BILL ANALYSIS                                                                                                                                                                                                    

                               Senator Wieckowski, Chair
                                  2015 - 2016 Regular
          Bill No:           SB 5
          |Author:    |Vidak                                                |
          |Version:   |12/1/2014            |Hearing      |4/15/2015        |
          |           |                     |Date:        |                 |
          |Urgency:   |Yes                  |Fiscal:      |Yes              |
          |Consultant:|Rebecca Newhouse                                     |
          |           |                                                     |
          Subject:  California Global Warming Solutions Act of 2006:   
          market-based compliance mechanisms:  exemption

          Existing law under the California Global Warming Solutions Act of  
          2006 (CGWSA) (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.

          2.Requires ARB to adopt GHG emissions reductions measures by  
            regulation, and sets certain requirements in adopting the  

          3.Authorizes ARB to adopt a regulation that establishes a system  
            of market-based declining annual aggregate emission limits for  
            sources or categories of sources that emit GHGs, applicable from  
            January 1, 2012, to December 31, 2020, inclusive.

          This bill exempts fuel suppliers from ARB's cap-and-trade program.  


          1.Climate Change Overview.

             There is broad scientific consensus that the climate is warming  


          SB 5 (Vidak)                                            Page 2 of  
             and that much of this warming is due to human activities, with  
             serious implications for California. 

             The 5th assessment report from the Intergovernmental Panel on  
             Climate Change (IPCC) notes that atmospheric concentrations of  
             global warming pollutants have risen to levels unseen in the  
             past 800,000 years.  Carbon dioxide concentrations have  
             increased by 40% since pre-industrial times. 

             These increases have led to a rise of global average surface  
             temperatures of approximately 1.4?F since 1900, with much of  
             this increase occurring after 1970.  Per the latest report by  
             the National Oceanic and Atmospheric Administration (NOAA),  
             2014 was the 38th consecutive year that the global temperature  

             Research indicates that an increase in the global average  
             temperature of 3.6?F above pre-industrial levels, which is only  
             1.1?C (2.0?F) above present levels, poses severe risks to  
             natural systems and human health and well-being. According to  
             the U.S. Environmental Protection Agency, for every 2?F  
             increase in global average temperature, we can expect to see  
             5-15% reductions in crop yields, 3-10 percent increases in  
             rainfall during heavy precipitation events when flood risks are  
             already high, and 200-400% increases in areas burned by  
             wildfires in the western United States. 

             Already, higher temperatures globally have resulted in  
             diminished snow and sea ice, and have caused sea level to rise  
             by nearly eight inches.

             In California, the frequency of extreme events, including heat  
             waves, wildfires, floods, and droughts, are expected to  
             increase.  Higher temperatures and more frequent and severe  
             extreme events will have a range of consequences for public  
             health through impacts to water quality, air quality, and the  
             spread of infectious diseases.

             Current impacts from climate change can be felt in California's  
             ongoing severe drought, the nature of which has likely been  
             worsened due to the record temperatures across the state. 

             Additionally, drought conditions and increased temperatures  
             have facilitated the spread of disease in the state.  West Nile  


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             Virus cases doubled in California last year in large part from  
             increased temperatures and small pools of stagnant  
             water-conditions that result in increased virus production and  
             populations of mosquitoes that spread it.

             For these reasons and others, a major report from the  
             University of College London's Institute for Global Health and  
             the medical journal The Lancet has called climate change the  
             "biggest global health threat of the 21st century." Climate  
             change not only brings about new threats, but is also a  
             magnifier of existing natural hazards.  The impacts to health,  
             infrastructure, hazard response, etc. will come with a  
             financial cost as well.  Additionally, the Pacific Institute  
             estimates that $100 billion worth of property is at risk of  
             flooding during a 100-year flood with 1.4 meters of projected  
             sea level rise, including 55 healthcare facilities, over 330  
             hazardous waste facilities or sites, 30 coastal power plants,  
             and 28 wastewater treatment plants.

             Although global warming is unavoidable, deep and severe cuts in  
             GHG emissions are needed on a global scale to avoid the most  
             severe consequences of a changing climate.

             As the evidence for anthropogenic climate change has mounted  
             over the last few decades, the state has implemented a broad  
             climate portfolio to mitigate global warming impacts by  
             pursuing policies that reduce GHGs.

