BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 535
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          Date of Hearing:  June 27, 2011

                       ASSEMBLY COMMITTEE ON NATURAL RESOURCES
                                Wesley Chesbro, Chair
                    SB 535 (De Léon) - As Amended:  June 21, 2011

           SENATE VOTE  :  23-15
           
          SUBJECT  :  California Communities Healthy Air Revitalization 
          Trust

           SUMMARY  :  Directs a minimum of 10 percent of non-administrative 
          revenues generated pursuant to the California Global Warming 
          Solutions Act (AB 32) to the California Communities Healthy Air 
          Revitalization Trust (CalCHART) to be awarded for specified 
          purposes to benefit socioeconomically disadvantaged communities 
          impacted by air pollution and climate change.

           EXISTING LAW  , under AB 32:

          1)Requires the Air Resources Board (ARB) to adopt a statewide 
            greenhouse gas (GHG) emissions limit equivalent to 1990 levels 
            by 2020 and adopt regulations to achieve maximum 
            technologically feasible and cost-effective GHG emission 
            reductions.  

          2)Authorizes ARB to adopt fees to be paid by the sources of GHG 
            emissions regulated pursuant to AB 32.  Fee revenues must be 
            deposited in the Air Pollution Control Fund and may be spent 
            for purposes of carrying out AB 32.

          3)Authorizes ARB to permit the use of market-based compliance 
            mechanisms to comply with GHG reduction regulations, to be 
            adopted by 2011 and operative by 2012, once specified 
            conditions are met.  Prior to adopting a market-based 
            compliance mechanism, to the extent feasible and in 
            furtherance of achieving the statewide GHG emissions limit, 
            ARB must:

             a)   Consider the potential for direct, indirect, and 
               cumulative emission impacts from these mechanisms, 
               including localized impacts in communities that are already 
               adversely impacted by air pollution.

             b)   Design any market-based compliance mechanism to prevent 








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               any increase in the emissions of toxic air contaminants or 
               criteria air pollutants.

             c)   Maximize additional environmental and economic benefits 
               for California, as appropriate.

          4)Further requires ARB, to the extent feasible and in 
            furtherance of achieving the statewide GHG emissions limit, 
            to:

             a)   Design market-based and certain other regulations, 
               including distribution of emissions allowances where 
               appropriate, in a manner that is equitable, seeks to 
               minimize costs and maximize the total benefits to 
               California, and encourages early action to reduce GHG 
               emissions.

             b)   Ensure that activities undertaken to comply with the 
               regulations do not disproportionately impact low-income 
               communities, and complement efforts to achieve and maintain 
               federal and state ambient air quality standards and to 
               reduce toxic air contaminant emissions.

          5)Requires ARB to ensure that the GHG emission reduction rules, 
            regulations, programs, mechanisms, and incentives under its 
            jurisdiction direct public and private investment toward the 
            most disadvantaged communities in California and provide an 
            opportunity for small businesses, schools, affordable housing 
            associations, and other community institutions to participate 
            in and benefit from statewide efforts to reduce GHG emissions.

           THIS BILL  :

          1)Allocates at least 10 percent of the non-administrative 
            revenues deposited in the Air Pollution Control Fund (APCF) 
            pursuant to AB 32 to CalCHART to provide funding to the most 
            impacted and disadvantaged communities for programs or 
            projects that reduce GHG emissions or mitigate direct health 
            impacts of climate change, through competitive grants, loans, 
            or other funding mechanisms.  Projects may include "green 
            collar" employment or training.

          2)Defines "most impacted and disadvantaged communities" as 
            either those areas having the highest 10 percent air pollution 
            exposure and socioeconomic vulnerability within an air basin 








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            that does not meet one or more national or state ambient air 
            quality standards, or those areas having the highest 10 
            percent socioeconomic vulnerability to direct health or 
            environmental impacts of climate change.

          3)Requires ARB to administer CalCHART funds and begin 
            implementation of the program within 90 days of finding that 
            more than $5 million has been deposited.  Authorizes up to 
            five percent of CalCHART funds to be spent on administration.

          4)Requires ARB to conduct a public process and prepare a report 
            regarding implementation, the types of programs and projects 
            to be funded, the selection and oversight process, and 
            eligibility criteria.

          5)Requires ARB, in consultation with the Climate Action Team, 
            to:

             a)   Adopt, and update every three years, a list of the most 
               impacted and disadvantaged communities.

             b)   Report to the Legislature regarding the CalCHART program 
               by September 1, 2015 and every three years thereafter.

