BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 278
                                                                  Page 1

          Date of Hearing:  April 1, 2013

                       ASSEMBLY COMMITTEE ON NATURAL RESOURCES
                                Wesley Chesbro, Chair
                  AB 278 (Gatto) - As Introduced:  February 11, 2013
           
          SUBJECT  :  California Global Warming Solutions Act of 2006:  Low  
          Carbon Fuel Standard

           SUMMARY  :  Requires the Air Resources Board (ARB) to consider  
          four specified factors when it determines the "carbon intensity"  
          (CI) of fuels under its Low Carbon Fuel Standard (LCFS)  
          regulation.

           EXISTING LAW  :

          1)Pursuant to the California Global Warming Solutions Act (AB  
            32), requires ARB to adopt a statewide greenhouse gas (GHG)  
            emissions limit equivalent to 1990 levels by 2020 and to adopt  
            rules and regulations to achieve maximum technologically  
            feasible and cost-effective GHG emission reductions.  AB 32  
            also requires ARB to adopt early action measures (EAM) to  
            reduce GHG emissions.

          2)Pursuant to Governor Schwarzenegger's Executive Order S-01-07,  
            sets a statewide goal to reduce the CI of California's  
            transportation fuels by at least 10% by 2020.  The order  
            required ARB to consider adopting a LCFS to implement this  
            goal, either as an EAM or in another regulatory proceeding.   
            In 2009, ARB adopted the LCFS as a regulation.  The LCFS  
            attributes CI values to a variety of fuels based on direct and  
            indirect emissions, including land use changes caused by  
            production of biofuels.

           THIS BILL  requires ARB, in determining CI for purposes of the  
          LCFS, to consider the following four factors:

          1)The life-cycle CI impacts of potential or actual  
            deforestation.

          2)The environmental laws and practices of the jurisdiction from  
            which the fuel originates.

          3)Any disruptions or other effects upon food supply, food costs,  
            and food shipping that could occur as a result of California  








                                                                  AB 278
                                                                  Page 2

            policy.

          4)Changes to the local economy, including job loss or worker  
            displacement, resulting from changes in the production of a  
            fuel.

           FISCAL EFFECT  :  Unknown

           COMMENTS  : 

           1)Background.   In 2007, Governor Schwarzenegger issued Executive  
            Order S-1-07, calling for a reduction of at least 10 percent  
            in the CI of California's transportation fuels by 2020.  The  
            Order instructed the California Environmental Protection  
            Agency to coordinate activities between the University of  
            California, the California Energy Commission and other state  
            agencies to develop and propose a draft compliance schedule to  
            meet the 2020 target.
             
             The Order further directed ARB to consider initiating  
            regulatory proceedings to establish and implement the LCFS.   
            In response, ARB identified the LCFS as an early action item  
            and adopted a regulation in 2009, to be implemented beginning  
            in 2010.  2010 was a reporting year and the first CI reduction  
            requirement of 0.25% began in 2011.  The target increased to  
            0.5% in 2012 and 1.0% in 2013.  To date, fuel suppliers have  
            over-complied, predominantly by blending ethanol with  
            gasoline, which is preferred in the near term because ethanol  
            blending is required by the federal Renewable Fuel Standard  
            (RFS) and does not require significant changes in fueling and  
            vehicle infrastructure.  However, natural gas, biodiesel and  
            electricity have also been used in significant amounts to  
            comply with the LCFS.

            In 2009 and 2010, three lawsuits were filed against the LCFS  
            by ethanol interests - two in federal court and one in state  
            court.  The federal lawsuits were brought by trade  
            associations of ethanol producers and refiners who claim that  
            the LCFS is preempted under the Energy Independence and  
            Security Act of 2007 and violates the Commerce Clause of the  
            U.S. Constitution (e.g., by assigning corn ethanol from the  
            Midwest a CI value above that of corn ethanol made in  
            California).  Plaintiffs claim that corn ethanol will  
            eventually be excluded from the California market in favor of  
            more advanced biofuels that have a lower CI value.  ARB  








                                                                  AB 278
                                                                  Page 3

            contends that many corn ethanol producers from the Midwest  
            have in fact registered with ARB with CI values that are well  
            below gasoline and, indeed, even less than California corn  
            ethanol.  Plaintiffs also claim that California is  
            impermissibly regulating interstate commerce beyond its  
            borders by regulating aspects of a fuel's lifecycle that occur  
            outside of the state's borders.  The combined federal lawsuit  
            (Rocky Mountain Farmers Union v. Goldstene) is before the  
            Ninth Circuit Court of Appeals, which is considering ARB's  
            appeal of several adverse rulings and a preliminary injunction  
            that were issued by the lower federal court in Fresno in  
            December 2011.  In April 2012, the Ninth Circuit granted ARB's  
            request for a stay of the preliminary injunction, which  
            allowed ARB to resume enforcement of the LCFS during the  
            pendency of the lawsuit.  On October 16, 2012, the Ninth  
            Circuit considered oral arguments from the parties.  A ruling  
            from the Ninth Circuit is expected sometime this year.

