BILL ANALYSIS Ó SENATE COMMITTEE ON ENVIRONMENTAL QUALITY Senator Wieckowski, Chair 2015 - 2016 Regular Bill No: AB 692 ----------------------------------------------------------------- |Author: |Quirk | ----------------------------------------------------------------- |-----------+-----------------------+-------------+----------------| |Version: |6/2/2015 |Hearing |7/15/2015 | | | |Date: | | |-----------+-----------------------+-------------+----------------| |Urgency: |No |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant:|Rebecca Newhouse | | | | ----------------------------------------------------------------- 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 AB 692 (Quirk) Page 2 of ? 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 AB 692 (Quirk) Page 3 of ? 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 AB 692 (Quirk) Page 4 of ? 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. AB 692 (Quirk) Page 5 of ? 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 AB 692 (Quirk) Page 6 of ? 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 AB 692 (Quirk) Page 7 of ? 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 AB 692 (Quirk) Page 8 of ? 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. AB 692 (Quirk) Page 9 of ? 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 AB 692 (Quirk) Page 10 of ? 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 AB 692 (Quirk) Page 11 of ? 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 -- END --