BILL ANALYSIS Ó AB 278 Page 1 ASSEMBLY THIRD READING AB 278 (Gatto) As Amended April 4, 2013 Majority vote NATURAL RESOURCES 9-0 APPROPRIATIONS 17-0 ----------------------------------------------------------------- |Ayes:|Chesbro, Grove, Bigelow, |Ayes:|Gatto, Harkey, Bigelow, | | |Garcia, Muratsuchi, | |Bocanegra, Bradford, Ian | | |Patterson, Skinner, | |Calderon, Campos, | | |Stone, Williams | |Donnelly, Eggman, Gomez, | | | | |Hall, Ammiano, Linder, | | | | |Pan, Quirk, Wagner, Weber | ----------------------------------------------------------------- SUMMARY : Requires the Air Resources Board (ARB) to consider specified factors under its Low Carbon Fuel Standard (LCFS) regulation. Specifically, this bill requires ARB to: 1)Consider greenhouse gas (GHG) emissions associated with land use or other significant indirect effects in determining the "carbon intensity" (CI) of fuels for purposes of the LCFS. 2)Identify, to the extent feasible, the environmental laws and practices of the jurisdiction from which the fuel originates that may affect GHG emissions from production and transportation of fuel. 3)Solicit comments and consider and respond the evidence regarding: a) Significant effects upon food supply, food costs, and food shipping caused by the LCFS. b) Significant effects upon the local economy, including job loss or worker displacement caused by the LCFS. EXISTING LAW : 1)Requires, pursuant to the California Global Warming Solutions Act (AB 32 (Núñez), Chapter 488, Statutes of 2006), ARB to adopt a statewide GHG emissions limit equivalent to 1990 levels by 2020 and to adopt rules and regulations to achieve AB 278 Page 2 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)Sets, pursuant to Governor Schwarzenegger's Executive Order S-01-07, 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. FISCAL EFFECT : According to the Assembly Appropriations Committee, significant start-up and on-going annual costs in the $1 million to $2 million range (special fund) for the increased workload associated with the expanded analysis for activities including: the update of fuel pathways and carbon intensity scores; macroeconomic modeling of LCFS impacts on local economies; the creation of an inventory of foreign and state laws and practices, and; a new server and software. COMMENTS : In 2007, Governor Schwarzenegger issued Executive Order S-1-07, calling for a reduction of at least 10% in the CI of California's transportation fuels by 2020. The Executive 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 Executive 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 AB 278 Page 3 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 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. 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 AB 278 Page 4 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. 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% 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 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 AB 278 Page 5 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 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." 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 AB 278 Page 6 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. 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 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. Analysis Prepared by : Lawrence Lingbloom / NAT. RES. / (916) 319-2092 FN: 0000948