Senate Standing Committee on Environmental Quality

We're going to be discussing a very important topic, which is, of course, cap and trade rulemaking. As you all know, I think it was 18 years ago now. The Legislature passed AB 32, which set in motion a really significant effort to decarbonize our state's economy in response to the growing threat of climate change. And so since then, California, of course, we've continued to push the envelope in terms of our climate goals. Those goals have gotten more and more ambitious.

At the same time, we've been continuing to feel more and more dramatic effects of climate change. We just had a hearing last year, CARB did a review of the 2022 Scoping Plan Update that suggested that we need to increase our target emissions reductions to 48% below 1990 levels by 2030 to be on track to be carbon neutral by 2045, as is required under recent legislation.

We know that up until now, cap and trade has certainly been a really important part of California's climate plan, and it's been used as an important tool to drive emissions reductions. I know that CARB's had its work cut out for it, designing, running, and improving the cap and trade program for many years now. And obviously, there's been a lot of concerns raised about various aspects of the program.

I do think that for the most part, the program has succeeded, and the tweaks and changes that have been made have made it more successful. So let me just start by saying thank you to CARB for the really tremendous effort that you've all undergone to get our cap and trade program into the state that it is today. I also want to thank all of our panelists who have remained really engaged in helping the program be the best it can be, raised criticisms, oftentimes very uncomfortable.

We're now at a really interesting moment in the program. It's not been formally amended since 2018, but over the last year, CARB has held a number of workshops to contemplate potential changes to the regulations. And now we've got an opportunity to talk about what insights have been gleaned from these workshops, what lessons could be integrated into the program going forward.

We also have a chance to hear from some independent experts highlighting both the successes of the cap and trade program so far and the opportunities that we may have going forward to make the program better. And I'm also hopeful that we'll have the opportunity to sort of ask some really deep and kind of existential questions about the program. Is it doing what we need it to do? Does it really have the foundational basis to get us to our broader goals?

How do we compare our programs both on the revenue generation side and on the spending side to places like Washington and elsewhere that have been highlighted as a successful program? We're being asked to reauthorize the program by all sorts of different folks. And I think one of the things we want to do is really do a deep dive, really start a big discussion about what that reauthorization ought to look like and on what terms.

Let me say, this effort here is going to be part of a string of hearings. I know the Joint Committee on Climate Change that is chaired by Senator Stern is looking to do several deep dives into aspects of the program over the course of the early part of the year. And while Senator Stern isn't here personally, he's listening in right now, I know, and is very engaged in this effort, too. So I want to put that out there.

So anyway, kicking us off today, we're going to be having Liane Randolph, who's Chair of CARB, to provide some vital context and updates on the rulemaking process. We're also joined by Sarah Cornett, who's a really fantastic analyst at LAO, Katelyn Roedner Sutter, who's the Assembly appointee to the Independent Emissions Market Advisory Committee, IEMAC, Catherine Garoupa, who's from CARB's Environmental Justice Advisory Committee, EJAC, and of course, Danny Cullenward, Vice Chair and Senate appointee to the IEMAC, and then Matt Botil as well, who's the Chief of the Industrial Strategies Division at CARB.

So we really do appreciate all the panelists coming in today, bringing a unique and valuable perspective on the design of the program and for the time and effort. And mean, ultimately, this is really about making sure that we learn more about CARB's rulemaking process, how decisions that change the cap and trade program are being considered.

And then really, ultimately, we all have to make decisions as a Legislature to figure out how we want to both productively contribute to these ongoing conversations, but also figure out what the path moving forward is. We're going to start with Chair Randolph. She's going to provide an opportunity for Members of the Committee to ask her questions. And then we're going to have a second panel where everyone will deliver kind of scene setting remarks.

We're going to ask that Members of the Committee hold their questions for the second panel until all the panelists have got given their remarks, and then we'll have a discussion from there. So that's the plan for today. It's going to be an interesting hearing. And let me pass it over to my Co-chair, Senator Becker, thank you.

Thank you for Senator Allen, look forward to this. Yeah, exactly. For the Joint Hearing today, and pleased to open some, grateful to offer some opening comments as well. First of all, I want to thank all the panelists that Senator Allen mentioned for being here today, particularly Chair Randolph. Thank you for your time today.

You've been a foundational partner on climate issues, and cap and trade is a critical component of our efforts to get to net zero, and I look forward to the ongoing discussions and collaborations on this issue. In the 2022 Scoping Plan, CARB estimates that in the reference scenario, the cap and trade program will help fill the gap of between 79 to 98 million metric tons of co2 in the next six years to be on track for carbon neutrality by 2045.

And in last year's Scoping Plan, the target was updated to 48% reduction, as Senator Allen mentioned, by 2030 relative to 40% last year, which is a significant and important expansion of our ambitions. Needless to say, it's evident that both carbon, and all the various climate models agree that both more astringency and additional climate solutions are going to be needed to ensure that we keep on track for 85% emissions reductions by 2045.

Carbon proposed scenarios in the rulemaking step into that with ambitious outcomes by, for example, removing allowances from the market, and we'll hear about that today. And again, I want to again reiterate the agency and the Chair's leadership on this issue. While we present concerns and potential opportunities at this hearing today, I want to again recognize the rule of the role and the importance of CARB's ambitious modeling to ensure that we can get to net zero.

At the same time, we do make assumptions in the Scoping Plan about what we can do that are unlikely to happen without further policy action. I think we need to recognize that as well. For example, we're not putting sufficient state funding for livestock emissions that CARB estimates are needed to get to the 1383 emissions reduction goals. As another example, we're not funding carbon dioxide removal technologies per the Scoping Plan estimates, besides a very small pool of R and D funding every year.

While the program cannot and will not be the primary driver in getting the state to net zero, it does provide a backstop to fill that gap of uncertainty. On top of this, the most disadvantaged communities don't feel tangible fast enough improvements to air quality and public health from these stationary sources of air pollution. While the covered sources are not the only source of air pollution, the smokestacks are causing both pollution and GHG emissions.

While the Legislature passed previous legislation to try to close the gap of improvement, it's clear there are significant limitations to those programs, and we'll hear about that today. And finally, just a way of kind of setting the stage. The main funding from cap and trade, which is meant to transition the sectors not regulated or which will need more R and D support or for supporting the transition in low income communities, are not currently being targeted well towards those uses in a cost effective way, at least according to LAO, as we'll hear.

The GGRF investments from our Greenhouse Gas Reduction Fund have been going to programs that are very important, but for the most part are not effective or not pointed at high priority climate expenditures in the sectors or technologies that are necessary for meeting our climate goals. A recent analysis by CSG estimate the cost effectiveness of our overall spending is about $1,003 a ton. So this program is an important part of our state's portfolio policies, and it is critical for CARB and Legislature to iteratively make improvements to ensure it's serving both our climate and our air quality goals.

I look forward to being a partner with our colleagues, and we know there's also a very important Energy oversight hearing today, too, so we'll probably have some Members in and out, but I appreciate the Members who are here, the Governor's Office, looking for opportunities to strengthen our ambition while making sure we stay ambitious in achieving all of our climate targets. Thank you.

Okay, let's go ahead and get started with Chair Randolph.

Good morning. Thank you for having me. It's good seeing you all this morning. Okay, so my remarks are going to get fairly wonky, so I hope all the information is useful as we engage in this discussion. As the Senators have mentioned, the Cap-and-Trade Program is an economy wide cap on greenhouse gas emissions. It covers approximately 400 facilities and 80% of the state's GHD emissions.

The cap is achieved via creating a budget of allowances equal to the cap, then reducing the number of allowances in the system each year to achieve our reduction goals. Each allowance corresponds to one metric ton of greenhouse gas emissions. Each entity regulated by the program is required to surrender one compliance instrument for each ton of greenhouse gases they emit through either an allowance or an offset, which I'll discuss shortly. So we'll start with allowances.

The Cap-and-Trade Program allowances are distributed in a manner to help achieve the requirements of AB 32 and the overall goals of the program. Most allowances are sold at quarterly auctions, the proceeds of which will fund California climate investments, which I'll discuss later. A number of the allowances are allocated towards electrical and gas utilities, the majority of which are consigned at quarterly auctions and the proceeds distributed in the form of a credit on customer bills twice a year.

Slightly over 15% of the allowances are allocated directly to industry to prevent GHG emissions leakage, which is the relocation of California businesses out of state. A final 5% of the allowances are placed in the Allowance Price Containment Reserve, which protects businesses and consumers from spikes in allowance prices. As the number of the available allowances decline, this sends that long term signal to regulated entities, encouraging them to decarbonize their operations in the way that's most effective and cost effective for them.

In addition to allowances, regulated entities can also use CARB evaluated and approved compliance offsets to cover a limited portion of their carbon emissions. The regulation sets limits on the usage of offsets to ensure that as the emissions cap declines, the covered entities are still incentivized to decarbonize. Right now, statute limits these offsets to 4% of an entity's greenhouse gas emissions, and half of those offsets must provide direct environmental benefits to California.

Offsets represent verified GHG emissions reductions by projects that follow strict requirements in sectors and sources not covered by the Cap-and-Trade Program. It's important to note that the compliance offsets used in the Cap-and-Trade Program undergo a higher level of scrutiny and review than the voluntary offsets that are in the market, and that includes statutory requirements for real, permanent, verifiable, quantifiable, and enforceable emissions reductions.

California standards for offsets have withstood litigation and are regarded as the gold standard for carbon offsets, which is reflected in their significantly higher value on the offset market. The fungibility of offsets and allowances, along with other elements of the program, are designed to increase compliance flexibility and cost effective emissions reductions amongst the regulated entities. That includes a three year compliance period that gives entities time to develop compliance responses when annual emissions vary due to drought or economic conditions or other circumstances.

The program facilitates integration with other GHG reduction programs, including programs in California as well as programs in linked jurisdictions. In 2014, the Cap-and-Trade Program linked with the Quebec Cap and Trade System, and that allows mutual acceptance of allowances issued by both jurisdictions, which increases the flexibility of the program. Finally, let's talk about the California climate Investments. Cap-and-Trade auction proceeds are, of course, appropriated by the state Legislature to a variety of programs.

Over $26 billion has been raised by cap and trade, and more than half of that revenue has been directed to priority communities exceeding the 50% required by statute. These funds really represent the only sustained source of investment for critical programs benefiting priority communities. These funds have helped provide rebates for electric vehicle deployment, weatherize low income homes, expand clean public transportation, and preserve and restore public lands. Over 567,000 projects have been funded so far and have reduced an estimated 78.6 million metric tons of GHG emissions.

As mentioned earlier, the program was adopted by the Board in 2011 and has been amended eight times over the past 13 years. These updates reflect legislative direction, the latest data and implementation experience, and the current program reflects the legislative direction that was given by AB 398 in 2017. 398 added a price ceiling to manage cost, reduced the compliance offset usage limit, as I mentioned earlier, to 4%, and addressed GHG emissions leakage concerns by directing CARB to treat all covered industry as a high risk for leakage when distributing free allowances. So that's the Cap-and-Trade Program itself.

Now, as the Senators mentioned, we are embarking on a cap and trade rulemaking to update the program. So I want to talk a little bit about what we've learned through that process. I will give you a caveat that there is a cap and trade auction scheduled for tomorrow, so I want to be brief to avoid any sensitivities that might influence auction behavior.

So we're currently engaged in that public decision making process to align the program with the 2022 Scoping Plan that was approved by my board in December of 2022. The most important change to the regulation we are considering is removing allowances through 2030. One scenario is to align with the latest inventory update for the SB 32 40% target for 2030.

But we're also evaluating the removal of additional allowances to align with a 48% reduction as called for in the 2022 Scoping Plan to achieve that 2045 carbon neutrality goal. And we also analyzed an additional scenario, which would be a 55% reduction target by 2030, to evaluate more increased ambition in the near term. Questions have also been raised about the approximately 5% banked or unused allowances in the program currently held by private companies.

Evaluating this is part of the rulemaking and is being considered as part of the forthcoming technical work and public workshops. As it relates to compliance offsets, currently, no changes are being considered at this time. We are continuing to implement the requirements pursuant to AB 398 as related to offsets. As noted, GHG emissions from compliance offsets must meet those statutory established criteria of real, permanent, quantifiable, verifiable, enforceable, and additional given the possibility of reversal.

For example, the loss of forest in wildfire has generated concerns regarding compliance offsets. CARB ensures that the statutory requirements continue to be met through the creation of a buffer pool. Each project must calculate its risk of reversal and then contribute additional GHG reductions to that buffer pool that is used to maintain the environmental integrity of the Cap-and-Trade Program. And, of course, any changes to the compliance offset usage requirement would need to be evaluated in the context of cost containment.

Compliance offsets are one of the key levers CARB has available to help manage the overall costs of the program while also directing private funds to actions such as sustainable forest management and destruction of high global warming potential gases. The Compliance Offset Program, particularly the Forest Offsets Protocol, is also a pathway for tribes to voluntarily participate in the program and generate critical revenue for their members. And, of course, we need to consider managing any changes to avoid stranded investments in these compliance offset projects.

As part of the public workshops this year, we've partnered with our linked partner, Quebec, to model how changes to the program would potentially impact both linked programs. The two models used by CARB and Quebec are structurally different, relying on different assumptions and provide different results. However, the use of those models allows us to cross check results and focus on the directional impacts of program changes. The two draft modeling results highlight a few common themes that we have shared publicly in our workshop discussions.

Reducing allowance supply increases scarcity for allowances and increases allowance prices. The 5% banked allowances are exhausted in the early part of the next decade. Removal of allowances between now and 2030 accelerates the use of banked allowances and increases allowance prices sooner in this decade and post 2030. Cost containment and leakage become important areas of further evaluation and work as allowance supply decreases and prices increase. And the existence of a post 2030 program can help moderate those prices moving forward.

Another area where we have solicited input is on market rules. We currently have position limits, monitoring of account holder relationships, and extensive disclosures to help on market monitoring for collusion or market manipulation by participating entities. We also have a third party monitor that assists in day to day market monitoring and monitoring of auction behavior by participating entities. While we have exercised some enforcement action, we have not observed any instances to date where the market has experienced price manipulation or collusion.

A key feature of protecting the market is timely disclosure of market information from CARB and Quebec as market administrators. We have a new market dashboard on our website which contains quarterly and annual statistics and reports on prices, freely allocated allowances to sectors, volumes of compliance instruments traded, registered market participants, and volumes of compliance instruments held in private and state accounts, among other data.

We will continue to discuss with the contracted market monitor and our linked partner any additional data that would be helpful to add to that database to summarize and disclose. We're continuing to evaluate if any changes are needed to modify or add new rules to protect the market as allowance supply decreases moving forward. A key consideration in making data public is the potential for the data to be used to disadvantage any sector or individual covered company, so we have to balance what we're disclosing very carefully.

