BILL ANALYSIS
SB 1033
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Date of Hearing: June 28, 2010
ASSEMBLY COMMITTEE ON NATURAL RESOURCES
Wesley Chesbro, Chair
SB 1033 (Wright) - As Amended: April 26, 2010
SENATE VOTE : 32-1
SUBJECT : California Global Warming Solutions Act of 2006 (AB
32): allowances
SUMMARY : Requires the Air Resources Board (ARB) to distribute
greenhouse gas (GHG) emission allowances only to entities
regulated under AB 32 and authorizes those regulated entities to
sell or trade allowances only to another regulated entity.
EXISTING LAW , AB 32:
1)Requires the Air Resources Board (ARB) to adopt a statewide
GHG emissions limit equivalent to 1990 levels by 2020 and
adopt regulations to achieve maximum technologically feasible
and cost-effective GHG emission reductions.
2)Authorizes ARB to permit the use of market-based compliance
mechanisms to comply with GHG reduction regulations, to be
adopted by 2011 and operative by 2012, under limited
circumstances once specified conditions are met. Pursuant to
this authority, ARB has issued a preliminary draft regulation
proposing to adopt a cap-and-trade program, which, if adopted,
is likely to include distribution of allowances. However, ARB
has not yet indicated how allowances will be distributed.
3)Requires ARB, in adopting regulations, including market-based
compliance mechanisms, to design the regulations, including
distribution of allowances, in a manner that is equitable,
seeks to minimize costs and maximize the total benefits to
California, and encourages early action to reduce greenhouse
gas emissions.
4)Defines "allowance" as an authorization to emit, during a
specified year, up to one ton of carbon dioxide equivalent.
THIS BILL :
1)Requires ARB, if it allows the use of market-based compliance
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mechanisms that include the distribution of allowances, to
sell or otherwise distribute an allowance only to a regulated
entity subject to the GHG limit to which that allowance
applies.
2)Permits a regulated entity to sell or trade allowances only to
another regulated entity.
3)Defines "regulated entity" as the entity that has an
obligation to surrender allowances under ARB's regulations.
FISCAL EFFECT : According to the Senate Appropriations
Committee, pursuant to Senate Rule 28.8, negligible state costs.
COMMENTS :
1)Background. The AB 32 Scoping Plan is a description of the
specific measures ARB and others must take to meet the
objective of AB 32: Reduce statewide GHG emissions to 1990
levels by 2020. The reduction measures identified in the
Scoping Plan must be proposed, reviewed, and adopted as
individual regulations by January 1, 2011, to become operative
by January 1, 2012.
According to ARB, a total reduction of 174 million metric tons
(MMT), or 30 percent compared to business as usual, is
necessary to achieve the 2020 limit. The major sources of GHG
emissions that must be cut are the transportation and
electricity sectors, as well as high global warming potential
(GWP) products. Reductions of approximately 140 MMT (~80
percent) will be achieved through identified "regulatory"
measures. Of the regulatory measures, more than 54 percent of
the tons come from four measures in the transportation and
electricity sectors. ARB proposes to achieve an additional
34.4 MMT (~20 percent) reductions necessary to meet the 2020
limit through a cap-and-trade program that links with other
states and/or provinces participating in the Western Climate
Initiative (WCI) to create a regional market.
ARB's preliminary proposed cap-and-trade program would apply
to an estimated 600 regulated entities engaged in stationary
combustion, cement manufacturing, cogeneration, petroleum
refining, hydrogen production, aluminum production, facility
operators calcining carbonates, CO2 supplier or transfer
recipient, electricity generation, glass production, iron and
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steel production, lime production, natural gas transmission
and distribution, nitric acid production, oil and gas
extraction field operation, production of industrial gases,
pulp and paper production, soda ash production, electricity
deliverers, transportation fuel deliverers, and natural gas
deliverers.
Although ARB has indicated its intention to adopt a
cap-and-trade regulation by the end of 2010, release of a
draft regulation defining allowance allocation and other key
issues has been delayed and is still pending.
2)Allowance allocation is up in the air. While ARB's November
2009 "Preliminary Draft Regulation for a California
Cap-and-Trade Program" (PDR) does not specify how allowances
would be allocated, it does provide the following explanation:
In a cap-and-trade program, a limit, or cap is put on the
amount of pollutants (GHGs) that can be emitted. Each
allowance equals one metric ton of carbon dioxide
equivalent. The total number of allowances created is
equal to the cap set for cumulative emissions from all the
covered sectors. These allowances may be auctioned and/or
freely given to companies or other groups. In addition to
allowances, a limited amount of emissions reductions from
sources that are outside the cap coverage, called offsets,
could be authorized. This would allow emissions in the
capped sectors to slightly exceed the allowances issued.
