BILL ANALYSIS                                                                                                                                                                                                    Ó

                              Senator Jim Beall, Chair
                           2015 - 2016 First Extraordinary

          Bill No:          SBX1 2            Hearing Date:     9/1/2015
          |Author:   |Huff                                                  |
          |Version:  |6/30/2015                                             |
          |Urgency:  |No                     |Fiscal:      |Yes             |
          |Consultant|Erin Riches                                           |
          |:         |                                                      |

          SUBJECT:  Greenhouse Gas Reduction Fund:  transportation  

            DIGEST:  This bill appropriates Greenhouse Gas Reduction Fund  
          (GGRF) monies generated from transportation fuels to  
          transportation infrastructure, excluding high-speed rail.

          AB 32: The Global Warming Solutions Act of 2006

          Existing law (AB 32, Núñez, Chapter 488, Statutes of 2006)  
          requires the state Air Resources Board (ARB) to develop a plan  
          to reduce emissions to 1990 levels by 2020.  It also requires  
          ARB to ensure that programs to reduce greenhouse gas (GHG)  
          emissions are targeted, to the extent feasible, to the most  
          disadvantaged communities in the state.  AB 32 authorizes ARB to  
          deposit any fees paid by GHG emission sources into the GGRF.   
          Existing law (AB 1532, Pérez, Chapter 807, Statutes of 2012)  
          specifies that GGRF revenues must be used to facilitate the  
          achievement of GHG emissions reductions.  

          Existing law specifies that ARB may include market-based  
          compliance mechanisms in the AB 32 regulations, and requires  
          that these mechanisms maximize additional environmental and  
          economic benefits for California, as appropriate.  The Scoping  
          Plan approved by ARB in 2008 outlined a suite of measures aimed  
          at achieving AB 32 goals.  Average emissions data in the Scoping  


          SBX1 2 (Huff)                                       Page 2 of ?
          Plan broken down by sector reveal that transportation accounts  
          for almost 40% of statewide GHG emissions.  The industrial  
          sector, including refineries, oil and gas production, cement  
          plants, and food processors, was shown to contribute 20% of the  
          state's total GHG emissions.

          Background on Cap-and-Trade

          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.  The  
          cap is enforced by requiring each source, known as covered  
          entities, 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.  

          In the first compliance period, the capped sector includes the  
          electricity and industrial sectors.  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, a covered entity must periodically submit to ARB  
          allowances sufficient to match its GHG emissions during the  
          period.  Transportation fuels account for more than half of the  
          allowances sold.

          Cap-and-Trade Auction Revenues

          The 2014-15 budget agreement allocated $832 million in  
          cap-and-trade revenues to a variety of GHG emission-reduction  
          programs.  Beginning in 2015-16, the budget agreement  
          appropriates 25% of GGRF revenues to the state's high-speed rail  
          project, 20% to affordable housing and sustainable communities  
          grants, 10% to intercity rail capital projects, and 5% to  
          low-carbon transit projects.  The remaining 40% of GGRF revenues  
          is available for annual appropriation by the Legislature.  

          This bill appropriates GGRF monies generated from transportation  
          fuels to transportation infrastructure, excluding high-speed  



          SBX1 2 (Huff)                                       Page 3 of ?
          1)Purpose.  The author states that although California's roads  
            are in disrepair, the taxes that drivers pay on fuel are not  
            funding transportation improvements.  The state currently  
            ranks 47th in overall highway performance and 46th in urban  
            congestion.  Highway system repair and maintenance is  
            underfunded by $5 billion annually, while local street repair  
            is underfunded by $1.8 billion per year.  The state faces $59  
            billion in deferred road maintenance.  The author states that  
            this bill ensures that the "cap-and-trade taxes imposed on  
            gasoline" are dedicated to transportation infrastructure, and  
            prevents these funds from being spent on high-speed rail  
            because it is a "contributor to greenhouse gases."

          2)Impact of placing transportation fuels under the cap.  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, inclusion of this sector was a critical piece in the  
            design of the program to achieve the directives of AB 32.  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.  Some  
            critics argue that including fuels under the cap will lead to  
            a significant increase in gasoline prices, disproportionately  
            hurting consumers who are dependent on car travel and least  
            able to absorb gasoline price hikes.  However, it is 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.  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.  