I will share some of the feedback we've received to date from the public workshops, and I'm sure the panel will be able to provide a lot more detail and context around a lot of these observations. Market observers, environmental groups, and financial entities generally support increasing Cap-and-Trade Program stringency, consistent with at least a 48% GHG emissions reduction target by 2030.

Industrial entities are encouraging recognition of GHG emissions reductions achieved by carbon capture and sequestration and have raised concerns about allowance removal resulting in higher allowance costs and potentially leakage. Utilities have expressed concern for any decrease in allowance allocation if allowances are removed. Concerns have been expressed from a variety of stakeholders about the impacts of changes to utility ratepayers, particularly low income customers, but so far have not included recommended provisions to address those concerns.

We've also heard from regulated entities and voluntary participants concerns and potential resistance to enhanced oversight of related company relationship disclosures. Most regulated entities feel that the holding limit is appropriately set to decline with the cap. The AB 32 Environmental Justice Advisory Committee has provided significant input, including advocating for the elimination of free allowances, elimination of offsets, and the implementation of no trading zones for facilities in priority communities. So staff will continue to evaluate these and other topics over the next few months.

So, as I wrap up, I just wanted to share a few observations. For this program, I think it's important to recognize that it is a closed system. It has been an effective program because it has been structured very carefully to balance all these competing interests. So no design feature can be considered in isolation. Changes to one feature will ripple across the system and impact the overall program.

So moving forward, we have to be carefully analyzing potential changes and consider those changes in the context of having a more stringent program. When the program was being developed, as you all know, there were lots of predictions that it would have severe negative economic impacts on the state. Those predictions have not come to pass. We have achieved our 2020 GHG emissions reduction goals six years early and without the catastrophic economic consequences that some predicted, nor has there been a collapse in program prices.

Going forward, we all know doing this work that we have run out of the low hanging fruit solutions, and achieving our long term climate goals will require an unprecedented transformation in our built environment and our transportation systems. Our efforts to avoid the worst impacts of climate change are going to become more challenging, and we must consider the health and economic impacts to the most vulnerable communities in California. But I'm optimistic.

I'm very proud to work with this Administration and with this Legislature, who has shown incredible leadership on tackling climate change, and continue to leverage California's innovative spirit, our tenacity and our strong can do attitude to drive us toward that carbon neutral future. So thank you. I appreciate having the opportunity to speak with you.

Thank you, Madam Chair. Let's go to Senator Dahle.

Thank you, Mr. Chair. I'm sorry, I'm on Sub 2, I'm on EQ, and I'm on Energy, which are all happening at the same time. So just bear with me for a few minutes. I have a question and then I have a comment as well. My question is, you mentioned in your remarks that we have not seen the economic impact to Californians through this GGRF program since its inception, and I take exception to that.

I think maybe that we have seen our electricity prices and our fuel prices in California go up. We also, I wanted to ask you, do you have the ability to be able to track, and I don't know if this is in the part of your, I know you're just in the regulatory part of it. You're not in the job creating.

But we hear a lot about, we've created all these jobs, but most of those jobs have been in public sector or directly to solar or transmission or now the new jobs is going to be in offshore wind. But the private industry that has left California, we know there's an exodus of California. There's no debate about that. It's happening. And we've seen, in our budgets, a decline. We're in a huge budget deficit this year.

And the stock market's doing great and the economy is doing great throughout the country, but it's not doing great in California. So I'm concerned about what the future looks like between now and 2030. How are we going to, number one, make sure we meet our climate goals, at the same time, making sure California stays economically viable through good paying jobs and actually businesses staying in California. Do you look at that part of it as well or no?

I guess I would say a few things. First of all, I hear you on utility rates. You know, being a former PUC Commissioner. I will note that as you look at utility rates, there's a lot of factors that are going into it. But one of the key factors is that we are both trying to adapt to climate change and mitigate climate change at the same time. Right?

So there are significant steps we need to take to harden our system, our transmission distribution system, for wildfire and take other steps to prepare us for the impacts of climate change. And certainly, as we decarbonize the electricity sector, we have come up with very effective ways to recognize the fact that renewable energy is on a very clear downward cost trajectory. I think the rates issue is much more complicated than simply saying our climate programs are burdening rates because there's so many other factors.

And as I mentioned, adapting to climate change is a critical piece. On the jobs part, I think, first of all, we work very closely with the Workforce Agency, which has, the Workforce and Labor Agency, which does have an individual who is really working closely on this issue of climate and jobs and the relationship. We continue to be very supportive of good paying jobs, ensuring that our climate transition does create good paying jobs.

And there's lots of opportunities that we see, if you look at the Scoping Plan, some of the opportunities to grow employment in implementing many of these climate programs and strategies. It's a key part of the scenario. Development shows that our selected scenario in the 2022 Scoping Plan does include job growth. So I think we can continue to build a strong economy in California even as we are both mitigating and adapting to climate change.

Thank you. One more comment, and you may want to comment on or not. It's $1,000 a town I think was the average 103. I think it was $1,003. I think Senator Allen maybe mentioned that as the baseline. But there are some programs that we know are hundreds of thousands of dollars, tons. For example, the bullet train is something that cost a ton of money.

And the return to Californians is, we don't even know what it's going to be, and depends on what it ends up being because it's still in flux. And I know that that was out of your hands, that there's been a ballot initiative. I'm not throwing that out. But I think we need to be honest with Californians and that needs to be part of this equation to say, even though maybe we should change our mind on the train.

I've said that for the 12 years I've been here. I think it's a waste of money. I know in forestry we can do under $15 a ton we can sequester carbon. That's a heck of a lot better deal than 1000 or 100,000. I know there's some areas in that, so I wanted to just throw that out. I think mainly, not so much for you, but for the legislators to know that that's something I'm going to be watching. And I think Californians are watching as well.

My last comment would be on forestry part of it, because I know that there's been a lot of talk, and I represent a very forested area of California. And a forest that is properly managed will emit carbon, but not at the level one that hasn't been managed. So if we thin that forest and then fire comes through, the forest is still alive after the fire goes through. It happened for millennia before we messed with it and stopped fire from being part of that equation.

So when we have these emission problems where we've had banking in forestry, and then we have these catastrophic events, it's because the forest wasn't put into a state where it can sustain fire and still sequester carbon after a fire. So I think that's somewhere we should focus on, making sure that we thin that forest and allow it to do what it normally was doing before we manipulated and stopped fire. So I just want to throw that out.

I think that's a great area where we can do great things for the environment. We can sequester carbon and not emit as much carbon for millennia on too, as well. So I just want to throw that out because it's something I know that many of the Members have been on the forestry tours, and I've advocated for that because I think it's a great carbon sink forest. It's a great place for wildlife, water, all comes from those managed, good managed forests. So I want to thank you for your time. Good to see you again. And sorry, I have to run to another meeting.

Sure. And just on the forestry point, I've also been on those tours, seeing a managed forest in an offset project and an unmanaged forest, and the difference is striking. So I completely agree with you. And the Scoping Plan does call for more investments in forest management. Thank you.

Just a quick follow up to that. Maybe you could talk about some of the mechanisms in the program that soften price spikes are there to prevent price crashes in the future.

Right. I mean, the banked allowances are a classic example of that because allowing entities to bank those allowances kind of helps them address or mitigate for potential price spikes. And they have allowances that they can use rather than purchasing allowances with extreme high prices. So that helps kind of moderate the price spikes.

And so I think that sort of goes to my point about you got to sort of look at this as a closed system. And the careful reduction in the cap, being very judicious about that. All of those mechanisms help keep the program on a fairly predictable trajectory so that the covered entities can understand how to plan, figure out what they need to do to meet compliance obligations.

Well, I just want to clarify one thing that was said by Senator Dahle. I think he said something about the cost of the bullet train being estimated hundreds of thousands per ton. That's just not my understanding. Now, of course, the bullet train hasn't been completed, and so one could say it's an infinite cost because there is no mitigation that's happened yet. So that's one argument.

The flip side is I know there are researchers that estimate that the future cost of abatement from the project would be about 1800 dollars per ton, which, by the way, is way higher than everything else. So the central point, I think, is correct. The general expenditure is the estimate is around $1000. I know the cap-and-invest program in Washington, a lot of the programs seem to be less expensive per ton. And I think one of the things I would like to talk about. Do you want to give us some thoughts on the Washington program and the extent to which we should be drawing inspiration or information from their program?

I guess I would say a couple things. We stay in close communication with Washington, as we do with other jurisdictions that have programs. One of our goals is to be able to link with other jurisdictions as much as possible, right? So we keep those lines of communication open. Some states are setting up programs and are interested in talking to us about linkage.

I do know that the Washington program is somewhat, I don't want to say in flux, but I mean, there's conversations about potential changes to that program. There's obviously a ballot measure aimed at the program, which is unfortunate.

So I guess I would say I don't necessarily kind of want to go into the specifics of the program necessarily, other than I think we will continue to stay in contact with them, continue to support kind of the technical work that they're doing and the potential changes that they're considering, but I don't think that the program is fundamentally better or worse than California. It's just slightly different.

One of the arguments is may not--and maybe this is a better conversation for us to have with the panel, but I'll throw it out there for people to start thinking about, I suppose--is that I've seen arguments made that the Washington, and maybe this is more on the expenditure side, so it's less central to your bailiwick on this, but that the things that are funded on the Washington program are things that are more popular with the general public, that they can see and touch and feel that's expanded to everybody.

Weathering programs, transit, and they've done a really good job of directly tying the program to the legislation and the kinds of projects that they're getting funded that impact people directly. Now, of course, maybe their popularity will be tested with this ballot measure.

So I would say a couple of things. First of all, our climate investment programs have touched hundreds of thousands of people in the State of California, and we have done many of the same things that Washington talks about, right? We've done the weatherization we have funded. One of the key programs that I spend a lot of time promoting is incentives for heavy-duty trucking.

I have gone down to see these zero-emission class eight trucks with the California Climate Investments decal right on the side of it. And those trucks are benefiting communities today on those heavily traveled corridors. We have done--one of my other favorite example is the Clean Mobility Options Program, which funds planning for community zero-emission or low carbon mobility projects and helps deploy those projects. It funds work with community groups to actually have the groups decide what the best program is. Is it an e-bike program?

Is it a car sharing program? And so not only does it fund the planning, it funds the deployment. So those are just a couple of examples. I think the funds are used to help support our AB 617 Community Air Protection Program, where community steering committees can work with local air districts, CARB staff, and industry to come up with, again, community solutions that are specific to that area. So I guess I would disagree with the premise that our investments do not benefit communities and individuals.

I think they do, and I think the Legislature has done a good job of ensuring that at least 50 percent, as required by statute, of those funds go towards the most impacted communities.

Let me delve in a little bit more on most impacted communities comment because I know, as has been discussed, there's been debate about facility level emissions caps. And I'd love to get to the extent that you feel you're able to just talk to us about where that proposal is fitting into the conversation at CARB right now.

It's definitely part of the conversation at the workshop level. It is something we will consider. Again, the program is a closed system. So it's a market-based program. So if you sort of say, 'well, this aspect of the program is not subject to the same market conditions as the program as a whole,' then that has impacts.

So I think it's something that we need to consider because it has clearly been advocated for, but we'll also have to sort of think about what the pros and cons of that would be and how it would affect the overall market system. So we obviously haven't made any determinations yet. It's part of the suite of potential tweaks that we'll be discussing, but as with any of these changes, we have to figure out how it fits in to the larger program.

Yeah. Okay. So it's not your sense; it's something you could adopt without additional legislative direction. It's within your authority under current law?

Yeah, I think that's correct.

Could you also, one other thing I wanted to ask about, the price ceiling, the mechanism by which we set the price ceiling where it is, and also, if we were to hit the ceiling, what would be the ramifications in terms of allowance availability, emissions, revenues, et cetera?

You know, I think that might be a better question for Matt on the next panel because we have not been in that place. So I haven't had to deal with that.

Okay. Including where we've--and how we've set the price ceiling, we should ask him too?

Yeah, absolutely.

Okay. Thoughts? Yes, Senator Becker.

Yeah, just a couple last follow-ups. You talked about banked allowances in the sort of cost containment piece, but also been discussion about how CARB is going to move forward to prevent future excessive allowance banking. So I don't know if you wanted to, if anything you can comment on that, number one, then number two, just on the price containment piece, just to finish that conversation. I know as part of AB 398, there were inclusion of two price steps to mitigate price impact to the program. And maybe you could comment how often have those been used since 2017, and has CARB seen a successful positive impact on containing?

Yeah, I think that's another Matt question.

Okay. All right. We'll go back to him on that one. Anything on the future excessive banking that you want to comment on here?

I can have Matt comment on that, too.

Okay.

Again, that's another sort of programmatic changes that's been sort of workshopped, but I haven't delved into the details yet on that.

Right.

Okay. For our identification, can you just give us a bit of a timeline in terms of the next steps on the rulemaking process? More workshops planned?

Yeah. So we really want to get this accomplished because we want to make sure that we have our opportunity to receive the benefits of the increased ambition and also really encourage covered entities to take advantage of the federal opportunities that are out there to reduce emissions. The typical regulatory process is we release a surrea, which is an economic analysis of the potential changes.

Then we do release proposed regulatory language put out for public comment, and then the Board has an opportunity to take a look and weigh in. We would like to get this done by the end of the year. I think there likely will be more public engagement, potentially more workshops, engagement with our Environmental Justice Advisory Committee, but our goal is to get this done before the end of the year.

Okay. Just on the previous comment you made about, I don't disagree with you that there's a lot of benefits that regular people associated with our expenditures. What role does CARB see it playing in getting the word out about the benefits? Is that your job? Is it not your job? Whose job is it? Maybe it's nobody's job. Is that an important part of the story?

Oh, I think it is our job, and I think we try to do the best we can. We have a very extensive website that talks about all the different programs and the different categories. We do go through a public process to make recommendations every few years to work with stakeholders to recommend programs and things that we think the fund should be used for.

Even though we aren't the ultimate decision makers, we do get feedback, and through that process, we're able to kind of talk about, okay, here's what we've done in the past. Here are some ideas for the future. So we do do workshops, public engagement around that, and that's actually getting started right now. We try to do as much marketing as we can.

As I mentioned, you will see the little California Climate Investments logo on various projects throughout the state. Obviously, you know, we can certainly do more to highlight the programs. I think the challenge is: people focus on the program; they don't necessarily focus on the color of money that's supporting the program, right? So they'll know that a program exists. They'll know that it's part of the state's overall support for clean transportation, for clean energy infrastructure, other things, but they don't necessarily understand that that comes from the Greenhouse Gas Reductions Fund. And so we try to tell that story as best we can.

