BILL ANALYSIS �
AB 2390
Page 1
ASSEMBLY THIRD READING
AB 2390 (Muratsuchi)
As Amended May 23, 2014
Majority vote
NATURAL RESOURCES 6-3 APPROPRIATIONS 11-5
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|Ayes:|Chesbro, Garcia, |Ayes:|Gatto, Bocanegra, |
| |Muratsuchi, Skinner, | |Bradford, |
| |Stone, Williams | |Ian Calderon, Eggman, |
| | | |Gomez, Holden, Pan, |
| | | |Quirk, Ridley-Thomas, |
| | | |Weber |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Grove, Bigelow, Patterson |Nays:|Bigelow, Donnelly, Jones, |
| | | |Linder, Wagner |
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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. Specifically,
this bill :
1)Requires the Treasurer, by June 30, 2015, to establish and
administer the Reserve.
2)Provides that the purpose of the Reserve shall be to
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 Treasurer to coordinate with the Air Resources
Board (ARB) to adopt criteria and guidelines for the Reserve
that ensures that it meets its purpose.
4)Requires the Reserve, at its discretion, to enter into
long-term contracts to purchase LCFS and RFS credits at a
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guaranteed price from developers of projects to produce
renewable fuels in California.
5)Requires the Reserve to hold and sell credits and develop
related procedures.
6)Provides that eligible projects include, but are not limited
to:
a) Facilities that produce transportation fuels from
agricultural, livestock, food, or food processing waste
that is remaining after all economically recoverable food
content is extracted, and from nonfood crops.
b) Facilities that produce transportation fuels from forest
waste produced from sustainable forest management
practices.
c) Facilities that capture and clean landfill gas that is
used for transportation fuels.
d) Wastewater treatment facilities that produce
transportation fuels from biogas or biosolids.
e) Other facilities that produce transportation fuels from
organic waste.
7)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.
8)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
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.
9)Prohibits the Reserve from entering into contracts for the
purchase of LCFS or RFS credits from LCFS obligated parties or
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RFS regulated parties that are required to obtain and retire
those credits pursuant to the LCFS and RFS.
10)Makes related findings and definitions.
EXISTING LAW :
1)Pursuant to the California Global Warming Solutions Act of
2006 (AB 32 (N��ez), Chapter 488, Statutes of 2006), requires
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.
2)Pursuant to Executive Order S-01-07 (Schwarzenegger) (the
Order), sets a statewide goal to reduce the carbon intensity
(CI) of California's transportation fuels by at least 10% by
2020. The Order required ARB to consider adopting a LCFS to
implement this goal. 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.
FISCAL EFFECT : According to the Assembly Appropriations
Committee:
1.Cost pressures estimated to be in the $25 to $50 million range
to:
a. Cover initial administrative costs of the program before
fuel credits obtained by the program can be sold to
obligated parties.
b. Provide working capital to cover the purchase price of
the fuel credits until credits can be sold to obligated
parties.
c. Cover any losses if the credit purchase price exceeds
the price at which the credits are sold to obligated
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parties.
2. The bill does not currently identify or provide a
funding source for these identified expenditures.
3. Increased costs to ARB for consultation and technical
assistance to support the development and ongoing
operations of the Reserve in the $800,000 range (Cost of
Implementation Account).
4. Unknown additional costs for administering the Reserve.
COMMENTS : In 2007, Governor Schwarzenegger issued the Order,
calling for a reduction of at least 10% 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 adopted the LCFS regulation in 2009, to be implemented
beginning in 2010. 2010 was a reporting year and the first CI
reduction requirement of 0.25% began in 2011. The target
increased to 0.5% in 2012 and 1% 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 courts and one in state
court. The federal lawsuits were brought by trade 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 United States (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
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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. Corey) 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% 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 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.
The LCFS regulation requires ARB to provide a public report on
credit and deficit generation quarterly. The report includes
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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 credits under the
federal RFS, including allegations of fraud and manipulation.
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.
Analysis Prepared by : Lawrence Lingbloom / NAT. RES. / (916)
319-2092
FN: 0003772