BILL ANALYSIS Ó AB 692 Page 1 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 AB 692 Page 2 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. AB 692 Page 3 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 AB 692 Page 4 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 AB 692 Page 5 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. AB 692 Page 6 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: AB 692 Page 7 Support California Biodiesel Alliance DuPont Opposition None on file Analysis Prepared by:Lawrence Lingbloom / NAT. RES. / (916) 319-2092 AB 692 Page 8