Okay. Lots of questions. All right, thank you. Appreciate it, and I know you're going to be listening into the rest of the conversations, but we're excited to have all this work.

Yeah, I'm going to be listening remotely because I have to.

Okay.

Yeah. I will definitely be listening, and I really appreciate the engagement and the thoughtful conversation and looking forward to hearing the panel.

All right, thank you. All right, next we've got a panel that will be discussing what's at stake for our current cap and trade rulemaking. And so we've got Sarah, Caitlin, Catherine, Danny, and Matt, who I introduced during my opening comments. So let's have you all come up, and I think we'll start with Sarah Cornett from the LAO.

Okay. Yeah, maybe pull one over there and then, yeah, this is fun. We got to have everybody. There we go. One big happy family. Just to let folks know, the panel was designed to draw upon the various kind of advisory boards that exist in this space. So obviously the LAO, EJAC. And then obviously we've got Matt here, who's going to deal with over here, who's been referred to many times to handle all the tough questions. Anyhow, let's get started with Ms. Cornett.

Great. Well, thank you. And we've prepared a handout that you should have in front of you. I'll just leave some of these if you other panelists want some. This is also available on the LAO website. Just for the sake of time and given Chair Randolph's comments, I'm going to skip ahead to page nine of the handout, key legislative considerations.

So, yeah, just to kind of set the stage for this moment, we just want to begin with kind of acknowledging this is a really key time for the Legislature to think about its preferred role in the direction of the program. So while CARB ultimately has authority over the rulemaking process and the program design, the Legislature could weigh in and direct CARB to make certain program changes or consider certain issues if there are priorities there. Second, the issue of kind of annual versus cumulative emissions forecasts.

So this is a little bit of a wonky issue, but in some of the workshops that CARB has presented, the modeling is focused on cumulative emissions rather than an annual look at emissions. We think that the Legislature may want to direct CARB to kind of focus on an annual look just to better align kind of the modeling with our statewide statutory targets, which do focus on annual emissions. And then third, how should the state balance pursuing emissions reductions with potential cost impacts?

So this is something that I think, we think is really important to consider. As Chair Randolph identified the changes that CARB is considering, adjusting the cap and removing allowances will likely increase allowance prices. We have a table here that just shows some of the potential impacts in terms of different allowance prices on the costs of retail gasoline and diesel. So this is just something to keep in mind.

And even despite this potential impact, this option is still likely to be less costly than some other programs or policies the state might have to employ to help us meet our statutory goals. And then moving to the next page. So how should the state allocate allowances to balance different program goals and impacts? So as Chair Randolph mentioned, some allowances are sold at the state run auctions and the revenue is used in GGRF while others are given away to covered entities, including utilities.

So the way that that allocation works can have an impact on cost to consumers. So, for example, utilities use the revenue that they generate from selling their free allowances to apply a bill credit, the California Climate credit on IOU customer bills. So in terms of how CARB makes its decisions around allocation, this is also something that we think the Legislature should consider and is worth kind of keeping a close look at. And then in terms of taking other steps to mitigate potential cost impact.

So we have three kind of tools that are available here. The allowance price ceiling came up. It sounds like we'll talk more about that. That's something that exists. The Legislature could consider directing CARB to make certain changes. CARB currently has the authority to set the price ceiling. So if the Legislature has something in mind, that's an option there. Again, the allowance allocation issue that I mentioned, and then the use of GGRF revenues.

So the state could consider using any additional GGRF revenues that materialize from an increase in allowance prices to support rebates to low or middle income consumers for energy cost growth that might result from program changes. This is something that has been identified in some studies of carbon markets as a pretty effective and efficient way to target benefits and try to reduce some of those inequitable impacts of cost growth and energy.

And then finally, on the last page, so does the Legislature want to take action to extend the program beyond 2030? If the Legislature does want to continue with the program, making an extension decision sooner rather than later could provide some assurance to the market and mitigate against potential price volatility with allowances. And then finally, what are the Legislature's expenditure priorities for GGRF revenues? So we could potentially be seeing some big changes in GGRF revenues depending on how CARB makes its changes.

So the Legislature may want to start thinking now about its priorities for these revenues. And then just for your reference, the first few pages of the handout just cover some background on the program, the use of GGRF, and some comments that we've made before to you about how the way the program is not currently well structured to help us meet our 2030 and 2045 emissions reductions goals.

Okay, I want to follow up with you on that particular topic, but we're going to listen to the whole panel first. So let's next go to Caitlin Rodner Sutter from IEMAC.

Thank you very much. I appreciate the opportunity to be here today. I am Caitlin Rodner Sutter, Assembly Appointee to the Independent Emissions Market Advisory Committee though I should say that everything I'm going to say today doesn't necessarily represent every Member of IEMAC, I'm sure it won't. Such is the nature of these advisory committees. And I should also say I'm the California Director for Environmental Defense Fund as well.

So first, I really want to emphasize to you the essential role that the cap and trade program plays in achieving our greenhouse gas reduction goals, both 2030 and what we will need to do to achieve our 2045 goal.

This program is a key piece of our suite of climate policies and specifically the emissions cap, which, when it is designed with sufficient ambition and high environmental integrity, plays a really unique role in acting as the backstop to provide the greatest possible certainty that we will meet these 2030 and 2045 goals. So what that means is if other programs overperform an emissions abatement, there could be less demand for allowances and less pressure on that emissions cap.

If, however, other programs do not deliver the desired or expected abatement, the emissions cap closes that gap because there would be greater demand for allowances and potentially higher allowance prices. But when that cap is well designed, meaning it is sufficiently stringent, California's covered emissions cannot exceed what is required to meet our targets and we do not have another program that fills this role with its focus strictly on tons of emissions. So I want to just emphasize this is a unique and important program.

However, the key, of course, is the stringency of the emissions cap to make all of that true. And as Chair Randolph said, that is really the number of allowances that are in the program. And EDF has been recommending to CARB since the 2018 rulemaking that there be fewer allowances available in the annual budgets to increase the level of climate ambition.

IEMAC has made similar recommendations, but I am pleased to say that in the current rulemaking, CARB is taking that very step and considering different scenarios for how to reduce the allowance budgets in the near term. And I think that's a really positive step to increase the stringency of the program. And I just appreciate CARB's focus on near term ambition.

However, there are a few additional items that we would like CARB to consider in this rulemaking process, and one is preserving the ability to bank allowances, which has important climate benefits. That is, if you purchase an allowance today and it does not get turned in for compliance today, that represents a ton of emissions that is not emitted today.

Banking allowances essentially brings reductions forward in time, which means less cumulative climate impact as near term reductions are more important for the overall benefit to the climate than reductions we plan for out in the future. Additionally, as CARB considers removing allowances from the program, they may want to consider increasing these price containment tiers or the price ceiling. One of the factors that goes into the determination of what those price containment points and price ceiling are is the social cost of carbon, which is significantly higher today.

EPA put it at about $190 a ton than it was back when AB 398 passed in 2017. So I think that is something that we would ask CARB to look at as well. And then additional program features include an emissions containment reserve, which would reduce allowance supply when prices are low, counting offsets underneath the cap instead of in addition to the cap.

This would maintain that vital flow of resources to natural and working lands and our tribes, while also accounting for some of the uncertainty around certain types of offsets. And then facility level emission caps, or what EJAC refers to as no trading zones to ensure that facilities in overburdened communities or specific sectors, such as refineries, are reducing their greenhouse gas pollution and correlated co-pollutants, at least as fast as the state's economy wide cap.

And then I guess lastly, I would echo what the LAO has said about the future of the program. If we want covered entities to invest in emissions abatement technology, there needs to be a clear path forward for the program after 2030, and that signal needs to be sent now. Decisions are being made today which will impact our emissions for years to come. And so, as you think about this post-2030, I would second the recommendation of looking at leakage assumptions that were made in AB 398.

Direct allocation is really important to preventing emissions and economic leakage, but only if the underlying assumptions going into that are sound. And I think, as LAO was saying, we really should consider how the revenue from this program is targeted, especially toward the most vulnerable households and communities. And then the very last thing I'll say is California also has an opportunity before it as CARB makes these program updates.

And you all consider what a post 2030 program looks like to expand our climate diplomacy by pursuing linkage with Washington and potentially New York in the future. California cannot solve climate change on our own, and exporting ambitious and well designed policy so others can join our efforts will yield far greater benefits than what we alone can do. So there's a lot in here, and I look forward to discussing it all with you. But thank you very much for your time and your interest.

Great. Thank you. All right, let's next go to Catherine Garoupa from CARB and EJAC.

Good morning. Catherine Garoupa, Executive Director of the Central Valley Air Quality Coalition, or CVAC EJAC co-chair, has been mentioned and also the convener of our Carbon Markets Workgroup. I want to thank Committee staff and the Senators for giving us the opportunity to speak today and to thank Katie Valenzuela on my team for helping put together a handout which should have been distributed to the Senators and the panelists. It is also available online, and the remaining hard copies I have I'm happy to put out for folks in the audience.

It's important to frame my comments by saying that the EJ movement is absolutely not a monolith, and I can really only speak to the San Joaquin Valley perspective and the perspective of CVACs members. Fundamentally, market based mechanisms are not designed to produce equitable outcomes. And in fact, the ability to trade or purchase emissions credits that are a fraction of the cost of actual emissions reductions naturally fails to create sufficient cost incentive.

What we see in priority environmental justice communities in the San Joaquin Valley is that emissions are not going down. And there's an example in the handout, which I'll touch on in a minute, of South Stockton, where our office is located and where I have worked at the CSU Stanislaw Stockton Center since 2016. So very familiar with that community. Recognizing that cap and trade is a climate program, but it's largely the same sources that are producing criteria, air pollutants.

It should be baseline that the cap and trade program fundamentally should not make our air pollution problems worse, especially in a region like the San Joaquin Valley, which is the most polluted in the United States for fine particles, causing a public health crisis. Rather, we should be framing our approach as mandatory emissions reductions that start in frontline communities if we're serious about a phase out of fossil fuels in California.

That being said, we recognize that the cap and trade program is here to stay, whether we support it or not, and reforms are absolutely needed. The Environmental Justice Advisory Committee Workgroup has been engaged in the public process and has submitted several comment letters that should also be a part of your background.

Documents that Chair Randolph also touched on that include recommendations like prioritizing direct emissions reductions, eliminating free allowances, eliminating offsets, particularly those from the international market, and localizing them to ensure that it's California communities that are experiencing the benefits and implementing facility level caps or no trade zones, which I appreciate a robust dialogue with the Independent Emissions Market Advisory Committee about the implications of such a recommendation.

I couldn't help but notice that Chair Randolph said that she believes that it's within CARB's authority to implement no trade zones because when I explicitly asked CARB staff at our November EJAC meeting whether that was true, they said no, that they cannot implement no trade zones without legislative direction. So it would be important to get clarity on that point.

I also want to make a quick and explicit pivot to talking about GGRF funded projects and specifically Assembly Bill 617 that created the Community Air Protection Program. When the program was extended in 2017, this companion bill was passed to ensure that air quality and environmental justice communities improved and at that time was characterized as a down payment in addressing those issues.

What we've seen over the last seven years of the implementation of this program is that in the San Joaquin Valley, money is going to polluters, not households, and money is going to air districts and not community based organizations.

So again, in south Stockton, where I've been on the Community Steering Committee, which is in the 99th percentile for diesel pm, 99th percentile for asthma on CalEnviroScreen historically an incredibly ethnically diverse community with Filipino and Latino ethnic enclaves that were destroyed by the construction of what's called the Crosstown Freeway, highway four. The Port of Stockton is one of the largest polluters in the area, and as a result, the Community Steering Committee for 617 disagreed with the air district's recommendation to give $5 million in incentives to the port.

For a variety of reasons, which are more detailed in the handout, but fundamentally increasing concerns with incentivizing increased expansion at the port, and that some of the technology that was being proposed, Carbstaff explicitly said, was not a fit for the type of ships that actually come into the port of Stockton.

So instead of allowing the Community Steering Committee to reallocate that $5 million to things like home weatherization, electrification, infrastructure, things that were priority for community members, the air district took the $5 million back and CARB said that they couldn't do anything about it. We recently convened a regional summit of our members working across the San Joaquin Valley, and so I just want to highlight a few of the gaps that remain in this program.

There is a lack of enforceability to the community air protection plans that are created. There's no teeth to provisions like best available control technology, which is meant to make sure that the dirtiest and oldest facilities are being cleaned up. Instead, what we've gotten is an updated list of backed embarked, but no actual implementation on the ground.

AB 617 was also supposed to ensure enhanced enforcement and instead what we've seen is our air district bring us lists of people who got violations for burning in their fireplaces, not attention to the largest sources, not site inspections, not source testing to ensure that we have the best available control technology at the largest polluting facilities in the most overburdened communities. We also, unfortunately, see continued permitting of new sources.

So as we're creating a plan to try to bring emissions down, just in south Stockton, along with the port expanding, there are several proposals for warehouses. There's a proposed carbon capture project at the biomass facility, and several other things that are detailed in the handout. Fundamentally, CARB is no longer selecting new communities. So how are we building off of the lessons that have been learned over the last seven years of this program?

And again, how are we ensuring that we go above and beyond both in cap and trade, AB 617, and whatever else we need to do to really fundamentally reduce the burdens in environmental justice communities and increase the benefits. So in closing, there are a lot of solutions, and we would urge a focus on real reductions, protections, and benefits directly to the most impacted households. Thank you.

Thank you very much. Thank you. All right, let's next go over to Danny Cullenward, also from IEMAC.

Good morning, Senators. Danny Cullenward, I'm the Senate's appointee to the IEMAC, where I've been serving since 2017. I want to start off with a couple of notes of appreciation. First to Dr. Catherine with the Environmental Justice Advisory Committee, which has been collaborating with the IEMAC and just been doing some very important work to constructively dialogue around some of these challenges.

And I want to echo, I don't speak for environmental justice communities, but when I speak to other members of environmental justice communities and environmental justice NGOs, I do think there's a significant frustration with past promises and the adequacy of what we're doing today.

Senator Allen will recall last year at an oversight hearing he co-chaired that Chair Randolph announced her intention to begin addressing some of the issues that are now part of the workshop process involving the accumulation of unused allowances in the bank that LAO and others have identified as some of the concerns that keep this program from operating as effectively as it could.

And I want to acknowledge both the chair's leadership and the work of the staff in the workshop process to begin a robust dialogue around those issues. So I very much appreciate that effort. I'll keep my comments short. I just want to touch on a couple of issues I can come back to things like offsets and price ceilings and other issues if you all want to get into that in conversation.

But the main issue I want to highlight is one of affordability in the sense that both in this program and also in the Low Carbon Fuel Standard, a related emissions trading program that CARB runs. We are looking at a regulatory proposal in that program, as well as directions for this program that will substantially increase carbon prices and affect the fuel prices that consumers face.

