BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
                              Senator Wieckowski, Chair
                                2015 - 2016  Regular 
           
          Bill No:            AB 692
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          |Author:    |Quirk                                                |
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          |Version:   |6/2/2015               |Hearing      |7/15/2015       |
          |           |                       |Date:        |                |
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          |Urgency:   |No                     |Fiscal:      |Yes             |
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          |Consultant:|Rebecca Newhouse                                     |
          |           |                                                     |
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          SUBJECT:  State agencies: low-carbon transportation fuels.

            ANALYSIS:
          
           Existing law  , under the California Global Warming Solutions Act  
          of 2006 (Health and Safety Code §38500 et seq.): 
          
          1) Requires the California Air Resources Board (ARB) to  
             determine the 1990 statewide greenhouse gas (GHG) emissions  
             level and approve a statewide GHG emissions limit that is  
             equivalent to that level, to be achieved by 2020, and to  
             adopt GHG emission reduction measures by regulation, and sets  
             certain requirements in adopting the regulations. 

          2) Authorizes ARB to include the use of market-based compliance  
             mechanisms in the regulations. 

          3) Requires that before the inclusion of any market-based  
             compliance mechanism, that ARB do all the following: 

             a)    Consider the potential for direct, indirect, and  
                cumulative emission impacts from these mechanisms,  
                including localized impacts in communities that are  
                already adversely impacted by air pollution. 

             b)    Design any market-based compliance mechanism to prevent  
                any increase in the emissions of toxic air contaminants or  
                criteria air pollutants. 

             c)    Maximize additional environmental and economic benefits  







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                for California, as appropriate. 

          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. 

          3) Defines "very low-carbon transportation fuel" as a liquid or  
             gaseous fuel having not more than 40% of the carbon intensity  
             (CI) of the closest comparable petroleum fuel for that year,  
             as specified. 

          4) Authorizes the Legislature to appropriate GGRF moneys 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. 


            Background
          
          1) Cap and trade auction revenue.  ARB has conducted 11  
             cap-and-trade auctions.  The first 10 have generated almost  
             $1.6 billion in proceeds to the state. 

             Several bills in 2012, and one in 2014, provided legislative  
             direction for the expenditure of auction proceeds including: 

                       SB 535 (de Leon, Chapter 830, Statutes of 2012)  
                  requires that 25% of auction revenue be used to benefit  
                  disadvantaged communities and requires that 10% of  
                  auction revenue be invested in disadvantaged  
                  communities. 

                       AB 1532 (J. Perez, Chapter 807, Statutes of 2012)  
                  directs the Department of Finance to develop and  








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                  periodically update a three-year investment plan that  
                  identifies feasible and cost-effective GHG emission  
                  reduction investments to be funded through the GGRF.  AB  
                  1532 specifies that GGRF moneys may be allocated to  
                  reduce GHG emissions through investments including, but  
                  not limited to, development of state-of-the-art systems  
                  to move goods and freight, advanced technology vehicles  
                  and vehicle infrastructure, advanced biofuels, and  
                  low-carbon and efficient public transportation.

                       SB 1018 (Budget and Fiscal Review Committee,  
                  Chapter 39, Statutes of 2012) created the GGRF, into  
                  which all auction revenue is to be deposited.  The  
                  legislation requires that before departments can spend  
                  moneys from the GGRF, they must prepare a record  
                  specifying, among other things, how the expenditures  
                  will be used, and how the expenditures will further the  
                  purposes of AB 32. 

                       SB 862 (Budget and Fiscal Review Committee,  
                  Chapter 36, Statutes of 2014) requires the ARB to  
                  develop guidelines on maximizing benefits for agencies  
                  administering GGRF funds and guidance for administering  
                  agencies on GHG emission reduction reporting and  
                  quantification methods. 

             Legal consideration of cap-and-trade auction revenues.  The  
             2012-13 budget analysis of cap-and-trade auction revenue by  
             the Legislative Analyst's Office noted that, based on an  
             opinion from the Office of Legislative Counsel, the auction  
             revenues should be considered mitigation fee revenues, and  
             their use requires that a clear nexus exist between an  
             activity for which a mitigation fee is used and the adverse  
             effects related to the activity on which that fee is levied.   
             Therefore, in order for their use to be valid as mitigation  
             fees, revenues from the cap-and-trade auction must be used to  
             mitigate GHG emissions or the harms caused by GHG emissions. 

             In 2012, the California Chamber of Commerce filed a lawsuit  
             against the ARB claiming that cap-and-trade auction revenues  
             constitute illegal tax revenue.  In November 2013, the  
             superior court ruling declined to hold the auction a tax,  
             concluding that it's more akin to a regulatory fee.  The  
             plaintiffs filed an appeal with the 3rd District Court of  








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             Appeal in Sacramento in February of last year.

