Date of Hearing: May 16, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 1156

Author:(Eduardo Garcia) – As Amended Ver:April 30, 2019

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill requires the State Treasurer, in consultation with the Air Resources Board (ARB), to develop and implement a pilot financial mechanism for dairy-related and other projects producing very-low-carbon transportation fuels or negative-carbon transportation fuels in the state, known as the Environmental Credit Insurance Program (ECIP).

FISCAL EFFECT:

1. First year State Treasurer’s Office costs (or the California Pollution Control Finance Authority in the State Treasurer’s Office) of approximately $635,000 (General Fund) to implement the requirements of the bill, including the development of financial mechanism. Costs include additional personnel and consultant contracts. Once the program is operational, costs may be funded by fees charged to insured projects and General Fund support may no longer be necessary.
2. ARB costs are minor and absorbable.

COMMENTS:

Background and Purpose. SB 1383 (Lara), Chapter 395, Statutes of 2016, requires ARB to approve and implement the comprehensive short-lived climate pollutant (SLCP) strategy to achieve, from 2013 levels, a 40% reduction in methane, a 40% reduction in hydroflourocarbons (HFCs), and a 50% reduction in anthropogenic black carbon, by 2030. SB 1383 establishes specific procedures to regulate dairy sources of methane.

SB 1383 also requires ARB to develop a pilot financial mechanism to reduce the economic uncertainty associated with the value of environmental credits from dairy-related projects producing low-carbon transportation fuels. In November 2018, ARB issued an “SB 1383 Pilot Financial Mechanisms Paper” which proposed two possible mechanisms for financing dairy biomethane projects: Contracts for Difference and Put Options. This bill adopts the Contracts-for-Difference model and prescribes additional details.

Analysis Prepared by: Jennifer Galehouse / APPR. / (916) 319-2081

Date of Hearing: April 22, 2019

ASSEMBLY COMMITTEE ON NATURAL RESOURCES

Laura Friedman, Chair

ABPCA Bill Id:AB 1156 (

Author:Eduardo Garcia) – As Amended Ver:April 10, 2019

SUBJECT: Methane: dairy and livestock: pilot financial mechanism: Environmental Credit Insurance Program

SUMMARY: Requires the State Treasurer, in consultation with the Air Resources Board (ARB), to develop and implement a pilot financial mechanism for dairy-related and other projects producing low-carbon transportation fuels in the state, known as the Environmental Credit Insurance Program (ECIP).

EXISTING LAW:

1. 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% by 2020. The order required ARB to consider adopting a Low Carbon Fuel Standards (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 greenhouse gas (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.
2. Requires ARB to approve and implement the comprehensive short-lived climate pollutant (SLCP) strategy to achieve, from 2013 levels, a 40% reduction in methane, a 40% reduction in hydrofluorocarbon gases (HFCs), and a 50% reduction in anthropogenic black carbon, by 2030.
3. Requires ARB to adopt regulations to reduce methane emissions from dairy and livestock manure management operations, subject to a variety of conditions and requirements, including requiring ARB and the Public Utilities Commission (PUC) to establish energy infrastructure development and procurement policies for dairy biomethane projects, including:
   1. Requiring ARB to develop a pilot financial mechanism to reduce the economic uncertainty associated with the value of environmental credits from dairy-related projects producing low-carbon transportation fuels.
   2. Directing gas utilities to implement at least five dairy biomethane pilot projects; and
4. Requires the California Energy Commission (CEC), ARB and the PUC to develop recommendations for development and use of renewable gas, then consider and adopt policies and incentives to increase production and use of renewable gas, including biomethane and biogas, that reduces SLCPs in the state. Requires prioritization of fuels with the greatest GHG benefits, including consideration of carbon intensity and reduction in SLCPs.

THIS BILL transfers the duty to implement a pilot financial mechanism from ARB to the Treasurer, expands the scope of the mechanism to include non-dairy projects, and specifies details of the ECIP as follows:

1. Requires ECIP to increase the price certainty of the LCFS credit market for low- or negative-carbon fuel development projects by providing payments to project applicants for the difference between the strike price and environmental credit price if the environmental credit price drops below the contracted strike price.
2. Requires the goals of ECIP to include all of the following:
   1. Increase the price certainty for the LCFS credit market.
   2. Reduce the risk to low- and negative-carbon transportation fuel projects financed based on environmental credit value.
   3. Accelerate the development of projects that capture methane.
3. Requires ECIP to do all of the following:
   1. Provide private, supplemental insurance coverage to cover the costs of the program if the price of environmental credits goes below a certain percentage of the strike price. This insurance may be underwritten by the Treasurer or be a requirement for project applicants to include the cost of insurance in the reverse auction price. Authorizes the Treasurer to charge a fee to insured projects to cover the reasonable costs of the program in providing supplemental insurance.
   2. Provide a process for establishing the strike price via a reverse auction utilizing an open bid process until program funding is fully subscribed, with all moneys received to be deposited in the Environmental Credit Insurance Fund (Fund) established by the bill.
   3. Ensure that different transportation fuels are considered under separate strike prices and that at least two types of transportation fuels are selected.
   4. Consider the credit worthiness of the project applicant and the readiness of the low- and negative-carbon fuel development project.
   5. Ensure that the term for the insurance coverage is no less than 10 years.
   6. Allow for the Treasurer to deposit environmental credit revenue in the Fund if environmental credit prices are above the strike price.
   7. Allow the Treasurer to charge a fee to project applicants that hold contracts for the reasonable costs of administering the program, with all moneys received to be deposited in the Fund.
   8. Ensure that sufficient moneys are held in escrow to manage liability and protect the state from an unexpected shortfall.
4. Creates the Fund, with moneys to be allocated, upon appropriation by the Legislature, by the Treasurer for the purposes of the program.
5. Establishes the following definitions:
   1. “Contract” means a contract established via reverse auction for a strike price valuation of environmental credits.
   2. “Environmental credit” means the asset generated by low-carbon fuel producers with a monetizable value under the LCFS.
   3. “Insurance coverage” means the payout of money to a project applicant in the event an environmental credit value drops below a strike price.
   4. “Insured projects” are projects that have been approved for inclusion in the program by the Treasurer.
   5. “Low- and negative-carbon fuel development project” means a project in the state that will develop a transportation fuel eligible for a credit pursuant to the LCFS.
   6. “Low-Carbon Fuel Standard credit market” means the credit market established pursuant to the LCFS.
   7. “Reverse auction” is an auction in which project developers bid for a desired strike price. The lowest bid receives the contract, and other contracts are awarded in ascending price order until the program moneys are allocated.
   8. “Strike price” means a price established between the Treasurer and a counterparty representing an agreed-upon combined value of the environmental credits.

FISCAL EFFECT: Unknown

COMMENTS:

1. Background. SB 1383 (Lara), Chapter 395, Statutes of 2016, requires ARB to approve and implement the comprehensive SLCP strategy to achieve, from 2013 levels, a 40% reduction in methane, a 40% reduction in HFCs, and a 50% reduction in anthropogenic black carbon, by 2030. SB 1383 establishes specific procedures to regulate dairy sources of methane. Specifically, regulations to reduce methane emissions from dairy and livestock manure management operations are subject to the following conditions:
   • 1. Reductions are limited to 40% below 2013 levels by 2030;
     2. Requires emission reduction regulations to be implemented on or after 2024;
     3. ARB must first complete specified steps, including stakeholder consultation, public meetings, and research;
     4. ARB must determine the regulations are technologically feasible, economically feasible, cost-effective, and minimize and mitigate potential leakage;
     5. Requires ARB to analyze progress toward the targets and authorizes ARB to reduce the 40% by 2030 goal if the analysis determines that progress has not been made due to insufficient funding, technical or market barriers;
     6. Requires ARB and PUC to establish energy infrastructure development and procurement policies for dairy biomethane projects, including directing gas utilities to implement at least five dairy biomethane pilot projects; and
     7. Enteric emission reductions shall be achieved only through incentive-based mechanisms until ARB determines that a cost-effective, considering the impact on animal productivity, scientifically proven means of reducing enteric emissions is available and that adoption of the enteric emissions reduction method would not damage animal health, public health, or consumer acceptance.

SB 1383 also requires ARB to develop a pilot financial mechanism to reduce the economic uncertainty associated with the value of environmental credits from dairy-related projects producing low-carbon transportation fuels. In November 2018, ARB issued an “SB 1383 Pilot Financial Mechanisms Paper” which proposed two possible mechanisms for financing dairy biomethane projects: Contracts for Difference and Put Options. This bill adopts the Contracts for Difference model and prescribes additional details.

1. Author’s statement:

California’s ambitious climate targets include targets for methane mitigation in the state. SB 1383 requires ARB to adopt regulations to reduce manure methane emissions from dairies and livestock by 40% below 2013 levels by 2030. Methane emissions are 9% of the state’s annual greenhouse gas emissions, and the dairy and agriculture sectors are approximately 60% of those emissions.

Despite these ambitious targets, it can be hard for project developers to secure funding for methane mitigation projects. The theory behind a pilot financial mechanism is that, by providing certainty in credit prices, project developers would be more successful in obtaining financing, thereby enabling faster action than is possible with public subsidy alone – particularly for projects that are testing new and innovative technologies. The pilot financial mechanism will create a guaranteed floor price to ensure financeability of projects largely dependent on low-carbon fuel credit markets.

1. Bar for inclusion of LCFS fuels may be too low. Under this bill, the ECIP could be used to assist dairy-related and other projects producing low-carbon transportation fuels in the state, without specifying any particular carbon intensity. To provide more focus and bang for the buck, the author and the committee may wish to consider limiting the program to projects that produce fuels with zero or negative carbon intensity values. Alternatively, the program could be limited to “very low carbon transportation fuels,” as defined in Section 43870 of the Health and Safety Code (i.e., fuels that are not more than 40% the carbon intensity of the closest comparable petroleum fuel).
2. Should auction details be left to the Treasurer? This bill goes beyond ARB’s recommendations to prescribe very specific details regarding design of the ECIP, including requiring a reverse auction. The author and the committee may wish to consider whether the Treasurer’s Office should be given more discretion to determine and adjust these details as it implements the program.

REGISTERED SUPPORT / OPPOSITION:

Support

Agricultural Energy Consumers Association
Coalition for Renewable Natural Gas
Oberon Fuels

Opposition

None on file

Analysis Prepared by: Lawrence Lingbloom / NAT. RES. /