The economic analysis for the LCFS program talks about fuel price impacts as much as 40 or 50 cents a gallon in the next couple of years from the amendments that are under consideration. And you have Elio's table in the handout today looking at what possible future carbon prices in the cap and trade program would mean for some of these fuel price impacts.

Now, the IMAC has been very clear, and Caitlin spoke to this earlier, the more we rely on the Cap-and-Trade Program, we can expect that the efficiency of that program will lower our overall costs. It will also increase the carbon price and the visible impacts to consumers, and I really hope legislators will center that discussion.

I also think it's very important, and I'm heartened by this being a Joint Hearing between a Policy and a Budget Committee to bring together the spending and market design features of the program with a single, coherent theory about how those two should work together. Most of the discussions so far in the CARB workshop process have focused on market design, appropriately so, because that's what CARB controls. But I encourage the Legislature as we think about how the program spending is structured.

About two thirds of the money is continuously appropriated under a very old deal with former legislative leaders and former governors that may or may not reflect current priorities. I also want to call out that there is a unique feature of the Cap-and-Trade Program and the GGRF that is not available in the Low Carbon Fuel Standard. And that is the option to send money back to people in a variety of different ways, we consider in the form of rebates.

You could imagine directing those monies to utility bill relief. There's lots of different ways people could talk about thinking about rebates as the price of carbon goes up. Those rebates could go back to some people. They could go to targeted lower income and middle income households. That is a policy tool that is unique to the Cap-and-Trade Program, it is not in the Low Carbon Fuel Standard program.

And to the extent we want to focus on the direct impacts that everybody feels because everybody will face the price impacts from both of these programs, rebates are a potential tool to consider with either current revenue or future increases in revenue from this program.

And I just want to emphasize again, that is not a tool that's currently available in the Low Carbon Fuel Standard because money doesn't flow into the state and it can't be redirected out through appropriations or expenditures in a way that could target Low income household impacts. So, again, to close, I think it's very important to consider the budget and spending side of the program as a complement and integrated whole with the market design.

And maybe the last thing to mention, which the IMAC has talked about in several reports, including a detailed chapter in last year's report, we may need legislative extension to resolve uncertainty in the program. And so I think this is an important opportunity for the Legislature to think about what those priorities are. Thank you very much for your time.

Okay. All right, I think. Do either of you guys want to make some. Yes. Okay. You'd like to make some?

Yeah. Matt Botill with the California Resources Board, and I don't have any prepared remarks today, but I think there were a couple of questions that the Senators were hoping to get a little clarity on, so happy to answer those. And I'm also here to answer any other questions on the program that you may have.

On broad cost effectiveness and the allowance price containment reserve prices, I just want to reflect the fact that there are a couple of different metrics that I heard being discussed, the cost effectiveness of the various GGRF investments as reported versus what the program is providing. So the current allowance price right now in the Cap-and-Trade Program hovers around $40 a ton. One of the main features of the program is its ability to cost effectively reduce greenhouse gas emissions.

You can contrast that with some of the decisions made by the Legislature and the Administration on the Greenhouse Gas Reduction Fund, where there's various different priorities and how that money is spent that will alter the cost effectiveness of those emission reductions. Mr. Cullen Ward mentioned the importance of focusing on low income households and protecting costs for those households, particularly as we transition to carbon neutrality. That's one consideration that's placed on the expenditure of those GGRF monies.

Focusing on equity related investments can sometimes be less cost effective on a greenhouse gas basis as you're moving technologies and advanced greenhouse gas strategies into those communities. So on the questions about the price ceiling, the current price ceiling tiers right now are set at around $56 for the first tier and around $72 for the second tier. We're, as I mentioned earlier, right around $40 in the secondary market. The last auction cleared right around $38. So we haven't gotten to those price tiers yet.

And in the history of the program, we haven't triggered price containment reserve sale yet either. So I just want to be clear on that point. And then I guess maybe the only other clarification that I can provide at this time. I think Dr. Catherine mentioned this question about the ability to Institute no trading zones or individual facility caps.

So with respect to the provisions in AB 398, there is a distinction between what CARB has the authority to do pre 2030 and post 2030, and the distinction, I think that's being made there is what can be done post 2030 with the program when the AB 398 provisions sunset. So happy to answer any other questions that the Committee has. And thanks for having me.

Great. Okay. I know Josh has a lot of questions.

Well, I think, let me just start with some, I have a lot of reform related questions, but let me start with some just kind of top line, level set questions and then turn over to you, and then we can kind of come back and jointly discuss maybe some of the reform questions.

I think we heard very clearly some of the concerns, particularly around the, and I wasn't here when 617 was negotiated, but clearly it's not having whatever intended effect it was in terms of air pollution benefits for communities not having. So we'll certainly want to come back to that, just to kind of level set on the program.

Maybe, Matt, maybe you're the person, but for CARB, just to kind of be clear, so in the scoping plan, what is the gap between the pathway we plan to get to 48% below 1990 levels by 2030 and additional emissions reductions we'll need from other mechanisms, such as a more stringent Cap-and-Trade program?

Happy to take that one. And I think this kind of reinforces some of the testimony I gave to this Committee just last year, too, with respect to the work that we did on the 2022 scoping plan, where we outlined a path to achieving carbon neutrality by 2045, supporting the AB 1279 targets of an 85% reduction in anthropogenic greenhouse gases emissions by 2045, and looking at what trajectory do we need to be on to be able to achieve carbon neutrality by 2045?

The scoping plan identified a 48% reduction in GHG emissions by 2030 would put us on that path to carbon neutrality and to achieving the 1279 targets. We did what's called a reference scenario. So, looking at existing policies, what's the trajectory of emissions through 2030 and through 2045. That data is public. It's in the scoping plan. And what we identified was, under the kind of existing policies as they stood in 2022 that had been adopted, we were on a path of around 300 million metric tons.

So there would be a gap of close to 70 to 80 million metric tons to get to that 48% reduction level. Let me double check the math. That actually is the 40% reduction level. Sorry. So we looked at this question of, given the current policies, what was the trajectory that we would be on on 2030? I do want to flag that that was looking at existing regulations absent theCap-and-Trade program.

So what we were looking at were regulations like advanced clean cars that were on the books, SB 100 and others that had already been enacted to see where we would be from an emissions trajectory, given those existing regulations, because those are a little bit more straightforward to predict vehicle stocks and renewable electricity build out, et cetera.

And so there's significant uncertainty on how we are going to progress towards those 2030 targets with respect to the pace of renewable deployment, the pace of zero emission vehicle technology adoption. Since the scoping plan was adopted, the board has adopted the Advanced Clean Fleets Regulation. We now have really accelerated and ambitious regulations in the light duty sector, in the medium heavy duty sector, to deploy zero emission vehicles to drive down emissions in the transportation sector.

But consumer adoption of those vehicles will be important over the next decade to see what trajectory we're on for 2030. Just like build out of renewables will be important to achieve the SB 100 targets and bring those emissions down to 2030. So there are more things that need to happen to put us on this trajectory to 48%, and the ability for Cap-and-Trade to also support achieving the 48% reduction is something that we're obviously looking at.

That's been the subject of our workshops that we've had over the course of the last year. We've also looked at other options around continuing the 40% target as well as a 55% trajectory, and we're continuing to evaluate those options.

So without any, basically saying, without any programs such as Cap-and-Trade, we'd get to about 68% of our goal by 2030. Is that correct? Is that math correct?

So let's see, what do I got in here? Test me on the numbers here. We did say we would get to about 300 million metric tons in 2030. And we also flagged that there was uncertainty associated with getting to those numbers. And there's a discussion in the scoping plan about what that uncertainty is really focused on, and it is on zero emission vehicle adoption and renewable deployment. And I'd have to double check the percentages. Trustee can do the math.

Okay. And what are some of the other policies identified in the scoping plan to close that gap in addition to Cap-and-Trade, like the more stringent ICFS?

Yeah. So the scoping plan calls for increasing the pace of renewables deployment. It calls for increasing the amount of hydrogen production that can be deployed to support decarbonization of the transportation fleet, as well as other sectors like the industrial sector. The scoping plan calls for accelerating VMT reductions to be able to reduce the amount of energy we use in the transportation sector. It calls for increasing electrification in various different sectors, both commercial and industrial sectors, to support further, deeper decarbonization.

And it also calls for strategies for CCS and carbon removal to support achieving a 48% reduction in the AB 1279 carbon neutrality targets. So there's a number of strategies that are identified in the scoping plan that are complementary to the cap and trade program. If they are put in place and they reduce emissions, that obviously will get us closer to that 48% target that we put on the 2030 scoping plan.

Okay. And Caitlin, I know there's a lot of skeptics about the incentives created safer industry in terms of reductions around the plan. Maybe you can speak to how do we know the program is creating incentives to reduce emissions? And maybe from what you've seen, what are the economics incentives created by the plan to get to net zero?

Yeah, I mean, a few things I'd say on this. I guess the first, and maybe this is going to sound super oversimplified, but before Cap-and-Trade, there was no price on climate pollution. You could emit as much as you want of greenhouse gases with zero cost. That cost was borne by everybody who lives around the facilities, by all of us as Californians. And so there was no economic incentive to be reducing greenhouse gas emissions. Now, as we've been hearing, we're at 38, $40 a ton.

So I mean, very clearly now there is a cost to climate pollution, and that cost is borne by the polluters. And we've also acknowledged we have an auction tomorrow. We'll see what that price is at. But I think there's very clearly an economic incentive to be reducing emissions precisely because there is a cost associated with that now. Even if a facility is receiving free allocation, there is an opportunity cost there because they can sell those allowances.

And if they are using them for compliance, that is revenue that they are foregoing. Simply putting a price on pollution is a significant economic incentive. And I guess to underscore that even further, the second thing I would say is that for the past several years, that price has been consistently above the price floor, above the minimum price, which tells us that there is a scarcity of allowances to some extent because the demand is greater than the allowances available.

So I think that is another indication of an economic incentive to be reducing emissions. And to go back to the point earlier that we need to reduce the available number of allowances going forward, which is something that I think is incredibly important, we will see greater economic incentive for facilities to reduce their emissions. And then I guess the last thing I would say on this again is sort of the unique role of the emissions cap as a backstop.

There is a lot of uncertainty in what the scoping plan includes, a lot of uncertainty about sort of where our emissions trajectory might go. And I think that is why this backstop feature is just so essential.

Great. Wondering, you mentioned the price is now not at the floor. I think it maybe had been in the past, but it's not. I don't know if you can compare that to our price to other countries or other programs, number one. And then I guess the second follow up would be do you think the program itself is sufficient to have facilities reduce emissions or do you believe it's sufficient?

I mean comparing to, you know, Washington has-well, now their price is pretty much on par with California's. It has been higher than California's for their last several auctions. And some of that is just structural and how their program is designed. The Regional Greenhouse Gas Initiative has prices that are significantly lower than California's, but that is only covering the power sector. So it's a little hard to make that comparison.

But those are both programs that we would sort of look to, to both learn from and hopefully influence as well. And then sufficient, I would say we need a significant increase in ambition in the program. I think this program is essential to meet both near term and long term goals, but I do not think it is sufficiently rigorous right now to provide the certainty that we need and that a program like this can do.

What does that look like to you?

I think it looks like removing allowances in the near term. So I think my perspective is I'm pleased to see CARB looking at 48% as a target for 2030 for program reforms. I mean, it is one of three scenarios. I think it is essential that we're at least aligned with the scoping plan.

So I think removing enough allowances that we are in line to achieve what the scoping plan says we need to do, and we need to achieve that 48% by 1990 to be on track to meet our net zero goal by 2045. And so then if we're looking out after 2030, I think, again, it means setting your allowance budget.

So not only are you on track for that 85% reduction no later than 2045, but you're also taking into consideration some of those emissions that are outside of the cap. You are taking into consideration the number of allowances that are held in the bank. And you heard in my remarks, I think banking is really important, but I also think we need to think about the number of allowances that are in the bank as we issue future allowances.

So, yeah, I mean, fundamentally, it goes back to the number of allowances and making sure that that number is small enough and continues to shrink over time.

And what's your sense of the way that the airport has been grappling with that question right now?

Yeah, like I've said, I'm pleased with what CARB is doing right now. I frankly would have liked it several years ago, but I'm pleased with what they are doing right now as we look at 2025 to 2030. We need to start thinking about post 2030, though, and I don't think we've had that conversation yet about the level of ambition that is required from 2030 to 2040.

And their concerns from several years ago were just the cost impacts?

Well, I don't want to speak for CARB. I think they did a rulemaking in 2018 and they made decisions about what was included in that rulemaking and what wasn't going to be included in that rulemaking. I don't know their decision process that went into that.

Yeah. Happy to add a few points there. So, for the previous 2018 rulemaking, we were teeing off of work that had been done on the 2017 scoping plan, as well as the passage of AB 398 to inform the program between 2021 and 2030. There are provisions in the rulemaking now that allow for a continued decline on the CAPS post 2030.

But with the update of the 2022 scoping plan, the clear signals about the need for increased ambition and the passage of AB 1279, we are now in this process of looking again at our trajectory to 2030, as well as post 2030.

The workshops that we've been holding, in fact, over the fall and last summer, we've been discussing these various different options for allowance budget adjustments between now and 2030, as well as what it could look like post 2030, as well as presenting preliminary findings from UC Davis and others on what the allowance supply and demand could look like and what that could mean for costs and pricing under the program as we get much more stringent post 2030 shooting for that 2045 target.

There are concerns about availability of allowances and costs associated with the program as it really ramps up the rate of reductions that are necessary. And I think this Committee may know, certainly this panel knows, too, that the program just recently, in 2021, increased its ambition in terms of its rate of decline of emission reductions. And so that has already sped up. And post 2030, that again continues to happen, which makes the program much more stringent and raises the demand for allowances.

One other comment that I failed to mention, and unfortunately, Senator Becker isn't here, about the previous question regarding getting to 2030. I also wanted to flag the importance of, Caitlin mentioned this, reductions outside the cap sectors for getting to our 2030 target. And those include things like short lived climate pollutants that are not part of the cap sectors, as well as other emissions coming from natural and working land. So that's another important consideration.

Yeah. Okay. Wanted to ask, Sara, just if you wouldn't mind expanding a little bit on some of your thoughts and concerns about the discretionary appropriations process and the extent to which it's been truly efficacious. And then I think maybe we'll get Danny involved in this-Danny and Catherine involved in this conversation.

And just to clarify, you mean for GGRF appropriations?

Yeah, I mean, the nexus, it's seeming as though, especially now that we're in a--you know, it's, you know, the tendency on the part of the Legislature and the Governor to use it as a flex fund as other budget challenges pop up. We've seen various climate priorities that were going to be fully funded in the General Fund now get shifted over there.