          2.AB 32: The Global Warming Solutions Act of 2006.

               A.     Overview: In 2006, the Global Warming Solutions Act of  
                 2006, AB 32 (Nez and Pavley), Chapter 488, Statutes of  
                 2006, established a statewide GHG emissions limit by 2020.   
                 AB 32 defines GHGs as carbon dioxide, methane, nitrous  
                 oxide, hydrofluorocarbons, perfluorocarbons, and sulfur  
                 hexafluoride and requires ARB to determine the 1990  
                 statewide GHG emissions level and approve a statewide GHG  
                 emissions limit that is equivalent to that level, to be  
                 achieved by 2020. 

                 AB 32 also requires ARB, among other things, to inventory  
                 GHGs in California, outline a Scoping Plan for achieving  
                 the 2020 GHG emission limit, and implement regulations that  
                 achieve the maximum technologically feasible and  


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                 cost-effective reduction of GHG emissions. 

                 The statute also specifies that ARB may include  
                 market-based compliance mechanisms in the AB 32  
                 regulations, and requires that the market-based compliance  
                 mechanisms maximize additional environmental and economic  
                 benefits for California, as appropriate. 

               B.     Scoping Plan: The Scoping Plan was first approved by  
                 ARB in 2008 and outlined a suite of measures aimed at  
                 achieving 1990-level emissions in 2020.   Average emissions  
                 data in the Scoping Plan broken down by sector reveal that  
                 transportation accounts for almost 40% of statewide GHG  
                 emissions, and electricity and commercial and residential  
                 energy sector account for over 30% of statewide GHG  
                 emissions.  The industrial sector, including refineries,  
                 oil and gas production, cement plants, and food processors,  
                 was shown to contribute 20% of California's total GHG  

          The 2008 Scoping Plan recommended that reducing GHG emissions from  
          the wide variety of sources that make up the state's emissions  
          profile could best be accomplished through a cap-and-trade program  
          along with a mix of other strategies including:

                     the low carbon fuel standard (LCFS); 
                     light-duty vehicle GHG standards;
                     expanding and strengthening existing energy efficiency  
                 programs, and building and appliance standards; 
                     achieving a 33% Renewable Portfolio Standard;
                     regional transportation-related GHG targets; and
                     creating targeted fees on water use and high global  
                 warming potential pollutants. 

            According to ARB's Initial Statement of Reasons (ISOR) in  
            adopting the cap-and-trade regulation, "The cap-and-trade  
            program is a key element of the overall Scoping Plan strategy to  
            scale back California's greenhouse gas emissions to 1990 levels  
            by 2020, reduce our dependence on fossil fuels, stimulate  
            investment in clean and efficient technologies, and improve air  
            quality and public health.

            "By establishing an overall limit on GHG emissions, the program  
            establishes the price signal needed to drive long-term  


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            investment in cleaner and more efficient types of fuels and  
            energy sources, while affording covered entities flexibility to  
            seek out and implement the most cost-effective options to reduce  
            emissions.  The program will also complement and support  
            California's existing efforts to reduce criteria and toxic air  

          1.Background on Cap and Trade.

               A.     Overview: Beginning on January 1, 2013, the  
                 cap-and-trade regulations set a firm, declining cap on  
                 total GHG emissions from sources that make up approximately  
                 85% of all statewide GHG emissions.  Sources included under  
                 the cap are termed "covered" entities.  The cap is enforced  
                 by requiring each covered entity to surrender one  
                 "compliance instrument" for every metric ton of carbon  
                 dioxide equivalent that it emits at the end of a compliance  
                 period.  Over time, the cap declines, resulting in GHG  
                 emissions reductions. Based on the first update to the  
                 Climate Change Scoping Plan, the cap-and-trade program will  
                 be responsible for approximately 30% of the required GHG  
                 emission reductions to meet the AB 32 goal of reducing GHG  
                 emissions to 1990 levels by 2020.

                 Compliance instruments include allowances and offsets,  
                 where allowances are generated by the state in an amount  
                 equal to the cap, and offsets result from emissions  
                 reductions achieved in an uncapped sector and are  
                 quantified and verified using an ARB-approved compliance  
                 offset protocol.  The inclusion of offsets in the  
                 cap-and-trade program is designed to help reduce entities'  
                 compliance costs.  

