BILL ANALYSIS Ó SENATE COMMITTEE ON ENVIRONMENTAL QUALITY Senator Wieckowski, Chair 2015 - 2016 Regular Bill No: SB 706 ----------------------------------------------------------------- |Author: |Pavley | ----------------------------------------------------------------- |-----------+-----------------------+-------------+----------------| |Version: |4/6/2015 |Hearing | 4/29/15 | | | |Date: | | |-----------+-----------------------+-------------+----------------| |Urgency: |No |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant:|Rebecca Newhouse | | | | ----------------------------------------------------------------- SUBJECT: Greenhouse Gas Reduction Fund: alternative fuels ANALYSIS: Existing law: 1. Under the California Global Warming Solutions Act of 2006 (also known as AB 32), 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, and to adopt GHG emissions reductions measures by regulation. ARB is authorized to include the use of market-based mechanisms to comply with these regulations. (Health and Safety Code §38500 et seq.) 2. Establishes the Greenhouse Gas Reduction Fund (GGRF) in the State Treasury, and requires all moneys, except for fines and penalties, collected pursuant to a market-based mechanism be deposited in the fund. (Government Code §16428.8) 3. Prohibits the state from approving allocations for a measure or program using GGRF moneys except after determining that the use of those moneys furthers the regulatory purposes of AB 32, and requires moneys from the GGRF be used to facilitate the achievement of reductions of GHG emissions in California. (HSC §39712) 4. Specifies that GGRF moneys may be allocated to reduce GHG SB 706 (Pavley) Page 2 of ? emissions through investments including, but not limited to, development of state-of-the-art systems to move goods and freight, advanced technology vehicles and vehicle infrastructure, advanced biofuels, and low-carbon and efficient public transportation. (HSC §39712) This bill: 1. Makes legislative declarations and findings relating to the need to support low-carbon fuels production that boosts supply and diversity and provide energy security. 2. Requires that GGRF moneys be available to encourage the in-state production of alternative fuels with low-carbon intensity from new and existing facilities using sustainable feedstock, with preference given to disadvantaged communities. Background 1.Use of Cap and Trade Auction Revenue. ARB has conducted ten cap-and-trade auctions, generating almost $1.6 billion in proceeds to the state. Several bills in 2012, and one in 2014, provide legislative direction for the expenditure of auction proceeds including SB 535 (De León), Chapter 830, Statutes of 2012, AB 1532 (J. Pérez), Chapter 807, Statutes of 2012, SB 1018 (Budget Committee), Chapter 39, Statutes 2012, and SB 862 (Budget Committee), Chapter 36, Statutes of 2014. SB 535 (De León), Chapter 830, Statutes of 2012, requires that 25% of auction revenue be used to benefit disadvantaged communities and requires that 10% of auction revenue be invested in disadvantaged communities. AB 1532 (J. Pérez), Chapter 807, Statutes of 2012, directs the Department of Finance to develop and periodically update a three-year investment plan that identifies feasible and cost-effective GHG emission reduction investments to be funded SB 706 (Pavley) Page 3 of ? with cap-and-trade auction revenues. AB 1532 requires moneys from the fund facilitate the achievement of GHG emissions reductions. SB 1018 (Budget Committee), Chapter 39, Statutes of 2012, created the GGRF, into which all auction revenue is to be deposited. The legislation requires that before departments can spend moneys from the GGRF, they must prepare a record specifying: (1) how the expenditures will be used, (2) how the expenditures will further the purposes of AB 32 (Núñez, Pavley), Chapter 488, Statutes of 2006, (3) how the expenditures will achieve GHG emission reductions, (4) how the department considered other non-GHG-related objectives, and (5) how the department will document the results of the expenditures. SB 862 (Budget Committee), Chapter 36, Statutes of 2014, requires the ARB to develop guidelines on maximizing benefits for disadvantaged communities by agencies administering GGRF funds, and guidance for administering agencies on GHG emission reduction reporting and quantification methods. Legal consideration of cap-and-trade auction revenues: The 2012-13 budget analysis of cap-and-trade auction revenue by the Legislative Analyst's Office noted that, based on an opinion from the Office of Legislative Counsel, the auction revenues should be considered mitigation fee revenues, and their use requires that a clear nexus exist between an activity for which a mitigation fee is used and the adverse effects related to the activity on which that fee is levied. Therefore, in order for their use to be valid as mitigation fees, revenues from the cap-and-trade auction must be used to mitigate GHG emissions or the harms caused by GHG emissions. In 2012, the California Chamber of Commerce filed a lawsuit against the ARB claiming that cap-and-trade auction revenues constitute illegal tax revenue. In November 2013, the superior court ruling declined to hold the auction a tax, concluding that it is more akin to a regulatory fee. AB 32 auction revenue investment plan: The first three-year investment plan for cap-and-trade auction proceeds, submitted by Department of Finance, in consultation with ARB and other state agencies in May of 2013, identified sustainable communities and clean transportation as one of the key sectors that provide the SB 706 (Pavley) Page 4 of ? best opportunities for achieving the legislative goals and supporting the purposes of AB 32. The plan recommended the aforementioned sector receive the largest allocation of funds from the GGRF, but did not specify a monetary amount. Budget allocations: The 2014-15 Budget allocates $832 million in GGRF revenues to a variety of transportation, energy, and resources programs aimed at reducing GHG emissions. Various agencies are in the process of implementing this funding. The budget agreement specifies how the state will allocate most cap-and-trade auction revenues in 2015-16 and beyond. For all future revenues, the legislation appropriates 25% for the state's high-speed rail project, 20% for affordable housing and sustainable communities grants, 10% to intercity capital rail projects, and 5% for low-carbon transit operations. The remaining 40% is available for annual appropriation by the Legislature. Of that 40%, $15 million was appropriated to California Department of Food and Agriculture to fund agricultural energy and operational efficiency programs, with $12 million directed for financial assistance for the installation of dairy digesters, and $3 million to support deployment and use of renewable natural gas, its analogues, and other low-carbon renewable biofuels derived from agricultural waste, for use in the transportation sector. CalRecycle was also awarded $25 million of GGRF funds in 2014-15. They have established multiple programs for some of these funds to reduce GHG emissions through providing financial assistance to expand existing capacity or establish new facilities to process California-generated organic waste through composting or anaerobic digestion to produce low-carbon fuel. The Governor's proposed 2015-16 cap-and-trade expenditures are largely the same as the 2014-15 plan, albeit with larger amounts proposed allocations for programs with continuous appropriations. 