BILL ANALYSIS �
AB 2390
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Date of Hearing: April 7, 2014
ASSEMBLY COMMITTEE ON NATURAL RESOURCES
Wesley Chesbro, Chair
AB 2390 (Muratsuchi) - As Introduced: February 21, 2014
SUBJECT : Low Carbon Fuel Standard: Green Credit Reserve
SUMMARY : Establishes a Green Credit Reserve (Reserve) to
purchase credits generated pursuant to the Low Carbon Fuel
Standard (LCFS) regulation and the federal Renewable Fuel
Standard (RFS) from developers of renewable fuel production
facilities in California for the purpose of supporting the
financing and construction of these facilities.
EXISTING LAW :
1)Pursuant to the California Global Warming Solutions Act (AB
32), requires the Air Resources Board (ARB) to adopt a
statewide greenhouse gas (GHG) emissions limit equivalent to
1990 levels by 2020 and to adopt rules and regulations to
achieve maximum technologically feasible and cost-effective
GHG emission reductions. AB 32 also requires ARB to adopt
early action measures (EAM) to reduce GHG emissions.
2)Pursuant to Governor Schwarzenegger's Executive Order S-01-07,
sets a statewide goal to reduce the carbon intensity (CI) of
California's transportation fuels by at least 10 percent by
2020. The order required ARB to consider adopting a LCFS to
implement this goal, either as an EAM or in another regulatory
proceeding. In 2009, ARB adopted the LCFS as a regulation.
The LCFS attributes CI values to a variety of fuels based on
direct and indirect GHG emissions. The LCFS permits producers
of certain low-CI fuels to opt in to LCFS regulation for the
purpose of generating credits, which can be banked and used
for compliance, sold to regulated parties, and purchased and
retired by regulated parties. In addition, LCFS credits can
be exported to other GHG emission reduction programs.
THIS BILL :
1)Requires the Governor, by June 30, 2015, to designate a state
agency to establish and administer the Reserve.
2)Provides that the purpose of the Reserve shall be to
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facilitate and encourage the development of renewable and low
carbon transportation fuel projects in California by providing
stability and predictability for the value of credits
generated by the production of those fuels pursuant to the
LCFS and RFS.
3)Requires the Reserve, at its discretion, to enter into
long-term contracts to purchase LCFS and RFS credits at a
guaranteed price from developers of projects to produce
renewable fuels in California.
4)Requires the Reserve to hold and sell credits and develop
related procedures.
5)Provides that eligible projects include, but are not limited
to:
a) Facilities that produce transportation fuels from
agricultural waste that is remaining after all reasonably
usable food content is extracted.
b) Facilities that produce transportation fuel from
forest waste produced from sustainable forest management
practices.
c) Facilities that capture and clean landfill gas that
is used for transportation fuels.
d) Sewage treatment facilities that produce
transportation fuels.
e) Digester gas facilities that produce transportation
fuels.
f) Facilities that produce transportation fuels from
solid waste.
6)Requires the Reserve to offer contracts beginning September 1,
2015 for a term that includes the time to finance, design, and
construct the production facility, a defined start-up period,
plus up to 15 years of commercial production.
7)Requires the Reserve to purchase only those LCFS and RFS
credits that are actually produced by the fuel producer and
that meet the requirements of the contract and the
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requirements of the LCFS or RFS in effect at the time the
contract is executed. Provides that future amendments,
modifications, or changes to the RFS or LCFS that are made
after the contract execution date shall not affect the
requirements of the Reserve to purchase the RFS credits or
LCFS credits.
8)Prohibits the Reserve from entering into contracts for the
purchase of LCFS or RFS credits from LCFS obligated parties or
RFS regulated parties that are required to obtain and retire
those credits pursuant to the LCFS and RFS.
9)Makes related findings and definitions.
FISCAL EFFECT : Unknown
COMMENTS :
1)Background . In 2007, Governor Schwarzenegger issued Executive
Order S-1-07, calling for a reduction of at least 10 percent
in the CI of California's transportation fuels by 2020. The
Order instructed the California Environmental Protection
Agency to coordinate activities between the University of
California, the California Energy Commission and other state
agencies to develop and propose a draft compliance schedule to
meet the 2020 target.
The Order further directed ARB to consider initiating
regulatory proceedings to establish and implement the LCFS.
In response, ARB identified the LCFS as an EAM and adopted a
regulation in 2009, to be implemented beginning in 2010. 2010
was a reporting year and the first CI reduction requirement of
0.25 percent began in 2011. The target increased to 0.5
percent in 2012 and 1.0 percent in 2013. To date, fuel
suppliers have over-complied, predominantly by blending
ethanol with gasoline, which is preferred in the near term
because ethanol blending is required by the federal RFS and
does not require significant changes in fueling and vehicle
infrastructure. However, natural gas, biodiesel and
electricity have also been used in significant amounts to
comply with the LCFS.
