BILL ANALYSIS �
SB 1572
SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
Senator S. Joseph Simitian, Chairman
2011-2012 Regular Session
BILL NO: SB 1572
AUTHOR: Pavley
AMENDED: As Introduced
FISCAL: Yes HEARING DATE: April 23, 2012
URGENCY: No CONSULTANT: Peter Cowan
SUBJECT : GLOBAL WARMING SOLUTIONS ACT: GREENHOUSE GAS
REDUCTION ACCOUNT
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 to adopt GHG emission
reduction measures by regulation, and sets certain
requirements in adopting the regulations. ARB may include the
use of market-based mechanisms to comply with these
regulations. (Health and Safety Code �38500 et seq.).
2) Requires ARB to prepare and approve a scoping plan by January
1, 2009, for achieving the maximum technologically feasible
and cost-effective reductions in GHG emissions from sources or
categories of sources of GHGs by 2020. ARB must evaluate the
total potential costs and total potential economic and
noneconomic benefits of the plan for reducing GHGs to the
state's economy and public health, using the best economic
models, emission estimation techniques, and other scientific
methods. The plan must be updated at least once every five
years. (�38561).
3) Authorizes ARB to adopt a schedule of fees to be paid by GHG
emission sources regulated under CGWSA, to be deposited into
the Air Pollution Control Fund and available upon
appropriation by the Legislature for carrying out the CGWSA.
(�38597).
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This bill :
1) Establishes the Greenhouse Gas Reduction Account (the account)
within the Air Pollution Control Fund and requires that all
moneys excluding penalties and fines collected pursuant to the
market-based compliance mechanism be deposited in the account
and available upon appropriation by the Legislature for the
purposes of carrying out the CGWSA.
2) Makes findings that: a) ARB, in accordance with its
discretionary authority, has adopted a final regulation
establishing a cap-and-trade program for GHGs and that funds
generated by the program are regulatory fees whose use is
required to conform with Sinclair Paint Co. v. State Board of
Equalization (1997) 15 Cal.4th 866; b) under current
cap-and-trade regulations ARB will begin auctioning GHG
emission allowances and proceeds will be deposited into the
Air Pollution Control Fund and only available upon
appropriation by the Legislature; and c) if the cap-and-trade
regulation does not remain in place ARB may adopt alternate
regulation to ensure the reduction of GHG emissions pursuant
to the CGWSA.
3) Declares the intent of the Legislature to enact legislation:
a) Requiring the Governor to submit a draft expenditure
plan detailing how funds in the account should be spent.
b) Establishing criteria for agencies to develop and adopt
through an open public process a final expenditure plan of
monies in the account, upon appropriation by the
Legislature.
c) Appropriate funds from the account according to the
final expenditure plan and for the purpose of reducing GHG
emissions in a manner consistent with the CGWSA.
COMMENTS :
1) Purpose of Bill . According to the author "In November 2012,
�ARB] will administer an initial auction of greenhouse gas
emissions allowances to carry out the cap-and-trade component
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of the Scoping Plan implementing �CGWSA]. While ARB has
existing legal authority to auction allowances and deposit
moneys from the auction into the Air Pollution Control Fund,
these moneys cannot be expended without an appropriation by
the Legislature. Authorizing strategic expenditures of these
auction revenues is necessary to achieve the purposes of
�CGWSA] through critical investments in California's economy.
SB 1572 lays the foundation for an open and thoughtful
legislative process to establish a strategic �CGWSA]
expenditure plan. The bill:
Ensures that the Legislature not miss an opportunity to
invest in pollution reduction and job creation in California.
Does not authorize the cap-and-trade program or its
auction component-ARB's discretionary authority to adopt these
regulations was already established in 2006 with the passage
of AB 32.
Provides that whatever revenues materialize will be
expended through a plan that is developed transparently,
legally, and with strong legislative guidance and oversight."
2) Brief background on cap-and-trade . The adopted cap-and-trade
regulation imposes a cap on the aggregate GHG emissions
allowed from "capped sectors." The entities covered within
these sectors constitute approximately 85% of all statewide
GHG emissions. Each year the cap declines, thus resulting in
a reduction in GHG emissions over time. To comply with the
cap, covered entities must surrender to the state a number of
"compliance instruments" equal to the amount of their GHG
emissions, as expressed in the equivalent metric tons of CO2.
The regulations describe two types of compliance instruments:
1) an "allowance" to emit GHGs, all of which are generated by
the state in an amount equal to the cap and; 2) an "offset"
resulting from an emissions reduction achieved in an uncapped
sector and generated by third party pursuant to a protocol
adopted by ARB.
Under the cap-and-trade regulation many of the allowances are
freely allocated to the covered entities, some are held in a
price containment reserve, and the remainder auctioned.
Allowances received or purchased can be traded, thus creating
an emissions market which according to ARB minimizes
compliance costs and encourages businesses to invest in GHG
emissions reductions. ARB plans to hold auctions quarterly
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starting in November 2012, and monies collected for allowances
sold at auction are deposited into the Air Pollution Control
fund, with the exception of allowances sold on behalf of
Investor Owned Utilities (IOUs). IOUs are given enough
allowances to cover all of their emissions, but are required
to auction them all. The revenues from these auctions are
then returned to the IOUs to be used for ratepayer benefit in
accordance with an ongoing rulemaking at the Public Utilities
Commission (PUC).
