THIRD READING  

Bill No: AB 293

Author: Eduardo Garcia (D)

Amended: 4/2/19 in Assembly

Vote: 21

SENATE ENVIRONMENTAL QUALITY COMMITTEE: 7-0, 6/5/19

AYES: Allen, Bates, Hill, Skinner, Stern, Stone, Wieckowski

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

ASSEMBLY FLOOR: 76-0, 5/2/19 (Consent) - See last page for vote

SUBJECT: Greenhouse gases: offset protocols

SOURCE: Author

DIGEST:

This bill requires the Compliance Offsets Protocol Task Force to make recommendations related to offsets in the cap-and-trade program and to develop recommendations for the Air Resources Board on the inclusion of aggregation methodologies to allow groups of landowners to jointly develop an offset project.

ANALYSIS:

Existing law:

1. Establishes the Air Resources Board (ARB) as the air pollution control agency in California. (Health and Safety Code (HSC) §39500 et seq.)
   
2. Requires ARB to ensure that statewide greenhouse gas (GHG) emissions are reduced to at least 40% below the 1990 level by December 31, 2030 (i.e., SB 32); and allows ARB, until December 31, 2030, to adopt regulations that utilize market-based compliance mechanisms (i.e., the cap-and-trade program) to reduce GHG emissions. (HSC §§ 38566, 38562)
   
3. Establishes the Compliance Offsets Protocol Task Force, with membership appointed by ARB, as specified, to provide guidance to ARB in approving new offset protocols for the cap-and-trade program for the purposes of increasing offset projects with direct environmental benefits (DEBs) in the state while prioritizing disadvantaged communities, Native American or tribal lands, and rural and agricultural regions.
   
4. Specifies that a covered entity’s compliance obligation under the cap-and-trade program may be met by surrendering offset credits, of which no more than one-half may be sourced from projects that do not provide DEBs in state, as follows:
   
   1. From January 1, 2021 to December 31, 2025, a total of 4%.
   2. From January 1, 2026 to December 31, 2030, a total of 6%.
      

This bill:

1. Requires the Compliance Offsets Protocol Task Force to consider the development of additional offset protocols, including, but not limited to, protocols for the enhanced management or conservation of agricultural and natural lands, and for the enhancement and restoration of wetlands.
   
2. Requires the Compliance Offsets Protocol Task Force to develop recommendations for ARB on the inclusion of methodologies to allow groups of landowners to jointly develop natural and working lands offset projects under the approved offset protocols, as specified.

Background

1. Implementing AB 32: The California Global Warming Solutions Act of 2006. In 2006, AB 32 (Núñez and Pavley, Chapter 488, Statutes of 2006) was signed into law, which requires ARB to determine the 1990 statewide GHG emission level and achieve a reduction in GHG emissions to that level by 2020. In addition to calling on ARB to inventory GHGs in California (including carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride) and approve the aforementioned statewide GHG emissions limit.
   
   AB 32 also required ARB to (1) implement regulations that achieve the maximum technologically feasible and cost-effective reduction of GHG emissions; (2) identify and adopt regulations for discrete early-action measures; and (3) prepare and approve a scoping plan, to be updated at least once every five years, to achieve the maximum technologically feasible and cost-effective reduction of GHG emissions. Due to a variety of factors, most importantly being the great recession that started in 2008, California will achieve the goals of AB 32 in advance of the 2020 deadline.
   
   In 2016, the Legislature approved, and the Governor signed, SB 32 (Pavley, Chapter 249, Statutes of 2016), which required ARB to ensure that statewide GHG emissions are reduced to at least 40% below the 1990 level by December 31, 2030. This new goal is known as the SB 32 target.
   
   The following year, AB 398 (E. Garcia, Chapter 135, Statutes of 2017) was enacted to extend the authority of ARB to implement a cap-and-trade program to reduce GHG emissions throughout the state.
   
2. Cap-and-Trade. The original cap-and-trade program was recommended by ARB as a central approach to flexibly and iteratively reduce emissions over time. Pursuant to legal authority under AB 32, ARB adopted cap-and-trade regulations and those regulations were approved on December 13, 2011.
   
