BILL ANALYSIS                                                                                                                                                                                                    Ó

                                                                  SB 1572
                                                                  Page 1

          Date of Hearing:  July 2, 2012

                                Wesley Chesbro, Chair
                    SB 1572 (Pavley) - As Amended:  June 25, 2012

           SENATE VOTE  :  23-13 (prior version)
          SUBJECT  :  California Global Warming Solutions Act of 2006:  AB 
          32 Investment Fund

           SUMMARY  :  Specifies expenditures of up to $250 million in the 
          2012-13 fiscal year derived from the auction of greenhouse gas 
          (GHG) allowances pursuant to the cap-and-trade program adopted 
          by ARB pursuant to AB 32.

           EXISTING LAW  :

          1)Requires ARB, pursuant to AB 32, to adopt a statewide 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 permit the use of market-based compliance 
            mechanisms to comply with GHG reduction regulations, to be 
            adopted by 2011 and operative by 2012, under limited 
            circumstances once specified conditions are met.

          3)Creates the Greenhouse Gas Reduction Fund and requires all 
            moneys, except for fines and penalties, collected by ARB from 
            the auction or sale of allowances pursuant to a market-based 
            compliance mechanism to be deposited in the Fund and available 
            for appropriation by the Legislature.

          4)Requires the Department of Finance (DOF) to submit proposed 
            legislation, on or before January 10, 2013, that provides a 
            detailed spending plan for moneys in the Fund, unless the 
            Legislature passes a bill on or before August 31, 2012 that 
            establishes a long-term spending strategy for moneys in the 
            Fund.  Requires any state agency, prior to expending any 
            moneys appropriated from the Fund, to prepare a specified 

          5)Authorizes the DOF to allocate or otherwise use an amount of 
            at least $500 million from moneys deposited in the Fund, and 


                                                                  SB 1572
                                                                  Page 2

            make commensurate reductions to General Fund expenditure 
            authority, to support the regulatory purposes of AB 32.  
            Requires ARB and DOF, at least 60 days prior to allocating any 
            funds to submit a plan for the expenditure or use of the funds 
            to the chairpersons of the Senate and Assembly Appropriations 
            Committees and the Chairperson of the Joint Legislative Budget 
            Committee.  Prohibits the use of funds for the purpose of 
            developing a high-speed rail system for at least two years.

           THIS BILL  :

          1)Creates the Greenhouse Gas Reduction Account and requires all 
            revenues, except for fines and penalties, collected by ARB 
            from the auction or sale of allowances pursuant to a 
            market-based compliance mechanism to be deposited in the 
            Account and available, upon appropriation by the Legislature, 
            for the purposes of this bill.

          2)Requires, notwithstanding any other law, 50 percent of auction 
            revenues collected in the 2012-13 fiscal year, or $250 
            million, whichever is less, that are not used by DOF to offset 
            General Fund expenditures pursuant to the Budget Act, to be 
            available for priority projects listed in this bill.

          3)Provides that any funds appropriated, but not allocated by the 
            administering agency by the end of the 2012-13 fiscal year, 
            revert back to the Account to be expended according to a 
            long-term expenditure plan in accordance with subsequent 

          4)Provides that no funds will be expended pursuant to this bill 
            if the total auction revenues in the 2012-13 fiscal year are 
            less than $550 million.

          5)Requires projects funded by the bill to comply with the 
            following criteria:

             a)   Achieve greenhouse gas emissions reductions at a 
               reasonable cost. 

             b)   Rapidly achieve budgetary savings for families, small 
               businesses, schools, universities, companies regulated 
               under the cap-and-trade program, community institutions, 
               and state, local, and regional governments.


                                                                  SB 1572
                                                                  Page 3

             c)   Advance the purposes of the cap-and-trade program, in 
               particular the purpose of the auction to reduce the risk of 
               market manipulation and windfall profits.

             d)   Protect existing jobs in the state by minimizing 

             e)   Benefit the most adversely impacted and disadvantaged 
               communities to the maximum extent feasible.

             f)   Provide opportunities, where appropriate, for small 
               businesses, schools, local governments, not-for-profit 
               entities, state and local certified conservation corps, 
               state conservancies, and other community institutions to 
               participate in and benefit from statewide and regional 
               efforts to reduce greenhouse gas emissions.

          6)Requires allocation of funds according to the following 

             a)   K-12 energy projects - The greater of 35.6 percent or 
               $89 million to the Public School Energy Savings Account. 

               i)     56.25 percent shall be available as loans to public 
                 schools at a 2 percent interest rate and a 20-year term.

               ii)    18.75 percent shall be available as loans at a 1 
                 percent interest rate and a 20-year term to public 
                 schools with 35 percent or greater proportion of students 
                 with free and reduced lunches.

               iii)   25 percent shall be available as grants to 
                 qualifying public schools, using an existing program 
                 within the jurisdiction of the California Energy 
                 Commission (CEC), including the Bright Schools Program, 
                 or in collaboration with the Office of Public School 
                 Construction, through either the new construction or 
                 modernization programs of the School Facility Program.

             b)   Public university projects - The greater of 8 percent or 
               $20 million to the Higher Education Climate Solutions Fund 
               for allocation to public university governing boards for 
               GHG reduction projects and activities at public 
               universities regulated under the cap-and-trade program, 
               including, but not limited to, the following projects and 


                                                                  SB 1572
                                                                  Page 4


               i)     Energy efficiency upgrades that reduce electricity 
                 and natural gas consumption at university-controlled 

               ii)    Procurement of biomethane or biogas that displaces 
                 natural gas usage at university facilities.

               iii)   Procurement of carbon-neutral electricity that 
                 displaces conventional electricity generation at 
                 university facilities.

               iv)    Administrative costs not to exceed 1 percent.

