BILL ANALYSIS                                                                                                                                                                                                    Ó

                              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

          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  


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             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  

          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  


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            with cap-and-trade auction revenues.  AB 1532 requires moneys  
            from the fund facilitate the achievement of GHG emissions  

            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  


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            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  
            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  
            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  

          2. Low-Carbon Fuel Standard.

             The LCFS requires the reduction of the carbon intensity (CI)  


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             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  

             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  


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             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  

             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. 
          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  

             "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  


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             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  

             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  

                       Which entity is administering the program? 

                       Will that agency be required to create guidelines  
                  or specify program requirements for these incentives? 


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                       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  

          Clean Energy and Clean Energy Renewable Fuels  

          None on file  

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