          6)Requires ARB to appoint a seven-member review panel, in 
            consultation with the Senate pro Tempore and the Speaker of 
            the Assembly.  Each member must have demonstrated expertise, 
            and a minimum of seven years of working experience, in the 
            areas of air pollution, public health, energy efficiency, 
            transportation, economics, or running a small business.  Three 
            members must have demonstrated knowledge and experience in 
            advancing community interests in the area of environmental 
            protection for at least seven years.

          7)Requires CalCHART project awards to be approved by a majority 
            (four members) of the review panel.

          8)Provides that ARB may only approve a program or project for 
            funding after determining that the use of moneys for that 
            program or project is consistent with the requirements for 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) 15 Cal.4th 866 and 
            reaffirmed in California Farm Bureau Federation v. State Water 
            Resources Control Bd. (2011) 51 Cal.4th 421 (except for 








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            penalty moneys, if those moneys are segregated from fee 
            moneys).

           FISCAL EFFECT  :  Unknown

           COMMENTS  :

           1)Background.   AB 32 authorizes ARB to adopt via regulation "a 
            schedule of fees to be paid by the sources of greenhouse gas 
            emissions" and deposit revenues into the Air Pollution Control 
            Fund.  AB 32 also authorizes, but does not require, the use of 
            market-based mechanisms to achieve GHG emission reductions, 
            provided specified conditions are met.

            Thus far, ARB has proposed to use its fee authority only for 
            the limited purpose of funding its own and other state 
            agencies' AB 32 implementation costs, and to repay loans of 
            other state funds that previously have been approved by the 
            Legislature for these purposes - amounting to not more than 
            $55 million annually.  However, it's possible that a more 
            expansive fee on GHG emitters, the auction of GHG emission 
            allowances, or another market mechanism will produce 
            significantly higher revenues over the course of AB 32 
            implementation.

            AB 32 also requires ARB to ensure that the GHG emission 
            reduction rules, regulations, programs, mechanisms, and 
            incentives under its jurisdiction direct public and private 
            investment toward the "most disadvantaged communities" in 
            California and provide an opportunity for small businesses, 
            schools, affordable housing associations, and other community 
            institutions to participate in and benefit from statewide 
            efforts to reduce GHG emissions.  

            With regard to any market-based compliance mechanisms, ARB is 
            required to: "consider the potential for direct, indirect, and 
            cumulative emissions impacts from these mechanisms, including 
            localized impacts in communities that are already adversely 
            impacted by air pollution."  In addition, in adopting and 
            implementing AB 32, ARB is required to "ensure that activities 
            undertaken to comply with the regulations do not 
            disproportionately impact low-income communities."  With 
            regard to "co-pollutants," AB 32's GHG-reduction regulations 
            must be designed and implemented to "prevent any increase in 
            the emissions of toxic air contaminants or criteria air 








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            pollutants" and "complement efforts to achieve and maintain 
            federal and state ambient air quality standards and to reduce 
            toxic air contaminant emissions."
             
             In December 2010, ARB adopted a proposed cap-and-trade program 
            that would apply to an estimated 600 regulated entities 
            engaged in stationary combustion, cement manufacturing, 
            cogeneration, petroleum refining, hydrogen production, 
            aluminum production, facility operators calcining carbonates, 
            CO2 supplier or transfer recipient, electricity generation, 
            glass production, iron and steel production, lime production, 
            natural gas transmission and distribution, nitric acid 
            production, oil and gas extraction field operation, production 
            of industrial gases, pulp and paper production, soda ash 
            production, electricity deliverers, transportation fuel 
            deliverers, and natural gas deliverers.

            In a cap-and-trade program, a limit, or cap is put on the 
            amount of pollutants (GHGs) that can be emitted.  Each 
            allowance equals one metric ton of carbon dioxide equivalent.  
            The total number of allowances created is equal to the cap set 
            for cumulative emissions from all the covered sectors.  These 
            allowances may be auctioned and/or freely given to companies 
            or other groups.  In addition to allowances, emissions 
            reductions from sources that are outside the cap coverage, 
            called offsets, could be authorized.  This would allow 
            emissions in the capped sectors to exceed the allowances 
            issued.  After initial distribution of allowances-or in the 
            use of offsets-compliance instruments may be traded among 
            entities.  At the end of each compliance period, covered 
            entities are required to turn in, or surrender, enough 
            compliance instruments to match their emissions during this 
            time period.  ARB has proposed to give allowances to regulated 
            entities during the first, three-year compliance period, but 
            eventually, sale of allowances by ARB could generate 
            significant revenues that would be deposited in the Air 
            Pollution Control Fund and subject to appropriation by the 
            Legislature.

