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, SB 143 Page 2 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 SB 143 Page 3 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. SB 143 Page 4 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 SB 143 Page 5 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 SB 143 Page 6 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