BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 278
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          ASSEMBLY THIRD READING
          AB 278 (Gatto)
          As Amended  April 4, 2013
          Majority vote 

           NATURAL RESOURCES        9-0    APPROPRIATIONS      17-0        
           
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          |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 |
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          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  








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            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  








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          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  








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          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  








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          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  








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          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 


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