3) Cap-and-trade revenues in the budget . The Governor's January
budget proposal estimates that fee revenues from the first set
of auctions will be $1 billion in the 2012-13 Budget, with
auctions planned for November 2012, February 2013, and May
2013. Actual revenues cannot be known until the auctions have
been completed. The proposal does not contain a specific plan
for expenditure of the revenue, rather it includes a General
Fund offset of $500 million, and identifies general categories
of spending including: a) clean and efficient energy, b)
low-carbon transportation, c) natural resource protection, and
d) sustainable infrastructure development. The January budget
also provides that an expenditure plan for both the $500
million General Fund offset as well as the $1 billion will be
jointly submitted by the Director of Finance and ARB. The
plan must include specific expenditures and will allow the
Legislature not fewer than 30 days to review the plan before
allocation of funding will begin.
4) Sinclair Paint nexus test . The Childhood Lead Poisoning
Prevention Act of 1991 required the Department of Health
Services to establish a regulatory fee on businesses that are
or were sources of lead contamination to implement various
lead poisonings programs. Sinclair Paint Company argued that
this regulatory fee was a tax because: a) the program
provides a broad public benefit, not a benefit to the
regulated business, and b) the companies that pay the fee have
no duties regarding the lead poisoning program other than
payment of the fee. The California Supreme Court upheld the
fee, as a "mitigation fee," ruling that the state may impose
fees on companies that make contaminating products and use
those proceeds to mitigate the adverse effects resulting from
those products. Also described in the court's decision is the
so-called Sinclair nexus test, which requires that a clear
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nexus must exist between the use of a mitigation fee and the
adverse effects related to the activity on which that fee is
levied.
According to an opinion received by the Legislative Analyst's
Office (LAO) from Legislative Counsel, revenues resulting from
ARB's cap-and-trade auctions would constitute "mitigation fee"
revenue, and be subject to the limitations of the Sinclair
nexus. Thus the revenues must only be used to mitigate GHG
emissions or the adverse effects caused by them.
5) The Legislative Analyst's Office report . The LAO, in its
February 16th report on cap-and-trade revenue, raised
several issues for the Legislature to consider when
developing an expenditure plan:
a) The revenues from the cap-and trade auctions cannot be
known until the auctions occur. Waiting to appropriate the
revenues until the 2012-13 auctions have occurred would
provide the Legislature with greater certainty on how much
revenues will be available for expenditure.
b) The Legislature will need to adopt a detailed
expenditure plan. The LAO recommends that the Legislature
direct the administration to provide an expenditure plan
outlining its suggested use of the revenues to expand or
establish new programs and to consider alternatives, as
necessary, to the plan that better align with legislative
priorities.
c) Programs that yield the greatest GHG emission reduction
return on investment should be prioritized and the various
programs in the expenditure plan should be ranked by this
metric.
d) All proposed uses of cap-and-trade revenues must pass
the Sinclair nexus test and be used to mitigate GHG
emissions or their effects.
e) Plan how IOU revenues will be spent. Current ARB
regulations require that allowances given to the IOU are
not subject to appropriation by the Legislature. At a
minimum, more information is needed from the PUC to ensure
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that expenditures of other cap-and-trade revenues are not
duplicative of the use of the IOU revenues.
6) Outstanding issues . Rather than declaring the legislative
intent "to enact legislation" regarding certain account
matters, SB 1572 must clearly specify the requirements for
the account.
7) Support Concerns . According to supporters SB 1572 "provides a
framework to advance the goals of California's landmark law,
the �CGWSA], to reduce �GHG] emissions in a manner that
optimizes benefits for all Californians." Supporters also note
that "fees generated by the market-based compliance mechanism
should adhere to the legal precedent of �Sinclair Paint]
governing regulatory fees, advancing GHG reductions and the
goals of AB 32."
8) Opposition Concerns . According to opponents "The purpose of
cap-and-trade is to reduce greenhouse gas emissions, not raise
billions in new revenue for state coffers?�SB 1572] wrongly
assumes �ARB] has the legal authority to withhold allowances
and conduct the auctions, and the bill would spend revenues
without a good understanding of the serious impacts of
collection and expenditure on program cost-effectiveness and
emissions leakage."
9) Related legislation . AB 1532 (P�rez) establishes the
Greenhouse Gas Reduction Account to receive all cap-and-trade
revenues and specifies conditions for expenditures of funds
from the account. AB 1906 (Nestande) requires that all monies
resulting from the auction allowances allocated to investor
owned utilities be used to reduce the rates that are above the
cost of service, and will be heard by the Assembly Natural
Resources Committee April 23, 2012.
AB 2404 (Fuentes) establishes the Local Emission Reduction
Program to receive all cap-and-trade revenues and specifies
that it be appropriated to various local programs, and will be
heard by the Assembly Natural Resources Committee April 23,
2012.
SOURCE : Senator Pavley
SUPPORT : American Lung Association, Audubon California,
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Blue Green Alliance, California Climate and
Agriculture Network, California Energy Efficiency
Industry Council, California Releaf, California
Urban Forests Council, California Watershed
Network, Californians Against Waste, CALSTART,
Energy Independence Now, Environment California,
Environmental Defense Fund, Environmental
Entrepreneurs, Greenlining Institute, Natural
Resources Defense Council, Nature Conservancy,
Pacific Forest Trust, Small Business Majority,
Transform, Trust for Public Land, Union of
Concerned Scientists, Wilderness Society
OPPOSITION : American Council of Engineering Companies of
California, California Chamber of Commerce,
California Grocers Association, California
Manufacturers & Technology Association, California
Metals Coalition, California Taxpayers
Association, Can Manufacturers Institute, Chemical
Industry Council of California, Western States
Petroleum Association