the revenue, rather it includes a General Fund offset of $500 million, and identifies general categories of spending, including: a) clean and efficient energy, b) low-carbon transportation, c) natural resource protection, and d) sustainable infrastructure development. The natural resources budget trailer bill establishes the Greenhouse Gas Reduction Fund as a special fund in the State Treasury to receive all funds resulting from cap-and-trade auctions. It also specifies that the fund be appropriated in the annual Budget Act and requires the Department of Finance to submit to the Legislature a proposal for expenditure of the fund, unless the Legislature passes a bill before August 31, 2012, specifying a process for establishing a long-term spending plan that includes: a) criteria and requirements for the use of the auction proceeds, b) establishment of program categories eligible for funding, and c) the specification of the process that ARB use to develop the strategy. The trailer bill further requires agencies expending moneys from the fund to prepare a record describing the uses of the funds, how they further the goals of the CGWSA, including attainment of the 2020 limit, how non-GHG emissions objectives of the CGSWA were considered, and a description of how the agency will document the results of the expenditure. The trailer bill also allows the PUC to allocate up to 15% of proceeds from the auction of allowance distributed to IOUs for clean energy and energy efficiency projects established by statute and administered by the IOUs. The remainder of the IOU allowance allocation proceeds must be credited directly to residential, small business, and emissions-intensive trade-exposed retail ratepayers. AB 1532 Page 9 4) Sinclair Paint nexus test . The Childhood Lead Poisoning Prevention Act of 1991 required the Department of Health Services to establish a regulatory fee on businesses that are or were sources of lead contamination to implement various lead poisoning programs. Sinclair Paint Company argued that this regulatory fee was a tax because: a) the program provides a broad public benefit, not a benefit to the regulated business, and b) the companies that pay the fee have no duties regarding the lead poisoning program other than payment of the fee. The California Supreme Court upheld the fee, as a "mitigation fee," ruling that the state may impose fees on companies that make contaminating products and use those proceeds to mitigate the adverse effects resulting from those products. According to an opinion received by the Legislative Analyst's Office (LAO) from Legislative Counsel, revenues resulting from ARB's cap-and-trade auctions would constitute "mitigation fee" revenue, and be subject to the limitations of the Sinclair nexus. Thus the revenues must only be used to mitigate GHG emissions or the adverse effects caused by them. AB 1532 requires that no funding be approved unless it is determined to meet the limitations of the Sinclair nexus. 5) Planning the investments . AB 1532 establishes the Greenhouse Gas Reduction Account within the Air Pollution Control Fund, a fund controlled by ARB, which is further charged with developing eligibility guidelines and, with input from specified agency secretaries, the investment plan development. AB 1532 establishes the reduction of GHG emissions as the priority for the expenditure of cap-and-trade and identifies several other complementary goals. The bill further identifies several categories to be considered for investment. These categories include emission sources that, under the cap-and-trade program, are capped sources as well as non-capped sources which may include emission sources for which ARB has adopted GHG emission offset protocols. Investment in GHG reductions from each of these sources has different pros and cons. Investments in non-capped sectors would provide incentives for the AB 1532 Page 10 reductions of GHG emissions from sources for which insufficient incentives exist and may result in highly cost-effective GHG emissions reductions that would not otherwise have occurred. Investments in capped sectors add an additional incentive, above the cap-and-trade program, for GHG emission reductions and may reduce cap-and-trade compliance costs. The state currently has several programs and mandates designed to reduce GHG emissions, or designed for other purposes that may have the ancillary benefit of GHG reductions. To increase investment effectiveness the investment plan should identify these existing programs, evaluate success rates, and identify opportunities for augmentation or investment gaps. 6) Support and opposition concerns . According to supporters of AB 1532, this bill advances the goals of CGWSA by creating a clear and open framework for developing the investment plan and the adoption of funding criteria. Supporters also endorse application of Sinclair tests in funding determinations. Opponents state that AB 1532 prematurely anticipates proceeds resulting from the allowance auctions that ARB may not have the necessary authority to conduct. Opponents also contend that not all priorities indicated in AB 1532 are consistent with the Sinclair decision. 