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: August 24, 2012 FISCAL: Yes HEARING DATE: August 29, 2012 URGENCY: No CONSULTANT: Peter Cowan SUBJECT : CALIFORNIA GLOBAL WARMING SOLUTIONS ACT: GREENHOUSE GAS REDUCTION FUND SUMMARY : Existing law : 1) Under the California Global Warming Solutions Act of 2006 (CGWSA): a) 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.). b) 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). 2) Establishes the Greenhouse Gas Reduction Fund (GHGRF) in the AB 1532 Page 2 State Treasury and requires all moneys, except for fines and penalties, collected pursuant to a market-based mechanism be deposited in the fund. (Government Code §16428.8). 3) Requires that prior to the expenditure of moneys appropriated from the GHGRF a state agency prepare a record consisting of a description of: a) each expenditure; b) how the proposed expenditure will further the purposes of the CGWSA; c) how the proposed expenditure will contribute to reducing GHG emissions; d) how the agency considered the applicability and feasibility of other objectives pursuant to the CGWSA; and e) how the agency will document the result achieved by the expenditure. (§16428.9) 4) Requires the Department of Finance submit to the Legislature, in bill format, by January 10, 2013, a proposed detailed spending plan that includes: (§16428.8): a) Criteria and requirements for use of the moneys. b) Establishment of program categories eligible for funding. c) A specification for a public process that ARB must use to develop a long-term spending strategy. d) The proposed role for the Legislature in reviewing the strategy. 5) Specifies that #4 does not apply if the Legislature passes a bill on or before August 31, 2013, that becomes law and specifies a long-term spending strategy and includes the components required of the plan in #4. This bill as amended by the Committee on July 2, 2012 (August 6, 2012 version of the bill) : 1) Establishes the Greenhouse Gas Reduction Account (the account) within the GHGRF 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. AB 1532 Page 3 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 emissions in this state through investments that include, but are not limited to, investments in: a) Clean and efficient energy including specified programs and projects. b) Low-carbon transportation and infrastructure, including specified programs and projects. c) Natural resource protection, including specified AB 1532 Page 4 programs and projects. 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. d) Establish minimum criteria and provide for the tracking of outcomes. 7) Requires any state agency that allocates moneys as described above adopt guidelines that are consistent with the guidelines adopted by ARB pursuant to #6. 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 AB 1532 Page 5 investment plan must: a) analyze existing programs and requirements that reduce GHG emission and identify gaps; b) establish priorities for the allocation of moneys; c) identify specific categories of programs and projects; d) identify proposed levels of expenditures for each category; and e) 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 (CalEPA), 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 proposed investment plan or any amendment to an adopted investment 30 days prior to adoption. 13)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. 14)Requires ARB to submit an annual report no later than December 1 to the appropriate committees of the Legislature AB 1532 Page 6 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. August 21, 2011 Senate Appropriations Committee Amendments : 1) Delete provisions conflicting with current law regarding the establishment of the GHGRF (see existing law #2). 2) Add the mitigation of climate change impacts and effects on the state's communities, economy, and environment, to the list of complementary goals for the use of the GHGRF. 3) Clarify and identity additional potential purposes for investments for moneys in the GHGRF. 4) Require CalEPA to develop, and update every two years, a methodology that identifies priority community areas based on geographic, socioeconomic, and environmental hazard criteria which may include: a) area adversely affected by environmental pollution and hazards; b) areas that contain or produce material that pose a significant hazard to humans; c) areas with concentrations of low income, high unemployment, low home ownership, high rent, and low levels of education attainment. 5) Require ARB to develop guidelines for agencies for the purposes of allocating moneys to projects that maximize benefits for priority community areas pursuant to #4 above. 6) Authorize agencies to set aside a portion of appropriated funds for projects that maximize benefits to priority community investment areas. Agencies must ensure investments maximize the benefits for investments to priority community areas through specified activities. 