BILL ANALYSIS Ó
AB 720
Page 1
Date of Hearing: April 27, 2015
ASSEMBLY COMMITTEE ON NATURAL RESOURCES
Das Williams, Chair
AB 720
(Cooley) - As Introduced February 25, 2015
SUBJECT: California Global Warming Solutions Act of 2006:
market-based compliance mechanisms
SUMMARY: Revises the cap-and-trade regulation adopted by the
Air Resources Board (ARB) to (1) eliminate the limit on
greenhouse gas (GHG) emission allowances that may be held by any
covered entity ("holding limit") and (2) require ARB to set a
price cap on any allowances auctioned by ARB.
EXISTING LAW, pursuant to the California Global Warming
Solutions Act (AB 32):
1)Requires ARB to adopt a statewide GHG emissions limit
equivalent to 1990 levels by 2020 and to adopt rules and
regulations to achieve maximum technologically feasible and
cost-effective GHG emission reductions.
2)Authorizes ARB to permit the use of market-based compliance
mechanisms to comply with GHG reduction regulations, once
specified conditions are met. ARB has adopted a cap-and-trade
regulation which applies to regulated entities engaged in
stationary combustion, cement manufacturing, cogeneration,
petroleum refining, hydrogen production, aluminum production,
AB 720
Page 2
facility operators calcining carbonates, carbon dioxide (CO2)
supplier or transfer recipient, electricity generation, glass
production, iron and steel production, lime production,
natural gas transmission and distribution, nitric acid
production, oil and gas extraction field operation, production
of industrial gases, pulp and paper production, soda ash
production, electricity deliverers, transportation fuel
deliverers, and natural gas deliverers. The cap-and-trade
regulation has covered (i.e., imposed a compliance obligation
on) large industrial facilities and electricity generators
emitting more than 25,000 metric tons of CO2 equivalent per
year since January 1, 2013. Distributors of fuels, including
gasoline, diesel and natural gas, have been covered since
January 1, 2015. The regulation includes a "holding limit" on
allowances any one covered entity may hold and a price
containment reserve to mitigate the price of allowances
auctioned by ARB.
THIS BILL:
1)Eliminates the holding limit adopted by ARB in Section 95920
of the cap-and-trade regulation by requiring ARB to allow
covered entities to freely sell or transfer GHG allowances
held in a holding account or compliance account, except for
allowances retired to meet a compliance obligation.
2)Requires ARB to set a price cap on any allowance offered for
purchase through ARB.
3)Requires ARB to adopt regulations to implement these
requirements by June 30, 2016 and exempts the regulations from
the Administrative Procedure Act and the California
Environmental Quality Act.
4)Defines terms for purposes of the bill and makes related
AB 720
Page 3
findings and declarations.
FISCAL EFFECT: Unknown
COMMENTS:
1)Background. According to ARB's cap-and-trade regulation
(Section 95920), "(t)he holding limit is the maximum number of
California GHG allowances that may be held by an entity or
jointly held by a group of entities with a direct corporate
association?at any point in time." The formula for
calculating the holding limit takes up to six pages of the
430-page regulation. The basic purpose of the holding limit
is to prevent large entities from hoarding allowances and
manipulating the market. The holding limit is one of the
primary tools available to ARB for discouraging and preventing
manipulation and market power. Critics contend that the
holding limit could harm liquidity in the allowance market and
restrict efficient trades (by inducing covered entities to
move allowances into their compliance accounts, from which the
allowances can't be traded).
Expert economists have suggested revisions to the holding
limit, such as focusing on the holdings of a firm relative to
its compliance obligation rather than a single holding limit.
This bill would eliminate the holding limit and instead
require ARB to set a price cap. In the current regulation,
ARB proposes to mitigate price spikes by maintaining an
allowance price containment reserve where a finite number of
allowances may be sold to market participants at a fixed
price.
According to GHG emissions data reported to ARB, the following
entities have compliance obligations in excess of the holding
AB 720
Page 4
limit (figures are reported 2013 GHG emissions in metric
tons):
Southern California Gas Company - 45,807,966
Pacific Gas and Electric Company - 43,506,493
Tesoro Refining and Marketing - 41,295,452
Chevron Products Company - 33,341,224
Phillips 66 Company - 19,509,963
Valero Marketing and Supply Company - 14,659,973
BP West Coast Products - 14,293,378
1)Author's statement:
Cap-and-trade regulations currently establish a holding
limit. The holding limit is set relative to the size of the
cap of the program. It does not consider the compliance
obligation of the participating entity.
Entities that have significant operations in California
have compliance obligations that exceed the holding limit.
To remain in compliance, these large facilities must
transfer allowances from their holding account into their
compliance account. Once transferred, allowances cannot be
AB 720
Page 5
removed from the compliance account. As a result, the
allowances must be held in the compliance account until
they are retired by ARB. This effectively makes the market
even smaller - and even more subject to manipulation.
The (allowance price containment) reserve allows the ARB to
auction allowances at certain prices to mitigate
significant supply and demand imbalance that could cause
market volatility. Significant concerns have been raised,
however, regarding the ability of the reserve to mitigate a
significant imbalance. The rapidly increasing allowance
costs that could result from the reserve's inability to do
so would negatively impact obligated parties under the
program and challenge the program's long term viability.
REGISTERED SUPPORT / OPPOSITION:
Support
California Manufacturers & Technology Association (sponsor)
California Chamber of Commerce
California Independent Oil Marketers Association
Coalition for Sustainable Cement Manufacturing & Environment
National Federation of Independent Business
AB 720
Page 6
Western States Petroleum Association
Opposition
American Lung Association
Bay Area Air Quality Management District
Environmental Defense Fund
National Parks Conservation Association
Natural Resources Defense Council
Analysis Prepared by:Lawrence Lingbloom / NAT. RES. / (916)
319-2092
AB 720
Page 7