                 In the first compliance period, the capped sector includes  
                 the electricity and industrial sectors.  Uncapped sectors  
                 throughout the course of the program include small  
                 businesses (with annual emissions under 25,000 metric tons  
                 CO2e), agriculture, and forestry.  In the second compliance  
                 period beginning in 2015, distributors of transportation  
                 fuels, natural gas, and other fuels also come under the  
                 cap.  Once under the cap, an entity covered by the  
                 regulation must periodically submit to ARB allowances  
                 sufficient to match its GHG emissions during the period. 


          SB 5 (Vidak)                                            Page 6 of  
                 ARB is allocating most allowances for free in order to  
                 provide transition assistance and to minimize leakage for  
                 trade-exposed industries (leakage refers to increased GHG  
                 emissions outside California either from entities leaving  
                 the state and producing emissions elsewhere, or by  
                 reduction of economic activity within the state that is  
                 offset by increased production outside the state).  The  
                 remaining allowances (apart from a small amount set aside  
                 in a price containment reserve) are auctioned off. Electric  
                 utilities are provided free allocation of allowances for  
                 the benefit of ratepayers.

               B.     Auction Proceeds:  ARB has conducted seven auctions of  
                 GHG emission allowances so far.  These auctions have  
                 resulted in approximately $950 million in proceeds to the  

                 For the 2014-15 fiscal year, the budget appropriated $832  
                 million from cap-and-trade auction revenue, with the  
                 largest fraction directed to sustainable communities and  
                 clean transportation.  Other categories of funding included  
                 low carbon transportation, energy, natural resources and  
                 water diversion, high-speed rail, and inter-city rail  

                 The current budget year proposal mirrors the previous  
                 years' budget, with the same categorical appropriations (by  
                 percentage) of the estimated GGRF funds ($1.02 million).  

               C.     Future Auction Revenue:  According to the Legislative  
                 Analyst's Office (LAO) February 24th report on the  
                 Governor's Cap and Trade Revenue budget proposal, "The  
                 amount of revenue that future allowance auctions will  
                 generate will depend on the price of allowances and the  
                 number of allowances purchased versus allocated for free.   
                 The price of allowances could range greatly depending on  
                 demand for allowances relative to the cost of directly  
                 reducing GHG emissions, the state of the economy, and other  
                 factors.  ARB has adopted regulations to keep auction  
                 prices within a certain range by setting a minimum and  
                 maximum price for allowances sold at auctions-from $10 per  
                 ton of emissions to $40 per ton of emissions."  The  
                 regulation adjusts both the minimum and maximum auction  
                 allowance prices by 5% plus inflation every year.


          SB 5 (Vidak)                                            Page 7 of  
          1. Purpose of Bill.  

             According to the author, "In 2006 the Legislature passed  
             Assembly Bill 32 'The Global Warming Solutions Act of 2006.'   
             AB 32 set a goal of reducing [GHGs] to 1990 levels by the year  
             2020.  The legislation charged [ARB] with developing and  
             implementing a plan to achieve this 2020 goal.

             "The ARB devised a cap and trade market system to requiring  
             emitters of GHG to purchase carbon credits.  The costs of these  
             credits vary depending on the number of credits available and  
             future demand for these credits.  Over time the ARB will reduce  
             the number of available credits in order to achieve the 2020  
             goal outlined in AB 32, which will increase the cost of these  

             "When drafting their regulations, the ARB decided to phase in  
             different GHG emitters into the cap and trade market over time.  
              Starting in 2013 electricity generation facilities (power  
             plants) and large industrial facilities were required to  
             purchase carbon credits.  Starting in 2015 suppliers of  
             transportation fuels (gasoline and diesel) along with natural  
             gas and propane suppliers will be required to purchase carbon  
             credits to offset GHG emissions.

             "By bringing these fuels under cap and trade system there is a  
             new cost that must be factored into the selling and  
             distribution of gasoline, diesel, natural gas, and propane.   
             The cost to purchase these credits will be passed on to the  
             consumer in the form of higher prices.

             "There is wide variation in how much this regulation will  
             increase the cost of gasoline.  The non-partisan Legislative  
             Analyst Office (LAO) estimates that this policy alone will  
             result in increased gas prices of 13 to 20 cents a gallon, but  
             it can be as high as 50 cents a gallon.  Other estimates put  
             the cost as high as 76 cents a gallon.  This cost would be on  
             top of some of the highest gas prices and taxes that California  
             drivers already pay.

