The California Global Warming Solutions Act of 2006 designates the State Air Resources Board as the state agency charged with monitoring and regulating sources of emissions of greenhouse gases. The act authorizes the state board to include use of market-based compliance mechanisms. Existing law requires all moneys, except for fines and penalties, collected by the state board as part of a market-based compliance mechanism to be deposited in the Greenhouse Gas Reduction Fund and to be available upon appropriation. Existing law requires the Department of Finance, in consultation with the state board and any other relevant state agency, to develop, as specified, a 3-year investment plan for the moneys deposited in the Greenhouse Gas Reduction Fund. Existing law authorizes moneys from the fund to be allocated for the purpose of reducing greenhouse gas emissions in this state through specified investments if the investment furthers the regulatory purposes of the act and is consistent with law.

This bill would additionally create the California Low-Carbon Fuels Incentive Program to be administered by the state board and the State Energy Resources Conservation and Development Commission, and would authorize moneys in the fund appropriated to the program to be used to promote and further California climate goals to encourage the in-state production of alternative fuels with low-carbon intensity provide incentives for the in-state production of low-carbon transportation fuels from new and existing facilities, facilities using sustainable feedstock, with preference priority to be given to projects benefitting disadvantaged communities.

The California Global Warming Solutions Act of 2006 designates the State Air Resources Board as the state agency charged with monitoring and regulating sources of emissions of greenhouse gases. The act authorizes the state board to include use of market-based compliance mechanisms. Existing law requires all moneys, except for fines and penalties, collected by the state board as part of a market-based compliance mechanism to be deposited in the Greenhouse Gas Reduction Fund and to be available upon appropriation. Existing law requires the Department of Finance, in consultation with the state board and any other relevant state agency, to develop, as specified, a 3-year investment plan for the moneys deposited in the Greenhouse Gas Reduction Fund. Existing law authorizes moneys from the fund to be allocated for the purpose of reducing greenhouse gas emissions in this state through specified investments if the investment furthers the regulatory purposes of the act and is consistent with law.

This bill would additionally authorize moneys in the fund to be used to promote and further California climate goals to encourage the in-state production of alternative fuels with low-carbon intensity from new and existing facilities, using sustainable feedstock, with preference to be given to disadvantaged communities.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

SB 1402 (Pavley) - Low-carbon fuels

This bill meets the criteria for referral to the Suspense File.

Bill Summary: SB 1402 creates

the California Low-Carbon Fuels Incentive Program, to be administered by the California Air Resources Board (ARB), in conjunction with the State Energy Resources Conservation and Development Commission (CEC) to provide incentives for the in-state production of low-carbon transportation fuels from new and existing facilities using sustainable feedstock. The program will be funded from moneys appropriated from the Greenhouse Gas Reduction Fund (GGRF), and must prioritize projects providing direct benefits to disadvantaged communities.

Fiscal Impact:

• Between $150,000 annually (GGRF) and approximately $928,000 (GGRF) annually to the ARB to administer the program depending upon how the bill is implemented. (See staff comments).
• Unknown, likely minor, costs to the CEC.
• Cost pressures, potentially in the millions of dollars, to fund the incentive program.

Background:

Several programs in California have been established to create markets for low-carbon fuels, in furtherance of meeting GHG emissions reduction goals. ARB established the Low-Carbon Fuel Standard (LCFS) pursuant to authority under AB 32 in 2009, and began implementing the program in 2010. The LCFS requires transportation fuels used in the state to meet certain average annual carbon limitations. The program ultimately requires a 10% reduction in the carbon intensity (CI) of a particular fuel by 2020. The CI measures the net carbon emissions of the entire life-cycle of the fuel, including carbon emitted during production, refining, transportation, and conversion of the fuel to useable energy. Fuel suppliers can meet the standard by reducing the carbon intensity of their fuels, or by purchasing credits from other suppliers of other fuels that have carbon intensities below state requirements.

The LCFS CI requirement was frozen at 1% from 2013 until late last year as a result of litigation where the court concluded that ARB’s adoption of the LCFS violated requirements of the California Environmental Quality Act and the California Administrative Procedure Act. ARB readopted the LCFS to correct those administrative deficiencies last fall and approved a modified CI reduction schedule that still meets the original LCFS target of a 10% reduction by 2020.

In 2011, more than 75% of the credits in the program were generated from ethanol and less than 25% were generated from non-ethanol fuels. Through the third quarter of 2015, however, credits from non-ethanol alternative fuels have more than doubled and account for about 60% of the total credits.