             AB 32 auction revenue investment plan.  The first three-year  
             investment plan for cap-and-trade auction proceeds, submitted  
             by Department of Finance, in consultation with ARB and other  
             state agencies in May of 2013, identified sustainable  
             communities and clean transportation, energy efficiency and  
             clean energy, and natural resources and waste diversion as  
             the three sectors that provide the best opportunities, in  
             that order, for achieving the legislative goals and  
             supporting the purposes of AB 32.  

             Budget allocations.  The 2014-15 Budget allocates $832  
             million in GGRF revenues to a variety of transportation,  
             energy, and resources programs aimed at reducing GHG  
             emissions.  Various agencies are in the process of  
             implementing this funding.  SB 862 (Budget and Fiscal Review  
             Committee), the 2014 budget trailer bill, established a  
             long-term cap-and-trade expenditure plan by continuously  
             appropriating portions of the funds for designated programs  
             or purposes.  The legislation appropriates 25% for the  
             state's high-speed rail project, 20% for affordable housing  
             and sustainable communities grants, 10% to the Transit and  
             Intercity Rail Capital Program, and 5% for low-carbon transit  
             operations.  The remaining 40% is available for annual  
             appropriation by the Legislature. 

             Of that 40%, $15 million was appropriated to California  
             Department of Food and Agriculture to fund agricultural  
             energy and operational efficiency programs, with $12 million  
             directed for financial assistance for the installation of  
             dairy digesters, and $3 million to support deployment and use  
             of renewable natural gas, its analogues, and other low-carbon  
             renewable biofuels derived from agricultural waste, for use  
             in the transportation sector. 

             CalRecycle was also awarded $25 million of GGRF funds in  
             2014-15.  
             They have established multiple programs for some of these  
             funds to reduce GHG emissions through providing financial  
             assistance to expand existing capacity or establish new  
             facilities to process California-generated organic waste  
             through composting or anaerobic digestion to produce  
             low-carbon fuel. 








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             The Governor's 2015-16 Budget proposes increased  
             appropriations of $25 and $60 million, respectively, for the  
             aforementioned CDFA and CalRecycle GGRF programs.

          1) Low Carbon Fuel Standard.  In January 2007, Governor  
             Schwarzenegger issued Executive Order S-01-07 in which he  
             ordered the establishment of a statewide goal of reducing the  
             carbon intensity (CI) of California's transportation fuels by  
             at least 10% by 2020 and ordered ARB to establish a  
             low-carbon fuel standard (LCFS) for the state.

             The ARB adopted the LCFS regulation in April 2009, and it  
             took full effect a year later.  In May 2009, the ARB adopted  
             its AB 32 Scoping Plan to map out how to achieve the  
             reduction in GHG emissions by 2020, as required by AB 32.   
             The Scoping Plan included the LCFS as an early action measure  
             and projected the program to result in 15 million metric tons  
             (MMT) of emissions reductions, or about 20% of the GHG  
             emissions reductions needed to reach the 2020 GHG emissions  
             target of 427 MMT.

             The ARB staff designed the LCFS to reduce GHG emissions by  
             reducing the CI of transportation fuels used in California by  
             an average of 10% by the year 2020.

             The LCFS achieves a 10% reduction in average CI by  
             establishing an initial
             intensity level for specified providers of transportation  
             fuels ("regulated parties") and incrementally lowering the  
             allowable CI in each subsequent year.

             For example, modest targeted reductions of 0.5 and 1.0% are  
             required for 2012 and 2013, respectively.  The reductions  
             become more substantial with each year, such that by 2020,  
             the 10% average reduction is achieved.  This reduction makes  
             room for low-CI fuels to enter the market.  A regulated party  
             needs to meet each year's specified target, taking into  
             account all of its transportation fuels.  If the reduction in  
             intensity exceeds the target, the provider earns a credit,  
             which can be sold or carried forward.  The LCFS allows fuels  
             like electricity, hydrogen, and natural gas, which already  
             meet the CI standards through 2020, to generate LCFS credits  
             that may be sold.  Regulated fuel providers, therefore, can  








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             meet their annual CI levels through several compliance  
             strategies: making low-GHG fuels, such as biofuels made from  
             waste products; carrying forward credits from previous years  
             from their own production process; buying credits from other  
             fuel producers; or reducing the amount of fuel they sell.  A  
             fuel provider meets the requirements of the LCFS if the  
             amount of credits at the end of the year is equal to, or  
             greater than, the deficits.  A provider determines its  
             credits and deficits based on the amount of fuel sold, the CI  
             of the fuel, and the efficiency by which a vehicle converts  
             the fuel into useable energy.  Under the LCFS, a regulated  
             party's compliance with the annual CI requirements is based  
             on end-of-year credit/deficit balancing.

