BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session SB 1402 (Pavley) - Low-carbon fuels ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: March 28, 2016 |Policy Vote: E.Q. 4 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: May 9, 2016 |Consultant: Narisha Bonakdar | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: SB 1402 creates the California Low-Carbon Fuels Incentive Program, to be administered by the California Air Resources Board (ARB), in conjunction with the State Energy Resources Conservation and Development Commission (CEC) to provide incentives for the in-state production of low-carbon transportation fuels from new and existing facilities using sustainable feedstock. The program will be funded from moneys appropriated from the Greenhouse Gas Reduction Fund (GGRF), and must prioritize projects providing direct benefits to disadvantaged communities. Fiscal Impact: Between $150,000 annually (GGRF) and approximately $928,000 (GGRF) annually to the ARB to administer the program depending upon how the bill is implemented. (See staff comments). Unknown, likely minor, costs to the CEC. Cost pressures, potentially in the millions of dollars, to fund the incentive program. SB 1402 (Pavley) Page 1 of ? Background: Several programs in California have been established to create markets for low-carbon fuels, in furtherance of meeting GHG emissions reduction goals. 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 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. According to the ARB, "The requirements of the bill would likely be met by ARB's "price per gallon" production incentive program, which is included in the Governor's proposed 2016-17 budget. This production incentive program would be distributed on a first-come/first-served basis, and may encourage (1) In-state SB 1402 (Pavley) Page 2 of ? very low carbon fuel producers to ramp up to their maximum production; (2) In-state very low carbon fuel producers who are about to come online to begin producing; and (3) In-state very low carbon fuel producers who are producing very low carbon fuels, but who are not receiving maximum credit for their fuel, to register in all pertinent systems. ARB has requested one position for this work in the Governor's proposed budget, although it is unknown whether the Legislature will approve this BCP." Proposed Law: 1) This bill: 1) Creates the California Low-Carbon Fuels Incentive Program, funded through the GGRF, and administered by ARB, in conjunction with the 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. Related Legislation:a) 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. 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 SB 1402 (Pavley) Page 3 of ? additional fees on vehicle registrations and vessel registrations. Staff Comments: ARB staff notes that this bill could be implemented through ARB's "price per gallon" incentive program, which is included in the Governor's proposed 2016-17 budget. However, per ARB, discussions with the author's office suggest that they would like ARB to implement a "contracts for differences" program to incentivize the construction of low carbon fuel production facilities within the state by guaranteeing either a minimum fuel price or a minimum "strike price" for finished fuel after adjusting for other state and federal incentives and the selling price of the fuel. This program is beyond the scope of the approach proposed in the budget. -- END --