BILL ANALYSIS Ó
SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
Senator Wieckowski, Chair
2015 - 2016 Regular
Bill No: SB 5
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|Author: |Vidak |
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|Version: |12/1/2014 |Hearing |4/15/2015 |
| | |Date: | |
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|Urgency: |Yes |Fiscal: |Yes |
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|Consultant:|Rebecca Newhouse |
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Subject: California Global Warming Solutions Act of 2006:
market-based compliance mechanisms: exemption
ANALYSIS:
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
regulations.
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.
Background
1.Climate Change Overview.
There is broad scientific consensus that the climate is warming
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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
increased.
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 (Núñez 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
emissions.
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
pollutants."
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.
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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
state.
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
priorities.
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.
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Comments
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
credits.
"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
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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.
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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,
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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
SUPPORT:
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
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Western Growers Association
OPPOSITION:
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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