             The CI requirement has been frozen at 1% since 2013 as a  
             result of litigation, but the ARB plans to re-adopt the LCFS  
             this year.  After re-adoption, the CI will begin to decrease  
             toward the 10% reduction required by 2020.

             Carbon intensity.  Carbon intensity (CI) is a measure of the  
             direct and indirect
             GHG emissions associated with each of the steps in the full  
             life-cycle of a transportation fuel (also referred to as the  
             "well-to-wheels" for fossil fuels, or "seed or  
             field-to-wheels" for biofuels).  The overall GHG contribution  
             from each particular step in the production and delivery  
             process is a function of the energy that step requires.   
             Thus, if a fuel that requires little energy to create, and  
             produces low carbon emissions when consumed, has to be  
             transported significant distances for use, it may still have  
             a high life-cycle CI because of the high energy requirements  
             of transport.

             For each fuel pathway, the LCFS requires the analysis of both  
             direct effects and indirect effects when determining the CI  
             of the fuel:

                           Direct effects: Direct effects take into  
                    account farming practices (e.g., frequency and type of  
                    fertilizer used), crop yields, harvesting practices,  
                    transportation of the feedstock, the type of fuel  
                    production process used, its efficiency and fuel use,  
                    the value of co-products generated, and the transport  
                    and distribution of the fuel.  Biofuels that are  








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                    energy-intensive to produce and distribute will have  
                    higher CI values and be of less value when complying  
                    with the LCFS standards.

                           Indirect effects: An indirect effect that  
                    generates significant quantities of GHGs is land use  
                    change.  A land use change effect is initially  
                    triggered by a significant increase in the demand for  
                    a crop-based biofuel.  For example, 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 impact results.  The specific impact  
                    consists of the carbon released into the atmosphere  
                    from the lost cover vegetation and disturbed soils in  
                    the periods following the land use conversion. 

             These direct and indirect effects currently factored into the  
             LCFS program result in ethanol produced from food having a  
             significantly higher CI value than biofuels produced from  
             waste products or other types of fuels that are not crop or  
             fossil fuel based. 

            Comments
          
          1) Purpose of Bill.  According to the author, "Several promising  
             technologies, including hydrogen, cellulosic ethanol,  
             renewable natural gas, renewable diesel, biodiesel or  
             advanced bio-based hydrocarbons have shown the potential to  
             substantially reduce the state's GHG emissions and its  
             dependence on petroleum.  AB 692 will assist in meeting the  
             State's needs to reduce GHG emissions by reducing the use of  
             traditional petroleum fuels by agencies and departments.   
             This bill will provide a market for advanced low carbon fuels  
             is uncertain and facilitating private capital is needed to  
             support the advancement of these technologies."

          2) State fuel purchases.  The largest state agency purchasers of  
             fuel are from the State Transportation Agency, Forestry and  
             Fire Protection (CalFIRE), Department of Corrections and  
             Rehabilitation, Department of Water Resources, and the  








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             Department of Fish and Wildlife.  The state government  
             purchases a significant amount of fuels for its fleet; in  
             fiscal year 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  
             85% ethanol blends. 

          3) What fuels are we talking about?  Biofuels, or alternative  
             fuels, can be produced using various feedstock and  
             technologies.  The most common biofuels include ethanol  
             produced from sugar or the starch portion of plants (e.g.  
             corn, sugarcane, and sugar beets).  Ethanol can also be  
             produced from lignocellulosic materials, such as green and  
             agricultural waste products, and when produced in this way,  
             is termed cellulosic ethanol.  The commercialization of  
             cellulosic ethanol has been constrained due to technical  
             barriers including high costs of pretreatment, necessary  
             biochemical catalysts and conversion processes.  The US EPA  
             recently lowered the amount of cellulosic ethanol required in  
             2013 to meet the federal Renewable Fuels Standard mandate for  
             cellulosic ethanol from 6 million gallons to just over  
             800,000 gallons. 

             Another type of biofuel, biodiesel, is produced from used  
             cooking oil, corn oil by-product, or tallow.  The primary  
             challenge of scaling up biodiesel production is the  
             availability of cropland for oil production to produce enough  
             biodiesel that would significantly replace fossil fuel  
             consumption.  Other low-carbon biofuels include renewable  
             gas, or biomethane, from the breakdown of organic matter in  
             anaerobic conditions, which can be substituted in place of  
             fossil fuel natural gas.

             Very low carbon fuels, as defined in AB 692, capture liquid  
             or gaseous transportation fuels having no greater than 40%  
             the carbon intensity of the closest comparable petroleum fuel  
             for that year, as measured by LCFS Regulation.  According to  
             the ARB, approved fuel and production pathways that would  
             qualify as very low carbon fuels under the bill include  
             renewable diesel produced from used cooking oil, corn oil  
             by-product, tallow, or fish oil, and biomethane from  
             landfills, dairy digesters, and food and green waste  
             digesters.