             "Senate Bill 5 would immediately halt the inclusion of  


          SB 5 (Vidak)                                            Page 8 of  
             transportation fuels as well as natural gas and propane in the  
             cap and trade system.  This will result in lower gas prices for  
             hardworking California families that are already struggling to  
             make ends meet."  

          2. What Would Happen to AB 32 Goals? 

             AB 32 tasked ARB with developing a strategy on how to achieve  
             1990 levels by 2020, and the authority to implement that  
             strategy.  Findings and declarations of AB 32 assert the intent  
             of the legislation for ARB is to design emissions reduction  
             measures to meet the statewide emissions limits for GHGs in a  
             manner that minimizes costs and maximizes benefits for  
             California's economy, improves and modernizes California's  
             energy infrastructure and maintains electric system  
             reliability, maximizes additional environmental and economic  
             co-benefits for California, and complements the state's efforts  
             to improve air quality.

             As noted in the background, the cap-and-trade ISOR states that  
             the program was developed to meet these various goals, in  
             conjunction with other GHG regulatory programs, "to scale back  
             California's greenhouse gas emissions to 1990 levels by 2020,  
             reduce our dependence on fossil fuels, stimulate investment in  
             clean and efficient technologies, and improve air quality and  
             public health."  The ISOR also notes that the regulation meets  
             statutory goals, such as cost-effectiveness and consideration  
             of overall societal benefits by establishing a "price signal  
             needed to drive long-term investment in cleaner and more  
             efficient types of fuels and energy sources, while affording  
             covered entities flexibility to seek out and implement the most  
             cost-effective options to reduce emissions." 

             As transportation fuels are responsible for about 40% of the  
             state's GHG emissions, as well as about 80% of the emissions of  
             ozone-forming gases and over 95% of diesel particulate matter,  
             the inclusion of this sector was a critical piece in the design  
             of the program to achieve the directives of AB 32 noted above.   
             As the sector with the largest contributor of GHG emissions in  
             the state, as well as a primary source of other air pollutants,  
             transportation fuels were included (along with other sectors  
             which produce a significant fraction of the state's GHGs such  
             as utilities and industrial facilities) to implement an  
             equitable cap-and-trade program representative of the state's  


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             overall emission profile.  

             Specifically, the inclusion of transportation fuels in the  
             cap-and-trade program in 2015 more than doubled the size of the  
             program, with respect to GHG emissions and the number of  
             allowances.  As emissions reduced from the fuels sector  
             represents such a large fraction of total reduced emissions  
             necessary to meet the 2020 goal, it is unlikely that AB 32  
             goals will be met unless other regulatory changes, including  
             requiring greater reductions from entities that are already  
             covered, are implemented.  

             It is unclear to what extent an additional burden of emission  
             reduction on entities that are already covered will lead to  
             necessary emissions reductions to achieve AB 32 goals, and what  
             actions ARB would take in order to make up the difference, and  
             therefore, the delay of fuels under the cap creates large scale  
             market uncertainty for all participants, compromising the  
             integrity of the program. 

             Is it appropriate to exclude fuels under the cap-and-trade  
             program, subjecting other covered entities to a significantly  
             greater level of financial and regulatory burden, when (1)  
             fuels represent such a signficiant component of GHG emissions  
             in the state, and (2) their exclusion would endanger the  
             ability of California to meet AB 32 goals?  

          3. Gas Price Volatility. 

             The bill is based on the premise that including fuels under the  
             cap will lead to a significant increase in gasoline prices,  
             hurting consumers who are dependent on car travel and least  
             able to absorb gasoline price hikes, disproportionately.  
             However, it is very difficult to estimate any potential price  
             impact from including transportation fuels under the cap.  This  
             value depends on the demand for allowances, the extent of  
             investment by transportation fuel providers in alternative  
             fuels, how much of their compliance obligation is met through  
             offsets or allowances on secondary markets, and other factors. 

             Some estimates from economists put a potential gas price  
             increase anywhere from 10 to 15 cents, assuming that allowances  
             prices will continue to stay near floor prices and that the  
             bulk of those costs will be passed on wholly to consumers.   


