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 









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              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 









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              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.










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              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.










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           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 









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              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 









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              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.









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            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.










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            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 









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              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.









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              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 









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              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









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                          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









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                          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