            The state lawsuit (Poet, LLC v. California Air Resources  
            Board), brought by a major ethanol producer, alleges that ARB  
            did not fully comply with the Administrative Procedure Act and  
            the California Environmental Quality Act when adopting the  
            LCFS regulation.  The hearing on that case was held in August  
            2011, and in November 2011, the Fresno Superior Court ruled in  
            favor of ARB on all 14 causes of action raised by the  
            plaintiffs.  Plaintiffs have since appealed the case to the  
            Court of Appeal in Fresno.  The court has asked for additional  
            supplemental briefs and ARB is preparing its brief, due April  
            2.

           2)How the LCFS currently accounts for indirect effects of fuel  
            production.   For the LCFS, ARB staff has identified one  
            indirect effect that generates significant quantities of GHG  
            emissions:  land use change effects.  A land use change effect  
            is initially triggered by a significant increase in the demand  
            for a crop-based biofuel.  When farmland devoted to food and  
            feed production is diverted to the production of that biofuel  
            crop, supplies of the displaced food and feed crops are  
            reduced.  Supply reductions cause prices to rise, which, in  
            turn, stimulates increased production.  If that production  
            takes place on land formerly in non-agricultural uses, a land  
            use change effect results.  The specific effect consists of  
            the carbon released to the atmosphere from the lost cover  
            vegetation and disturbed soils in the periods following the  
            land use conversion.








                                                                  AB 278
                                                                  Page 4


            ARB estimates the land use change effects of biofuel crop  
            production using the Global Trade Analysis Project (GTAP),  
            which is a computer model developed and supported by  
            researchers at Purdue University.  Within the GTAP's scope are  
            111 world regions, some of which consist of single countries,  
            others of which are comprised of multiple neighboring  
            countries.  Each region contains data tables that describe  
            every national economy in that region, as well as all  
            significant intra- and inter-regional trade relationships.   
            The data for this model is contributed and maintained by more  
            than 6,000 local experts.

            As noted above, ARB's efforts to examine the full lifecycle  
            GHG emissions of fuels have provoked claims that the LCFS  
            impermissibly regulates interstate commerce.  The regulation  
            assigns a significant penalty to ethanol produced from corn  
            and an even higher penalty for ethanol produced from sugar  
            cane in Brazil.  In fact, the majority (60 to 80 percent  
            depending on the source) of the CI value attributed to  
            Brazilian ethanol is due to indirect effects.  These penalties  
            are directly attributable to land conversion, including  
            deforestation, associated with the feedstock crops.

            Regarding the four factors listed in this bill, ARB has  
            provided comments to the committee and the author, which are  
            summarized below.

             Deforestation:
                  
            ARB staff analysis does account for lifecycle CI impacts  
            related to potential or actual deforestation.  When a  
            lifecycle pathway is developed for a crop-based biofuel, an  
            indirect land use change (iLUC) value is developed using the  
            GTAP model for land that will be converted to agricultural  
            production as a result of increased demand for that crop.  The  
            approach accounts for land conversions in all regions of the  
            world based on available land and likelihood of land to be  
            converted as demand for land goes up.  The methodology  
            attributes new land to come from forests in addition to  
            pastureland and cropland pasture.  A fuel that is more likely  
            to displace forests will have a higher CI, making it less  
            attractive for use in complying with the LCFS.  Waste-derived  
            biofuels do not require land (no attendant deforestation) and  
            are assigned "zero" iLUC values.  The LCFS seeks to  








                                                                  AB 278
                                                                  Page 5

            incentivize the production and use of waste-derived biofuels,  
            limiting any potential for deforestation.