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             Fuels at or below 50% the carbon intensity of comparable  
             petroleum fuels made up approximately 1% of the total volume  
             of fuels produced in 2013.

          4) Below a threshold, different fuels count the same.  As noted  
             above, there are many different types of feedstock and  
             various technologies to produce alternative fuels, which all  
             contribute to the ultimate carbon intensity of the fuel.  For  
             example, certain renewable diesels from tallow have a CI of  
             around 39% compared to conventional diesel, whereas certain  
             local, waste-based fuels, such as biomethane derived from  
             anaerobic digestion of food waste, can have a CI close to  
             zero (or even a negative value, indicating a net reduction of  
             carbon from burning the fuel).  Under this bill, any "very  
             low carbon fuel," defined as having a CI value less than or  
             equal to 40% of the closest comparable petroleum fuel, would  
             count the same toward state agencies' procurement obligation.  
              

             Instead of treating all "very-low carbon fuels" identically,  
             the bill could set CI-based targets for state agency fuel  
             procurements, in order to provide incentives for purchasing  
             the lowest CI fuel available (and not just fuels that have a  
             CI at or less than 40% of the gasoline or diesel baseline  
             CI).  However, implementation of that approach may be more  
             complicated, in terms of accounting and tracking, then the  
             approach laid out in AB 692 where a defined set of fuels  
             qualify under the bill, and state agencies are simply  
             required to procure a known quantity of those fuels. 

          5) Closest comparable petroleum fuel.  AB 692 defines "very low  
             carbon transportation fuel" to mean a liquid or gaseous  
             transportation fuel having no greater than 40% the carbon  
             intensity of the closest comparable petroleum fuel for that  
             year.  This definition is ambiguous regarding what baseline  
             low carbon fuels would be compared to in order to qualify  
             under this definition.  Does "closest comparable petroleum  
             fuel" refer to the emissions, the composition, the use, or  
             other characteristics of the fuel?  Natural gas, although a  
             fossil fuel, is not considered a petroleum-based fuel.  Would  
             renewable natural gas be compared to fossil fuel natural gas,  
             or a petroleum product?  Would fuel blends, with a  
             significant fraction primarily of a petroleum-based fuel, be  








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             considered a "closest comparable petroleum fuel" for the  
             purposes of this definition?

             Should this bill move forward, the author should work to  
             clarify this definition. 

          6) Use of GGRF.  In recognition of the higher costs of very low  
             carbon fuel, this bill authorizes the Legislature to  
             appropriate GGRF moneys to state agencies that buy  
             transportation fuel in order to offset these costs. 

             GGRF investments must facilitate the achievement of GHG  
             emissions reductions.  However, after that requirement is  
             fulfilled, there are number of other policy goals that should  
             be considered, including benefits to environmental quality,  
             resource protection, public health and the economy, as well  
             as benefits to disadvantaged communities.  And although the  
             fund is growing, it is still a limited source of revenue.  In  
             order to create an optimized investment strategy from GGRF  
             moneys, proposals should not be considered in isolation, but  
             be assessed in aggregate to determine what suite of measures  
             best meets the requirements of the fund, uses resources most  
                                                                                  efficiently, and maximizes policy objectives. 

             As budget discussions on a cap-and-trade investment strategy  
             have been pushed to later this year, an opportunity exists to  
             have a comprehensive discussion on the universe of GGRF  
             proposals currently in the Legislature, during budget  
             negotiations this summer.  If the Legislature feels that the  
             program established through AB 692 is an appropriate  
             expenditure of GGRF moneys, then this measure should also be  
             considered through the budget process for cap-and-trade  
             expenditures, along with all other measures proposing to  
             expend, or authorize for expenditure, GGRF moneys.

            Related/Prior Legislation

          AB 1176 (Perea) of 2015 would establish the Advanced Low-Carbon  
          Diesel Fuels
          Access Program to fund low-carbon diesel fueling infrastructure  
          projects in disadvantaged communities.  AB 1176 will be heard by  
          the Senate Environmental Quality Committee on July 15, 2015.  

            AB 1992 (Quirk) of 2014 would have authorized ARB to establish a  








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          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.  AB 1992 failed  
          passage in the Senate Transportation and Housing Committee.  
           
          DOUBLE REFERRAL:  

          This measure was heard in Senate Transportation and Housing  
          Committee on June 30, 2015, and passed out of committee with a  
          vote of 8-2.
           
           SOURCE:                    Author  

           SUPPORT:               

          Biodico Sustainable Biorefineries
          California Biodiesel Alliance
          Clean Energy
          Coalition for Renewable Natural Gas
          DuPont  
           Sacramento Municipal Utility District
           
           OPPOSITION:    

          CalTax
                                          
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