7) Outstanding issues . Amendments are necessary to: a) Strike the provision exempting investment plans from CEQA. b) Require the investment plans include an analysis of existing programs and requirements for GHG emission reductions and that the plans identify and address gaps (see last paragraph comment #5). c) Clarify that the guidelines developed by ARB regarding the minimum criteria and qualifications for receiving funding (#6, p. 4) should include criteria for assessing outcomes. AB 1532 Page 11 d) Clarify that guidelines developed by agencies regarding the minimum criteria and qualifications for receiving funding (#7, p. 4) must be consistent with ARB regulations developed for those purposes (#6, p. 4). e) Establish Greenhouse Gas Reduction Account as a separate account in the State Treasury rather than in the Air Pollution Control Fund, this is consistent with the natural resources budget trailer bill. f) Specify that the investment plans and all changes, regardless of nature, to the investment plan are submitted to the budget committees 30 days prior to adoption. g) Specify the annual report be summited by December 1 each year, to ensure adequate time for review prior to the January Budget proposal. 8) Related legislation . SB 237 (Wolk) would have established the California Agricultural Climate Benefits Advisory Committee and established eligible uses in the agricultural sector for revenues generated from the cap-and-trade program and died in the Senate Appropriations Committee. SB 535 (De León) establishes the California Communities Healthy Air Revitalization Trust in the State Treasury and requires it be funded with a minimum of 10% of the revenue generated by the cap-and-trade program to reduce greenhouse gas emissions, mitigate the direct health impacts of climate change, and finance training for green collar employment opportunities in the most impacted and disadvantaged communities in California. SB 535 is currently in the Assembly Appropriations Committee. SB 1572 (Pavley) establishes the Greenhouse Gas Reduction Fund within the Air Pollution Control Fund and requires that all moneys collected pursuant to the market-based compliance mechanism be deposited in the Fund and specifies the lesser of half of the money in the Fund for 2013-14 or $250 million would be available for appropriation by the Legislature, to administering agencies to fund prescribed AB 1532 Page 12 projects that meet certain goals relating to GHG emissions reductions. The bill would require administering agencies to prepare and submit to the Legislature quarterly reports on funded projects and activities. SB 1572 is set for hearing in Assembly Natural Resources Committee July 2, 2012. AB 1186 (Skinner) would prohibit the PUC from approving an expenditure plan for proceeds resulting from the auction of allowances allocated to IOUs unless the expenditure plan included a minimum of 10% of the proceeds going to K-12 energy efficiency grants. AB 1186 will be heard by the Senate Environmental Quality Committee July 2, 2012. AB 2404 (Fuentes) requires cap-and-trade revenues to be deposited in a newly created 'Local Emission Reduction Fund' where they are available to fund locally adopted greenhouse gas reduction plans that emphasize specified co-benefits. All reduction plans must be adopted by a local government in furtherance of CGWSA goals. AB 2404 is currently in the Assembly Appropriations Committee. SOURCE : Speaker Pérez SUPPORT : American Federation of State, County and Municipal Employees, AFL-CIO American Lung Association American Society of Landscape Architects - California Asian Pacific Environmental Network Audubon California Big Sur Land Trust Bolsa Chica Land Trust Breathe California California Association of Local Conservation Corps California Biomass Energy Alliance California Clean DG Coalition California Climate and Agriculture Network California Housing Partnership Corporation California Infill Builders Federation California Interfaith Power & Light AB 1532 Page 13 California ReLeaf California State Association of Counties California Transit Association California Urban Forests Council California Watershed Coalition California Watershed Network Californians Against Waste CALSTART Coalition for Clean Air Electrification Leadership Council Ella Baker Center, Green Collar Jobs Campaign Energy Independence Now Environmental Defense Center Environmental Defense Fund Friends of Harbors, Beaches and Parks Golden Gate Audubon Society Greenlining Institute Honda North America Intelligent Transportation Society of California Land Trust of Santa Cruz County Los Angeles County Metropolitan Transportation Authority Marin Agricultural Land Trust Natural Resources Defense Council Non-Profit Housing Association of Northern California Open Space District Pacific Forest Trust Peninsula Open Space Trust Santa Clara County Open Space Authority Sensys Networks Silicon Valley Leadership Group Sonoma County Agricultural Preservation and Open Space District State Building and Construction Trades Council of California Sunrun The Nature Conservancy The Wilderness Society Trust for Public Land Union of Concerned Scientists AB 1532 Page 14 Waste Management Water Replenishment District of Southern California OPPOSITION : American Council of Engineering Companies of California California Asian Pacific Chamber of Commerce California Business Properties Association California Chamber of Commerce California Chapter of the American Fence Association California Fence Contractors' Association California Framing Contractors Association California Grocers Association California Independent Oil Marketers Association California League of Food Processors California Manufacturers & Technology Association California Metals Coalition California Retailers Association California Taxpayers Association Cal Tax Can Manufacturers Institute Chemical Industry Council of California Engineering Contractors' Association Flasher/Barricade Association Golden State Builders Exchange Marin Builders' Association National Federation of Independent Business United Contractors Western State Petroleum Association