               In order to be eligible for funds from the Higher Education 
               Climate Solutions Fund, a public university shall:

               i)     Agree to make an additional investment in GHG 
                 abatement projects and activities, equal in value to 25 
                 percent of the funds it receives.

               ii)    Submit to the Legislature a five-year investment 
                 plan detailing the projects and activities to be funded 
                 with an anticipated allocation.

               iii)   Submit an annual report to the Legislature 
                 describing the disposition of funds received in the 
                 previous calendar year and the planned expenditures for 
                 allowance revenue in the coming calendar year.

             c)   Rapid transition assistance for industrial facilities - 
               The greater of 12 percent, or $30 million to the Public 
               Utilities Commission (PUC) to carry out the self-generation 
               incentive program, subject to the following limitations:

               i)     Incentives shall only be available to covered 
                 entities under the cap-and-trade program.

               ii)    The PUC shall not award incentives for emissions 
                 reduction measures that are otherwise specifically 
                 required by statute, regulation, or court order.

             d)   Residential energy efficiency - The greater of 4 percent 
               or $10 million to the Department of Community Services and 


                                                                  SB 1572
                                                                  Page 5

               Development for expenditure pursuant to the Weatherization 
               Assistance Program.  The Department shall expend at least 
               50 percent within multi-family rental housing developments 
               subject to specified affordability restrictions.

             e)   Energy in agriculture priority projects - The greater of 
               1.6 percent or $4 million to the CEC for expenditure in 
               accordance with the Agricultural Industry Energy Program, 
               including the adoption of renewable energy and 
               energy-efficient technologies and management practices that 
               reduce GHG emissions, energy and water use, production 
               costs, and minimize negative environmental impacts while 
               improving economic sustainability.

             f)   Sustainable land use and transportation - The greater of 
               20 percent or $30 million to the Strategic Growth Council 
               (SGC) for allocation to metropolitan planning 
               organizations, or, within the Southern California 
               Association of Governments region, to a county 
               transportation commission, or to other local governmental 
               entities in regions not within a metropolitan planning 
               organization, that further the purposes of specified 
               regional planning processes.  

               i)     Project funding determinations shall be made at the 
                 regional level in accordance with statewide criteria 
                 developed by the SGC that prioritize investments in 
                 projects that:

                  (1)       Cost-effectively reduce GHG emissions and 
                    provide other co-benefits.

                  (2)       Integrate transportation, land use, and water 
                    and other resource conservation strategies.

                  (3)       Occur in regions with sustainable community 
                    strategies that meet GHG emission reduction targets, 
                    or in other regions, for equivalent blueprint plans or 
                    other regional plans.

               ii)    Funds allocated by the SGC may be used for 
                 integrated infrastructure development, design, 
                 construction, or planning, including modeling and 
                 verification systems that impose GHG emission reduction 
                 performance measurement tools for local and regional 


                                                                  SB 1572
                                                                  Page 6

                 actions, and operation and maintenance of transportation 
                 infrastructure, provided that the integrated 
                 infrastructure development, design, construction, or 
                 planning or operation and maintenance measures are part 
                 of a comprehensive regional or local plan that directly 
                 results in overall GHG emission reduction and 

               iii)   Of funds available to the SGC, 40 percent shall be 
                 available to the Department of Housing and Community 
                 Development to be expended for loans for specified 
                 affordable transit-oriented housing.

             g)   Goods movement - The greater of 4.8 percent or $12 
               million to ARB for goods movement consistent with the goods 
               movement efficiency measures included in the AB 32 Scoping 

             h)   Lower-Emission School Bus Program - The greater of 2 
               percent or $5 million to ARB for the Lower-Emission School 
               Bus Program.

             i)   Clean Vehicle Rebate Project - The greater of 12 percent 
               or $30 million dollars to ARB for the Clean Vehicle Rebate 
               Project.  Rebates shall only be available to households 
               with a combined gross annual income of less than $80,000 
               per year, and only one rebate shall be available per 
               qualifying household.

          7)Requires agencies awarding funds to find that the project or 
            activity reduces GHG emissions in furtherance of AB 32 and to 
            submit quarterly reports to the Legislature with specified 
            information about funded projects and activities.

          8)Provides that the provisions of the bill are severable.