2. Low-Carbon Fuel Standard. The LCFS requires the reduction of the carbon intensity (CI) SB 706 (Pavley) Page 5 of ? of transportation fuels used in California by an average of 10% by 2020. CI is a measure of the direct and indirect GHG emissions associated with each of the steps in the full lifecycle of a transportation fuel. According to the 2008 Scoping Plan, the LCFS is projected to result in 15 MMTCO2e of the 80 MMTCO2e of emissions reductions needed to reach the 2020 GHG emissions reductions goal. A party's overall CI for its transportation fuels needs to meet each year's specified CI level target. If the reduction in intensity exceeds the target, the provider earns a credit, which can be sold or carried forward. Providers of clean fuels that meet the 2020 target are exempt from the regulation but can opt in to earn credits. Regulated fuel providers can meet their annual CI levels by making low-GHG fuels, 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. 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% were required for 2012 and 2013, respectively. The reductions become more substantial with each year, such that by 2020, the 10% average reduction will be achieved. This reduction makes room for low-CI alternative fuels to enter the market. 3. AB 118. AB 118 (Núñez), Chapter 750, Statutes of 2007, created the Alternative and Renewable Fuels and Vehicle Technology Program (ARFVTP) program. AB 118 provides, upon appropriation by the Legislature, approximately $100 million annually for the ARFVT program until 2024. These funds primarily come from additional fees on vehicle registrations and vessel registrations. The program requires the California Energy Commission (CEC) to implement the Alternative and Renewable Fuels and Vehicle Technology Program (ARFVTP) to provide funding measures to specified entities to develop and deploy technologies and SB 706 (Pavley) Page 6 of ? alternative and renewable fuels in the marketplace, without adopting any one preferred fuel or technology, to help attain the state's climate change policies. The CEC is required to develop an investment plan for the program in consultation with an advisory committee. Specifically, the CEC specifies their $100 million budget supports the development of alternative and renewable low-carbon fuels, optimization of alternative and renewable fuels for existing and developing engine technologies, production of alternative and renewable low-carbon fuels in California and projects that decrease, on a full fuel cycle basis, the overall impact and carbon footprint of alternative and renewable fuels and increase sustainability. The 2014-15 Investment Plan update proposed funding for the alternative fuel production category, including biomethane, gasoline and diesel substitutes, of $20 million, and $20 million for hydrogen fueling infrastructure. Comments 1. Purpose of Bill. According to the author, "In his January state of the state address, the Governor outlined three key climate goals to help California achieve our overarching climate polices: 50% generation from renewable resources, up to 50% petroleum reduction from fuels, and doubling of energy efficiency in buildings. "As we have seen during the early months of 2015, California is still vulnerable to price volatility from global markets. Thus, California must strengthen our economy's resilience to price volatility in oil markets in order to protect drivers, while we further our state's climate objectives (e.g., the Low-Carbon Fuel Standard and the 50% petroleum reduction targets identified by the Governor and Senate pro Tem President De León's SB 350). "SB 706 will create well-paying 21st century jobs focused in disadvantaged communities. The program, to be funded by the Greenhouse Gas Reduction Fund, encourages the near-term production of robust volumes of low-carbon intensity alternative fuels from sustainable feedstocks at facilities SB 706 (Pavley) Page 7 of ? in California." 2. Setting Up a New Program. Current law lists various categories of eligible expenditures from the GGRF including reducing GHG emissions through energy efficiency and clean and renewable energy distribution, water use and supply, strategic planning, increased diversion of municipal solid waste, and development of advanced technology vehicles, and advanced biofuels, as well as other investments. Additionally, SB 535 (De León), Chapter 830, Statutes of 2012, requires a minimum of 25% of the GGRF moneys be spent to benefit disadvantaged communities and a minimum of 10% of GGRF moneys be spent within those communities. This requirement, as well as other language in the statute directing GGRF moneys in disadvantaged communities where feasible and applicable, clearly articulates a prioritization for investments in disadvantaged communities. The bill specifies that funding "shall be available, with preference for disadvantaged communities, to encourage the in state production of alternative fuels with low-carbon intensity from new and existing facilities using sustainable feedstock." The author states that SB 706 establishes a "program" to be funded by the GGRF, which encourages the near-term production of robust volumes of low-carbon intensity alternative fuels. SB 706, however, does not specify any requirements or provisions outlining how this program, funded through GGRF, would operate. For instance: How much of GGRF moneys will be directed to these investments? What types of fuels and technologies are eligible? Which entity is administering the program? Will that agency be required to create guidelines or specify program requirements for these incentives? SB 706 (Pavley) Page 8 of ? Will these incentives be awarded through a competitive process based on GHG emission reductions? How will progress be measured and tracked? The author may want to add to the bill to answer these questions as the bill moves through the process. If the bill is amended moving forward, the Senate Environmental Quality Committee should hear the measure again. SOURCE: Author SUPPORT: Clean Energy and Clean Energy Renewable Fuels OPPOSITION: None on file -- END --