            Although slated for final adoption later this year and 
            implementation beginning in 2012, ARB's proposed cap-and-trade 
            program has been sidetracked by a recent court ruling in a 
            lawsuit filed by environmental justice groups alleging 
            deficiencies in ARB's CEQA analysis.  On May 20, the San 
            Francisco Superior Court, in Association of Irritated 








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            Residents, et al v. ARB, ruled that ARB had failed to comply 
            with CEQA in adopting its AB 32 Scoping Plan and enjoining any 
            further cap-and-trade rulemaking until ARB remedies its CEQA 
            analysis.  The court found that ARB's discussion of 
            alternatives was inadequate and that ARB improperly approved 
            the Scoping Plan prior to completing its environmental review. 
             On June 13, ARB released a revised alternatives analysis 
            intended to comply with the Superior Court ruling, which is 
            scheduled for board consideration in August.  ARB has also 
            appealed the ruling.

           2)Purpose of the bill.   According to the author:

               Currently, ARB is authorized to collect revenues from 
               regulated GHG emitters through a market-based mechanism. As 
               directed by AB 32, revenues collected would be deposited 
               into the Air Pollution Control Fund.  The problem is that 
               AB 32 did not provide a definition for California's most 
               impacted and disadvantaged communities, nor direction on 
               how the state will mitigate adverse impacts from climate 
               change in these communities, nor direction on how the state 
               will ensure these communities can participate in and 
               receive investments from activities taken pursuant to 
               Assembly Bill 32 and not experience disproportionate 
               impacts.

               SB 535 ensures that as California takes steps to address 
               global warming, we invest in the neighborhoods that 
               continue to suffer from higher levels of pollution and who 
               are least able to confront the expected impacts of the 
               climate crisis.  SB 535 outlines a process to identify 
               disadvantaged communities and allows for a periodic 
               modification, when necessary.  It requires that a minimum 
               of ten percent of revenues deposited in the Air Pollution 
               Control Fund pursuant to AB 32, other than administrative 
               fees, to be allocated to projects that reduce greenhouse 
               gas emissions and mitigate health impacts in disadvantaged 
               communities.  The projects envisioned will provide 
               environmental and health benefits, and may include: energy 
               efficiency upgrades, deployment of pollution reduction 
               technology and investments in transit.  Additionally, a 
               portion of funds could be used to help these communities 
               tackle the climate crisis, including anticipated heat waves 
               and rising sea levels.









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           3)Where will the funds come from?   As noted above, 
            non-administrative revenues in excess of $5 million are 
            necessary to initiate implementation of the CalCHART program.  
            There is no currently-operative source for these revenues.  It 
            could come from a more expansive regulatory fee (or "carbon 
            tax") on emitters.  However, given ARB's intentions and 
            actions thus far, revenues are most likely to come from ARB's 
            direct sale of emission allowances if a cap-and-trade program 
            is implemented.  The amount of revenue is highly uncertain and 
            depends on several variables, primarily the amount of 
            allowances sold and allowance price.  The range of estimated 
            funds available to CalCHART (assuming the $5 million trigger 
            is achieved) is $500,000 to well over $1 billion.

           4)Where will the funds go?   The bill establishes general 
            criteria for distribution of funds and very broad criteria for 
            project eligibility.  The distribution criteria (in the 
            definition of "most impacted and disadvantaged communities") 
            targets areas with a combination of high air pollution 
            exposure and poverty.  Although there is room for 
            interpretation how the criteria is applied, this is most 
            likely to be urban areas near ports, major industrial sources, 
            freeways and/or railyards, as well as densely-populated 
            communities in the Central Valley.  Funds must go to projects 
            to "reduce (GHG) emissions or mitigate direct health impacts 
            of climate change, although the bill also permits "green 
            collar" employment or training, which probably wouldn't be 
            otherwise eligible as a direction reduction or mitigation.  
            Within the broad boundaries of these criteria, the bill gives 
            significant discretion to ARB and the review panel to decide 
            how to spend the funds (subject at least to annual budgetary 
            review of the program by the Legislature).