   Beginning on January 1, 2013, the cap-and-trade regulation sets a firm, declining cap on total GHG emissions from sources that make up approximately 80% of all statewide GHG emissions. Sources included under the cap are termed “covered entities.” The cap is enforced by requiring each covered entity to surrender one “compliance instrument” for every emissions unit (i.e., metric ton of carbon dioxide equivalent or MTCO₂e) that it emits at the end of a compliance period.
   
   Two forms of compliance instruments are used: allowances and offsets. Allowances are generated by the state in an amount equal to the cap and may be “banked” (i.e., allowing current allowances to be used for future compliance). An offset is a credit for a real, verified, permanent, and enforceable emission reduction project from a source outside a capped sector (e.g., a certified carbon-storing forestry project). Some fraction of allowances are allocated freely to covered entities, a small portion are set aside as part of an allowance price-containment reserve (a cost-containment mechanism that releases additional allowances into the market to slow price increases), and the rest are auctioned off quarterly.
   
   Since November 2012, ARB has conducted eight California-only, 13 joint California-Québec, two joint California-Québec-Ontario, and then another three joint California-Québec cap-and-trade auctions (Ontario withdrew from the joint cap-and-trade program after a change in their political leadership). To date, approximately $10.3 billion has been generated by the cap-and-trade auctions and deposited into Greenhouse Gas Reduction Fund (GGRF).
   
3. Offsets. As noted, in addition to allowances, voluntary, additional emission reductions from sources that are outside the cap, called offsets, can be used to meet up to 8% of a facility’s compliance obligation through 2020. AB 398 reduced offset limits to 4% from 2021 through 2025 and 6% from 2026 through 2030, and specified that no more than one-half may be sourced from projects that do not provide DEBs in state.
   
   The offset limits apply to total emissions, not the reduction obligation. In practice, a facility may increase its GHG emissions and purchase offsets (and/or allowances) to cover excess emissions. Unlike allowances sold at auction, purchase of offsets generates no revenue for the state.
   
   To assure that offsets achieve GHG reductions that are real, permanent, quantifiable, verifiable, additional, and enforceable, ARB recognizes only compliance offsets generated by sources that adhere to a compliance offset protocol adopted by ARB. To date, ARB has adopted protocols for the following six project types: livestock manure management, ozone depleting substances (ODS), urban forests, United States (U.S.) forests, mine methane capture (MMC), and rice cultivation. U.S. forests projects are the largest source of compliance offsets by far, followed by ODS, livestock, and MMC. No compliance offsets have been issued for urban forests or rice cultivation projects.
   
   The vast majority of compliance offsets used to date have been generated by projects located outside of California. Arkansas accounts for about one-third of offsets, from large ODS projects. Another one-third are generated by forest projects in states such as Michigan, New Hampshire, and Ohio. California accounts for about a quarter of offsets, ranging from forest projects on the North Coast to appliance recycling (ODS) in Compton.
   
   While ARB has justified the reliance on compliance offsets as an opportunity for low-cost reductions from outside the cap, others have questioned how offsets, particularly from sources outside the state, might meet the statutory statewide GHG limits or otherwise produce DEBs in California. The “cost containment” justification for the offsets is tempered by the fact that allowances continue to sell at or near the floor price and the potential glut of allowances due to over-allocation portends not only continued low allowance prices, but the risk that the 2030 GHG reduction target will not be met.
   
4. Recent concern about offsets from the Legislature. On May 8, 2019, key leaders on environmental policy in both the Senate and Assembly sent a letter to California Environmental Protection Agency (CalEPA) Secretary Jared Blumenfeld and Air Resources Board Chair Mary Nichols on offsets within the cap-and-trade program. These authors raised a “concern that methodological weaknesses in the U.S. Forest Protocol may be undermining its environmental integrity and frustrating California’s progress toward its legally binding 2030 greenhouse gas emissions limit, as established by SB 32 (Pavley, Chapter 249, Statutes of 2016).”
   
   The authors also noted that, “a number of recent criticisms suggest that the [Forest Offset] Protocol’s standards may not be consistent with [statutory] requirements. Because of the forest offset program’s prominent role and the substantial criticisms that have been made about its performance, a thorough and independent review of the environmental integrity of the U.S. Forest Protocol is needed to give policymakers confidence that the credits the protocol generates are real and contribute to state climate policy goals.”