          SB 5 (Vidak)                                            Page 10 of  
             LAO, in a letter to Assembly Member Perea on August 4, 2014, in  
             reviewing studies on projected allowance prices under cap and  
             trade, project that by 2020, the price of gasoline will likely  
             be 13 to 20 cents per gallon, with the possibility that the  
             price could exceed 50 cents per gallon.  They note that the  
             actual price will depend on a wide variety of economic,  
             technological and regulatory factors that are difficult to  
             predict.  Severin Borenstein, a member of the market simulation  
             group that published the primary study that LAO analysis was  
             based on, estimated a 9-10 cent increase in gasoline prices in  
             2015 as a result of transportation fuels coming under the cap. 

             In general, gas prices are dependent on a myriad of factors  
             that have created a volatile gasoline market that currently  
             manifests in rapid and large price shifts at the pump.   
             According to the US Energy Information Administration, the  
             statewide average weekly retail price of gasoline in 2012  
             ranged from $3.55 per gallon to $4.71 per gallon; and in 2013,  
             this price ranged from $3.60 per gallon to $4.26 per gallon.   
                  Because of these large fluctuations, which are common with  
             gasoline prices, it is unclear whether an increase in gas  
             prices from cap and trade will be discernable from normal gas  
             price fluctuations. According to LAO, "?even if cap-and-trade  
             leads to a large price increase, it might be difficult to  
             distinguish this increase from other fluctuations in gasoline  
             prices.  For example, a price increase of 60 cents per gallon  
             of gasoline-an increase larger than many of three estimates we  
             reviewed-would be smaller than the difference between the  
             highest and lowest weekly gasoline prices observed in 2013."

             Additionally, LAO stated that their estimates consider what  
             will happen to the price of transportation fuel as a result of  
             being included in the cap and trade program, but they cannot  
             predict what would happen to these prices if, instead of  
             including transportation fuels in cap-and-trade, alternative  
             policies were adopted to meet the AB 32 emission targets.  They  
             state that the alternatives could affect fuel prices increasing  
             them more than cap-and-trade would.

             After months of decline to some of the lowest gas prices seen  
             in the last five years, gasoline prices began steadily  
             increasing in February, but have been declining again since  
             March. As of April 8, 2015, average regular grade gas prices  
             for California were at $3.14, compared to $4.05 a year prior,  


          SB 5 (Vidak)                                            Page 11 of  
             according to AAA's website.

          4. Exempts Other Entities. 

             Transportation fuel providers (including gasoline and diesel  
             fuels) are the primary entities that are phased into the  
             program in 2015, but they do not represent the only types of  
             entities that are covered in the second compliance period.   
             Natural gas suppliers are also covered under the program  
             beginning in 2015. As the bill exempts any entity that did not  
             have a compliance obligation in the first compliance period,  
             natural gas suppliers, in addition to gasoline and diesel fuel  
             providers, would also be exempted from the cap-and-trade  
             regulation by SB 5.  

            Related/Prior Legislation

          SB 1 (Gaines) of 2015 contains very similar provisions to SB 5.   
          SB 1 is currently in the Senate Environmental Quality Committee. 

          AB 69 (Perea) of 2014 exempts entities that did not have a  
          compliance obligation under the cap-and-trade program on January  
          1, 2013, from the program requirements until December 31, 2017.   
          AB 69 (Perea) was held in the Senate Rules Committee.
          SOURCE:                    Author  

          American Refuse
          Central Union School District 
          City of Delano
          City of Hanford 
          City of Lemoore
          City of Reedley 
          Clovis Unified School District 
          Delano Union School District 
          Fairfax School District
          Fresno County Board of Supervisors
          Fresno County Farm Bureau
          Greater Fresno Area Chamber of Commerce 
          Lemoore Chamber of Commerce
          Lemoore Union High School District
          Madera County Board of Supervisors
          Tulare County Board of Supervisors


          SB 5 (Vidak)                                            Page 12 of  
          Western Growers Association

          American Lung Association
          California League of Conservation Voters
          California Electric Transportation Coalition
          California Municipal Utilities Association 
          Catholic Charities, Diocese of Stockton 
          Climate Parents
          Climate Resolve
          Consumers Union
          Environmental Defense Fund
          The Nature Conservancy
          Natural Resources Defense Council

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