BILL ANALYSIS                                                                                                                                                                                                    Ó



               SENATE COMMITTEE ON TRANSPORTATION AND HOUSING
                              Senator Jim Beall, Chair
                                2015 - 2016  Regular 

          Bill No:          AB 692            Hearing Date:    6/30/2015
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          |Author:   |Quirk                                                 |
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          |Version:  |6/2/2015                                              |
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          |Urgency:  |No                     |Fiscal:      |Yes             |
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          |Consultant|Erin Riches                                           |
          |:         |                                                      |
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          SUBJECT:  State agencies:  low-carbon transportation fuels


            DIGEST:  This bill requires 3% of the aggregate amount of  
          transportation fuel purchased by state agencies to be procured  
          from very low-carbon fuel sources.  

          ANALYSIS:
          
          The Low Carbon Fuel Standard (LCFS) was established through a  
          Governor's Executive Order in January 2007.  The Air Resource  
          Board (ARB) adopted the LCFS regulation in April 2009, effective  
          the following year.  The LCFS aims to reduce greenhouse gas  
          (GHG) emissions from the transportation sector by about 16  
          million metric tons by 2020.  It is also designed to reduce  
          California's dependence on petroleum, create a lasting market  
          for clean transportation technology, and stimulate the  
          production and use of alternative low-carbon fuels. 

          The LCFS requires producers of petroleum-based fuels to reduce  
          the carbon intensity (CI) of transportation fuels used in  
          California by an average of 10% by 2020.  It consists of two  
          elements: a cap on total GHG emissions from the entire fuel  
          sector, and a carbon credit-trading mechanism that incentivizes  
          the production and use of low-carbon fuels.  Petroleum  
          importers, refiners, and wholesalers may either develop their  
          own low-carbon fuel products or buy LCFS credits from other  
          companies that sell low-carbon alternative fuels such as  
          biofuels, electricity, natural gas, or hydrogen.  The CI has  
          been frozen at 1% since 2013 as a result of litigation, but ARB  







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          plans to re-adopt the LCFS this year.  After re-adoption, the CI  
          will begin to decrease toward the 10% reduction required by  
          2020.

          The baseline LCFS fuels are reformulated gasoline mixed with  
          corn-derived ethanol and low sulfur diesel.  Lower carbon fuels  
          may include ethanol, biodiesel, renewable diesel, or blends of  
          these fuels with gasoline or diesel as appropriate.  Compressed  
          natural gas may also be a low-carbon fuel, as well as hydrogen  
          and electricity.    

          This bill:

          1)Requires, beginning January 1, 2017, that 3% of the aggregate  
            amount of transportation fuel purchased by state agencies must  
            be procured from very low-carbon fuel sources.  

          2)Requires the amount of very low-carbon fuel purchased to  
            increase by 1% each year until January 1, 2024 (i.e., up to  
            10% by 2024).  

          3)Defines "very low-carbon transportation fuel" as a liquid or  
            gaseous fuel having not more than 40% of the CI of the closest  
            comparable petroleum fuel for that year as measured by LCFS  
            methodology.  

          4)Authorizes the Legislature to appropriate Greenhouse Gas  
            Reduction Fund (GGRF) monies to state agencies that are buyers  
            of transportation fuel to offset any increased costs resulting  
            from the purchase of very low-carbon fuel.

          5)Requires the Department of General Services to coordinate with  
            state agencies that are buyers of transportation fuel and  
            submit to the Legislature an annual progress report on  
            implementation of the mandate in this bill.

          COMMENTS:

          Purpose.  The author states that while the state has met the 1%  
          GHG reduction commitment of LCFS, it has done so primarily by  
          using corn and sugarcane ethanol and soybean biodiesel; only a  
          very small fraction of the California fuel market is currently  
          satisfied by fuels made from waste products.  The main obstacle  
          preventing other fuels from entering the LCFS market is access  
          to capital.  Building a commercial-scale low-carbon fuel  








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          production facility requires hundreds of millions of dollars.   
          The market for low-carbon fuels is uncertain due to fluctuations  
          in the petroleum markets, changes in the regulatory landscape,  
          and the inherent uncertainty involved when deploying new  
          technology.  This bill guarantees a market for very low-carbon  
          fuels by requiring the state fuel portfolio to include a minimum  
          share of very low-carbon fuels.  This requirement will give  
          assurance to prospective producers of very low-carbon fuels that  
          there will be a market for them, even if they are not  
          cost-competitive in the short term. 