          9)Establishes related findings regarding ARB's cap-and-trade 

           FISCAL EFFECT  :  Unknown

           COMMENTS  : 

           1)Background on cap-and-trade.  The AB 32 Scoping Plan is a 
            description of the specific measures ARB and others must take 


                                                                  SB 1572
                                                                  Page 7

            to meet the objective of AB 32:  Reduce statewide GHG 
            emissions to 1990 levels by 2020.  The reduction measures 
            identified in the Scoping Plan must be proposed, reviewed, and 
            adopted as individual regulations by January 1, 2011, to 
            become operative beginning on January 1, 2012.

            According to ARB, a total reduction of 80 million metric tons 
            (MMT), or 16 percent compared to business as usual, is 
            necessary to achieve the 2020 limit.  Approximately 78 percent 
            of the reductions will be achieved through identified 
            "regulatory" measures.  ARB proposes to achieve the balance of 
            reductions necessary to meet the 2020 limit (approximately 18 
            MMT) through a cap-and-trade program.  

            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 regulated 
            entities or other parties.  In addition to allowances, 
            emissions reductions from sources that are outside the cap 
            coverage, called offsets, can be used to meet compliance 
            obligations.  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 surrender enough compliance 
            instruments to match their emissions during this time period.  
            The cap-and-trade program adopted by ARB applies to an 
            estimated 600 regulated entities.  The first auction of 
            allowances will take place on November 14, 2012, and the 
            auctions will be held quarterly thereafter.  

            Electric utilities are given free allowances by ARB in order 
            to lessen impacts of AB 32 implementation on electricity 
            ratepayers.  ARB requires investor-owned utilities (IOU) to 
            offer their freely-allocated allowances for auction each year 
            while publicly-owned utilities are permitted, but not 
            required, to offer their allowances for auction.  Revenue from 
            the sale of utility allowances is to be used for the benefit 
            of their ratepayers.  The Public Utilities Commission has an 
            ongoing proceeding that is examining the potential uses of the 
            funds, although the recently-enacted Resources Trailer Bill 
            (SB 1018) requires the revenues to be credited directly to 
            residential, small business, and emissions-intensive 


                                                                  SB 1572
                                                                  Page 8

            trade-exposed IOU customers, except for 15 percent that may be 
            allocated for IOU-administered clean energy and energy 
            efficiency projects.

           1)Related budget actions and pending legislation.   As noted 
            above, the 2012-13 Budget Act (AB 1464) authorizes DOF to 
            allocate at least $500 million from cap-and-trade revenue, and 
            make commensurate reductions to General Fund expenditure 
            authority, to support the regulatory purposes of AB 32.  

            The Resources Budget Trailer Bill (SB 1018) creates the 
            Greenhouse Gas Reduction Fund for cap-and-trade auction 
            revenues and requires DOF to submit proposed legislation, on 
            or before January 10, 2013, that provides a detailed spending 
            plan for moneys in the Fund, unless the Legislature passes a 
            bill on or before August 31, 2012 that establishes a long-term 
            spending strategy for moneys in the Fund.  

            Finally, AB 1532 (John A. Pérez) creates the Greenhouse Gas 
            Reduction Account for cap-and-trade auction revenues and 
            establishes procedures for deposit and expenditure of funds 
            pursuant to an investment plan.  This bill conflicts with the 
            budget actions and AB 1532 in that it creates a duplicative 
            "Greenhouse Gas Reduction Account" which captures all 
            cap-and-trade revenues for the purposes of the bill.  

             The author and the committee may wish to consider  amending 
            this bill to create a different account for the limited, 
            short-term purposes of the bill.

           2)Allocation funds may leave some priorities out.   Though the 
            very specific allocations in this bill suggest great 
            precision, it is unclear how well the priorities embodied in 
            this bill align with short-term GHG reductions, funding need, 
            and the ability to spend the money effectively.  

            The feedback received by the committee in the short time the 
            bill has been in print suggests there are many other programs 
            to consider for funding.  It is evident that a significant 
            category in the discussion surrounding the budget and AB 1532, 
            natural resource protection, has been left out entirely.

            There are also programs of questionable need and /or merit 
            that are included in the bill.  For example, the PUC's 
            self-generation incentive program is adequately funded by 


                                                                  SB 1572
                                                                  Page 9

            utility ratepayers, has a specific statutory funding cap and 
            sunset, and does not have a record of producing verifiable GHG 

             The author and the committee may wish to consider  whether the 
            specific allocations in the bill are justified and whether 
            there are other categories and programs that should be 


          American Lung Association
          California Energy Efficiency Industry Council
          Coalition for Adequate School Housing
          County School Facilities Consortium
          Santa Clara County Open Space Authority
          School Energy Coalition
          University of California
          American Council of Engineering Companies
          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 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
          Can Manufacturers Institute
          Chemical Industry Council of California
          Engineering Contractors' Association
          Flasher/Barricade Association
          Golden State Builders Exchanges
          Marin Builders' Association
          National Federation of Independent Business
          United Contractors


                                                                  SB 1572
                                                                  Page 10

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