BILL ANALYSIS
SB 1033
SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
Senator S. Joseph Simitian, Chairman
2009-2010 Regular Session
BILL NO: SB 1033
AUTHOR: Wright
AMENDED: April 13, 2010
FISCAL: Yes HEARING DATE: April 19, 2010
URGENCY: No CONSULTANT: Randy Pestor
SUBJECT : GLOBAL WARMING SOLUTIONS ACT OF 2006
SUMMARY :
Existing law , under the California Global Warming Solutions
Act of 2006 (CGWSA):
1) 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 sets
various requirements to meet this requirement. (Health and
Safety Code 38500 et seq.).
2) Requires ARB to adopt GHG emission limits and emission
reduction measures by regulation on or before January 1,
2011, and meet certain requirements in adopting the
regulations. ARB may include the use of market-based
mechanisms to comply with these regulations. (38562,
38570).
3) Defines "allowance" as an authorization to emit, during a
specified year, up to one tone of carbon dioxide
equivalent. (38505).
This bill :
1) Requires ARB to sell or otherwise distribute an allowance
only to a regulated entity subject to the GHG emission
limit to which that allowance applies, if ARB allows the
use of market based mechanisms. A regulated entity may
sell or trade allowances only to another regulated entity.
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2) Defines "regulated entity" to be an entity having an
obligation to surrender allowances under regulations
adopted pursuant to CGWSA requirements relating to the
adoption of regulations.
COMMENTS :
1) Purpose of Bill . According to the author, "As part of its
Cap & Trade regulation to be adopted by December 2010, the
[ARB] must make fundamental decisions regarding the
allocation of allowances. One of these significant
decisions concerns the intended recipients of these
allowances either in the form of free allowances or revenue
from an allowance auction. In its initial Preliminary
Draft Regulation (PDR) for a Cap & Trade Program, the [ARB]
proposes that non-governmental entities and private
individuals without compliance obligations be allowed to
receive or purchase allowances for a variety of reasons."
The author notes that "As defined in Section 38505 of the H &
S Code, an 'allowance' means an authorization to emit,
during a specified year, up to one ton of carbon dioxide
equivalent. This bill seeks to ensure that allowances be
allocated in a manner that minimizes the economic burden
caused by the implementation of the [CGWSA]. It does so by
requiring that allowances be allocated only to those
entities with compliance obligations under the AB 32
regulations, as it is those entities and their customers
that will experience economic harm. According to the ARB's
AB 32 Economic and Allocation Advisory Committee (EAAC),
'the total allowance value under California's cap-and-trade
program is likely to be several billions of dollars in each
year of the program.' Because of the potential impact to
the economy of this critical decision, the Legislature
should carefully evaluate the policy options associated
with the distribution of allowances under the state's
climate change program."
SB 1033 requires ARB to sell or otherwise distribute an
allowance only to a regulated entity subject to the GHG
limit if the ARB allows the use of market-based compliance
mechanisms, and a regulated entity may sell or trade
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allowances only to another regulated entity.
2) Cap and trade . Under a cap and trade mechanism, ARB could
establish a declining cap on GHG emissions. Regulated
entities, such as powerplants, would obtain permits or
allowances to emit emissions up to their cap. Those
allowances could then be traded among regulated entities
with a purported result that those entities that could
lower their GHG emissions least expensively will do so and
sell their "excess" allowance to those who find it more
costly to lower their GHG emissions. An issue with such a
program is how regulated entities obtain the emission
allowances. A broader concern is whether the auctioning of
allowances is enforceable, transparent, and allows public
participation - and whether many will simply experience the
same shortcomings that affected personal portfolios when it
was determined that derivatives and other financial
instruments were essentially unregulated market mechanisms.
Fraud and market manipulation is an issue, including
hoarding of allowances to artificially drive up allowance
prices - which is a concern of many regulated entities if
nonregulated entities opt into the program. To address
this concern, some propose purchase limits that restrict
one from purchasing more than a certain percentage of
allowances. Another option is to limit such a program to
entities regulated under the CGWSA, as provided under SB
1033 - although some regulated entities could still acquire
an excessive number of allowances without purchase limits.
A part of some cap and trade programs is the creation of
offsets whereby a regulated entity can pay another entity
for its GHG reductions, which can then be used by the
regulated entity to meet its GHG cap. Examples may include
planting trees, or developing landfill gas capture and
windfarm projects. Firms currently sell carbon offsets
which are used by those who want to "green" their
activities. A major concern with offsets is the validity
of their activities - yet legislation seeking to ensure the
legitimacy of offsets is also opposed by those advertising
their use.