According to the ARB, “The requirements of the bill would likely be met by ARB’s “price per gallon” production incentive program, which is included in the Governor’s proposed 2016-17 budget. This production incentive program would be distributed on a first-come/first-served basis, and may encourage (1) In-state very low carbon fuel producers to ramp up to their maximum production; (2) In-state very low carbon fuel producers who are about to come online to begin producing; and (3) In‑state very low carbon fuel producers who are producing very low carbon fuels, but who are not receiving maximum credit for their fuel, to register in all pertinent systems. ARB has requested one position for this work in the Governor’s proposed budget, although it is unknown whether the Legislature will approve this BCP.”

Proposed Law:

1. This bill:
2. Creates the California Low-Carbon Fuels Incentive Program, funded through the GGRF, and administered by ARB, in conjunction with the CEC.
3. Requires the program to provide incentives for in-state production of low-carbon transportation fuels from new and existing facilities using sustainable feedstock and prioritizes projects providing direct benefits to disadvantaged communities.

Related Legislation:

AB 692 (Quirk, Chapter 588, Statutes of 2015) requires 3% of the aggregate amount of transportation fuel purchased by state agencies to be procured from very low-carbon fuel sources by January 1, 2017, and ratchets that requirement up until it reaches 10% by January 1, 2024. AB 692 defines “very low carbon transportation fuel” as a liquid or gaseous transportation fuel having no greater than 40% of the carbon intensity of the closest comparable petroleum fuel for that year.

AB 118 (Núñez, Chapter 750, Statutes of 2007) created the Alternative and Renewable Fuels and Vehicle Technology Program (ARFVTP) program. AB 118 provides, upon appropriation by the Legislature, approximately $100 million annually for the ARFVT program to the CEC until 2024. These funds primarily come from additional fees on vehicle registrations and vessel registrations.

Staff Comments:

ARB staff notes that this bill could be implemented through ARB’s “price per gallon” incentive program, which is included in the Governor’s proposed 2016-17 budget. However, per ARB, discussions with the author’s office suggest that they would like ARB to implement a “contracts for differences” program to incentivize the construction of low carbon fuel production facilities within the state by guaranteeing either a minimum fuel price or a minimum “strike price” for finished fuel after adjusting for other state and federal incentives and the selling price of the fuel.  This program is beyond the scope of the approach proposed in the budget.

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SENATE COMMITTEE ON ENVIRONMENTAL QUALITY

Senator Wieckowski, Chair

2015 - 2016 Regular

Bill No: SB 1402

SUBJECT: Low-carbon fuels

ANALYSIS:

Existing law:

1. Under the California Global Warming Solutions Act of 2006 (also known as AB 32), 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 emissions reductions measures by regulation. ARB is authorized to include the use of market-based mechanisms to comply with these regulations. (Health and Safety Code §38500 et seq.)
2. Establishes the Greenhouse Gas Reduction Fund (GGRF) in the State Treasury, and requires all moneys, except for fines and penalties, collected pursuant to a market-based mechanism be deposited in the fund. (Government Code §16428.8)
3. Prohibits the state from approving allocations for a measure or program using GGRF moneys except after determining that the use of those moneys furthers the regulatory purposes of AB 32, and requires moneys from the GGRF be used to facilitate the achievement of reductions of GHG emissions in California. (HSC §39712)
4. Specifies that GGRF moneys may be allocated to reduce GHG emissions through investments including, but not limited to, development of state-of-the-art systems to move goods and freight, advanced technology vehicles and vehicle infrastructure, advanced biofuels, and low-carbon and efficient public transportation. (HSC §39712)
   

This bill:

1. Creates the California Low-Carbon Fuels Incentive Program, funded through the GGRF, and administered by ARB, in conjunction with the State Energy Resources Conservation and Development Commission (CEC).
2. Requires the program to provide incentives for in-state production of low-carbon transportation fuels from new and existing facilities using sustainable feedstock and prioritizes projects providing direct benefits to disadvantaged communities.
   

Background

1. Increasing demand for low-carbon fuels. Several programs in California have been established to create markets for low-carbon fuels, in furtherance of meeting GHG emission reduction goals.
   1. Low-Carbon Fuel Standard. ARB established the Low-Carbon Fuel Standard (LCFS) pursuant to authority under AB 32 in 2009, and began implementing the program in 2010. The LCFS requires transportation fuels used in the state to meet certain average annual carbon limitations. The program ultimately requires a 10% reduction in the carbon intensity (CI) of a particular fuel by 2020. The CI measures the net carbon emissions of the entire life-cycle of the fuel, including carbon emitted during production, refining, transportation, and conversion of the fuel to useable energy. Fuel suppliers can meet the standard by reducing the carbon intensity of their fuels, or by purchasing credits from other suppliers of other fuels that have carbon intensities below state requirements.

