BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                SB 143
                                                                       

                      SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
                        Senator S. Joseph Simitian, Chairman
                              2011-2012 Regular Session
                                           
           BILL NO:    SB 143
           AUTHOR:     Rubio
           AMENDED:    March 22, 2011
           FISCAL:     Yes               HEARING DATE:     May 2, 2011
           URGENCY:    No                CONSULTANT:       Peter Cowan
            
           SUBJECT  :    GLOBAL WARMING SOLUTIONS ACT, OFFSETS

            SUMMARY  :    
           
            Existing law  , under the California Global Warming Solutions 
           Act of 2006 (CGWSA):

           1) Requires the Air Resources Board (ARB) to determine the 
              1990 statewide level of greenhouse gas (GHG) emissions and 
              achieve a limit that is equivalent to that by 2020 and sets 
              several requirements to meet that requirement, (Health and 
              Safety Code §38000 et seq.).

           2) Requires ARB in consultation with the Public Utilities 
              Commission (PUC) and the State Energy Resources 
              Conservation and Development Commission (CEC), in addition 
              to all state agencies with jurisdiction over GHG sources, 
              to develop a scoping plan for achieving the maximum 
              technologically feasible and cost-effective reductions in 
              GHG. The plan is required to identify and make 
              recommendations on direct emission reduction measures, 
              alternative compliance mechanisms, market-based compliance 
              mechanisms, and potential monetary and nonmonetary 
              incentives.  The 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) Requires ARB to adopt GHG emission limits and emission 
              reduction measures by regulation on or before January 1, 









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              2011, and meet certain requirements in adopting the 
              regulations.  ARB may include the use of market-based 
              mechanisms to comply with these regulations.  (§§38562, 
              38570).

            This bill  :

           1) Requires ARB, by July 1, 2012, to adopt methodologies for 
              determining the quantity of GHG emissions reductions 
              resulting from implementation of voluntary energy 
              efficiency programs, distributed electricity generation 
              programs, and programs administered by the PUC or CEC that 
              may reduce GHG emissions.  ARB must determine the cost 
              effectiveness in dollars per ton of GHG emissions reduced 
              for these programs and update those determinations from 
              time to time upon determining the need for update.

           2) Provides that beginning July 1, 2012, for the purposes of 
              the market-based compliance mechanism, a person may invest 
              in a program for which an emission reduction methodology 
              has been developed.

           3) Requires that by July 1, 2012, ARB adopt regulations 
              creating GHG emission reduction offsets that may be banked, 
              traded, or used for compliance with the market-based 
              compliance mechanism.

           4) Requires that a person who invests in a program, as 
              described by #1 above, be credited a quantity of GHG 
              emission offsets based on the size of the investment and 
              the cost effectiveness of the program.

           5) Authorizes ARB, upon appropriation by the Legislature and 
              in consultation with the PUC and CEC, to use any revenues 
              from any auction or other sale of GHG allowance to 
              establish and provide an incentive for private investment 
              in a program for which an emission reduction methodology, 
              as described above, has been developed.  This incentive is 
              limited to 40% of the investment in the emission reduction 
              program, and the full amount of offset, calculated as above 
              including the investment and incentive, must be credited to 
              the person investing in the program.  ARB may determine 
              after a public hearing that incentives must only be 









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              available for private investments implementing programs in 
              specific communities or geographic areas as determined by 
              ARB.

           6) Requires that by July 1, 2012, the ARB adopt regulations 
              for the calculation and crediting of offsets as well as the 
              incentives for private investment.

           7) Provides emergency regulatory authority for developing the 
              above regulations.

            COMMENTS  :

            1) Purpose of Bill  .  According to the author, "SB 143 would 
              provide an additional option to businesses that must comply 
              with AB 32 and need to utilize the Cap and Trade program 
              established by the ŬARB].  This new option would allow 
              businesses to earn carbon credits by investing in existing 
              California programs that reduce greenhouse gas emissions, 
              including distributed electricity generation programs.  The 
              bill would allow ŬARB] to create an incentive program to 
              encourage investment in certain programs or communities? SB 
              143 builds upon language in AB 32 which directs ŬARB] to 
              consider the other benefits of regulations before them to 
              implement AB 32.  Providing an 'in state' option provides 
              more robust benefits to our state than credits earned 
              through activities outside our borders. For example, 
              increased sales tax revenue, jobs, lower utility costs, and 
              improved air quality. Further, providing more options 
              within the Cap and Trade program ensures that credits are 
              less vulnerable to manipulation in the market."
               