According to the Climate Change Scoping Plan (December 2008),
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"The foundation of the Scoping Plan's strategy is a set of
measures that will cut greenhouse gas emissions by nearly
30 percent by the year 2020 as compared to business as
usual and put California on a course for much deeper
reductions in the long term." The Scoping Plan also notes
that
"In December 2007, ARB approved a greenhouse gas emissions
target for 2020 equivalent to the state's calculated
greenhouse gas emissions level in 1990. ARB developed the
2020 target after extensive technical work and a series of
stakeholder meetings. The 2020 target of 427 MMTCO2E
[million metric tons of carbon dioxide equivalents]
requires the reduction of 169 MMTCO2E, or approximately 30
percent, from the state's projected 2020 emissions of 596
MMTCO2E (business-as-usual) and the reduction of 42
MMTCO2E, or almost 10 percent, from 2002-2004 average
emissions . . . The total reduction for the recommended
measures slightly exceeds the 169 MMTCO2E of reductions
estimated in the Draft Scoping Plan. This is the net
effect of adding several measures and adjusting the
emission reduction estimates for some other measures."
ARB proposes to achieve 34.4 MMTCO2E through a cap and trade
program, or about 20% of a total 174 MMTCO2E reduction.
The CGWSA does not reference offsets, but focuses on GHG
emission reductions and only authorizes market based
mechanisms if certain conditions are met. As noted above,
the Scoping Plan includes cap and trade provisions, and
references the use of offsets to "no more than 49% of the
required reduction of emissions [within the 20% cap and
trade program]."
According to the "Preliminary draft regulation for a
California cap-and-trade program" (November 24, 2009), the
timeline for a cap and trade program calls for a Spring
2010 release of a proposed draft cap and trade regulation
with workshops, September 2010 public release of a final
draft regulation with initial statement of reasons and
beginning of a 45-day public comment period, October 2010
ARB consideration of the regulations, Spring 2011 adoption
by the Office of Administrative Law, Summer 2011 launching
of compliance instruments tracking system, Fall 2011
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initial auction of allowances, and January 1, 2012, cap and
trade program launch.
3) EAAC recommendations . ARB and Cal-EPA established the
Economic and Allocation Advisory Committee (EAAC) May 22,
2009, with two main roles: to provide input on evaluating
AB 32 economic impacts and to offer recommendations
regarding the allocation of allowance value. According to
the EAAC, in evaluating alternative allocation options and
arriving at recommendations, the following four criteria
were employed: fairness, cost-effectiveness, environmental
effectiveness, and simplicity. The EAAC note that these
four criteria "encapsulate objectives and requirements
throughout AB 32 . . ."
The EAAC recommendations to the ARB in the draft January 7,
2010, "Allocating Emissions Allowances Under California's
Cap-and-Trade Program" report identify the following "three
key components" of cap and trade: a) the regulatory
authority specifies the total quantity of allowances to be
distributed in given periods to participants in the
program, each allowance entitles the holder to emit a
certain quantity of emissions of a given pollutant, and the
number of issued allowances can decline over time; b) the
regulatory authority needs to distribute (put into
circulation) the emission allowances, that can be
distributed through free allocation, by selling them, or
through some combination of the two; and c) the provision
for trading (purchase or sale) of allowances, with
opportunities for private parties to buy and sell emissions
allowances.
According to the EAAC report, "the total allowance value under
California's cap-and-trade program is likely to be several
billions of dollars in each year of the program. The total
allowance value is quite different from the economic cost
of AB 32. Allowance value remains in the economy and does
not constitute a cost. The economic cost of AB 32 may be a
tiny fraction of allowance value. In fact, the same
studies that predict that the economic cost of AB 32 will
be negative (that is, that the policy will raise state
income) indicate a substantial allowance value."
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4) Technical issues to be addressed . Since it is uncertain
whether a cap and trade program can be successfully
achieved - and at the least cost of achieving emission
reductions - lines 3 to 6 on page 3 should be stricken.
For further clarification, on page 3, line 31, after "section"
insert: "that includes distribution of allowances." Also,
further clarification of the term "regulated entity" may be
needed.
SOURCE : Senator Wright
SUPPORT : California Manufacturers & Technology
Association, University of California, Western
States Petroleum Association
OPPOSITION : None on file