How are you guys in the LAO thinking about the way that it's evolved over the last few years and the way the Governor and quite frankly, legislative budget leadership, have treated the fund as it relates to our General Fund needs and necessities?

Yeah. Well, as previously mentioned, I think Katelyn maybe mentioned this--or I think it was Danny, actually--65 percent or so of GGRF revenues are continuously appropriated to statutory programs. So we have on page two of this handout just kind of a list of those, as well as some of the larger categories that have received the discretionary spending. So high-speed rail is number one at 25 percent, affordable housing and sustainable communities at 20, and there's a few others here.

So while GGRF revenues have historically been kind of focused on climate and environmental programs, but the emissions reductions associated with those programs really vary. And we also have noted before that the estimates that CARB uses to calculate emissions reductions from GGRF funded programs, there's been some concerns raised by our office as well as others about the reliability of those estimates.

So even with those high numbers of 1,000 dollars plus for some of those programs, there have been instances where we believe that those estimates are even overstated in terms of emissions reductions. So I think particularly in this budget situation that we're in now, GGRF was used last year and is being proposed by the Governor to be used this year as a solution to help backfill some General Fund reductions for prior climate commitments.

So we find that that approach can have merit in terms of relieving some General Fund pressure. But again, I think we just want to say again the point earlier that we made just about thinking about affordability, and especially if we see--we've gotten a little over about four and a half billion dollars last year from GGRF.

If that number goes up with an increased allowance price and that kind of coincides with increased cost to consumers in terms of gas prices, it might be worth considering using that money to kind of provide rebates or other ways to more directly benefit low-income folks who could be struggling from that.

And, you know--look, I'm no expert in the Washington program, we've talked about it, but one of the things I hear, I've read about it, is that they do perhaps a better job of--this is--the grass is always greener on the other side of the fence--but perhaps they've done a good job of directly tying.

So if people are seeing energy increases, energy cost increases that are related to the tightening of the allowance market, let's say, for home heating or air conditioning, there's a fund that's available to go in to help people with weatherization and double paying their houses and better insulation, all these things that are going to have a climate benefit and a cost benefit to consumers, especially as there may be concomitant energy price increases associated with the program.

I know there's good stuff happening all over the place with these expenditures, but obviously with so much of it going to high-speed rail and that being--obviously that's not directly benefiting anyone except for the people building it yet, right? I guess one of our challenges is ensuring that this is something that people are feeling as a real benefit. And I know something that you've thought quite a bit about, Danny.

Yeah, maybe just a couple of points to touch on. The reporting about how the money is spent is--I'm just going to be a little bit blunt--it's very poorly done. The numbers are not--they're misleading. They're not just, oh, there's some uncertainty and different wonky people who look at it come to different answers. They're fundamentally misleading by about a factor of five, and that's before you get to the wonky conversations about what honest estimates would be.

As to..?

The cost effectiveness.

Cost effectiveness?

Yeah. So the stated headline numbers--and this has been consistent for years--the total estimated climate benefits are counted, and only the partial costs of programs from the GGRF are counted, even though the programs that we fund are substantially funded by about 80 percent non-GGRF funds on average. That effectively reduces the reported cost-effectiveness by a factor of five, which is just wrong.

So is this just an across the board problem?

That's just like a metric when you hear about the cost-effectiveness of the program. Annual reports from the California Climate Investments have been doing that for years and LAO and others have observed this. And that's just an example of when you look at the reporting data, the picture that's being painted is just very different than what's going on. And my personal impression is that the people who benefit from these programs are very well represented in terms of their presence in the policymaking process.

But I don't think that's broadly representative of popular opinion. And what worries me is if there are popular concerns about energy price impacts, that the good things we do fund--and we could have a discussion about which ones we like relatively more or less--are not going to be as resonant as the concerns around the price impact. So I want to emphasize that.

What do you see as some of the most problematic expenditures, given all of these considerations?

I could name names. To me, that's sort of less important than this has been a black box that nobody understands except the people who directly benefit from it. It's an opaque part of the overall process, and I think making sure that--

The GGRF allocation process?

Yeah. I mean, again, it's continuously appropriated, most of it. The annual process is people fighting over 30, 35 percent of the budget. We could debate which stakeholders and programs are relatively more interesting, but there isn't a coherent thesis about what this program supports. That's like the simple answer as to why Californians should pay more, which I would like to be able to make that case, but it is hard for me to even describe what the GGRF currently supports.

And with all due respect to the LAO, which is perfectly characterized that every time I've seen a report, it's hard for people to get their heads around a factual description at that level and a very accurate level. And that's the gist of the problem I'm trying to communicate to you. If you say, 'why is it good?' We've heard the economic efficiency arguments for why carbon pricing is a helpful thing to rely on. I'm 100 percent on board with that.

Why is it good that you're asking me to pay more for gasoline or for electricity, I can't even begin to answer that question. Not that it doesn't have an answer or isn't a legitimate ask, but it is hard to tell that story because of the complexity and opacity of how the money is spent today. And that's my primary concern, rather than saying, 'I like this program.'

But can I drill down into that a little bit more? I mean, we have a whole bunch of expenditures that you can argue for: transit funding, drinking water, weatherization, wildfire prevention, rail. We can debate the relative merits of each of these programs, but there's an environmental benefit and a public benefit associated with each of these expenditures.

Absolutely. I guess the point I'm trying to make is they're relatively concentrated benefits. So if you're involved in the construction of high-speed rail or if you live in an area where that transit option is going to improve your life, that's interesting and good. If you don't, it's less interesting and good. And we don't have many of--the expenditure side of this program doesn't support many programs that have broad-based benefits that most people would have some kind of connection to.

And what are those kinds of programs?

I think the example you see of this in other carbon pricing programs tend to be rebate-oriented. And I think the Washington example--and I'll look to others who may have thoughts on this--I mean, Washington passed its cap-and-trade program when there was a budget shortfall and there were a series of transit measures that were unfunded and were prominent and relatively urgent and in many people's minds.

And the cap-and-trade funds have been largely--not exclusively, but that's one of the main things that they've done. And the analogy I would draw there is our continuous appropriations were decided many, many years ago, eons ago in political terms. And I think it's important to ask, have we hit the right balance in terms of what's resonant? The Washington program is a much more contemporary effort to spend money on nearer term political priorities.

And then the other approach that other systems take is rebating money where the funds actually go into sort of broad-based activities that many people have a connection to rather than, for example, I have trees planted in my neighborhood that were funded from the GGRF. That's really cool. My neighbors don't know anything about that and that doesn't do anything for you or your neighbors. And that's the sort of concern I'm trying to articulate. Not that the programs are bad or unworthy, but when you ask about their political salience, they're fairly concentrated and they're pretty invisible.

What are some specific rebate programs from Washington or elsewhere that you think have been really effective?

I don't know that rebates have been determined to be politically effective, and I think the warning sign I want to give you is that in Canada, where there is a national carbon pricing policy, the provinces that generally don't like it have been politically rebelling, particularly in places like Alberta, even though the policy model they're asked to follow is one where all of the monies are rebated and you should have sort of the maximum economic equity benefits that you would look for in a program design. That's not proven to be politically salient in places like Alberta, but that's the-

Well, that's just because they're so reliant on fossil fuels that they would kind of tend to object to carbon pricing of any form, no?

I wouldn't suggest the experience in Alberta necessarily translates. Here's the problem with rebating. Rebating can create good progressive economic outcomes that address the energy cost impacts and their impacts on lower income households. The problem is whether or not people notice or pay any attention to it. And I'll give you an example grounded in this program. We have the on bill California Climate Credit for customers of investor-owned utilities. I am like a professional energy nerd and I could barely make sense of my utility bill.

It's a good policy that has good effects that almost nobody understands. And that's one of the challenges with rebating, is how do you make sure that people see the rebate, feel the rebate, and connect that to saying, 'I'm good with the other consequences that rebate helps mitigate.' That's a challenge everywhere, and there's no sort of shining success story I can point you to where that's all been resolved, but I think given the price trajectories, it's the sort of thing we need to start talking about.

Yeah. On the one hand, I want to put a lot of emphasis on the public awareness, but I also don't want to put too much because if the programs truly are benefiting the public and people don't necessarily understand every single mechanism by which they're being benefited, as long as they actually are truly being benefiting, maybe that's enough. But I know of course you're raising broader concerns about whether the way we're doing our expenditure really is in line with current needs. It sounds as though--does the IEMAC get into--have you been discussing a proposal for a new approach to expenditures or is that not something that you..?

We haven't really touched on that in a formal way yet. So this has all just been me rather than a Committee.

Is that within your perceived scope?

We could address that.

And I think in this year's report, there's some effort to address affordability concerns, which is a little bit different but certainly related to the expenditures. And I think what you've heard come up here is a recognition that affordability is a real concern. And to Danny's point, maybe we need to rethink how some of these revenues are used to be able to better address some of the real needs and affordability questions.

I mean, I think the Washington example is a good one with respect to funding transit operations, which Eastern--Western Washington--sorry, I grew up on the East Coast--east and west is all back and forth to me. But you look at like the Seattle-Tacoma area, very transit rich, really benefits from that sort of thing. You look at Western--the other side of Washington, and it looks a lot more like San Joaquin Valley, and it's very rural, and not a lot of transit.

And that's where we see some of the frustrations. So I guess my point is, we need to think about whether it's general rebates or other ways to get benefits directly to people that benefit people in all parts of the state, and that might be supporting transit. It might be direct rebates. It might be better explaining what those rebates on your electricity bills really are.

I would also say, I think any of these programs ought to be targeted toward communities and households that are most vulnerable and most overburdened. This should not just be a blanket program, but really targeted to those most in need.

Can I just ask you about the use of the term rebate? Are we doing apples to apples here when we say the word 'rebate?' Did I hear you correctly that you also consider rebate subsidy for public transit funding that might lead to free transit passes and that kind of thing? That's also a rebate under your--

I was using it more to refer to what are essentially cash transfers that could come through utility systems.

This is direct--

A dividend type payment.

Okay. Okay.

And that's not to denigrate the value of expenditure programs that might target broad populations. I just think the mechanism is a little bit different.

But that's an expenditure program too, right?

Sure. I apologize for the confusing terminology. What I'm trying to get at here is, are we sending money to things that basically immediately transfer back to people, like essentially cash transfers?

Right.

Or are we funding programs that benefit people and that those people will like as a result?

Right.

And both of them require an expenditure, but I think they have sort of different logics and functions, and thinking about the balance of those both now and in an environment with significantly higher carbon prices and greater revenues, I think is an important priority.

Yeah. Though rebates in that context can be kind of funny because on the one hand, you're raising the energy cross and then you're taking it away and you're basically just creating a bureaucracy to manage the line item on people's butt bills. How much does that really benefit? Let me throw it over to you, Catherine. In your perfect world, would you just do away with the whole program? What's your advice to us if you weren't constrained by all these other people in the room?

You mean do away with the entire cap-and-trade program?

Yeah, potentially. What are your thoughts on all this?

I think in my overarching statements, I said the framework should be mandatory emissions reductions starting in frontline communities if we're serious about phasing out fossil fuels. At the same time, I understand cap-and-trade has been around for a really long time and it is a really big revenue generator and people are very attached to it. So our position is: we don't like the program, we would rather not have the program, but also if the program is here to stay, it needs serious reform.

I think one kind of angle to approach this from along the lines of what we're discussing here is what I would characterize as maybe households versus zip codes. It's really easy to say we're spending x percent of this money in 'disadvantaged communities' if you're just talking about census tracks or zip codes. It's a whole other thing if you're using that to incentivize polluters to potentially expand their footprint versus making direct improvements to people's quality of life.

So some of the things I mentioned were things like electrification, home weatherization, electric vehicle infrastructure and incentives, urban greening, ecosystem restoration, which I get to some degree exists within these lists, but are they truly reaching the most impacted low-income households in environmental justice communities? And high-speed rail is a very interesting example because, of course, the line that's currently being proposed to be constructed is through the San Joaquin Valley. But we are a transit desert in most of the San Joaquin Valley.

It's a rural area. It's very car-dependent. It's very hard for people to get around. It's hard for them to afford electric vehicles if they have EVs. Is there the charging infrastructure? Most likely not. So how are they getting to the high-speed rail stations? Can they afford the tickets? Probably not. So that's kind of in the continuous appropriations budget.

And then I do want to dive down a little deeper for a second in AB 617, because 1.4 billion dollars is also quite a bit of money going specifically to that program, and the biggest issue is that it lacks teeth, particularly in terms of measurable and enforceable metrics to ensure that we're actually getting emissions reductions. So in terms of measurability, a part of the Community Air Protection Program is to do air monitoring within those selected communities.

But what are we doing with the air monitoring data? Are we tracking progress? Are we feeding it into alert systems so that local community members can get a notice if air pollution levels are spiking? Not in the San Joaquin Valley. And why not? Why are we spending lots of money on air monitoring if we're not doing anything with it? And in terms of enforceability, again, with an incentives-heavy approach, we've already tried that for decades with San Joaquin Valley's state implementation plans.

We haven't met the 1997 standard for PM. We haven't met the 1979 standard for ozone. So at which point do we recognize that throwing a bunch of incentive money at the largest polluters is not actually cleaning up our air? And in some cases it may actually be subsidizing the expansion of polluting facilities. And these programs are often layering on each other, right? So the incentive money for AB 617 is going to things to achieve goals in our state implementation plans. So the air districts are getting tons of money to continue business as usual with no accountability for where those monies are spent.

And was that how it was structured in 617? Your central thesis is that it's just far too deferential to the individual air districts?

I mean, to the air districts--and CARB has a very hands-off approach and basically says, 'once we give it to the air districts, it's not within our authority to do anything else.' And when it was passed, it was characterized as a down payment, right? There was recognition that it was not sufficient, that improvements were going to have to be made.

But unfortunately, it hasn't been revisited in the last seven years, and I think we've been through implementation for long enough now to see that there are very large gaps.

And I know Senator Menjivar has a quick question. All right. Yeah. Sure.

I was just going to follow up on this, but you go.

Follow up, because I have a couple more.

Okay. Yeah. Go for it.

Oh, sure.

That's good.

Just on that. Thank you. So we're not meeting objective standards is your point? So CARB did have workshops on this, on 617. You mentioned lack of integration. Just maybe you could talk about--excuse me; keep hitting that--some of the other problems you've identified. So lack of integration of data from local air monitoring networks or limited implementation funding, maybe you could talk a little bit more about that. And have you seen air districts doing site inspections? Why or why not?

Yeah, great question. So one of the provisions that I mentioned briefly in my opening comments was that there was supposed to be review of best available control technology, which we were very excited by because technically we're already supposed to have that in the San Joaquin Valley. And what we found in implementation was actually that all the air districts were required to do was update their lists of what best available control technology is.