The term compliance instrument covers both allowances and
offsets. After initial distribution of allowances-or in
the use of offsets-compliance instruments may be traded
among entities. At the end of each compliance period,
covered entities are required to turn in, or surrender,
enough compliance instruments to match their emissions
during this time period.
Because allowances can be traded-that is, bought and sold-
they have a significant economic value whether they are
allocated free of charge to a facility or entity, or
initially acquired at auction. An entity would buy an
allowance if the market value of the allowance is less than
the cost of reducing emissions on-site. Alternatively, if
an entity believes that selling an allowance is
cost-effective, it may sell the allowance to another entity
at the current market price. ARB is considering different
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approaches for allocation and auction design and is
receiving input from a panel of economic, financial, and
policy experts.
In 2009, a 17-member Economic and Allocation Advisory
Committee (EAAC) was appointed to advise ARB on the
implementation of the proposed cap-and-trade program. The
EAAC comprises economic, financial, and policy experts with
various backgrounds and experiences. It will provide
advice on allocation of allowances and use of their value
and evaluate the implications of different allowance
allocation strategies such as free allocation, auction or a
combination of both. The Committee is expected to prepare
a report with its findings in January 2010.
The EAAC's March 2010 report, "Allocating Emissions Allowances
Under a California Cap-and-Trade Program," provides the
following additional information:
The ARB needs to make fundamental decisions regarding the
allocation of allowances and allowance value. The first
decision relates to the mechanism for initially putting
allowances into circulation. There are two main mechanisms
for this distribution: free allocation and auctioning.
These are not preclusive; the ARB could combine the two.
The second decision concerns the intended recipients and
uses of allowance value. Here the ARB needs to consider
what parties will receive allowance value, either in the
form of free allowances or revenue from an allowance
auction.
In principle, any entity-consumers, businesses, or public
agencies-can obtain allowance value either by receiving
free allowances or receiving revenue from an allowance
auction.
Free allowances can be distributed to compliance entities
(the emitters covered under a cap-and-trade program).
However, allowances can be given free to other parties (for
example, groups of consumers) as well. These parties could
then sell the allowances to the compliance entities. When
allowances are auctioned, the allowance value consists of
the proceeds from the auction. This allowance value can be
provided to various parties and serve various purposes.
Thus, the choice between free allocation and auctioning as
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a distribution mechanism does not pose constraints on the
individuals, firms or agencies that might receive allowance
value.
Some of the purposes to which allowance value can be
devoted include: preventing potential adverse impacts of AB
32 to certain parties, financing various investments or
other public expenditures, and directing the value to
citizens in the form of financial transfers ("dividends")
or reductions (or avoided increases) in California taxes.
Pending release of its draft regulation, ARB has held
workshops regarding allowance allocation and other key design
issues, but has not issued any additional written guidance on
the matter.
3)Limiting the market for market-based compliance. Whether you
agree with cap-and-trade or not, it's hard to argue that its
underlying purpose is to harness market forces to achieve
emission reductions more efficiently. Cap-and-trade
proponents believe it can achieve emission reductions at a
lower cost than direct regulation. Key to this objective is
setting a competitive price for allowances, so emitters can
decide whether it's cheaper to reduce their emissions or
obtain allowances. By restricting allocation and trading of
allowances to the emitters under the cap, this bill may
preclude much of the competitive activity that cap-and-trade
theory is based upon. While this may reduce compliance costs
and the risk of market manipulation, it could also result in
artificially low allowance values and less incentive to reduce
emissions, or insufficient liquidity for the efficient
exchange of allowances, like operating a financial system
without banks.
4)Who owns the sky? This bill presumes that the major GHG
emitters included in cap-and-trade have an exclusive right to
receive and trade allowances. This approach would foreclose
allocation options currently under consideration, such as
mitigating disproportionate economic or environmental impacts
from implementation of AB 32 and cap-and-trade by distributing
allowance value in the form of consumer dividends, tax
reductions, or environmental improvements.
REGISTERED SUPPORT / OPPOSITION :
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Support
None on file
Opposition
Environmental Defense Fund (unless amended)
Natural Resources Defense Council (unless amended)
Pacific Gas and Electric Company (unless amended)
Union of Concerned Scientists (unless amended)
Analysis Prepared by : Lawrence Lingbloom / NAT. RES. / (916)
319-2092