           5)Should the review panel decide project awards?   The June 21 
            amendments to this bill restore the 10 percent allocation 
            previously removed when the bill was approved by the Senate 
            Appropriations Committee and create a review panel which would 
            have to concur with ARB in the significant aspects of CalCHART 
            implementation, including identification of eligible 
            communities and individual project awards.  As a matter of 
            governance, it seems unusual to subordinate the ARB to a panel 
            that ARB itself is required to appoint.   The author and the 
            committee may wish to consider  amending the bill to limit the 
            review panel's role to reviewing and making recommendations 
            regarding program planning and award criteria, but eliminate 








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            its power to approve and reject project awards.  
            Alternatively, if the panel is to have a decision-making role, 
            including approving project awards,  the author and the 
            committee may wish to consider  adopt conflict standards to 
            assure appropriation separation between the panel members and 
            recipients.

           6)Prior legislation.   Last year, the Governor vetoed AB 1405 (De 
            Léon), which directed a minimum of 10 percent of revenues 
            generated pursuant to AB 32 to a Community Benefits Fund to be 
            awarded by the Secretary for Environmental Protection to 
            benefit disadvantaged communities.  In his veto message, the 
            Governor stated:

               This bill creates the California Climate Change Community 
               Benefits fund by requiring a minimum of 10% of revenues 
               from the sale of compliance instruments for market-based 
               compliance mechanisms under AB 32 to be deposited into the 
               fund.

               When the Legislature passed and I signed AB 32, we made a 
               commitment to California's disadvantaged communities that 
               we would ensure that the impacts of climate change and the 
               impacts of reducing climate change would not fall 
               disproportionately on their communities.  Throughout the 
               (ARB) process, they have kept this commitment in mind and 
               have fashioned every aspect of this program in a manner 
               that attempts to lessen any disproportionate impact on 
               these communities.

               I am confident ARB with keep on this path as they continue 
               the important work of fashioning market-based mechanisms 
               that will reduce the burden on California's business 
               community while still achieving our climate change 
               reduction goals.

               To that end, this bill is premature.  Unfortunately, the 
               bill proposes to spend money that does not currently exist 
               and might not ever exist in a fund controlled by the state 
               of California.

               Important work continues at ARB to determine the most 
               effective and least costly manner to implement AB 32.  I 
               encourage the supporters of this bill to work in earnest 
               with ARB as they build this program.  There will be a time 








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               to have this discussion.  Unfortunately, now is not that 
               time.

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          Asian Neighborhood Design
          Asian Pacific Environmental Network
          Asian Pacific Policy and Planning Council
          Breathe California
          California Environmental Justice Alliance
          California Interfaith Power and Light
          California League of Conservation Voters
          California League of Food Processors
          California Pan-Ethnic Health Network
          Catholic Charities, Stockton Diocese
          City Heights Community Development Corporation
          Coalition for Clean Air
          Communities for a Better Environment
          Community Action to Fight Asthma
          East Yard Communities for Environmental Justice
          Environment California
          Environmental Defense Fund
          Environmental Health Coalition
          Global Alliance for Incinerator Alternatives
          Greenlining Institute
          Latino Coalition for a Healthy Environment
          Los Angeles County Bicycle Coalition
          Natural Resources Defense Council
          People Organizing to Demand Environmental & Economic Rights 
          (PODER)
          San Diego Coastkeeper
          Sierra Club California
          Southeast Asian Community Alliance
          Tofa, Inc.
          Transform
          Trust for Public Land
          Union of Concerned Scientists
           
            Opposition 
           
          American Council of Engineering Companies - California
          Building Owners and Managers Association
          California Building Industry Association








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          California Chamber of Commerce
          California Council for Environmental and Economic Balance
          California Farm Bureau Federation
          California Forestry Association
          California Large Energy Consumers Association
          California League of Food Processors
          California Manufacturers & Technology Association
          California Metals Coalition
          California Retailers Association
          Cal-Tax
          Chemistry Industry Council of California
          Consumer Specialty Products Association
          International Council of Shopping Centers
          NAOIP - Commercial Real Estate Development Association
          Oxnard Chamber of Commerce
          Western Growers
          Western States Petroleum Association
          Western Wood Preservers' Institute


           Analysis Prepared by  :  Lawrence Lingbloom / NAT. RES. / (916) 
          319-2092