The LCFS CI requirement was frozen at 1% from 2013 until late last year as a result of litigation where the court concluded that ARB’s adoption of the LCFS violated requirements of the California Environmental Quality Act and the California Administrative Procedure Act. ARB readopted the LCFS to correct those administrative deficiencies last fall and approved a modified CI reduction schedule that still meets the original LCFS target of a 10% reduction by 2020.

In 2011, more than 75% of the credits in the program were generated from ethanol and less than 25% were generated from non-ethanol fuels. Through the third quarter of 2015, however, credits from non-ethanol alternative fuels have more than doubled and account for about 60% of the total credits.

• 1. AB 692 (Quirk, Chapter 588, Statutes of 2015) requires 3% of the aggregate amount of transportation fuel purchased by state agencies to be procured from very low-carbon fuel sources by January 1, 2017, and ratchets that requirement up until it reaches 10% by January 1, 2024. AB 692 defines “very low carbon transportation fuel” as a liquid or gaseous transportation fuel having no greater than 40% of the carbon intensity of the closest comparable petroleum fuel for that year.

1. AB 118. AB 118 (Núñez, Chapter 750, Statutes of 2007) created the Alternative and Renewable Fuels and Vehicle Technology Program (ARFVTP) program. AB 118 provides, upon appropriation by the Legislature, approximately $100 million annually for the ARFVT program to the CEC until 2024. These funds primarily come from additional fees on vehicle registrations and vessel registrations.

The program requires CEC to implement the ARFVTP to provide funding measures to develop technologies and alternative and renewable fuels in the marketplace to help attain the state’s climate change policies.

Specifically, the CEC specifies their $100 million budget supports the development of alternative and renewable low-carbon fuels, optimization of alternative and renewable fuels for existing and developing engine technologies, production of alternative and renewable low-carbon fuels in California and projects that decrease, on a full fuel-cycle basis, the overall impact and carbon footprint of alternative and renewable fuels and increase sustainability.

The ARFVT 2015-16 Investment Plan update proposed funding for the alternative fuel production category, including biomethane, gasoline and diesel substitutes, of $20 million. As of early 2015, the program has awarded a total of $51 million to 15 projects for biomethane production, $27.3 million to 12 projects for low-carbon gasoline substitutes, and $56.7 million to 18 projects for biodiesel and renewable diesel fuels. According to the 2015-16 Investment Plan, the Energy Commission notes they have provided preferences for projects located in or benefitting disadvantaged communities.

1. Cap-and-trade auction revenue. Since November 2012, ARB has conducted 14 cap-and-trade auctions, generating over $4 billion in proceeds to the state.

State law specifies that the auction revenues must be used to facilitate the achievement of GHG emissions reductions and outlines various categories of allowable expenditures. Statute further requires the Department of Finance, in consultation with ARB and any other relevant state agency, to develop a three-year investment plan for the auction proceeds, which are deposited in the GGRF.

Disadvantaged communities. SB 535 (de León, Chapter 830, Statutes of 2012) requires the Department of Finance, in the investment plan, to allocate at least 25% of available moneys in the GGRF to projects that provide benefits to disadvantaged communities, and at least 10% to projects located within disadvantaged communities.

To meet the SB 535 mandate, the Office of Environmental Health Hazard Assessment, under CalEPA’s guidance, developed a tool (termed CalEnviroScreen) to assess census tracts across the state that are disproportionately affected by multiple types of pollution and areas with vulnerable populations.

Additionally, SB 862 (Committee on Budget and Fiscal Review, Chapter 36, Statutes of 2014) requires ARB to develop guidelines on maximizing benefits for disadvantaged communities by agencies administering GGRF funds, and guidance for administering agencies on GHG emissions reduction reporting and quantification methods.

Legal consideration of cap-and-trade auction revenues. The 2012-13 Budget analysis of cap-and-trade auction revenue by the Legislative Analyst’s Office noted that, based on an opinion from the Office of Legislative Counsel, the auction revenues should be considered mitigation fee revenues, and their use requires that a clear nexus exist between an activity for which a mitigation fee is used and the adverse effects related to the activity on which that fee is levied. Therefore, in order for their use to be valid as mitigation fees, revenues from the cap-and-trade auction must be used to mitigate GHG emissions or the harms caused by GHG emissions.

In 2012, the California Chamber of Commerce filed a lawsuit against the ARB claiming that cap-and-trade auction revenues constitute illegal tax revenue. In November 2013, the superior court ruling declined to hold the auction a tax, concluding that it is more akin to a regulatory fee. The plaintiffs filed an appeal with the 3rd District Court of Appeal in Sacramento in February of 2014, and that case is pending.