          Background on state fuel purchases.  The largest state agency  
          purchasers of fuel are the departments of Transportation,  
          Forestry and Fire Protection (CalFIRE), Corrections and  
          Rehabilitation, Water Resources, and Fish and Wildlife.  The  
          state government purchases a significant amount of fuels for its  
          fleet; in FY 2007-08, for example, the state purchased  
          approximately 34 million gallons of gasoline, 11 million gallons  
          of diesel fuel, 327,174 gasoline gallon equivalents of  
          compressed natural gas and propane, and 66,183 gallons of E-85.   
          In 2014, for the third year in a row, California was named the  
          18th "greenest" fleet out of 100 public-sector fleets in North  
          America.  Pursuant to legislative and gubernatorial directives,  
          the Department of General Services has established multiple  
          sustainable fleet policies emphasizing the purchase of more  
          fuel-efficient vehicles and the reduction of petroleum use.

          Narrowly defined.  The state purchases fuel under two types of  
          contracts: bulk fuel purchases and retail fuel purchases (e.g.,  
          using a credit card at a retail gas station).  This bill does  
          not differentiate between the two types, simply requiring 3% of  
          the aggregate amount of transportation fuel purchased by state  
          agencies to be procured from very low-carbon fuel sources.  The  
          very narrow definition of low-carbon fuel in this bill, however,  
          would preclude purchase of some types of fuel, including  
          hydrogen gas and sugar cane ethanol, which tend to be somewhat  
          more readily available through retail purchase.  The definition  
          also precludes electric vehicles.  This bill originally defined  
          eligible fuels as having a maximum of 50% of the CI of the  
          closest comparable petroleum fuel for that year as measured by  
          LCFS methodology, but was amended to 40% in the Assembly Natural  
          Resources Committee in order to preserve the author's intent to  
          promote the development of very low-carbon fuels.

          LCFS a work in progress.  The ARB is currently in the process of  








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          re-adopting the LCFS in the wake of litigation.  The committee  
          may wish to consider whether it is appropriate to establish a  
          separate LCFS mandate for the state fleet even as ARB is  
          re-establishing the LCFS.  
          
          Where will the money come from?  In recognition of the higher  
          costs of very low-carbon fuel, this bill authorizes the  
          Legislature to appropriate GGRF monies to state agencies that  
          buy transportation fuel in order to offset these costs.  The  
          Legislature could alternatively choose to direct other monies,  
          such as General Fund, away from other programs for this purpose.  
           Either would likely require a budget appropriation, meaning  
          that departments might have to redirect funds internally until  
          the budget is passed in order to cover the increased fuel costs.

          Double-referred.  This bill has also been referred to the  
          Environmental Quality Committee.  

          Related Legislation:
          
          AB 1176 (Perea) - would establish the Advanced Low-Carbon Diesel  
          Fuels Access Program to fund low-carbon diesel fueling  
          infrastructure projects in communities that are  
          disproportionately impacted by environmental hazards and where  
          the greatest air quality impacts can be identified. AB 1176 is  
          an urgency bill also being heard by this committee today.

          AB 1992 (Quirk) - would have authorized ARB to establish a very  
          low-carbon fuel market program, in which transportation fuel  
          providers could be required to include in their sales a  
          specified percentage of very low-carbon fuels, defined as having  
          no greater than 50% of the carbon intensity of the closest  
          comparable petroleum fuel.  AB 1992 failed passage in this  
          committee in 2014.

          Assembly Votes:

            Floor:    52-27
            Appr:     12-5
            A&AR:       6-3
            NatRes:     6-3
          
          FISCAL EFFECT:  Appropriation:  No    Fiscal Com.:  Yes     
          Local:  No









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            POSITIONS:  (Communicated to the committee before noon on  
          Wednesday,
                          June 24, 2015.)
          
           SUPPORT:  

          Biodico Sustainable Refineries
          California Biodiesel Alliance
          Coalition for Renewable Natural Gas
          DuPont

          OPPOSITION:

          CalTax



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