          3)Creating a hole in the high-speed rail budget.  In 2008,  
            California voters approved Proposition 1A, the Safe, Reliable  
            High-Speed Passenger Train Bond Act for the 21st Century  
            (Prop. 1A), which authorized $9 billion in general obligation  
            bonds for the high-speed rail project.  In 2009, the federal  
            government augmented the Prop. 1A bond funding with roughly  
            $3.3 billion; the High-Speed Rail Authority (HSRA) committed  
            to match these federal funds with approximately $2.3 billion  
            in state funding.  Of the $8.8 billion appropriated thus far  


          SBX1 2 (Huff)                                       Page 4 of ?
            for high-speed rail, HSRA spent $950 million through 2013-14  
            and an estimated $917 million in 2014-15.  For 2015-16, HSRA  
            plans to spend $3.0 billion: $1.4 billion in Prop. 1A bond  
            funds, $1.2 billion in federal funds, and $500 million in GGRF  
            revenues.  By removing GGRF monies from the mix, this bill  
            would create a large hole in high-speed rail funding; it is  
            unclear what other funds could fill that hole.  

          4)Nexus issues?  Statute provides that GGRF investments must  
            facilitate the achievement of GHG emissions reductions.   
            Because the term "transportation infrastructure" is quite  
            broad, eligible projects could include projects known to  
            achieve GHG reductions, such as active transportation and  
            public transit (which are already being funded); projects with  
            unclear, even possibly negative GHG impacts, such as  
            congestion relief projects that increase capacity, signal  
            synchronization, grade separations, and road maintenance; and  
            projects that do not appear to achieve any GHG reductions,  
            such as bridge repair and stormwater culvert replacement.  If  
            GGRF revenues are used to fund such projects, the state could  
            leave itself open to litigation if critics perceive a lack of  
            nexus between a project and GHG reductions.

          5)A question of priorities.  There are currently a variety of  
            bills before the Legislature relating to GGRF revenues.  It is  
            difficult to determine what suite of measures best meets the  
            requirements of the GGRF, uses resources most efficiently, and  
            maximizes policy objectives, when bills are scattered across  
            various committees and even in different sessions.  Budget  
            discussions on a cap-and-trade investment strategy provide an  
            opportunity for a comprehensive look at the universe of GGRF  
            proposals.  The committee may wish to consider whether the  
            subject of this bill is more appropriate to the budget  
            discussion than the transportation special session.

          Related Legislation:

          SBX1 3 (Vidak) - would have redirected Prop. 1A bond proceeds to  
          state highways and freeways, and local streets and roads, upon  
          voter approval.  SBX1 3 failed passage in this committee on  
          August 19, 2015.  

          SBX1 6 (Runner) - would prohibit expenditure of GGRF funds on  
          the high-speed rail project and appropriate the majority of GGRF  
          monies to the California Transportation Commission for  


          SBX1 2 (Huff)                                       Page 5 of ?
          allocation to high-priority transportation projects, as  
          specified.  SBX1 6 is also being heard by this committee today.
          SBX1 8 (Hill) - would increase the percentage of GGRF funds from  
          10% to 20% for the Transit and Intercity Rail Capital Program  
          and from 5% to 10% for the Low-Carbon Transit Operations  
          Program.  SBX1 8 is also being heard by this committee today.  

          SB 5 (Vidak) - would have exempted fuel suppliers from ARB's  
          cap-and-trade program.  SB 5 failed passage in the Senate  
          Environmental Quality Committee on April 15, 2015. 

          ABX1 7 (Nazarian) - is identical to SBX1 8 (Hill).  ABX1 7 is  
          pending assignment in the Assembly Rules Committee.

          AB 23 (Nielsen) - was almost identical to SB 5 (Vidak).  AB 23  
          failed passage in the Assembly Natural Resources Committee on  
          March 23, 2015.

          FISCAL EFFECT:  Appropriation:  No    Fiscal Com.:  Yes     
          Local:  No


          POSITIONS:  (Communicated to the committee before noon on  
                       Thursday, August 27, 2015.)

          None received


          None received

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