             Environmental laws and practices:

             The LCFS does not directly mandate complying with local laws  
            and practices but includes provisions in it to indirectly  
            score fuels on the basis of compliance with environmental laws  
            and sustainable practices.  These include iLUC and  
            environmental impacts related to the use of fertilizers,  
            pesticides and field-burning of crop-related waste.  For  
            crudes supplied from various global sources, existing  
            provisions account for CI for individual crudes based on local  
            extraction practices (e.g., flaring).  Staff is also  
            considering a proposal to incent sustainability practices used  
            in the production of biofuel feedstocks.  Fuels produced in  
            regions and countries that do not adopt environmentally  
            sustainable practices may not be eligible for sustainability  
            incentives, which may include reductions to CI values based on  
            "best practices."
             
































                                                                 AB 278
                                                                  Page 6

            Effects on food:

             The LCFS already incents the production and use of  
            next-generation biofuels, preferably derived from waste  
            feedstocks that have no impacts on food shipping, food prices,  
            or food availability.  Nevertheless, staff is working with  
            stakeholders to further refine the methodology to account for  
            potential impacts of price effects and related reductions in  
            food consumption from the diversion of food crops to produce  
            biofuels.  The inclusion of an additional CI to a crop-derived  
            biofuel further reduces its GHG savings under the LCFS.  This  
            would send a signal that biofuels produced from food crops  
            would generate lower LCFS credits and discourage the use of  
            such fuels.  

            Changes to the local economy:

             The implementation of the LCFS will not lead to job losses or  
            large-scale worker displacement in California.  Concerns of  
            potential job losses in the refinery sector stem from the  
            assumption that the LCFS will cause refineries to shut down in  
            response to decreased consumer demand for gasoline and diesel.  
             As cleaner, alternative fuels displace some petroleum-based  
            fuels, jobs may shift from the petroleum industry to other  
            sectors of California's economy, such as agriculture.  The  
            shift in consumer dollars from gasoline and diesel toward  
            cleaner, more domestically-produced fuels will spur growth in  
            well-paying jobs in the clean fuels industry.

           3)Are the four factors relevant to the LCFS and CI in  
            particular?   Factor 1 (deforestation) is clearly relevant to  
            CI and currently accounted for in the LCFS.  Factor 2  
            (environmental laws and practices) is not generally relevant  
            to CI, but may be relevant to the extent laws and practices  
            affect GHG emissions from production of fuel.  However, GHG  
            emissions from production practices are already accounted for  
            in the LCFS.  Factor 3 (food effects) may be partially  
            correlated to CI, though the bill should distinguish food  
            effects that are caused by the LCFS and relevant to CI (such  
            as increased food shipping from crop displacement) from food  
            effects associated with other policies, such as the federal  
            RFS, and broader market forces.  Requiring ARB to embark on a  
            broad analysis of global food dynamics seems infeasible.   
            Factor 4 (local economic changes) does not appear to be  
            relevant to CI or practical to translate into a CI value.  ARB  








                                                                  AB 278
                                                                 Page 7

            does account for economic impacts in this state when it adopts  
            any regulation.  However, it does not seem appropriate or  
            feasible to task ARB with analyzing the particular economic  
            conditions in the dozens of regions and countries from which  
            California transportation fuel originates, particularly as a  
            condition of determining CI values.  

            The author and the committee may wish to consider  amending the  
            bill to remove from the mandatory CI determination those  
            factors (2 and 4 in particular) that are not related to CI.   
            To the extent the author and the committee wish to retain  
            those factors as considerations separate from CI, the bill  
            should limit ARB's analysis to effects with a demonstrable  
            correlation to the LCFS, as opposed to broader policies or  
            market forces.

           4)Prior LCFS legislation  :

            AB 768 (Gatto) required ARB to allow out of state producers of  
            "renewable natural gas" (i.e. biomethane) to generate credits  
            for compliance with the LCFS, notwithstanding ARB's adopted  
            requirement that regulated parties demonstrate a physical  
            pathway for delivery of the fuels to California.  AB 768 was  
            approved by this committee in April 2011, but was later  
            amended to bar cities and counties from prohibiting or  
            restricting the practice of male circumcision.

            AB 2311 (Mendoza) codified triennial review and reporting  
            requirements on ARB for the LCFS regulation.  AB 2311 was  
            approved by this committee in April 2010 and later held in the  
            Assembly Appropriations Committee.

            SB 1240 (Kehoe) required ARB to develop, implement, and  
            enforce a LCFS to reduce the CI of transportation fuels,  
            including accounting for GHG emissions on a full fuel-cycle  
            basis and avoiding or mitigating significant environmental  
            impacts, including impacts on species, habitat, ecosystems,  
            land use, biodiversity, air quality, water supply and quality,  
            and access to and production of food from producing compliant  
            fuels.  SB 1240 was approved by this committee in June 2008,  
            but was later amended to address real estate brokers.

            SB 210 (Kehoe) was nearly identical to SB 1240.  SB 210 was  
            approved by this committee in July 2007 and later vetoed by  
            Governor Schwarzenegger.








                                                                  AB 278
                                                                  Page 8


           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          American Federation of State, County and Municipal Employees  
          (AFSCME)
          CALSTART
          Milk Producers Council

           Opposition 
           
          Sierra Club California (unless amended)
           

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