Comments

Purpose of Bill. According to the author, “when AB 398 extended the Cap-and-Trade program until 2030, it made an important and new distinction between credits that provide a ‘direct environmental benefit’ and those that did not. This distinction is in direct result to concerns of many stakeholders that most of the offset credits were being issued to projects that did not directly help California meet our important climate targets. Many credits issued to-date may not meet this new threshold, meaning ARB must act quickly to develop new offset protocols and refine existing protocols so compliance entities have options for investment prior to the end of the fourth compliance period. AB 293 hopes to accelerate that process by giving some legislative direction regarding potential protocols that could meet the new ‘direct environmental benefit’ threshold while providing support to projects that are important to California.”

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT: (Verified 6/25/19)

Audubon California

California Association of Resource Conservation Districts

California Climate & Agriculture Network

California Forest Carbon Coalition

Grassland Water District

Midpeninsula Regional Open Space

Planning and Conservation League

Rural County Representatives of California

The Nature Conservancy

OPPOSITION: (Verified 6/25/19)

None received

ASSEMBLY FLOOR: 76-0, 5/2/19

AYES: Aguiar-Curry, Bauer-Kahan, Berman, Bigelow, Bloom, Boerner Horvath, Bonta, Brough, Burke, Calderon, Carrillo, Cervantes, Chau, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Diep, Eggman, Flora, Fong, Frazier, Friedman, Gabriel, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez, Gray, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Petrie-Norris, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Voepel, Waldron, Weber, Wicks, Wood, Rendon

NO VOTE RECORDED: Arambula, Grayson, Mullin, Quirk

Prepared by: Eric Walters / E.Q. / (916) 651-4108

6/26/19 15:55:48

**** END ****

SENATE COMMITTEE ON ENVIRONMENTAL QUALITY

Senator Allen, Chair

2019 - 2020 Regular

Bill No: AB 293

SUBJECT: Greenhouse gases: offset protocols

DIGEST: Requires the Compliance Offsets Protocol Task Force to make recommendations related to offsets in the cap-and-trade program and to develop recommendations for the Air Resources Board on the inclusion of aggregation methodologies to allow groups of landowners to jointly develop an offset project.

ANALYSIS:

Existing law:

1. Establishes the Air Resources Board (ARB) as the air pollution control agency in California. (Health and Safety Code (HSC) §39500 et seq.)
   
2. Requires ARB to ensure that statewide GHG emissions are reduced to at least 40% below the 1990 level by December 31, 2030 (i.e., SB 32); and allows ARB, until December 31, 2030, to adopt regulations that utilize market-based compliance mechanisms (i.e., the cap-and-trade program) to reduce GHG emissions. (HSC §§ 38566, 38562)
   
3. Establishes the Compliance Offsets Protocol Task Force, with membership appointed by ARB, as specified, to provide guidance to ARB in approving new offset protocols for the cap-and-trade program for the purposes of increasing offset projects with direct environmental benefits (DEBs) in the state while prioritizing disadvantaged communities, Native American or tribal lands, and rural and agricultural regions.
   
4. Specifies that a covered entity’s compliance obligation under the cap-and-trade program may be met by surrendering offset credits, of which no more than one-half may be sourced from projects that do not provide DEBs in state, as follows:
   
   1. From January 1, 2021 to December 31, 2025, a total of 4%.
      
   2. From January 1, 2026 to December 31, 2030, a total of 6%.
      

This bill:

1. Requires the Compliance Offsets Protocol Task Force to consider the development of additional offset protocols, including, but not limited to, protocols for the enhanced management or conservation of agricultural and natural lands, and for the enhancement and restoration of wetlands.
   
2. Requires the Compliance Offsets Protocol Task Force to develop recommendations for ARB on the inclusion of methodologies to allow groups of landowners to jointly develop natural and working lands offset projects under the approved offset protocols, as specified.
   

Background

1. Implementing AB 32: The California Global Warming Solutions Act of 2006. In 2006, AB 32 (Núñez and Pavley, Chapter 488, Statutes of 2006) was signed into law, which requires ARB to determine the 1990 statewide GHG emission level and achieve a reduction in GHG emissions to that level by 2020. In addition to calling on ARB to inventory GHGs in California (including carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride) and approve the aforementioned statewide GHG emissions limit.
   
