BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                       AB 692


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          ASSEMBLY THIRD READING


          AB  
          692 (Quirk)


          As Amended  June 2, 2015


          Majority vote


           ------------------------------------------------------------------- 
          |Committee       |Votes |Ayes                  |Noes                |
          |                |      |                      |                    |
          |                |      |                      |                    |
          |----------------+------+----------------------+--------------------|
          |Natural         |6-3   |Williams, Cristina    |Dahle, Hadley,      |
          |Resources       |      |Garcia, McCarty,      |Harper              |
          |                |      |Rendon, Mark Stone,   |                    |
          |                |      |Wood                  |                    |
          |                |      |                      |                    |
          |----------------+------+----------------------+--------------------|
          |Accountability  |6-3   |Salas, Burke,         |Lackey, Brough,     |
          |                |      |Frazier, Irwin,       |                    |
          |                |      |Medina, Rodriguez     |                    |
          |                |      |                      |Beth Gaines         |
          |                |      |                      |                    |
          |----------------+------+----------------------+--------------------|
          |Appropriations  |12-5  |Gomez, Bonta,         |Bigelow, Chang,     |
          |                |      |Calderon, Daly,       |Gallagher, Jones,   |
          |                |      |Eggman, Eduardo       |Wagner              |
          |                |      |Garcia, Gordon,       |                    |
          |                |      |Holden, Quirk,        |                    |
          |                |      |Rendon, Weber, Wood   |                    |
          |                |      |                      |                    |
          |                |      |                      |                    |
           ------------------------------------------------------------------- 








                                                                       AB 692


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          SUMMARY:  Requires at least 3% of the aggregate amount of fuel  
          purchased by state agencies to be procured from very low carbon  
          transportation fuel sources beginning January 1, 2017.  Requires  
          that amount to increase by 1% every year until January 1, 2024, at  
          which time the amount would be 10%.  Specifically, 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, state agencies that are  
            buyers of transportation fuels, to procure at least 3% of the  
            aggregate 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)Defines "very low carbon transportation fuel" as a liquid or  
            gaseous fuel having no greater than 40% of the carbon intensity  
            (CI) of the closest comparable petroleum fuel, as measured by  
            the LCFS methodology.


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


          5)Authorizes the Legislature to appropriate money from the GGRF to  
            state agencies to offset any increased costs resulting from the  
            purchase of very low carbon transportation fuel.




          6)Requires the Department of General Services to coordinate with  
            state agencies and submit an annual progress report to the  








                                                                       AB 692


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            Legislature.
          EXISTING LAW:  


          1)Pursuant to the California Global Warming Solutions Act (AB 32  
            (Núñez), Chapter 488, Statutes of 2006), 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 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 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.


          3)Establishes the Greenhouse Gas Reduction Fund (GGRF) and  
            requires all moneys, except for fines and penalties, collected  
            by ARB from the auction or sale of allowances pursuant to a  
            market-based compliance mechanism (i.e., the cap-and-trade  
            program adopted by ARB under AB 32) to be deposited in the Fund  
            and available for appropriation by the Legislature.


          FISCAL EFFECT:  According to the Assembly Appropriations  
          Committee, increased unknown annual costs in the low millions (3%  
          requirement in 2017) potentially increased to the tens of millions  
          (10% in 2024) for the added costs of procuring low carbon  
          transportation fuels as defined by the bill.








                                                                       AB 692


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          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 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 United States 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 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  








                                                                       AB 692


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          the LCFS during the pendency of the lawsuit.  In September 2013,  
          the Ninth Circuit Court ruled that the LCFS provisions were not  
          facially discriminatory, leaving the LCFS in place while the  
          plaintiffs petition for review by the United States 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.


          According to proposed CI tables published by ARB, the following  
          fuels may fall under the 40% definition in this bill:


          1)Natural gas (biomethane) from landfills, dairy/feedlot sources,  
            and anaerobic digestion of food/green waste and wastewater.
          2)Biodiesel and renewable diesel from used cooking oil, tallow and  
            plant sources.










                                                                       AB 692


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




          Analysis Prepared by:                                               
                          Lawrence Lingbloom / NAT. RES. / (916) 319-2092     
                                                                    FN:  
          0000852