           2) Status of Cap and Trade  . ARB on December 16, 2011, adopted 
              draft regulations for a proposed cap and trade market-based 
              compliance mechanism and is expected to produce a final 
              version of those regulations this fall.   
                 
              On March 17, 2011, the California Superior Court found ARB 
              had not properly considered alternatives to cap and trade 
              and thus failed to comply with the California Environmental 
              Quality Act (CEQA) and enjoined the ARB from proceeding 
              with cap and trade until the court determines it has fully 
              complied with CEQA.  









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             3) Offsets  . Offsets are GHG credits for technologies or 
              activities, that would not otherwise exist, that reduce 
              emissions of GHG or that remove GHG from the atmosphere.  
              ARB draft regulations on the market-based compliance 
              mechanism, or cap and trade, allow for such offsets.  
              According to proponents, offsets provide a safety valve on 
              the price of GHG allowances while providing incentives for 
              additional GHG emissions reducing activities or 
              technologies.  Offset critics note that ensuring that 
              offsets are additive, meaning the GHG reduction would not 
              occur in the absence of the market incentive, presents 
              numerous challenges for verifying both the magnitude and 
              longevity of the GHG reduction resulting from the offset 
              activity or technology.  

               Establishing specific programs as emissions offsets under 
              CGWSA establishes a precedent for allowing other programs 
              or activities to receive offset credits without subjecting 
              them to the same protocol and project verification of 
              offsets described in draft regulation. 
            
           4) Offset efficiency  .  The CGWSA requires that in developing 
              the scoping plan the ARB ensure that adopted GHG reduction 
              activities are complementary, nonduplicative, and can be 
              implemented in an efficient and cost-effective manner.  
              Several of the programs targeted by SB 143 for emission 
              reduction investment already fall under the 
              non-market-based parts of the scoping plan and therefore is 
              inconsistent with the scoping plan.  

               Under SB 143, for example, an emitter entity regulated 
              under cap and trade could invest in a distributed 
              generation project at its own facility, reaping multiple 
              rewards.  The entity would receive the benefit of the 
              project itself (e.g. reduced electricity costs), a state 
              incentive to undertake the project, and also a cap and 
              trade compliance offset.  In this example any of these 
              objectives might be sufficient inducement to undertake the 
              project.
                 
             5) Cost estimates  .  Verification of offsets, particularly 
              ensuring that the activity or technology would not have 









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              happened without the offset credit or monetary incentive, 
              is difficult.  This bill goes further and asks ARB to not 
              only estimate the carbon savings from specific programs, 
              but that ARB calculate the cost-efficiency of the offset, a 
              requirement that falls outside of the draft market-based 
              compliance mechanisms.  
                  
             6) Incentives for credits  . SB 143 allows the ARB to provide 
              incentives for private parties investing in certain 
              programs, subsidizing up to 40% of the offset cost.  
              According to the author, these incentives may be necessary 
              in cases where the cost per ton of reduced emissions of the 
              program is higher than the price of offsets or allowances 
              available under other market-based compliance alternative 
              compliance mechanisms. 
                  
               However, these incentives increase the cost to the state 
              with no additional GHG emissions reduction, yet will not 
              reduce the cost of compliance with the market-based 
              compliance mechanism. If the bill is passed the committee 
              should consider eliminating these incentives so only 
              cost-effective programs are pursued. 
            
           7) Emergency regulation  .  The committee may wish to consider 
              whether emergency regulation authority is necessary for 
              this program.  While such authority allows regulations to 
              be implemented more rapidly, it does not provide for public 
              input, the resulting regulations are only in place for 180 
              days, and the regulatory approval process must still be 
              completed.  

           8) Related legislation  .  SB 246 (De León) defines "Compliance 
              offset" to mean a reduction in GHG, used for compliance 
              with an emissions limit, in a sector different from sectors 
              regulated by a GHG emission limit for which a market-based 
              compliance mechanism exists.  This definition may conflict 
              with what "offsets" are used to mean in SB 143 as it 
              includes sectors for which market-based compliance 
              mechanisms exist. SB 246 will be heard by the Senate 
              Environmental Quality Committee May 2, 2011.  


           SOURCE  :        Senator Rubio  









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           SUPPORT  :       None on file  

           OPPOSITION  :    Breathe California, California Apollo Alliance, 
                          California Rural Legal Assistance Foundation, 
                          Center for Biological Diversity, Coalition for 
                          Clean Air, Forests Forever, Natural Resources 
                          Defense Council, Planning & Conservation 
                          League, Sierra Club California , Union of 
                          Concerned Scientists