   AB 32 also requires ARB to (1) implement regulations that achieve the maximum technologically feasible and cost-effective reduction of GHG emissions; (2) identify and adopt regulations for discrete early-action measures; and (3) prepare and approve a scoping plan, to be updated at least once every five years, to achieve the maximum technologically feasible and cost-effective reduction of GHG emissions. Due to a variety of factors, most importantly being the great recession that started in 2008, California will achieve the goals of AB 32 in advance of the 2020 deadline.
   
   In 2016, the Legislature approved, and the Governor signed, SB 32 (Pavley, Chapter 249, Statutes of 2016), which requires ARB to ensure that statewide GHG emissions are reduced to at least 40% below the 1990 level by December 31, 2030. This new goal is known as the SB 32 target.
   
   The following year, AB 398 (E. Garcia, Chapter 135, Statutes of 2017) was enacted to extend the authority of ARB to implement a cap-and-trade program to reduce GHG emissions throughout the state.
   
2. Cap-and-Trade. The original cap-and-trade program was recommended by ARB as a central approach to flexibly and iteratively reduce emissions over time. Pursuant to legal authority under AB 32, ARB adopted cap-and-trade regulations and those regulations were approved on December 13, 2011.
   
   Beginning on January 1, 2013, the cap-and-trade regulation sets a firm, declining cap on total GHG emissions from sources that make up approximately 80% of all statewide GHG emissions. Sources included under the cap are termed “covered entities.” The cap is enforced by requiring each covered entity to surrender one “compliance instrument” for every emissions unit (i.e., metric ton of carbon dioxide equivalent or MTCO₂e) that it emits at the end of a compliance period.
   
   Two forms of compliance instruments are used: allowances and offsets. Allowances are generated by the state in an amount equal to the cap and may be “banked” (i.e., allowing current allowances to be used for future compliance). An offset is a credit for a real, verified, permanent, and enforceable emission reduction project from a source outside a capped sector (e.g., a certified carbon-storing forestry project). Some fraction of allowances are allocated freely to covered entities, a small portion are set aside as part of an allowance price-containment reserve (a cost-containment mechanism that releases additional allowances into the market to slow price increases), and the rest are auctioned off quarterly.
   
   Since November 2012, ARB has conducted eight California-only, 13 joint California-Québec, two joint California-Québec-Ontario, and then another three joint California-Québec cap-and-trade auctions (Ontario withdrew from the joint cap-and-trade program after a change in their political leadership). To date, approximately $10.3 billion has been generated by the cap-and-trade auctions and deposited into Greenhouse Gas Reduction Fund (GGRF).
   
3. Offsets. As noted, in addition to allowances, voluntary, additional emission reductions from sources that are outside the cap, called offsets, can be used to meet up to 8% of a facility’s compliance obligation through 2020. AB 398 (E. Garcia, Chapter 135, Statutes of 2017) reduced offset limits to 4% from 2021 through 2025 and 6% from 2026 through 2030, and specified that no more than one-half may be sourced from projects that do not provide DEBs in state.
   
   The offset limits apply to total emissions, not the reduction obligation. In practice, a facility may increase its GHG emissions and purchase offsets (and/or allowances) to cover excess emissions. Unlike allowances sold at auction, purchase of offsets generates no revenue for the state.
   
   To assure that offsets achieve GHG reductions that are real, permanent, quantifiable, verifiable, additional, and enforceable, ARB recognizes only compliance offsets generated by sources that adhere to a compliance offset protocol adopted by ARB. To date, ARB has adopted protocols for the following six project types: livestock manure management, ozone depleting substances (ODS), urban forests, United States (U.S.) forests, mine methane capture (MMC), and rice cultivation. U.S. forests projects are the largest source of compliance offsets by far, followed by ODS, livestock, and MMC. No compliance offsets have been issued for urban forests or rice cultivation projects.
   
   The vast majority of compliance offsets used to date have been generated by projects located outside of California. Arkansas accounts for about one-third of offsets, from large ODS projects. Another one-third are generated by forest projects in states such as Michigan, New Hampshire, and Ohio. California accounts for about a quarter of offsets, ranging from forest projects on the North Coast to appliance recycling (ODS) in Compton.
   