7) Strike the requirement for ARB to adhere to the Administrative Procedure Act for the development of guidelines for agencies, potential funding applicants, and the public; and instead authorizes the guideline adoption after ARB holds one or more public hearing. AB 1532 Page 7 8) Add additional requirements for each of the three investment plans including: a) Maximizing benefit to priority community investment areas though specified activities. b) Identifying near and long-term GHG emissions reduction goals by sector including current and projected GHG emissions, progress toward sector GHG emission reduction goals, and the sectors progress compared to statewide GHG emissions targets. c) Listing and describing key measures and strategies the state relies on to achieve GHG emissions reductions including specified analysis for each measure or strategy. d) Analyzing gaps in current state strategies to reduce GHG emissions including: funding, policies, compliance, market preparedness, and state and local authority. e) Identifying programmatic investments of moneys, the expected GHG reduction and other cobenefits, the administering agency that will implement the investment, and other information ARB deems necessary. 9) Require that the Governor, if ARB in its report to the Legislature finds that an investment plan did not allocate 25% of available moneys from the prior fiscal year to priority community areas, include as part of the annual budget submission allocations to investments in an amount equal to the difference between 25% of the available moneys and the total investments that benefited priority community investment areas. This allocation must be in addition to the 25% required for that fiscal year. 10) Require ARB in its annual report to the Legislature describe how agencies have maximized the benefits of investments to priority community investment areas, including, but not limited to, the percentage of funds AB 1532 Page 8 allocated to date that have been invested in priority community investment areas. Amendments taken on the Senate Floor (August 24, 2012, version of the bill) and subsequently referred to the Senate Committee on Environmental Quality pursuant to Senate Rule 29.10 : 1) Strike the requirement that the state determine a measure or program is consistent with requirements, as established by the California Supreme Court in Sinclair Paint Co. v. State Bd. Of Equalization prior to approving funding. 2) Add specified investments to the specified purposes for the use of GHGRF moneys. 3) Add specified criteria for CalEPA to consider when developing a methodology that identifies priority communities for investment, including areas with proximity to sources that produce criteria and toxic air pollution and area with high concentrations of sensitive populations. 4) Strike redundant requirements and add new requirements to the GHGRF investment plans including, identifying GHG emission reduction goals for sectors that do not have targets. 5) Require that if ARB and CalEPA find that less than 10% of all available moneys from a fiscal year was invested in priority community investment areas the Governor include in the annual budget additional allocations to projects in priority community investment areas equal to the difference between 25% of the prior year's allocation and the actual allocation. 6) Require ARB to hold one public hearing on the required report prior to its submission to the Legislature. COMMENTS : 1) Back on 29.10 . Since the committee heard AB 1532 on July 2, 2012, amendments were taken in the Senate Appropriations Committee and the on the Senate floor. These amendments: a) AB 1532 Page 9 make changes to conform to the natural resources budget trailer bill, SB 1018; b) add mitigation of the impacts and effects of climate change on the state's communities, economy, and environment to the list of complementary goals for the use of the GHGRF; c) add or expand several identified investments to the specified purposes for the use of GHGRF moneys; d) require CalEPA to develop a methodology that identifies priority community investment areas using specified criteria and requires that 25% of the available moneys be allocated to projects in community investment areas; e) make various changes to the analyses required in each investment plan and the required annual report; f) strike the requirement that a program be consistent with the requirements established by the Sinclair nexus test (see Comment #6 below); and g) rather than requiring the guidelines for agencies, applicants, and the public be adopted by the ARB pursuant to the Administrative Procedure Act instead specifies the guidelines be adopted after one or more public hearings. 2) Proposed amendments . If AB 1532 is approved by the Committee, the author is proposing further amendments to: a) Require that the state not approve any funding until it determines that use furthers the regulatory purposes of the CGWSA. b) Strike requirements that the moneys be used only to achieve feasible and cost-effective GHG reductions. c) Strike the specified list of eligible investments, and instead specify investments may include, but are not limited to, funding to reduce emissions through: i) Energy efficiency, clean and renewable energy generation, transmission and storage and other related actions. ii) Development of advanced technology vehicles and vehicle infrastructure, advanced biofuels, state-of-the art goods movement, and efficient public transportation. AB 1532 Page 10 iii) Land and natural resource conservation and management, forestry, water use and supply, and sustainable agriculture. iv) Strategic planning and development of infrastructure. v) Increasing the in-state diversion of municipal solid waste from disposal through waste reduction, reuse and low-carbon recycled-content