BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
                               Senator Wieckowski, Chair
                                 2015 - 2016  Regular 
           
          Bill No:            SB 1402
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          |Author:    |Pavley                                               |
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          |Version:   |3/28/2016              |Hearing      |4/6/2016        |
          |           |                       |Date:        |                |
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          |Urgency:   |No                     |Fiscal:      |Yes             |
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          |Consultant:|Rebecca Newhouse                                     |
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          SUBJECT:  Low-carbon 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  
             emissions through investments including, but not limited to,  







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             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) Creates the California Low-Carbon Fuels Incentive Program,  
             funded through the GGRF, and administered by ARB, in  
             conjunction with the State Energy Resources Conservation and  
             Development Commission (CEC). 

          2) Requires the program to provide incentives for in-state  
             production of low-carbon transportation fuels from new and  
             existing facilities using sustainable feedstock and prioritizes  
             projects providing direct benefits to disadvantaged  
             communities.

            Background
          
          1) Increasing demand for low-carbon fuels. Several programs in  
             California have been established to create markets for  
             low-carbon fuels, in furtherance of meeting GHG emission  
             reduction goals.

             a)    Low-Carbon Fuel Standard. ARB established the Low-Carbon  
                Fuel Standard (LCFS) pursuant to authority under AB 32 in  
                2009, and began implementing the program in 2010.  The LCFS  
                requires transportation fuels used in the state to meet  
                certain average annual carbon limitations.  The program  
                ultimately requires a 10% reduction in the carbon intensity  
                (CI) of a particular fuel by 2020.  The CI measures the net  
                carbon emissions of the entire life-cycle of the fuel,  
                including carbon emitted during production, refining,  
                transportation, and conversion of the fuel to useable  
                energy.  Fuel suppliers can meet the standard by reducing  
                the carbon intensity of their fuels, or by purchasing  
                credits from other suppliers of other fuels that have carbon  
                intensities below state requirements.

                The LCFS CI requirement was frozen at 1% from 2013 until  
                late last year as a result of litigation where the court  
                concluded that ARB's adoption of the LCFS violated  
                requirements of the California Environmental Quality Act and  
                the California Administrative Procedure Act. ARB readopted  







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                the LCFS to correct those administrative deficiencies last  
                fall and approved a modified CI reduction schedule that  
                still meets the original LCFS target of a 10% reduction by  
                2020.

                In 2011, more than 75% of the credits in the program were  
                generated from ethanol and less than 25% were generated from  
                non-ethanol fuels. Through the third quarter of 2015,  
                however, credits from non-ethanol alternative fuels have  
                more than doubled and account for about 60% of the total  
                credits. 

             b)    AB 692 (Quirk, Chapter 588, Statutes of 2015) requires 3%  
                of the aggregate amount of transportation fuel purchased by  
                state agencies to be procured from very low-carbon fuel  
                sources by January 1, 2017, and ratchets that requirement up  
                until it reaches 10% by January 1, 2024.  AB 692 defines  
                "very low carbon transportation fuel" as a liquid or gaseous  
                transportation fuel having no greater than 40% of the carbon  
                intensity of the closest comparable petroleum fuel for that  
                year.

          2) 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 to the CEC until 2024.  These funds primarily  
             come from additional fees on vehicle registrations and vessel  
             registrations. 

             The program requires CEC to implement the ARFVTP to provide  
             funding measures to develop technologies and alternative and  
             renewable fuels in the marketplace to help attain the state's  
             climate change policies.  

             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 ARFVT 2015-16 Investment Plan update proposed funding for  







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             the alternative fuel production category, including biomethane,  
             gasoline and diesel substitutes, of $20 million.  As of early  
             2015, the program has awarded a total of $51 million to 15  
             projects for biomethane production, $27.3 million to 12  
             projects for low-carbon gasoline substitutes, and $56.7 million  
             to 18 projects for biodiesel and renewable diesel fuels.   
             According to the 2015-16 Investment Plan, the Energy Commission  
             notes they have provided preferences for projects located in or  
             benefitting disadvantaged communities.

          3) Cap-and-trade auction revenue.  Since November 2012, ARB has  
             conducted 14 cap-and-trade auctions, generating over $4 billion  
             in proceeds to the state.  

             State law specifies that the auction revenues must be used to  
             facilitate the achievement of GHG emissions reductions and  
             outlines various categories of allowable expenditures.  Statute  
             further requires the Department of Finance, in consultation  
             with ARB and any other relevant state agency, to develop a  
             three-year investment plan for the auction proceeds, which are  
             deposited in the GGRF.  

             Disadvantaged communities. SB 535 (de León, Chapter 830,  
             Statutes of 2012) requires the Department of Finance, in the  
             investment plan, to allocate at least 25% of available moneys  
             in the GGRF to projects that provide benefits to disadvantaged  
             communities, and at least 10% to projects located within  
             disadvantaged communities.  

             To meet the SB 535 mandate, the Office of Environmental Health  
             Hazard Assessment, under CalEPA's guidance, developed a tool  
             (termed CalEnviroScreen) to assess census tracts across the  
             state that are disproportionately affected by multiple types of  
             pollution and areas with vulnerable populations. 

             Additionally, SB 862 (Committee on Budget and Fiscal Review,  
             Chapter 36, Statutes of 2014) requires ARB to develop  
             guidelines on maximizing benefits for disadvantaged communities  
             by agencies administering GGRF funds, and guidance for  
             administering agencies on GHG emissions 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  







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             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.  The plaintiffs filed  
             an appeal with the 3rd District Court of Appeal in Sacramento  
             in February of 2014, and that case is pending.

