BILL ANALYSIS                                                                                                                                                                                                    Ó



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          Date of Hearing:  April 13, 2015


                       ASSEMBLY COMMITTEE ON NATURAL RESOURCES


                                 Das Williams, Chair


          AB 692  
          (Quirk) - As Amended April 6, 2015


          SUBJECT:  Low-carbon transportation fuels


          SUMMARY:  Requires each state agency that is a buyer of  
          transportation fuels to buy 3% of "very low carbon  
          transportation fuels," as defined, beginning January 1, 2017,  
          increasing by 1% per year thereafter until 2024.


          EXISTING LAW:  


          1)Pursuant to the California Global Warming Solutions Act (AB  
            32), requires the Air Resources Board (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.

          2)Pursuant to Executive Order S-01-07, sets a statewide goal to  
            reduce the carbon intensity (CI) of California's  
            transportation fuels by at least 10% by 2020.  Pursuant to AB  
            32, ARB adopted a Low Carbon Fuel Standard (LCFS) regulation  
            in 2009 to implement this goal.  The LCFS attributes CI values  
            to a variety of fuels based on direct and indirect GHG  
            emissions, including land use changes caused by production of  








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            biofuels.  The LCFS permits producers of certain low-CI fuels  
            to opt in to LCFS regulation for the purpose of generating  
            credits, which can be banked and used for compliance, sold to  
            regulated parties, and purchased and retired by regulated  
            parties.  In addition, LCFS credits can be exported to other  
            GHG emission reduction programs.

          THIS BILL:
          
          1)Declares that increasing the supply of low carbon fuels will  
            help the state achieve its GHG reduction goals, but that  
            existing incentives have not resulted in sufficient  
            development.

          2)Requires, beginning January 1, 2017, the Department of  
            Transportation (CalTrans), the Department of General Services  
            (DGS), and any other state agency that is a buyer of  
            transportation fuels, to procure 3% of the total amount of  
            fuel purchased from very low carbon transportation fuel  
            sources.  Requires that amount to increase by 1% every year  
            until January 1, 2024, at which time the amount would be 10%.



          3)Requires each state agency to submit a report to the  
            Legislature each year from 2018 to 2026.



          4)Defines "very low carbon transportation fuel" as a liquid or  
            gaseous fuel having no greater than 50% the CI of the closest  
            comparable petroleum fuel, as measured by the LCFS  
            methodology.



          5)Provides that the bill does not replace or modify any existing  
            standards or requirements imposed by the LCFS regulation.









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          FISCAL EFFECT:  Unknown


          COMMENTS:  


          1)Background on LCFS.  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 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 adopted the LCFS 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% 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 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).  The combined federal lawsuit (Rocky Mountain  








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            Farmers Union v. Corey) was heard by the Ninth Circuit Court  
            of Appeals, which considered 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.   
            In September 2013, the Ninth Circuit ruled that the LCFS  
            provisions were not facially discriminatory, leaving the LCFS  
            in place while the plaintiffs petition for review by the U.S.  
            Supreme Court.


            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  
            (APA) and the California Environmental Quality Act (CEQA) when  
            adopting the LCFS regulation.  In November 2011, the Fresno  
            Superior Court ruled in favor of ARB on all 14 causes of  
            action raised by the plaintiffs.  Plaintiffs then appealed the  
            case to the Court of Appeal in Fresno, which found both APA  
            and CEQA defects with ARB's process of adopting the LCFS.  As  
            a result, ARB has proposed adopting an alternative regulation  
            for diesel and readopting the LCFS regulation to comply with  
            the court's instructions.  


            Meanwhile, the LCFS is frozen at its 2013 (1% CI reduction)  
            level.  In addition to revising the regulation to comply with  
            the Court of Appeal ruling, ARB has proposed several other  
            modifications related to adjusting compliance schedules,  
            determining CI, cost containment in the credit market, and  
            other assorted issues.  ARB proposes to readopt the LCFS  
            regulation in July, with a target of 2% in 2016, 3.5% in 2017,  
            5% in 2018, 7.5% in 2019, and 10% in 2020 and thereafter.


          2)What types of fuels will be eligible?  According to proposed  
            CI tables published by ARB, the following fuels would fall  








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            under the 50% definition in this bill:

               a)     Natural gas (biomethane) from landfills,  
                 dairy/feedlot sources, and anaerobic digestion of  
                 food/green waste and wastewater.


               b)     Biodiesel and renewable diesel from used cooking  
                 oil, tallow and plant sources.


               c)     Ethanol from sugarcane.


               d)     Hydrogen, depending on the fuel source and  
                 production process.


            Fuels meeting the 50% definition made up about 1% of the total  
            volume of fuels produced in 2014. 


          3)Bill would treat very different fuels the same.  Under this  
            bill, any fuel meeting the 50% mark would count the same  
            toward a state agency's procurement obligation.  Eligible  
            fuels range from imported, crop-based fuels, such as sugarcane  
            ethanol (with a CI around 43% of gasoline), to local,  
            waste-based fuels, such as biomethane derived from anaerobic  
            digestion of food waste (with a CI less than zero).  If the  
            objective of the bill is to promote the development of very  
            low carbon fuels, the author and the committee may wish to  
            consider excluding conventional, crop-based fuels by changing  
            the standard from 50% to 40%.  
            
            Alternatively, the bill could adopt CI-based targets,  
            requiring state agencies to exceed LCFS targets by a specified  
            percentage, which would create a stronger incentive to procure  
            fuels that achieve the lowest CI.









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          4)Additional questions for the author and committee to consider:
            
               a)     Should every state agency that buys any  
                 transportation fuels be individually subject to this  
                 bill, or should there be a minimum amount of fuel that  
                 triggers a compliance obligation?

               b)     Does each state agency need to comply each year, or  
                 are agencies allowed to average, trade and/or bank  
                 compliance?



               c)     Do state agencies get to count the percentage of  
                 very low carbon fuels blended in conventional gasoline or  
                 diesel, or must they separately procure very low carbon  
                 fuels?



               d)     Do state agencies have to maintain the 10%  
                 procurement requirement after 2024?



               e)     How much should the state spend, from what source of  
                 funds, and should this expenditure be ranked against  
                 other uses of state funds to reduce GHG emissions?



               f)     Should each state agency be required to prepare a  
                 separate report each year, or should reporting be  
                 consolidated?

          1)Double referral.  This bill has been double referred to the  
            Accountability and Administrative Review Committee.

          REGISTERED SUPPORT / OPPOSITION:








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          Support


          California Biodiesel Alliance


          DuPont




          Opposition


          None on file







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



















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