In 2009 and 2010, three lawsuits were filed against the LCFS
by ethanol interests - two in federal court and one in state
court. The federal lawsuits were brought by trade
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associations of ethanol producers and refiners who claim that
the LCFS is preempted under the Energy Independence and
Security Act of 2007 and violates the Commerce Clause of the
U.S. Constitution (e.g., by assigning corn ethanol from the
Midwest a CI value above that of corn ethanol made in
California). Plaintiffs claimed that corn ethanol will
eventually be excluded from the California market in favor of
more advanced biofuels that have a lower CI value. ARB
contended that many corn ethanol producers from the Midwest
have in fact registered with ARB with CI values that are well
below gasoline and, indeed, even less than California corn
ethanol. Plaintiffs also claimed that California is
impermissibly regulating interstate commerce beyond its
borders by regulating aspects of a fuel's lifecycle that occur
outside of the state's borders. The combined federal lawsuit
(Rocky Mountain Farmers Union v. Goldstene) was heard by the
Ninth Circuit Court of Appeals, which considered ARB's appeal
of several adverse rulings and a preliminary injunction that
were issued by the lower federal court in Fresno in December
2011. In April 2012, the Ninth Circuit granted ARB's request
for a stay of the preliminary injunction, which allowed ARB to
resume enforcement of the LCFS during the pendency of the
lawsuit. In September 2013, the Ninth Circuit ruled that the
LCFS provisions were not facially discriminatory, leaving the
LCFS in place while the plaintiffs petition for review by the
U.S. Supreme Court.
The state lawsuit (Poet, LLC v. California Air Resources
Board), brought by a major ethanol producer, alleges that ARB
did not fully comply with the Administrative Procedure Act
(APA) and the California Environmental Quality Act (CEQA) when
adopting the LCFS regulation. In November 2011, the Fresno
Superior Court ruled in favor of ARB on all 14 causes of
action raised by the plaintiffs. Plaintiffs then appealed the
case to the Court of Appeal in Fresno, which found both APA
and CEQA defects with ARB's process of adopting the LCFS. As
a result, ARB has proposed adopting an alternative regulation
for diesel and readopting the LCFS regulation to comply with
the court's instructions. Meanwhile, the LCFS is frozen at
its 2013 (1.0 percent CI reduction) level.
In addition to revising the regulation to comply with the
Court of Appeal ruling, ARB has proposed several other
modifications related to adjusting compliance schedules,
determining CI, cost containment in the credit market, and
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other assorted issues. One of the proposed modifications
would have ARB operate a LCFS credit reserve to sell
compliance-only credits at a pre-determined price if regulated
entities are unable to obtain sufficient credits on the open
market.
2)LCFS credit market appears volatile . The LCFS regulation
requires ARB to provide a public report on credit and deficit
generation quarterly. The report includes how many credits
and deficits were generated in the most recent quarter, total
deficits and credits, as well as credits and deficits in
possession of regulated parties. The report also includes
number of credits transferred, number of parties making
transfers and the monthly average credit price for transfers.
The reported average price for credits steadily increased from
$17 in 2012 to $79 in December 2013, then declined to $48 in
February 2014. Volatility has also been a hallmark of the
market for Renewable Identification Number (RIN) credits under
the federal RFS, including allegations of fraud and
manipulation.
3)Can the Reserve beat the market ? The essential proposition of
this bill is that the state should take a risk on the future
price of LCFS credits that apparently private lenders are
unwilling to take. The potential benefits are significant -
increasing the local production and supply of low-carbon
fuels, while using the LCFS market mechanism to produce GHG
reductions, as well as environmental and economic co-benefits.
However, the bill in its current form provokes questions
about how much money, where it will come from, whether it's a
prudent risk for the state, and whether the risks are balanced
between the state and private developers.
4)Eligibility is broader than California renewable fuel sources .
Although the bill refers to production of "renewable" fuels
in California, the definition of eligible projects is very
broad and non-exclusive, explicitly permitting non-renewable
fuel sources and implicitly permitting feed-stocks from
outside of California. The author and the committee may wish
to consider amending the bill to eliminate non-renewable fuel
sources, such as "solid waste," and clarifying that eligible
facilities must produce fuel in California from in-state
feed-stocks.
REGISTERED SUPPORT / OPPOSITION :
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Support
American Biogas Council
BioCNG
Bioenergy Association of California (sponsor)
California Association of Sanitation Agencies
Clean Energy
CleanWorld
Coalition for Renewable Natural Gas
Environmental Defense Fund (in concept)
Sanitation Districts of Los Angeles County
Waste Management
Opposition
Western States Petroleum Association
Analysis Prepared by : Lawrence Lingbloom / NAT. RES. / (916)
319-2092