             Budget allocations.  SB 862 (Committee on Budget and Fiscal  
             Review, Chapter 36, Statutes of 2014), a budget trailer bill,  
             established a long-term cap-and-trade expenditure plan by  
             continuously appropriating portions of the funds for designated  
             programs or purposes.  The legislation appropriates 25% for the  
             state's high-speed rail project, 20% for affordable housing and  
             sustainable communities grants, 10% to the Transit and  
             Intercity Rail Capital Program, and 5% for low-carbon transit  
             operations.  The remaining 40% is available for annual  
             appropriation by the Legislature.  

             The Governor's 2016-17 proposed budget appropriates over $3  
             billion to a variety of programs and projects in the  
             transportation, energy, natural resources, and waste diversion  
             sectors.
            
          
            Comments
          
          1) Purpose of Bill.  According to the author, "With the passage of  
             SB 350 (de Leon, 2015), California cemented its climate  
             leadership by establishing a clear market signal to the clean  
             tech and energy sector that the state is committed to  
             renewables and energy efficiency for the long term.

             "During the Paris Climate conference, a large business  
             contingent was present, signaling that businesses are willing  
             to step up and do their part if they have the market certainty  







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             and predictability they need to plan.

             "Just this January, the Air Resources Board re-adopted the Low  
             Carbon Fuels Standard, ensuring that transportation fuels  
             consumed in California will be ten percent cleaner by 2020.  
             However, while the Low Carbon Fuel Standard drives the deep  
             emission reductions the state needs to meet our long term  
             climate policy, the lion's share of the credits are generated  
             out of state.

             "SB 1402 will create well-paying 21st century jobs focused in  
             disadvantaged communities in California. The program will  
             encourage the near-term production of robust volumes of low  
             carbon transportation from sustainable feedstocks at facilities  
             in California.

             "Through SB 1402, we send the right market signal and provide  
             the certainty that businesses need to do their part. The  
             home-grown clean energy economy is worth building -- not only  
             for our air, but for our economy and our businesses."
            
          2) Implementing a budget proposal.  The Governor's 2016-17 budget  
             proposal appropriates $500 million to ARB for Low Carbon  
             Transportation & Fuels.  According to the administration's  
             budget change proposal for this appropriation, "$455 million  
             would be directed to continue and expand GGRF Low Carbon  
             Transportation investments from the 2015-16, 2014-15, 2013-14  
             budget cycles to meet consumer demand, including projects that  
             provide incentives for sustainable freight technology, near-  
             and zero-emissions passenger vehicles, and clean trucks and  
             buses to achieve GHG emission reductions. $40 million would be  
             directed to establish a new program to provide incentives for  
             in-state production of ultra-low carbon fuels."  SB 1402  
             appears to contain the implementing statutory provisions for  
             the proposed $40 million to ARB for low-carbon fuel incentives.  
              

          3) Piece by piece. GGRF investments must facilitate the  
             achievement of GHG emissions reductions.  However, after that  
             requirement is fulfilled, there are a number of other policy  
             goals that should be considered, including benefits to  
             environmental quality, resource protection, public health and  
             the economy, as well as benefits to disadvantaged communities.   
             Various policy committees have been referred proposals for  
             investing GGRF moneys, and these committees will likely  







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             consider whether proposals meet basic statutory requirements  
             and align with legislative priorities.  However, in order to  
             create an optimized investment strategy from GGRF moneys,  
             proposals should not be considered in isolation, but be  
             assessed in aggregate to evaluate which set of proposals best  
             meets the requirements of the fund, uses resources most  
             efficiently, and maximizes policy objectives.  As the budget  
             committees are considering the Governor's proposal of GGRF  
             expenditures, the budget process may be an ideal way to  
             comprehensively consider the numerous policy bills, including  
             SB 1402, that propose new programs funded through the GGRF.  

          4) Setting up a new program.  SB 1402 does not specify any  
             requirements or provisions outlining how the Low-Carbon Fuels  
             Incentive Program, funded through GGRF, would operate. 

             For instance, what types of fuels and technologies are  
             eligible? What carbon intensity does a "low-carbon" fuel have  
             to meet? Will ARB and CEC be required to create guidelines or  
             specify program requirements for these incentives?  What form  
             will these incentives take?  Will these incentives be awarded  
             through a competitive process based on GHG emission reductions?  
              How will progress be measured and tracked? 

             As there is little specificity in the bill as to how this  
             program will operate, it is not clear how the bill will  
             accomplish the goals of the program.

          5) Complements or Copies? As noted in the background, the AB 118  
             program, administered by the CEC, already provides substantial  
             grants for the production of low-carbon fuels.  How will the  
             program created in SB 1402  differ from the CEC's AB 118  
             program?  Can the objectives of this bill be met by either  
             augmenting AB 118's budget through GGRF moneys, or by amending,  
             as necessary, the AB 118 program? 

            Related/Prior Legislation

          SB 706 (Pavley, 2015) 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.  SB 706 was held on the Senate Appropriations  
          Suspense file. 








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          AB 692 (Quirk, Chapter 588, Statutes of 2015) requires 3% by  
          January 1, 2017, and 10% by January 1, 2024, of the aggregate  
          amount of transportation fuel purchased by state agencies to be  
          procured from very low-carbon fuel sources.  
            
          SOURCE:                    Author  

           SUPPORT:               

          Clean Energy  

           OPPOSITION:    

          None received  
           
                                           
                                       -- END --