BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 1033|
|Office of Senate Floor Analyses | |
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THIRD READING
Bill No: SB 1033
Author: Wright (D)
Amended: 4/26/10
Vote: 21
SENATE ENV. QUALITY COMMITTEE : 5-1, 4/19/10
AYES: Simitian, Runner, Corbett, Lowenthal, Strickland
NOES: Pavley
NO VOTE RECORDED: Hancock
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
SUBJECT : California Global Warming Solutions Act of
2006:
allowances
SOURCE : Author
DIGEST : This bill requires the Air Resources Board, if
market-based compliance mechanisms are adopted that include
the distribution of allowances, which are defined under
existing law as authorizations to emit greenhouse gas
emissions, to sell or otherwise distribute an allowance
only to a regulated entity, subject to the greenhouse gas
emissions limit to which that allowance applies. This bill
authorizes a regulated entity to sell or trade an allowance
only to another regulated entity.
ANALYSIS : Existing law, under the California Global
Warming Solutions Act of 2006 (CGWSA):
CONTINUED
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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.
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.
3.Defines "allowance" as an authorization to emit, during a
specified year, up to one tone of carbon dioxide
equivalent.
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 that include the
distribution of allowances. A regulated entity may sell
or trade allowances only to another regulated entity.
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
According to the author's office, "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
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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."
This bill 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 that include the distribution of allowances, and
a regulated entity may sell or trade allowances only to
another regulated entity.
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.
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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 this
bill, 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), "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
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emission reduction estimates for some other measures."
ARB proposes to achieve 34.4 MMTCO2E through a cap and
trade program, or about 20 percent 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 percent of the required reduction of emissions
[within the 20 percent 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
initial auction of allowances, and January 1, 2012, cap and
trade program launch.
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
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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."
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 5/11/10)
California Manufacturers & Technology Association
University of California
Western States Petroleum Association
TSM:nl 5/11/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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