   While ARB has justified the reliance on compliance offsets as an opportunity for low-cost reductions from outside the cap, others have questioned how offsets, particularly from sources outside the state, might meet the statutory statewide GHG limits or otherwise produce DEBs in California. The “cost containment” justification for the offsets is tempered by the fact that allowances continue to sell at or near the floor price and the potential glut of allowances due to over-allocation portends not only continued low allowance prices, but the risk that the 2030 GHG reduction target will not be met.
   
4. Recent concern about offsets from the Legislature. On May 8, 2019, key leaders on environmental policy in both the Senate and Assembly—including the author of AB 293 and two Members of this Committee—sent a letter to California Environmental Protection Agency (CalEPA) Secretary Jared Blumenfeld and Air Resources Board Chair Mary Nichols on offsets within the cap-and-trade program. These authors raised a “concern that methodological weaknesses in the U.S. Forest Protocol may be undermining its environmental integrity and frustrating California’s progress toward its legally binding 2030 greenhouse gas emissions limit, as established by SB 32 (Pavley, Chapter 249, Statutes of 2016).”
   
   The authors also noted that, “a number of recent criticisms suggest that the [Forest Offset] Protocol’s standards may not be consistent with [statutory] requirements. Because of the forest offset program’s prominent role and the substantial criticisms that have been made about its performance, a thorough and independent review of the environmental integrity of the U.S. Forest Protocol is needed to give policymakers confidence that the credits the protocol generates are real and contribute to state climate policy goals.”

Comments

1. Purpose of Bill. According to the author, “when AB 398 extended the Cap-and-Trade program until 2030, it made an important and new distinction between credits that provide a ‘direct environmental benefit’ and those that did not. This distinction is in direct result to concerns of many stakeholders that most of the offset credits were being issued to projects that did not directly help California meet our important climate targets. Many credits issued to-date may not meet this new threshold, meaning ARB must act quickly to develop new offset protocols and refine existing protocols so compliance entities have options for investment prior to the end of the fourth compliance period. AB 293 hopes to accelerate that process by giving some legislative direction regarding potential protocols that could meet the new ‘direct environmental benefit’ threshold while providing support to projects that are important to California.”
   
2. Necessity. As noted in the background, key leaders on environmental policy in both the Senate and Assembly—including the author of AB 293 and two Members of this Committee—sent a letter to CalEPA and ARB outlining concerns about the veracity of US forest offsets. One concern was that forest projects account for approximately 80% of the offsets generated under the cap-and-trade program, but the protocol does not seem to address leakage adequately (see background for more detail). This calls into question whether the GHG emissions reductions that are assumed to occur through these offsets are being fully realized.
   
   Also of note, the Compliance Offsets Protocol Task Force, which ARB plans to appoint later this year, is already statutorily directed to make recommendations for more protocols for ARB to consider as a part of the cap-and-trade program. This bill purports to add recommendations for “enhanced management or conservation of agricultural and natural lands, and for the enhancement and restoration of wetlands,” but those types of offsets would already have been considered by the Compliance Offsets Protocol Task Force, as would many other types of offsets, such as destroying ODSs.
   
   It is unclear what, if any, value the proposed language adds to statute.
   Additionally, AB 293 requires the Compliance Offsets Protocol Task Force to make recommendations for the “inclusion of methodologies to allow groups of landowners to jointly develop natural and working lands offset projects under the approved offset protocols,” but offset projects with multiple owners are also already permitted under the current regulations and protocols.
   
   As such, this provision of AB 293 will result in no change to state policy on offsets.
   
   Finally, further direction provided in the bill requires the Compliance Offsets Protocol Task Force to recommend ways to “lower project transaction costs for participants and enable a greater number of landowners to participate in those projects while protecting the integrity and transparency of those projects.” This seems to imply that current costs to participants are unjustifiably high. There is no evidence that ARB has made the offset process unnecessarily expensive, and an attempt to further reduce the resources put into offset verification is worrying given the existing concerns over the veracity of the US forests offset protocol.
   
   A question arises as to the necessity of AB 293.
   

SOURCE:

Author

SUPPORT:

Audubon California

California Association of Resource Conservation Districts

California Climate & Agriculture Network

California Forest Carbon Coalition

Grassland Water District

Midpeninsula Regional Open Space

Planning and Conservation League

Rural County Representatives of California

The Nature Conservancy

OPPOSITION:

None received

-- END --

Date of Hearing: April 24, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 293

Author:(Eduardo Garcia) – As Amended Ver:April 2, 2019

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

SUMMARY:

This bill requires the Climate Offsets Protocol Task Force (Task Force), appointed by the California Air Resources Board (ARB), to consider developing additional offset protocols, including, but not limited to, protocols for the enhanced management or conservation of agriculture and natural lands and for the enhancement and restoration of wetlands.