They weren't required to actually go out to the largest emitters and ensure that they had best available control technology, which is what sightings of actions would achieve and then source testing. So you put a piece of technology on a facility, over years it degrades. It may not be working as well as it was when you originally installed it, which is why you would then go do source testing to see if the emissions levels actually match with what's on their permits.

We actually worked with the CARB Enforcement Division to make a proposal to the San Joaquin Valley Air District to take a collaborative approach in identifying the biggest emitters in South Stockton and supporting them in doing community engagement and education and doing the site visits and the source testing, and they refused. There are also supposed to--Yes. The San Joaquin Valley Air District refused. There are also supposed to be a scaling up of the lessons learned, right?

There are only so many communities that have been selected, but there are so many more environmental justice communities in need. So the South Coast adopted a much more ambitious indirect source rule than the San Joaquin Valley Air District currently has. Why aren't they required to update their rule? Why aren't there statewide standards that are set? When one air basin leads with what the best rules are, it should be required that the other air basins also do that.

And then to touch on your last point, Senator Becker, there has been this initial investment in creating the plans and deploying the air monitoring networks, and again, the lion's share going to the air districts and to the incentive funds. Where is the money to actually implement these plans to ensure that the measures that the communities did adopt and did get into their plans are again, actually being implemented and that we are seeing improvements? Communities that are selected get five years, a year to do a plan and then four years to follow up on that. What happens after that five years?

Yeah. And your point, we're talking about billions of dollars. It should be sufficient money to make an impact in these areas. Last on that, and then we'll turn over to Senator Menjivar, I'd like to have CARB respond to that. I mean, what are CARB's plans to increase inspections and oversight? And are there barriers to the agency's increase in its efforts, as some of the environmental justice groups have asked for?

Yeah, and I'm sorry, but I'm going to give you somewhat of an unsatisfactory answer in the fact that I am the Division Chief of our climate programs, and I will circle back with our Legislative Director about giving you an answer on the questions related to our air quality programs. It's not something that I oversee.

Well, I know there is a follow-up hearing I think the Joint Climate Committee is having coming up. So hopefully for that hearing we can have an answer to this question as well.

Thank you so much. I'm on page three. You all seem to be on page 1,000-something. So let me see if some of this is repetitive. But also on this dais, I'm the only Member that represents disadvantaged communities. So this is really close and personal, and Catherine, you mentioned a lot of these topics. I will agree with you. They're not hitting my communities. We don't see an impact. I have three airports in my district. No other Member has three airports in their district.

I'm interested in how we're addressing how we can use this program to address the particulate matter emissions, right? I'm interested in addressing the poor air quality in my district. So I'm here to tell you you're right. You're 100 percent right, too. I can't read that utility bill. Most of my constituents are actually just being scammed to get all these false rebates, right? There is no trust in my community to even participate in these rebates because they hear from anecdotal stories about all these scams in my community.

So this is a topic for me that wasn't--I'm not an expert. I think even the report said that we turn to CARB as the experts on these issues, even less so than my colleagues here to my right have had more experience in this topic. My experience comes in from the disadvantaged side of it. My experience comes in from the ongoing complaints of my constituents regarding the poor air quality.

The asthma cases, the methane leak that we had in the San Fernando Valley that wasn't caught for almost a year, and to your point, I don't know any updated numbers. Is there another leak happening right now? What's the accountability? The ongoing complaints that we go to, we turn to a QMD, and our response is: there's no violation. There's no violation. There's no violation. You can physically see the violations, but there's no accountability.

So all that, I have a couple of questions regarding this is, how can this program cap-and-trade, then regulate? And are we regulating particulate matter? And second, this predates my time, but this program was largely negotiated without EJ groups at the table, so how can we strengthen or utilize this program to strengthen or reduce pollution and disadvantaged communities? So two questions on the particulate matter and then on the air pollution. And, Catherine, I would love your perspectives on that, and then for CARB, I don't know if this is maybe your topic.

Yeah, because 617 was supposed to be the EJ fix, right?

Yeah. Just to be clear, there was absolutely not consensus on whether AB 617 was actually a good idea. Some people called it a poison pill at the time and basically were told, like, this is the thing that you get for the extension of cap-and-trade.

But there were groups that absolutely opposed AB 617 as a bad idea because it's not enforceable, because it lacks teeth, because these are just kind of aspirational plans and a huge giveaway to air districts to kind of continue business as usual, right? So some of the things I mentioned about measurability, enforceability, CARB actually playing an oversight role instead of saying, 'well, we gave the money to the air district and, well, they have to do the site inspections,' which I get is technically correct. But what about the enhanced enforcement provisions of AB 617?

And that was attempted as part of the negotiation? I wasn't involved in those negotiations, and the air districts fought it off or was that what happened there?

You mean within AB 617?

Yeah. When that was being negotiated in 2017.

I mean, I believe that industry was at the table to weaken those provisions as much as possible, to basically make it a, like, 'let's monitor and create more plans,' which is more of basically what we already do, right? There's not enforceability provisions to this. Our state implementation plans fall under the Clean Air Act. So at least there's citizen enforcement, right? We can sue the government if you don't meet those standards and if you don't show progress.

But AB 617 is purely aspirational, and there's tons of money going into it. So in terms of regulating particle pollution, that does mostly happen through state implementation plans. And part of what I highlighted in my opening comments that you weren't here for, Senator Menjivar, is that a market-based mechanism fundamentally is going to continue the historical pattern of concentrating pollution in environmental justice communities because it's much cheaper for them to buy credits. You know, we see that time and time again.

That was what EJ advocates raised at the inception of the cap-and-trade program and why so many groups were fiercely opposed. So we've sought reforms from the beginning to try to address those issues, and in 2007, we were told--or sorry, 2016--we were told AB 617 will kind of be the solution for that, but it definitely has not met the goals that were set out for it for the reasons that I've outlined.

In terms of strengthening approaches to how to make sure that emissions are actually going down, the EJAC Work Group and handout that Central Valley Air Quality Coalition also provided recommends things like eliminating offsets, eliminating allowances, making sure that we're not allowing offsets that are international, trying to prioritize offsets that are not only valid, but that occur in-state so that our communities are seeing those benefits and instituting things like facility level caps so that we can fundamentally break that cycle of continuing to incentivize industry to expand in the communities where it already exists, right?

It's the path of least resistance for them to continue to build out all of these projects in our environmental justice communities. And a market-based system is going to perpetuate that cycle unless we build in safeguards like facility level caps. To be clear, that will not solve all of our problems, right?

There will still be lots of other issues and lots of other fixes necessary to programs like AB 617 and beyond, but at least it's a step in the right direction of trying to ensure that we're not reducing emissions overall while continuing to concentrate them in frontline communities.

Senator, could I add something just very briefly? Just to emphasize a process point here, as somebody who had the unfortunate distinction of being around in 2017 for all this, but the cap-and-trade bill and AB 617, this air quality bill, did not go through a normal legislative process. There was no Committee hearing. There weren't extensive discussions and vetting from staff. So I hear the frustrations as well, and I think--

And Senator Wieckowski had one that was--

Which I worked on and am biased about. The point I'm trying to make is these bills did not reflect a normal legislative process, and my personal view, with respect to the cap-and-trade program, is that legislative reauthorization is something the Legislature ought to consider and the program may need, and that would afford an opportunity to address some of the questions you've raised and that Dr. Catherine has brought up.

Thank you, Senator. With respect to AB 617, I really defer to Dr. Catherine. I also live right near the area she's talking about in one town north, so I'm very familiar with the challenges in Stockton, and I think a lot of--

You're in Lodi?

I'm in Lodi.

Lodi. Okay. That's one town north.

Yeah. But an area I know really well, and I think a lot of the recommendations that she is making with respect to reforms to AB 617 would be incredibly valuable. So I want to, I guess, start by saying that with respect to your question about particulate matter, I mean, the way cap-and-trade is designed is it covers climate pollution. So it covers carbon dioxide and other greenhouse gas emissions. It does not cover particulate matter, NOx, SOx, that sort of thing.

However, to varying degrees--and there's a lot of variation depending on facility and pollutant--there is some amount of correlation between greenhouse gas pollution and these local air pollutants as well. And there is some peer-reviewed research that is trying to draw a causal link, not a correlation, but a causal link between reductions in greenhouse gas pollution under cap-and-trade and reductions in local air pollution at facilities that are also covered by cap-and-trade. And they find that there has been air quality benefits.

Now there's also research that Resources for the Future did that sort of acknowledge this, but also saw that there was inconsistencies. One example is refineries really have not kept up with everybody else in terms of reducing their greenhouse gas pollution or a local air pollution. And I think that is one example of where facility level emission caps or no trade zones could be a helpful solution to get at some of these specific polluters that have a disproportionate burden on disadvantaged communities. I guess I'll stop there before I ramble, but a couple of ideas for you.

Yeah, and Matt Botill from the California Resources Board. Appreciate the questions, Senator. And just to layer in a little bit, I did want to pull back just a second and talk a little about what our broader climate and air quality strategy is for the state. We've talked a little bit about in some of the previous dialogue, the goals that we've set for carbon neutrality. We've talked about the scoping plan, the strategies to get to carbon neutrality.

And largely, those strategies mean a significant decrease in combustion emissions across all sectors of the economy in California, and some of those most burdened communities in terms of emissions that they're experiencing and health impacts come from diesel particulate matter that are coming from the trucks and the equipment that are being used in California. There's also emissions from stationary sources that are impacting communities as well.

But when you look at this long-term trajectory, we've at the Board enacted policies, we've adopted regulations on the vehicle side, certainly, that are pushing zero-emission vehicle technologies and will decrease combustion emissions in these communities significantly over the next 20, 25 years.

We also looked at as part of the scoping plan, what happens if you increase electrification in other sectors, decreasing combustion emissions, pursuing the carbon neutrality approaches that we need, and saw significant health benefits from the reduction in fossil fuel use and the reduction in combustion emissions that come into those communities. And so there's a clear strategy that they're working towards here. And the Board itself has adopted rules to achieve that strategy towards zero-emission and reducing combustion.

On the question about the industrial facilities, more specifically, they're part of the cap-and-trade program. To the extent that we get more stringent under the cap-and-trade program, they're going to be looking for abatement options to be able to reduce their emissions going forward. Dr. Catherine mentioned a concern about offsets and reliance on buying credits in the future.

The program currently under AB 398 includes a provision to limit the use of offsets as well, and that was something that was enacted in 398 as part of the discussions on the extension of the program. So there are these legislative provisions that are meant to help address some of the concerns that have been raised on the program and on the industrial facilities.

One other point that I will make in terms of fossil fuel use in California, we are working hard to reduce fossil fuel use in California, and we've seen that as we decline demand of fossil gasoline use, fossil diesel use through alternatives in the transportation space, like battery electric vehicles, like hydrogen fuel cell vehicles, biofuels in the transportation space, that you've also seen a commensurate decline in the amount of fossil gasoline and diesel refining, et cetera. We have reduced refining capacity in the state as a result.

The scoping plan, and certainly the Governor last year called for additional analyses on the transition to phase down fossil fuel use in California and fossil fuel production in California. So CARB, in addition to the CEC, is also undertaking a process to look at the transition down of fossil fuel production and supply in California that's under SB1X-2. That's a separate process. But we've also undertaken, initiated that effort, and it's going and continuing this year.

I had some follow-up. So we do want to get to public comment, and we have meetings at noon, so we do have to wrap up, so we'll try to keep these quick. Just to carve first, we talked previously how we have both regulated--in other sectors, we have--cap-and-trade is a backstop, but we have other regulations. For example, electricity sector. We have the RPS to make sure you have to purchase more from renewable sources.

However, under AB 398, some industries are only allowed to be regulated by cap- and-trade and cannot be otherwise regulated. So is there a reason why we provide special treatment to those industries?

In designing the cap-and-trade program on the industrial side, obviously took our direction from the Legislature under AB 398 and how we designed those provisions and the requirements that AB 398 identifies, both in terms of industrial assistance and also leakage prevention.

That's something that was raised at the beginning of this hearing, concerns about the costs placed on those industries and resulting in those industries moving out of California and those emissions just happening elsewhere instead of within the state, and focusing on opportunities to incent the efficient production from those facilities and decline those emissions consistent with the direction in 398.

Okay. Just wanted to raise that question. So I think we should come back to that. Are there other regulations on air pollution that CARB--what are the most effective things you've done on air pollution? Are there other things that you can speak to on the air pollution front?

Sure, I'm happy to. As I mentioned earlier, I'm largely the Climate Change Division Chief, but I can talk a little bit at broad strokes here. And this goes back to my previous points, which is our work in the transportation sector.

Transportation emissions, over half of the total emissions inventory, both on greenhouse gases and criteria, pollutant side, major reason for the continued non-attainment that is happening in the San Joaquin Valley and South Coast and the combined efforts that CARB has on criteria, pollutants, and greenhouse gas emissions to pursue zero-emission vehicle strategies as well as lower emission technology in the transportation sector is driving those air quality benefits and those climate benefits.

And this is also why in my opening remarks, I mentioned in respect to the 2030 target, one of the important things that we need to be able to do as a state is transition the light-duty sector, the medium heavy-duty sector, to battery electric vehicles, to hydrogen fuel cell vehicles, and to other lower emitting sources. We need to build the infrastructure that will support fueling those vehicles, whether it's the charging or the hydrogen fueling infrastructure.

And that is one of the most important things that we can do to bring down air pollution, improve air quality, and bring down greenhouse gas emissions, particularly in the near term.

Let's get a couple of questions in quick succession here. Speaking of 398, it required CARB to assume that all industries are at medium or low risk to leakage--or actually at high risk of leakage. So, Danny, maybe--Mr. Cullenward, what are the industries that you think are getting unscientifically accounted allocations?

So the program provides free allowances to protect against this possibility of leakage of the facilities closing down and moving to another state or importing instead of the domestic production, which doesn't lead to any climate benefits. For many years, staff have proposed reducing those levels based on their assessments of leakage risk, including most recently in 2016, prior to the passage of AB 398. There's a variety of industries that were affected by the direction in AB 398 to provide the maximum leakage allocation.

The dominant beneficiary is the refining sector, which gets about 60 percent of the total free allocation in the program. A variety of other industrial sources in industrial manufacturing and agricultural food manufacturing also benefit, but by far, the lion's share is the refining sector.

For Catherine, you mentioned the facility-specific caps on emissions. What impact would that have on supply? Or is it the case would have a relatively small impact?

Yeah. So some--Dallas Burtraw, who's the Chair of IEMAC and also works for Resources for the Future, recently did an analysis of the impact of facility level caps, and they showed that it would be roughly 0.7 percent impact on total supply.