processing, manufacturing and other market development. vi) Community climate innovation programs that foster projects consistent with the above categories and are implemented by specified local entities. vii) Research, development, and deployment of innovative technologies or measures. d) Strike the requirement that CalEPA develop a methodology for identifying priority community investment areas, instead requiring CalEPA to identify disadvantaged communities using specified criteria. e) Require that the Department of Finance, rather than ARB, develop guidelines for administering agencies and strikes several requirements for those guidelines. f) Require that the Department of Finance on behalf of the Governor and in consultation with ARB and other relevant state agencies, rather than ARB develop and submit to the Legislature the three investment plans, and strikes several requirements, including the analysis of GHG emissions by sector, and existing GHG emission reduction measures. g) Strike the requirement for an advisory body, instead requiring the Climate Action Team along with the Secretaries of Agriculture and Labor and Workforce Agencies provide information to the Department of Finance to assist in the development of the investment plans. h) Require the investment plan to allocate 25% of AB 1532 Page 11 available moneys to projects that provide benefits to disadvantaged communities, and 10% of available moneys to projects within disadvantaged communities, and strike provisions requiring any shortfall to be made up in the subsequent fiscal year. i) Require that the Department of Finance, rather than ARB submit the annual report, strike several requirements for the report. j) Authorize, upon appropriation, moneys in the GHGRF to be available for administrative purposes. aa) Specifies that all loan repayments and all interest earning shall be deposited back into the GHGRF. 3) 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." 4) 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 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 AB 1532 Page 12 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 2012-13 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 2013-14, 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 2015-16 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. 5) 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. SB 1018, the natural resources budget trailer bill, establishes the Greenhouse Gas Reduction Fund as a special AB 1532 Page 13 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 with specified requirements (see existing law #4 and #5). SB 1018 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. 6) 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. Earlier versions of AB 1532 require that no funding be approved unless it is determined to meet the limitations of the Sinclair nexus, floor amendments strike this requirement. 7) Planning the investments . AB 1532 establishes the reduction AB 1532 Page 14 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 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. 8) Support and opposition concerns (as raised for June 18, 2013 version) . 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. 9) 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) enacts the California Communities Healthy Air and Revitalization Act and requires CalEPA to develop a methodology for identifying priority community investment areas. A minimum of 10% of moneys deposited in GHGRF must be used in the most impacted and disadvantaged communities. SB 535 would also require ARB to develop investment plans and AB 1532 Page 15 report on their progress to the Legislature and require the Office of Environmental Health Hazard Assessment to prepare a specified report by March 1, 2013, and every three years thereafter. SB 535 contains several sections that conflict with AB 1532 and amendments will be necessary to address the conflicts. SB 535 has been referred to the Assembly Natural Resources Committee pursuant Assembly Rule 77.2. SB 1572 (Pavley) appropriates moneys from the auction of allowances during the 2012-13 fiscal year to specified projects and establishes the Higher Education Greenhouse Gas Emissions Reduction Account within the GHGRF and any revenue collected by the state board from the sale of an allowance to the University of California or the California State University must be deposited into this account. SB 1572 has been referred to the Assembly Natural Resources Committee pursuant Assembly Rule 77.2. AB 1186 (Skinner) enacts the School Energy Efficiency and Greenhouse Gas Reduction Act and establishes the School Energy Efficiency and Greenhouse Gas Reduction Fund. The bill requires 20% of specified revenues deposited during the 2012-13 fiscal year in the GHGRF to be used for a grant program for eligible K-12 schools for energy efficiency improvements. AB 1186 is currently on the Senate Floor. 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 Suspense file. 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 AB 1532 Page 16 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 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 AB 1532 Page 17 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 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 AB 1532 Page 18 Support and opposition based on June 18th version of AB 1532.