This bill also requires the Task Force to develop recommendations for ARB on the inclusion of methodologies to allow groups of landowners to jointly develop natural and working lands offset projects under the approved offset protocols. This bill requires the recommendations to address how to lower project transaction costs for participants and enable a greater number of landowners to participate while protecting the integrity and transparency of those projects

FISCAL EFFECT:

According to ARB, costs are minor and absorbable.

COMMENTS:

1. Purpose. According to the author:

As of January 23, 2019, ARB has issued over 118 million compliance offset credits. ARB staff and stakeholders have expressed concern that most of those credits may not qualify as DEBs (direct environmental benefits) under the regulation adopted by ARB in December 2018. The Board’s resolution directed staff to convene the Task Force in early 2019 in an effort to ensure old protocols were revised and new protocols developed to allow covered entities to meet the new requirements in statute and the regulation. As of February 11, 2019 the members of that group and future meeting dates have not been announced.

ARB has long studied and quantified the impacts of the types of projects outlined in the bill. The most recent analysis comes from the Draft California 2030 Natural and Working Lands Climate Change Implementation Plan, released January 3, 2019. As one of the few sectors not covered by cap and trade, investments in this sector are the most likely source of offset credits and new offset protocols.

1. Background. The California Global Warming Solutions Act of 2006 (AB 32) requires ARB to adopt a statewide GHG emissions limit equivalent to 1990 levels by 2020 and adopt regulations, including market-based compliance mechanisms, to achieve maximum technologically feasible and cost-effective GHG emission reductions.
   

As part of the implementation of AB 32 market-based compliance measures, ARB adopted a cap-and-trade program that caps the allowable statewide emissions and provides for the auctioning of emission credits, the proceeds of which are quarterly deposited into the Greenhouse Gas Reduction Fund (GGRF) available for appropriation by the Legislature.

1. Cap-and-trade. The cap-and-trade regulation is an important element of ARB's strategy to achieve the 2020 statewide GHG limit. The regulation sets a statewide cap on GHG emissions from sources responsible for approximately 85% of California’s GHG emissions (large industrial facilities and electricity generators emitting more than 25,000 metric tons of CO2 equivalent per year, as well as distributors of fuels, including gasoline, diesel and natural gas). The cap declines at a rate of about 3% annually, ultimately arriving at the target emission level in 2020. To implement the regulation, ARB issues GHG emission allowances equal to the cap through a combination of free allocation to industrial facilities, consignment to electric and gas utilities on behalf of ratepayers, and quarterly auctions.

Once issued, allowances may be traded among entities. At the end of each compliance period, covered entities are required to surrender enough allowances to match their emissions for the period.

ARB allocates free allowances to large industrial facilities. Allocation of allowances for most industrial sectors is set at about 90% of average emissions, based on benchmarks that reward efficient facilities. For most industrial sectors, distribution of allowances is updated annually according to the production at each facility.

ARB consigns allowances to electrical distribution and natural gas utilities, with the requirement that the value of allowances must be used to benefit ratepayers and achieve GHG emissions reduction.

1. Offsets. In addition to allowances, voluntary, additional emissions reductions from sources that are outside the cap, called offsets, can be used to meet up to 8% of a facility's compliance obligation through 2020.

AB 398, Chapter 135, Statutes of 2017, reduced offset limits going forward to 4% from 2021 through 2025, then 6% from 2026 through 2030, of a covered entity's compliance obligation. No more than one-half may be sourced from projects that do not provide direct environmental benefits in state.

The offset limits apply to total emissions, not the reduction obligation. In practice, a facility may increase its GHG emissions and purchase offsets (and/or allowances) to cover excess emissions. Unlike allowances sold at ARB's auctions, the purchase of offsets generates no revenue for the state.

To assure that offsets achieve GHG reductions that are real, permanent, quantifiable, verifiable, additional and enforceable, ARB recognizes only compliance offsets generated by sources that adhere to a compliance offset protocol adopted by ARB.