Okay, that's helpful. I did want to get to a couple of other structural things. Katelyn, there's been discussion of rule-based mechanisms versus manual adjustments to supply, and maybe you can comment on that and whether states are using rule-based mechanisms and has it proved successful?

Yeah. So the idea here is that you sort of have some amount of predictability when the program is going to be reviewed, when questions like: are our investments delivering the kind of return that we're hoping they're delivering, do we have too many allowances in the program? And so the idea is to do this on a regular basis and a predictable basis. I mean, I mentioned in my opening statement that we've been asking CARB to revisit the allowance budget since 2018.

It would be a lot easier for everyone if there was some regulatory certainty and we knew when these questions were going to be considered and when potential changes to the program might be enacted. Washington State has a four-year review sort of built into their program. Obviously, the program hasn't been around that long yet, so we haven't had a review. The Regional Greenhouse Gas Initiative does it every like three to five.

It's not like a set year system, but, I mean, that's when they raise these questions of cost and stringency and all of that. The European Union has a similar process where it's like, I think in the past, I've used the analogy of like, you know, you go to the doctor every year whether you need it or not, hopefully, and it's like a checkup. And if there's something wrong, you can deal with it, and nothing's wrong, you all move on.

This is what a rule-based adjustment could look like--or a rule-based process, I should say--is to have that regular checkup, whether it's a compliance period or aligned with the scoping plan, but to dig into all of these questions on a regular basis and then everybody has consistency and predictability.

Got it. So something we should consider for the future?

Absolutely. Yeah.

Danny, I wanted to ask you--I know we've talked about offsets--one of the policy mechanisms CARB uses to hedge against potential risk is this buffer insurance pool. What is the current state of this insurance program, how frequently is used, and how is climate change going to affect this buffer pool?

It's not a good story. So the program requires people who generate offset credits to set a portion of those credits aside to act as a self-insurance program. And although the statutory direction of the offsets program is to pursue only permanent offsets, CARB has defined the word permanent to mean 100 years. So they've designed 100-year insurance program. 100 does not mean permanent as far as I see it, but that's what the agency decided. The insurance program is not bankrupt. It's not at risk of bankruptcy.

But it was hit very badly in the 2020 and 2021 wildfire seasons, and it is very clear--I've published research on this--that it's severely undercapitalized. I would describe it as insolvent, not at risk of bankruptcy. But there's absolutely no way it's going to cover 100 years of liabilities. The risk factors in the program don't account for climate change. They don't account for regional variation.

Even though we know that arid interior western forests are under severe current stress and even more severe future climate stress, they're given the same reversal ratings as forests in Upstate New York or Vermont, even though, again, we know that that is not the correct way to think about it. CARB, to their great credit, has commissioned a study to think about reviewing this, but continues to credit projects in fire-prone areas that are definitely going to burn and are not using good wildfire management practices.

Thank you. And for CARB, what happens if the losses exceed the buffer pool?

So the buffer pool right now has been at, I think, 28 million credits at this point. I was checking the accounts, the public information that we have just this morning, and I think the recent reversal that happened in respect to a wildfire was--and this was a larger one--but it was roughly two million. So hopefully that gives you a sense of scale that we're talking about here.

The buffer pool has continued to grow over the life of the program, originally starting with just the initial offset projects and less than a million credits to now where it's at over 28 million credits.

But if it's exceeded, I mean, I think the point is that doesn't take into account the impacts of climate change and some of the other concerns that were just raised with Mr. Cullenward.

We had a workshop on the U.S. offset force protocol about a year and a half ago and sought feedback on the protocol. And then we also have a contract, as Mr. Cullenward mentioned, to look at this in terms of look at potential adjustments to risk ratings so that we could potentially update the protocol in the future.

Mr. Cullenward, any further comments on the risk calculations?

Just, I want to emphasize that the wildfire contributions that were set aside for 100 years were burned through in less than ten. Like, this is not a rounding error, and Ponzi scams also grow until they collapse, and that is how I would analogize the accounting here. I hope it will improve. Last thing I want to say is there are now six peer-reviewed studies finding major problems with the offsets program. Most of them have to do with how the carbon is counted.

And we have the CEO of a large timber company that earns offset credits in the program saying he was given credits for not cutting down trees he's legally prohibited from cutting down. And I just want to emphasize, that sounds crazy and extreme. That's what the program is right now. And there's very severe problems that go beyond this fire risk problem.

Well, thank you for pointing out those concerns. Back over to you or Senator Menjivar?

Well, there's so much to--and there's a lot of backstory to a lot of this stuff in terms of how we got here and some of the politics behind those 2017 negotiations. Gosh. Okay.

While you're thinking about that, I will mention on the budget side, I do appreciate the discussion. And as Budget Sub Two Chair, this is something obviously deeply focused on and the expenditures, and as was mentioned, especially by the LAO, with our current budget crunch and foreseeable budget crunch in the upcoming years, this is really our money to reduce emissions. And we have to be, I think, much more disciplined and focused going forward about how this is used to reduce emissions. So I won't discuss more.

I think we had a good discussion about it, but I think it's something certainly to come back to. I just have one more question for Danny around CCS for accounting. What are your feelings about that? Do you see any issues with that going forward?

So I've heard concerns from stakeholder groups about carbon capture and storage. And setting aside, there are obviously different views about whether or not it's desirable. But if a facility were to install a carbon capture control system and sequester that CO2 underground, how that would be accounted for, and whether that captured CO2 would represent an emissions liability. I confess I don't see anything in the regs that would require that to be carried as a liability.

But I've heard concerns from stakeholders, and I know in IEMAC discussions we have, our draft report is up right now. One of the issues that's come up very briefly is how to account for that. So I personally don't think it should be controversial that if the CO2 is captured and safely stored underground, it's not an emissions liability. But there appears to be some stakeholder concern about ambiguity in the current rules.

I want to distinguish that from when we talk about removing CO2 from the atmosphere by any number of different means. Whether or not that should carry a credit in the cap-and-trade program presents significant challenges, particularly because the scoping plan calls for carbon removal on top of reductions. And if we credit it in these programs, we allow emissions increases that offset the reductions. And so I would flag the accounting issues for carbon removal are quite a bit more controversial and complicated.

I would welcome stakeholder feedback on how that accounting issue with respect to point source CCS works, and the IEMAC intends to make that a topic for this upcoming report cycle as well.

Okay. Surely important topic, and on the removal, your point is well taken because under the bill that we passed, 85 percent direct emissions reduction, 15 percent carbon removal. So that's on top of the emissions reductions. Yeah. Okay.

Right. I wanted to ask, there's so many different directions to go in this discussion. It's been great. By the way. I appreciate everyone's indulgence. Caitlin, can you talk a little bit about some of the political challenges that the Washington situation is facing and what lessons we might be able to learn? I mean, I guess part of their challenge was they just spiked the prices too quickly, and that is a good cautionary tale.

Well, I think Washington, I mean their program really, their power sector looks very different than California's. So I guess to back mean, California set our targets years and years ago, put a cap on emissions years ago. So we got a headstart, frankly. And Washington had already done a lot of the easier, Low-hanging, fruit-type emission reductions. They also really rely heavily on hydroelectric power, which is zero emission.

And so the space they have to make reductions in their power sector is smaller than it is in California, even with all of the progress California has made in our power sector. So from the beginning, it was set up not as, frankly, a more stringent program. And some of that was a deliberate decision because climate change is accelerating and we need to have more ambition. But some of it was also just structural to how the progress they'd already made and what their power sector looks like.

So I just want to say that that sort of from the beginning, their cap trajectory necessarily looked different than California's does. And then what we've seen is I,mean as they've implemented this program, we've had initially higher prices than California's in the Washington program that has declined a little bit as there is a measure on the ballot this November that could potentially repeal the program. This was before my time, but you probably will recall California went through the same thing after AB 32 was passed with Proposition 23.

So it is very similar in trying to undo climate progress. That's the uncertainty that Washington is facing right now. California has faced this uncertainty before and has always gotten through it and had more climate ambition on the other side. So I think that is one sort of perspective to have on what's going on in Washington. The other thing I'll say is Washington is working really diligently. I mean, their Legislature is also in session right now.

Their regulator, the Department of Ecology, has requested legislation that would make some amendments to the program to make it even more closely aligned with California's because they are very interested in linkage with California and being part of a larger market and are making moves to make that even easier and facilitate that even more going forward.

Can you tell me a little bit more about the environmental justice engagement in the Washington program, how that worked and how that played out. and it parallels to our.

Yeah, and like, Dr. Katherine said I mean, the environmental justice community is not a monolith. It's really hard to sort of paint with broad strokes. There were certainly groups that raised many of the same concerns about market-based mechanisms and how that is going to impact local communities.

And I think as a result of that, a lot of the air quality provisions that are built into their program, those are a result of those concerns, is building in a lot of those air quality provisions, many of which look similar to things that California has done as well, just maybe not as part of a cap and trade program.

There's also sort of an interesting dynamic in Washington because there was a huge need for funding. There's, I don't want to be, like, speaking out of school here, but, I mean, they have very little revenue for things like transportation and transit. There's no sales tax, there's no income tax. So the revenue that's available to spend on priorities is minimal. So there was a need for funding, which caused a lot of groups, the.

Need for these massive price hikes.

There was a lot of groups supported this type of program because they recognized we need revenue to support our priorities.

Yeah.

There's also a significant tribal presence in Washington, as there is in California. And the tribes were very supportive of this program for the most part, because there is a specific carve-out for offsets that are sold by tribes.

California does not have such an offset or such a provision in our offset program, but a recognition that if we want some of these benefits to go to tribes in the State of Washington, that we need to put that into law.

Okay, I have follow up with each of you on different topics coming out of this discussion. If we're not hearing additional questions from the Senators, I do think we need to go to public comment. But this has been a wide ranging and important discussion, and I really do appreciate everyone's thoughtful and engaging participation. So let's go to the microphone.

Hi. Good morning to the Committee. Thank you for the time and thank you for this rich discussion. I think it was really generative and exactly the type of conversations we need to be having in the Legislature. My name is Amir Ravel. I'm Policy Director with the Asian Pacific Environmental Network, or APEN. Thank you again for this hearing. We represent EJ communities in Richmond and Wilmington that have long lived in the shadow of the state's oil refineries.

And one thing that I want to just reiterate from this conversation, for our communities that's really important is that under the cap and trade program, some sectors covered under the program, like oil refineries, are actually seeing increased emissions under the program, and they are now the largest stationary source of greenhouse gas emissions in California. And so we are not seeing CARB effectively regulate industrial pollution in our neighborhoods.

And we see the program really letting big polluters like oil refineries off the hook through cap and trade via accounting gimmicks like allowance banking and offsets. And so, as the Legislature revisits the role of the cap and trade program, we urge the state to put California on a path towards a full, coordinated phase-out of fossil fuels, especially in sectors like oil refining, where we've seen emissions increase over the course of the program. And I do appreciate this conversation about revenue.

I think that's a conversation worth continuing around, really opening up the discussion on what it should fund or not. As an EJ advocate, I do really want to reiterate, in addition to emissions reductions, want to really center the equity targets that are something we advocated for through our history of organizing, to make sure it's also concentrating benefits in overburdening communities and amongst low-income households.

And finally, I do think the conversation on revenue points to the fact that this program alone, as well as other market based mechanisms, aren't actually focusing on the goal of direct emissions reductions, nor maybe are they intended to. And therefore, we need a broader framework around achieving emissions reductions at the source in communities like the ones we represent. Thank you.

Thank you. All right. Thank you very much. And we're going to ask people to keep their comments about two minutes, if that's possible.

Thank you, Mr. Chairs and Members, Brendan Twohig, on behalf of the California Air Pollution Control Officers Association, that's the Executive Officers representing all 35 local air districts, I would like to inform the record that the air districts were not involved in the negotiations for the AB 617 program. So I wanted to inform the record on that.

Also, there's been a lot of assertions made here today and comments and we would more than welcome the opportunity to sit down with you directly to provide a more accurate and complete picture of the program and what's actually happening in the air district role and what we're doing to try to get emissions reductions and improve public health in disadvantaged and vulnerable communities. Two points.

One is that the Legislative Analyst Office, in their 2022-23 analysis of the proposed ZEV package, put the AB 617 incentives in the top three of the mobile source incentive programs for cost-effectiveness, both on the GHG side and on the criteria pollutant side. The other two programs were also air district ministered programs, the Carl Moyer program and the Farmer program. So we can get emissions reductions, public health benefits and climate at the same time in a very cost-effective way.

The last thing I wanted to say is that the AB 617 community air protection program is underfunded. It always has been. There are currently 19 communities in the program, and the funding that goes towards incentives and air district implementation is comparable to when we had 10 communities. So, in essence, every time you add a community without providing funding with that, it's in effect a cut. And now the proposed budget contemplates another 50 million reduction for the program.

So I'd like you to keep these things in mind. Again, a lot of comments made today, and we would really welcome the opportunity to sit down with you and share what we believe is happening on the program.

And a lot of comments. You're specifically referring to this discussion of the South Stockton situation?

Well, that's one community. And so I'm sure the San Joaquin Valley would.

617 in general.

Yeah, and I'm talking 617 in general because there was a lot of discussion here about the program in general and.

Got you. Okay. Thank you.

Appreciate it.

Yeah.

Thank you.

Thank you. Yes, sir.

Good morning, Chairs. Alan Abbs with the Bay Area Air Quality Management District. I'd like to start with echoing my counterpart from CAPCOA and also just relate that the AB 617 process is by nature a bottom-up process. It's comprised of individual stakeholders, environmental groups, small business owners, large business owners, cities, municipalities, and the air district. And so there's always going to be a little bit of disagreement about what the best way to get reductions are.

But that's the way the process was designed. And as one of the panelists mentioned, individuals are not a monolith on what's right and what's wrong in the 617 program. One thing I did hear during the panel discussion was this concept that the best available retrofit control technology requirement in 617 ended up just being a list that air districts put out with no enforcement, no follow up action. And so I'd like to relate some breaking news to the members of the Committee this morning.

When the 617 was passed, the air district went about creating a rule called rule 65 for refineries, for fluidized catalytic converter units that would reduce pm emissions from those units by over 70%. We passed that rule in 2021 that was a result of the AB 617 program. The refiners that were affected by that filed a lawsuit to delay having that requirement put in effect. But this morning, the air district and the refineries announced a settlement.

That lawsuit and the refineries are going to be moving forward with meeting those rule requirements, as well as creating a community air protection fund for the City of Richmond, plus obligating themselves to pay up to $130,000,000 in penalties for not meeting the requirements to have all this done by 2026. It's really kind of offensive when I hear that the air districts haven't been meeting the requirements of 617, that it's just something that occurs on paper, that there's no follow-up from the air district.