Budget allocations. SB 862 (Committee on Budget and Fiscal Review, Chapter 36, Statutes of 2014), a budget trailer bill, established a long-term cap-and-trade expenditure plan by continuously appropriating portions of the funds for designated programs or purposes. The legislation appropriates 25% for the state’s high-speed rail project, 20% for affordable housing and sustainable communities grants, 10% to the Transit and Intercity Rail Capital Program, and 5% for low-carbon transit operations. The remaining 40% is available for annual appropriation by the Legislature.

The Governor’s 2016-17 proposed budget appropriates over $3 billion to a variety of programs and projects in the transportation, energy, natural resources, and waste diversion sectors.

Comments

1. Purpose of Bill. According to the author, “With the passage of SB 350 (de Leon, 2015), California cemented its climate leadership by establishing a clear market signal to the clean tech and energy sector that the state is committed to renewables and energy efficiency for the long term.

“During the Paris Climate conference, a large business contingent was present, signaling that businesses are willing to step up and do their part if they have the market certainty and predictability they need to plan.

“Just this January, the Air Resources Board re-adopted the Low Carbon Fuels Standard, ensuring that transportation fuels consumed in California will be ten percent cleaner by 2020. However, while the Low Carbon Fuel Standard drives the deep emission reductions the state needs to meet our long term climate policy, the lion’s share of the credits are generated out of state.

“SB 1402 will create well-paying 21st century jobs focused in disadvantaged communities in California. The program will encourage the near-term production of robust volumes of low carbon transportation from sustainable feedstocks at facilities in California.

“Through SB 1402, we send the right market signal and provide the certainty that businesses need to do their part. The home-grown clean energy economy is worth building -- not only for our air, but for our economy and our businesses.”

1. Implementing a budget proposal. The Governor’s 2016-17 budget proposal appropriates $500 million to ARB for Low Carbon Transportation & Fuels. According to the administration’s budget change proposal for this appropriation, “$455 million would be directed to continue and expand GGRF Low Carbon Transportation investments from the 2015-16, 2014-15, 2013-14 budget cycles to meet consumer demand, including projects that provide incentives for sustainable freight technology, near- and zero-emissions passenger vehicles, and clean trucks and buses to achieve GHG emission reductions. $40 million would be directed to establish a new program to provide incentives for in-state production of ultra–low carbon fuels.” SB 1402 appears to contain the implementing statutory provisions for the proposed $40 million to ARB for low-carbon fuel incentives.
2. Piece by piece. GGRF investments must facilitate the achievement of GHG emissions reductions. However, after that requirement is fulfilled, there are a number of other policy goals that should be considered, including benefits to environmental quality, resource protection, public health and the economy, as well as benefits to disadvantaged communities. Various policy committees have been referred proposals for investing GGRF moneys, and these committees will likely consider whether proposals meet basic statutory requirements and align with legislative priorities. However, in order to create an optimized investment strategy from GGRF moneys, proposals should not be considered in isolation, but be assessed in aggregate to evaluate which set of proposals best meets the requirements of the fund, uses resources most efficiently, and maximizes policy objectives. As the budget committees are considering the Governor’s proposal of GGRF expenditures, the budget process may be an ideal way to comprehensively consider the numerous policy bills, including SB 1402, that propose new programs funded through the GGRF.
3. Setting up a new program. SB 1402 does not specify any requirements or provisions outlining how the Low-Carbon Fuels Incentive Program, funded through GGRF, would operate.

For instance, what types of fuels and technologies are eligible? What carbon intensity does a “low-carbon” fuel have to meet? Will ARB and CEC be required to create guidelines or specify program requirements for these incentives? What form will these incentives take? Will these incentives be awarded through a competitive process based on GHG emission reductions? How will progress be measured and tracked?

As there is little specificity in the bill as to how this program will operate, it is not clear how the bill will accomplish the goals of the program.

1. Complements or Copies? As noted in the background, the AB 118 program, administered by the CEC, already provides substantial grants for the production of low-carbon fuels. How will the program created in SB 1402 differ from the CEC’s AB 118 program? Can the objectives of this bill be met by either augmenting AB 118’s budget through GGRF moneys, or by amending, as necessary, the AB 118 program?

Related/Prior Legislation

SB 706 (Pavley, 2015) requires that GGRF moneys be available to encourage the in-state production of alternative fuels with low-carbon intensity from new and existing facilities using sustainable feedstock, with preference given to disadvantaged communities. SB 706 was held on the Senate Appropriations Suspense file.

AB 692 (Quirk, Chapter 588, Statutes of 2015) requires 3% by January 1, 2017, and 10% by January 1, 2024, of the aggregate amount of transportation fuel purchased by state agencies to be procured from very low-carbon fuel sources.

SOURCE:

Author

SUPPORT:

Clean Energy

OPPOSITION:

None received

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