To date, ARB has adopted protocols for the following six project types: 1) livestock manure management; 2) ozone depleting substances (ODS); 3) urban forests; 4) U.S. forests; 5) mine methane capture (MMC); and 6) rice cultivation. U.S. forests projects are the largest source of compliance offsets by far, followed by ODS, livestock and MMC. No compliance offsets have been issued for urban forests or rice cultivation projects.

The vast majority of compliance offsets used to date have been generated by projects located outside of California. Arkansas accounts for about one-third of offsets, from large ODS projects. Another one-third are generated by forest projects in states such as Michigan, New Hampshire and Ohio. California accounts for 24% of offsets, ranging from forest projects on the North Coast to appliance recycling (ODS) in Compton. The use of offsets remains controversial.

1. Task Force. Among other things, AB 398 established the Compliance Offsets Protocol Task Force, consisting of specified stakeholders, to provide guidance to ARB in approving new offset protocols for purposes of increasing offset projects with direct environmental benefits in the state while prioritizing disadvantaged communities. The Task Force has yet to be appointed.

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

Date of Hearing: March 25, 2019

ASSEMBLY COMMITTEE ON NATURAL RESOURCES

Laura Friedman, Chair

ABPCA Bill Id:AB 293 (

Author:Eduardo Garcia) – As Amended Ver:February 26, 2019

SUBJECT: Greenhouse gases: offset protocols

SUMMARY: Requires the Compliance Offsets Protocol Task Force (Task Force) – appointed by the Air Resources Board (ARB) to make recommendations related to offsets in the cap and trade program – to develop recommendations for ARB on the inclusion of aggregation methodologies to allow groups of landowners to jointly develop an offset project.

EXISTING LAW:

1. Requires ARB to adopt a statewide GHG emissions limit equivalent to 1990 levels by 2020 and, in adopting rules and regulations to achieve the maximum technologically feasible and cost-effective GHG emissions reductions, to ensure that statewide GHG emissions are reduced to at least 40% below the 2020 statewide limit no later than December 31, 2030.
2. Requires ARB, when it adopts regulations to achieve GHG emission reductions beyond the 2020 statewide limit, to consider social costs and prioritize direct emission reductions at large stationary, mobile, and other sources.
3. Authorizes ARB to adopt a regulation that establishes a system of market-based declining annual aggregate emission limits for sources or categories of sources that emit GHG emissions, applicable from January 1, 2012, to December 31, 2030, to comply with GHG reduction regulations, once specified conditions are met. ARB has adopted a cap and trade regulation which applies to large industrial facilities and electricity generators emitting more than 25,000 metric tons of CO₂ equivalent per year, as well as distributors of fuels, including gasoline, diesel, and natural gas.
4. Requires any direct regulation or market-based compliance mechanism to achieve GHG reductions that are real, permanent, quantifiable, verifiable, and enforceable by ARB.
5. Requires ARB to adopt methodologies for the quantification of voluntary GHG emission reductions, and adopt regulations to verify and enforce any voluntary GHG emission reductions that are used to comply with GHG emission limits established by ARB.
6. Establishes offset credit limits. From January 1, 2021 to December 31, 2025, a total of 4%, and from January 1, 2026 to December 31, 2030, a total of 6%, of a covered entity's compliance obligation may be met by surrendering offset credits of which no more than one-half may be sourced from projects that do not provide direct environmental benefits (DEBs) in state (i.e., the reduction or avoidance of emissions of any air pollutant in the state or the reduction or avoidance of any pollutant that could have an adverse impact on waters of the state).
7. Establishes the Task Force, consisting of specified stakeholders, to provide guidance to ARB in approving new offset protocols for purposes of increasing offset projects with DEBs in the state while prioritizing disadvantaged communities.

THIS BILL:

1. Requires the Task Force to develop recommendations for ARB on the inclusion of aggregation methodologies to allow groups of landowners to jointly develop an offset project under the approved offset protocols.
2. Requires the recommendations to address how the aggregation of landowners’ GHG reduction activities may lower project transaction costs and allow a greater number of landowners to participate in natural and working lands offset projects while protecting the integrity and transparency of those projects.

