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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