BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 692 (Quirk) - Low-carbon transportation fuels. ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: June 2, 2015 |Policy Vote: T. & H. 8 - 2, | | | E.Q. 5 - 2 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 17, 2015 |Consultant: Marie Liu | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 692 would require state agencies to procure at least three percent of their total aggregate transportation fuels from very low carbon transportation fuel sources by January 1, 2017, with the amount to increase by one percent annually until January 1, 2024. Fiscal Impact: Unknown costs to the General Fund and various special funds, including the Greenhouse Gas Reduction Fund (GGRF), for increased fuel prices. Unknown costs, but potentially minor, to the General Fund and various special funds to the Department of General Services (DGS) to manage fuel purchases to meet the purchase requirements. Potential costs up to $175,000, but likely minor, to the Cost of Implementation Account (special) to the Air Resources Board AB 692 (Quirk) Page 1 of ? (ARB) to assist state agencies with compliance with the purchase requirements. Background: 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 that was designed to reduce the CI of transportation fuels by 10% by 2020. 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 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 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 AB 692 (Quirk) Page 2 of ? 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 in September this year. AB 236 (Lieu) Chapter 593, Statutes of 2007 established the goal of reducing or displacing the consumption of petroleum products by the state fleet compared to the 2003 consumption levels by 10 percent by 2012 and 20 percent by 2020. According to DGS's 2015 progress report for this requirement, the state fleet has surpassed the 2012 target of 10% and is on pace to meet or exceed the 2020 20% target. Proposed Law: This bill would require that at least three percent of the state agencies aggregated fuel purchases to be from very low carbon (VLC) transportation fuel sources beginning on January 1, 2017. This minimum requirement would increase by one percent every year until it reaches 10% in January 1, 2024. DGS would be required to coordinate with state agencies that buy transportation fuel and to report to the Legislature on actions taken pursuant to this requirement. The bill would define VLC transportation fuel as a liquid or gaseous transportation fuel having no greater than 40 percent of the carbon intensity of the closest comparable petroleum fuel for that area as measured by ARB's low-carbon fuel standard regulation. The bill would explicitly allow the Legislature to appropriate money from the Greenhouse Gas Reduction Fund (GGRF) to offset any increased costs resulting from the purchase of VLC transportation fuel. AB 692 (Quirk) Page 3 of ? Staff Comments: DGS administrative costs: State agencies buy transportation fuel through retail and bulk purchases. Bulk fuel purchases are made through contracts negotiated by DGS. As DGS already coordinates the bulk purchases of fuel, ensuring that sufficient bulk purchases are made from VLC transportation fuels is unlikely to add workload to DGS. Retail purchases, on the other hand, would require additional workload for both DGS and individual agencies to manage. However, as approximately 50% of the state's transportation fuel is purchased in bulk according to DGS, the requirements of this bill are likely to be met with bulk purchases only, avoiding complications and costs associated with managing retail sales. Fuel costs: This bill may also have costs to the extent that there is a price difference between VLC fuels and comparable petroleum fuel. As the price of both VLC fuels and petroleum fuels are constantly changing, this fuel cost is unknown. Staff notes that the state bought over 32 million gallons of petroleum fuels in 2012 so a small difference in price, say ten cents per gallon, could change state fuel costs by hundreds of thousands of dollars. A difference of fifty cents per gallon would bring the difference into the millions of dollars. Staff notes that the price of VLC transportation fuel may also depend on the supply availability and the number of suppliers. The simplest and least expensive way for state agencies to comply with this bill's requirement is to increase the use of renewable diesel because it can be used interchangeably with petroleum diesel. ARB has preliminary estimates that here are two suppliers of renewable diesel that can supply necessary fuel volumes for the state. There are additional suppliers of biodiesel, though not all biodiesel fit the bill's definition of a VLC transportation fuel. While ARB expects other suppliers to be created as demand increases, staff notes that a small number of suppliers may limit the ability of the state to negotiate on the price of VLC fuels especially as the as the suppliers will know that the state is under a mandated purchase requirements. Staff notes that there are no "off ramp" provisions of the bill AB 692 (Quirk) Page 4 of ? that would allow for a modification or a release of the purchase requirement should there be substantial price differentials in fuel costs or supply issues. The bill would allow GGRF to be used to offset any increased costs upon appropriation by the Legislature. If such an appropriation is not made, the costs would come from the General Fund and various special funds. Staff notes that there are multiple bills being considered by both houses of the Legislature that propose projects that would be eligible to receive GGRF funds. It is unclear how these bills will interact with each other. Staff notes that a discussion on the spending of GGRF is anticipated in August as part of a budget discussion. New Vehicle, retrofit, and infrastructure costs: The cost of switching to VLC fuels could be larger if such a switch would necessitate retrofits to vehicles or new vehicle purchases. The state is likely to be able to meet the bill's requirements simply by purchasing more renewable diesel, which, as mentioned above, can be used interchangeably with petroleum diesel. However, should the state need to use other VLC fuels, such as natural gas, the state could incur costs to purchase new vehicles, retrofit existing vehicles, or to build infrastructure allow the use of other VLC transportation fuels. Potential costs to the ARB: ARB believes that it may have costs associated with the implementation of this bill in order to assist other state agencies in developing compliance strategies as compliance with the bill will require CI calculations. ARB estimates $175,000 in costs annually for one Air Resources Engineer from the Cost of Implementation Account (special). While ARB may be consulted for assistance, staff notes that ARB already assigns a CI to all fuels sold in the state as part of the LCFS program so limited assistance may be needed. Also, this bill's purchase requirement is on the aggregate amount of transportation fuel bought by the state. As such, compliance could be achieved with purchases made by just a few agencies, minimizing the number of agencies that may request ARB assistance. AB 692 (Quirk) Page 5 of ? This bill requires DGS to submit a report on the progress in meeting this bill's requirements. Staff recommends that this report be combined with the AB 236 report. -- END --