Like my counterpart said, we'd certainly be willing to sit down with any of the members of the Committee, talk about what we've done and what we see ourselves doing in the future. Thank you.

Thank you very much. Okay. Yes, ma'am.

Hi. Thanks. Nicole Hutchinson. On behalf of CALSTART, I want to thank you all for having this hearing today. It's been a great conversation, and CALSTART looks forward to staying engaged. The cap and trade program plays a critical role in California's climate strategy, and the funding it provides through GDRF has been essential in furthering ZEV deployment, leading to reductions in the transportation sector for both criteria, pollutants, which do have a direct benefit to public health as well as GHG emissions.

We look forward to working with the Administration and the Legislature as you work to reauthorize this program. Thank you.

Virgil Welch with the California Carbon Solutions Coalition. Thank you, Senators, for the focus today on the cap and trade program. As we heard from several folks, actually, carbon capture and removal technologies are a key part of the suite of strategies that CARB has identified in the scoping plan as needed to achieve our 2030 and certainly our 2045 carbon neutrality goals. Senator Becker, you raised a question at the end with respect to CCS in particular and its role in cabin trade going forward.

Thank you.

And I did want to highlight the staff report that the Committee staff put together, acknowledging the need to take a look at that. CARB is taking a look at that as well. As I think you all know right now, emission reductions achieved via deployment of carbon capture do not count in the cap and trade program. As we've heard today, trying to find the requisite number of policy drivers to support deployment of all of these carbon management technologies is going to be really important.

So keeping a focus on that as we're moving forward in terms of incorporating into the program, emission reductions accounted for via CCS is going to be really important. Last point I did want to raise is just with respect to the rigor of accounting for reductions achieved via CCS. As I think you all probably know, we have a CCS protocol that lives in California's Low carbon fuel standard, which, if not the most rigorous, is certainly among the most rigorous in the world.

And it includes significant provisions with respect to permanence and liability and all of the associated things that we would expect to see from emission reductions achieved via CCS. So appreciate it. Thank you.

Thank you, Virgil. Thank you. Yes, sir.

Hi, Mikhail Scavaro here on behalf of the California Council for Environmental Economic Balance. We're a business labor organization. Many of our members, as obligated parties, just wanted to note of the panelists, and while we appreciate the Committee putting this together, two committees putting this together, there is a noticeable absence of anyone who actually pays into the cap and trade program or has an obligation within the program. And you're represented within the conversation today.

And our support of the program is why it was reauthorized by two thirds, why it continues to have the support that may not be seen in other jurisdictions as we're evidencing in Washington and further north in Canada.

And so to that end, we do want to note that as we start to bake in AB 1297, the 2022 Bill that has carbon neutrality in it, and shoot towards that 48% trajectory by 2030 for our interim target, that we're going to see a 27% increase per year on the obligation per party within the program, which is going to substantially have impacts on energy and fuel prices as we go forward.

And so to that end, as we start to think about reauthorization, it may be good to see CARB adopt the rule, maybe get an auction or two under our belt, to understand what our focus needs to be for post 2030. And so we'd urge that kind of patience and look forward as we go to see what exactly we need to adjust. The 48% may be enough to induce fairly high prices if we're not able to achieve our mitigations through the construction of carbon neutrality type technologies.

CCUS, hydrogen, interconnection, simply put, and the revenues from the program are important to getting all those programs off the ground. Additionally, we've got to be careful. Climate change privacy, AB 32. While we are seeking co-benefits from air quality and criteria pollutant reductions, it is not in and of itself a criteria pollutant or air quality program. We want them to be very good at reducing greenhouse gas most cost-effectively and efficiently. And we can't do that if we're also asking it to multitask.

And so we'd be cautious in how we frame that conversation, trying to keep the program as pure as possible so that it's doing its best job and then we can use the revenues for those other programs. Additionally, I'd caution on Washington, it is not a success at this point. It is facing a repeal for different reasons than California. Ours was based on whether it's tax or a fee. Theirs is based on they have the highest gas prices in the country right now.

The program was too heavily designed without liquidity. There's a fundamental change that's taking place. We hopefully that will align with California. But California is the leader. We don't look behind us at people who just adopted. They are members of WCI. In 2006, when we adopted AB 32, they didn't come along for over a decade. It's time for them to follow, time for us to lead and continue to go down a successful path. So look forward to following up and appreciate the hearing.

Thank you. Thanks very much. Yes, Sam,

Thank you for the hearing today. My name is Kendra Harris. I'm with the climate center. Thank you for doing the hearing today. We look forward to future conversations as this program is looking at reauthorization, we wanted just to point out a few shortcomings that the climate center recognizes. The cabin trade program. There's current oversupply of compliance instruments allowances. To ensure a more balanced and efficient carbon market, there needs to be a mechanism to reduce the number of allowances.

The oversupply threatens to derail the attainment of the legislatively required annual 2030 and beyond emissions reduction targets. Second, offset protocols are not rigorous, and studies have shown that purported emissions reductions are often not long lasting, permanent or additional. We advocate a ban on the use of offsets in the California cap and trade program. If that is not feasible, then replace offsets with possible insets. Third, free allowances are given to emissions intensive, trade exposed firms and electric and gas utilities.

These make up about 50% of the allowances in the market. This is a substantial subsidy to polluting firms, which dilutes incentives for carbon reductions in these sectors. We advocate reforming the allowances allocation for these industries to provide incentives for innovation. And lastly, an extension on the cap and trade program beyond 2030 is necessary to reach the legislative target of net zero GHG emissions no later than 2045.

This extension must be a top priority as it offers a crucial price signal that reducing future carbon emissions will be economically beneficial, a critical prerequisite for investments in innovative emerging carbon-free technologies. Thank you.

Thank you. Thank you. Yes sir.

Senators, Mike Monagan on behalf of the state building trades, we were very actively involved in the original part of the program and commit to remain so involved. This is a common-sense program. Help us meet our climate goals. Our Members, 500,000 Members, have built the utility grade solar, wind, battery storage and geothermal. And in the future we plan to build the next generation of projects, including carbon capture, sustainable fuels and hydrogen.

In closing, I'd like to say that the predictability of the program should be a priority in order to ensure that private investment will come to California. Thank you.

Thank you. Yes sir.

Senators Andres Ramirez, on behalf of the Trans Bay Joint Powers Authority, which owns and operates the Salesforce Transit center serving communities across the mega region and is also going to be the northern terminus for future high speed rail and electrified Caltrain as well. Really just looking forward to working with the Legislature and Administration on the reauthorization of the cap and trade program.

TJPA's portal project is going to serve clean trains such as electrified Caltrain, high speed rail, and is reliant on funding sources such as the TIRCP program, which currently gets 10% of the cap and trade dollars.

So if we wish to leverage the $0.01 generation funding from the Biden Administration and their transit funding, we are going to need to see the early reauthorization of the cap and trade program to ensure that the TIRCP program can continue to fund projects such as ours and other megaprojects if we wish to see them come to fruition. Thank you.

Thank you.

Good morning, Senators. Brady Van England, the California Chamber of Commerce here on behalf of the 14,000 Members of the chamber itself.

First, I'd just like to echo, a lot of the comments were made by the panelists and Rebecca, you alluded to it at the early part of the conversation. Senator Allen, you raised it as well too, the contemplation of how those dollars are spent.

The 65% are currently continuously appropriated, which might not reflect the Legislature's current priorities, and I certainly don't think it reflects carbs, the implementing body's priorities as well too, given that the scoping plan noted a 48% reduction and relied heavily on CCS, CDR and hydrogen to actually help us achieve those goals. And I don't know how or what from the funding would actually help us achieve those goals in and of itself.

Lastly, the last point I'd like to make and just align myself with the comments of from Siebe, industry played a huge role in the passage of AB 398. As we transition to a conversation about the extension of cap and trade, we fully expect to be part of that conversation as well, too. Thank you.

Thank you. Hi.

Thank you, chairs and members. Hello. My name is Olivia Seideman with Leadership Council for Justice and Accountability. We're an environmental justice organization that works alongside communities in the San Joaquin and eastern Coachella valleys. California's climate strategies must mitigate and eliminate environmental injustices, not exacerbate them. Direct emissions reductions that reduce carbon emissions and improve air quality are the most effective and equitable method of reaching California's climate goals and should be prioritized over market-based mechanisms like cap and trade that still permit pollution in disadvantaged communities.

As is the case in places like South Fresno, where leadership council works alongside communities, which is an AB 617 community and an industrial development hub. AB 617 has failed to address air quality issues in areas like South Fresno, which is one of the most polluted communities in the state, according to Cal virus screen, and where life expectancy is 20 years shorter than just a few miles north in North Fresno.

Despite this, the city and county continue to push for industrial development in the community, and Caltrans is pushing a highway expansion project that will facilitate this industrial development. It's an incredible failure of both local and state agencies to actually improve air quality and meet climate and equity goals. The state needs to take a hard look at this program, and any conversations around meaningful reform must include land use policies, direct emissions reductions at the source, and enforceability as program requirements.

Because cap and trade fails to meaningfully reduce air pollution and instead allows polluting land uses to continue in neighborhoods, California should instead implement climate strategies that address both carbon emissions and co-pollutants. Mandating emissions reductions at the source instead of relying on market-based mechanisms like cap and trade. While we're opposed to the continuation of cap and trade and urge California to prioritize direct emissions reductions, any updates to the rule must include critical guardrails that protect communities.

This includes the prohibition of carbon offsets, the use of no trade zones that prohibit credit purchases in disadvantaged communities, and the simultaneous adoption of effective land use policies that prevent the encroachment of polluting activities and pollution and polluting land uses in neighborhoods across the state simultaneously. Any cap and trade renewal conversations must also ensure that funds generated by auctions and contributed to the GGRF must prioritize direct meaningful and assured benefits to the most polluted and impacted communities in the state.

By both funding critical investments like TC and CRCs, and by reforming programs again like AB 617 to ensure that there's enforcement and accountability. Thank you.

Thank you so much. Yes, sir.

My name is Ken Johnson. I'm with the Climate Reality Project: Silicon Valley Chapter. AB 1279 establishes a state policy to achieve net zero greenhouse gas emissions, quote, as soon as possible. But CARB is not considering allowance budget scenarios or policies that would achieve net zero emissions any sooner than 2045. The scoping plan clearly indicates that more ambitious climate goals could be possible. The report states that, quote, "under the scoping plan scenario, impacts to economic and job growth would be negligible," unquote.

By contrast, one stakeholder, the Western States Petroleum Association, has asserted that a 55% reduction target for 2030, and probably also the 48% target, are not technologically feasible. But whether or not that is true is irrelevant because the cap is nonbinding, it is preempted by the price ceiling. The fundamental question for CARB is not whether a 55% or 48% GHG reduction target is feasible, but whether the price ceiling is affordable.

The price ceiling is currently $88 per ton and was originally set in 2021 based on the social cost of carbon. Now, the EPA has recently raised the SCC estimate to about $200 per ton. But SCC is only one of six statutory criteria that CARB is required to consider in setting the price ceiling. The first and most important criterion is, quote, "the need to avoid adverse impacts on resident households, businesses and estate's economy."

CARB should establish an affordable price ceiling, taking into consideration the allocation of allowance sales revenue, and should seek to achieve net zero emissions not as cheaply as possible, but as soon as possible. The ceiling represents the limit of what we are able and willing to pay for climate change mitigation. And as long as the price ceiling is below the social cost of carbon, there is no justification for adopting an emission target that results in allowance prices well below the ceiling. Thank you.

Thank you. Yes sir.

Thank you members. Rob Spiegel, California Manufacturers and Technology Association definitely appreciate the robust dialogue and comments here on California's cap and trade program and to kind of reiterate some of the comments both from Cal Chamber and my colleague from SIEB. The industry perspective is one, at least for my association as well as chamber and SiB, though, of how the very granular level of impacts and what has been done correctly at our facilities of the regulated sector are accomplishing.

And it's a perspective as well that can help with future programmatic design as well as kind of look holistically at the various other programs that impact our facilities on a statewide level. But with that as well, for the manufacturing sector specifically, why, yes, we're covered entities. We're also bigger than just oil and gas. We are pharmaceuticals. We are food and beverage processors, and these are also covered entities under the program.

And to kind of reflect on some of the comments from our colleague Danny Cullenward, when we start looking at some of the cost, impacts, not societal cost of carbon, but on those fundamental impacts is what I would call kind of like pocketbook costs to Californians. Increased costs and allowances and prices lead to increased costs in food commodities, increased cost of being able to construct the materials in which we do.

And so with affordability clearly in the lens of the Legislature this year, I think that raises a very serious consideration that may not have been done in our original discussions surrounding AB 32, SB 32, 398 or even 617.

So there's a different lens, I think, as we look to extending cap and trade and kind of the programmatic elements that are taking a harder look at cost to consumers, I think with that, to the extent that CMTA and our other industry colleagues can continue to be a collaborator as it relates to the program and participate in other conversations associated to cap and trade, we're very happy to do so for our sector in particular.

Not only are we the emitters in California, we're also creating the various technologies that are going to help California get its way to a brighter carbon future, if you will, or carbonless future. I think with those considerations, we definitely look forward to the continued conversations surrounding the program and to provide one more comment before I step away.

As we look at how GGRF is funded or not funded as GGRF are expenditures, perhaps it is best to now take a greater look at what those priorities are and whether or not those priorities or that funding source is meeting our ambitions under AB 1279 and the scoping plan. Are they aligning? Are they harmonizing with what California intends to do? We also see pathways, obviously for CDR, carbon capture and others, but appreciate the opportunity to provide comment and look forward to being in future discussions.

Thank you very much.

Thank you. Thank you.

Good morning. Still morning. Chairs and Members-

Just barely.

Silvia Solis Shaw here on behalf of the San Joaquin Valley Air Pollution Control District. Just want to make quick comments. The LAO has found that air district-implemented programs such as the farmer program and AB 617 are among the most cost-effective GGRF expenditures with respect to reductions in GHG and criteria pollutant emissions. The district tracks and reports on all of these expenditures to CARB currently, and our regulatory program has also reduced emissions from stationary sources by over 90%.

The district is committed to working with the South Stockton community and our other AB 617 communities. We are actively implementing the community emission reduction plans with a very active community participation and input. Given the limited time today, we will be providing a follow-up response to some of the claims raised in this hearing, which will provide a fuller picture of RCERP project implementation, emission trends, and our regulatory activities in our 617 communities. Thank you for your time.

Thank you, Silvia. All right, well, thank you, everybody, for participation. We're running off to caucus, but this was a great discussion. I know we've got several more hearings to come from the Joint Committee, and I do want to really thank the staff for pulling this together from both of our committees. Really good discussion and lots more to go on. Thank you, everyone.