FISCAL EFFECT: Unknown

COMMENTS:

1. Background. The cap and trade regulation sets a statewide cap on GHG emissions from sources responsible for approximately 85% of California's GHG emissions (large industrial facilities and electricity generators emitting more than 25,000 metric tons of CO₂ equivalent per year, as well as distributors of fuels, including gasoline, diesel, and natural gas). The cap declines each year to achieve the target emission level. To implement the regulation, ARB issues GHG emission allowances equal to the cap through a combination of free allocation to industrial facilities, consignment to electric and gas utilities on behalf of ratepayers, and quarterly auctions. Once issued, allowances may be traded among entities. At the end of each compliance period, covered entities are required to surrender enough allowances to match their emissions for the period.

ARB allocates free allowances to large industrial facilities. Allocation of allowances for most industrial sectors is set at about 90% of average emissions, based on benchmarks that reward efficient facilities. For most industrial sectors, distribution of allowances is updated annually according to the production at each facility. ARB consigns allowances to electrical distribution and natural gas utilities, with the requirement that the value of allowances must be used to benefit ratepayers and achieve GHG emissions reduction.

In addition to allowances, voluntary, additional emission reductions from sources that are outside the cap, called offsets, can be used to meet up to 8% of a facility's compliance obligation through 2020. AB 398 reduced offset limits going forward: to 4% from 2021 through 2025, then 6% from 2026 through 2030, of a covered entity's compliance obligation. No more than one-half may be sourced from projects that do not provide DEBs in state.

The offset limits apply to total emissions, not the reduction obligation. In practice, a facility may increase its GHG emissions and purchase offsets (and/or allowances) to cover excess emissions. Unlike allowances sold at ARB's auctions, purchase of offsets generates no revenue for the state.

To assure that offsets achieve GHG reductions that are real, permanent, quantifiable, verifiable, additional, and enforceable, ARB recognizes only compliance offsets generated by sources that adhere to a compliance offset protocol adopted by ARB. To date, ARB has adopted protocols for the following six project types: livestock manure management, ozone depleting substances (ODS), urban forests, United States (U.S.) forests, mine methane capture (MMC), and rice cultivation. U.S. forests projects are the largest source of compliance offsets by far, followed by ODS, livestock, and MMC. No compliance offsets have been issued for urban forests or rice cultivation projects.

The vast majority of compliance offsets used to date have been generated by projects located outside of California. Arkansas accounts for about one-third of offsets, from large ODS projects. Another one-third are generated by forest projects in states such as Michigan, New Hampshire, and Ohio. California accounts for about a quarter of offsets, ranging from forest projects on the North Coast to appliance recycling (ODS) in Compton.

While ARB has justified the reliance on compliance offsets as an opportunity for low-cost reductions from outside the cap, others have questioned how offsets, particularly from sources outside the state, might meet the statutory statewide GHG limits or otherwise produce benefits in California. The “cost containment” justification for the offsets is tempered by the fact that allowances continue to sell at or near the floor price and the potential glut of allowances due to over-allocation portends not only continued low allowance prices, but the risk that the 2030 GHG reduction target will not be met.

Against this backdrop, the Task Force, which ARB plans to appoint later this year, will make its recommendations for more protocols for ARB to consider. This bill adds recommendations for “aggregation methodologies” to allow groups of landowners to jointly develop offset projects. The necessity and effect of this provision is unclear, considering offset projects with multiple owners are permitted under the current regulations and protocols.

1. Author’s statement:

As of January 23, 2019, ARB has issued over 118 million compliance offset credits. ARB staff and stakeholders have expressed concern that most of those credits may not qualify as DEBs under the regulation adopted by ARB in December 2018. The Board’s resolution directed staff to convene the Task Force in early 2019 in an effort to ensure old protocols were revised and new protocols developed to allow covered entities to meet the new requirements in statute and the regulation. As of February 11, 2019 the members of that group and future meeting dates have not been announced.

ARB has long studied and quantified the impacts of the types of projects outlined in the bill. The most recent analysis comes from the Draft California 2030 Natural and Working Lands Climate Change Implementation Plan, released January 3, 2019. As one of the few sectors not covered by cap and trade, investments in this sector are the most likely source of offset credits and new offset protocols.

REGISTERED SUPPORT / OPPOSITION:

Support

Audubon California
California Climate & Agriculture Network
Planning and Conservation League
Rural County Representatives of California

The Nature Conservancy

Opposition

None on file

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