Joint Legislative Committee on Climate Change Policies

All right, we are going to go ahead and get started, so if I can have everybody take their seats, please. Many of my colleagues will be watching remotely, so I might be sitting up here alone or potentially a Senator will join along. Welcome to the first hearing of the Joint Legislative Committee on Climate change policies of 2025.

It goes without saying that we are living in an extraordinary time for climate and climate policy. Climate change is contributing to disaster cycles of intense flooding, crippling drought, rising seas that threaten our coastlines, unprecedented heat waves, and closest to home for me, devastating wildfires had skills that much of our infrastructure was simply not designed for.

Fueled by a dry landscape and propelled by extreme winds, we grapple with the impacts of these disasters at a time when affordability is perhaps the central challenge facing California. Whether through rising utility bills, insurance premiums, or any number of other expenses, household budgets are stretched across the state before.

Because affordability is such a cross cutting issue, it is imperative that we weigh affordability implications in all the policies we consider in the Legislature. While we're certain that climate change and affordability must be addressed, we do so in a cloud of uncertainty.

The Federal Government has rapidly shifted from supporting renewable energy, clean vehicle standards and environmental justice to foregoing leadership on environmental and climate policy altogether. California has shown tremendous leadership in setting goals and developing policies to reduce emissions and address climate change.

If anything, having an unreliable and at times hostile Federal Government makes it all the more important that California continue to lead on climate. But we must do so thoughtfully. California represents only a sliver of greenhouse gas emissions worldwide.

To truly move the needle on addressing climate change, California's climate policies must be durable and critically replicatable in other states and countries. We have to ensure that our policies are efficient, affordable, and provide tangible benefits to our constituents. Otherwise, how can we expect others to take similar steps toward addressing the climate crisis?

The need for California's climate leadership is to be ambitious, yet judicious is clear. The focus of today's hearing is the Cap and Trade program, its role in California's climate strategy, how it affects affordability, and how parts of it can be better utilized to maximize its affordability benefits to Californians.

I would like to thank my Senate, my Assembly fellow Assembly Members and Senate colleagues, and especially Vice Chair Stern who has joined us here today. And Senator Stern, do you have some comments? I'll make one brief one.

Okay. I appreciate the diligence that you're doing, Madam Chair here, and I'm excited to get into some details and get some updates.

I think we're doing a really good job this year in the Legislature of scrutinizing ourselves and sort of kicking the tires on all our programs to make sure they're delivering real results and that especially through that affordability lens that we're being tough on ourselves to see, like are we really delivering the best possible outcomes we can for the, for the buck.

But I guess just as a context setter, there will be limits, I think, on how affordable we can make lives for Californians when we're fighting potentially with one hand tied behind our back.

Already wholesale gas prices, since the Trump Administration announced their plan to export American energy and basically put a guarantee on LNG exports to Europe, has already driven up wholesale gas prices $0.75 per mmbtu throughout the entire western United States over the last 10 days. It is now at about $4 at the Henry Hub.

We're a little bit lower than that here at SoCal City Gate where I represent price impacts are going to affect refining the cost of gasoline.

The price impacts from this export, when I consider an America last approach to energy, are going to also drive up prices in electricity as well as the natural gas we use to heat our homes and stoves and the like.

So the one note of caution I guess I want to offer at the front end is to be careful about how much burden we do put on ourselves.

I don't want to over promise on this and under deliver and I think in some ways, given the chaos at the federal level right now, from an energy policy perspective, I mean the prospect of gutting the Ira, for example, those headwinds, the most we may be able to promise is that we're going to at least be able to just offset the pain that we're seeing from Washington.

I don't know how much that's going to be, but I go into this effort today and over the course of this year as I help we move into an expedited process for extending the program both at the regulatory and legislative level.

But I want to approach all that just knowing the full facts and hopefully we'll get into that at a future date. But for today I just thanks for. Thanks for being here to kick the tires and to staff too. Really. The preparation is excellent, so appreciate it.

Assembly Member thank you, Madam Chair and Mr. Chair. And I want to thank the speaker for appointing me to this Committee. I think this is.

We often say California leads the world, but I think this is an example where California has truly led the world and we have seen folks follow us in policies that we are hearing are effective and important in fighting climate change.

And as I think about the priorities of our house, the priorities of my time here in the next two years, there's no question that the affordability for Californians, as is indicated in subject matter here today, is top of mind.

But I think what's critical is that we just had the largest wildfires in history affecting some of our communities in ways that none of us ever could have imagined just months ago.

And so climate change is real, the impacts in our community are real, and we need to be continuing to lead in ensuring that we are fighting climate change with every tool California has. And this is such a critically important one.

And I truly believe that we can continue to provide a model for how cap and trade can function and be successful while balancing affordability for Californians. I'm an optimist who thinks it's all possible, and it will only be possible through these moments that we have together.

And I'm so glad to be seeing that we're doing this in a bicameral way, because the information that we'll get through these hearings are gonna guide us in having the real knowledge that we've learned over the last years of how this program has succeeded and how perhaps we can improve upon it to make sure that we continue to fight climate change and protect Californians as they try to live in our very expensive state.

So thank you for putting this together. Thank you to the staff for their extensive work already on the subject that I know will continue, and I look forward to participating.

Thank you. Thank you, Assemblymember Bauer-Kahan. We are joined today by Leanne Randolph, the Chair of the California Air Resources Board, Dr. Stephen Cliff, the Executive officer at CARB, and Reginder Sciota, Deputy Executive Officer for Climate Programs and Research at.

All. Right, thank you so much for having us here for this really, really important conversation. I very much appreciate, sort of, you know, the thoughts you all shared at the beginning, and really happy to take the opportunity to share how our existing programs are moving the needle on climate change and air quality.

And so I'll talk about sort of what we're doing overall, what we are working on in the coming year. And then Executive Officer Cliff and Deputy Executive Officer Sahota will come up and do a deep dive into cap and trade and have an opportunity to spend some more specific time on that.

As you all noted, we are in a period of unprecedented uncertainty. We have new direct attacks on our values and our policies that are being launched from Washington, D.C. every day. I want to affirm that the California Air Resources Board and The Administration will continue to defend our clean air and climate protection programs from these attacks.

We know the law is on our side. We know the science is on our side and the public is on our side. We have some of the best and brightest legal minds in the world in our ranks at CARB and at the Attorney General's Office.

And with your support at the Legislature, we are committed to advancing our legacy of policies that have shaped global climate action, that have stimulated clean technologies and unleashed innovation and opportunities here in California and worldwide. It is critical that we stay the course for public health, for economic competitiveness, and to build a sustainable future for Californians.

We are also acutely aware of how Californians are feeling price squeezes across our economy. We don't see any policy relief on that coming from Washington, D.C. and so we need to be committed here to ensure that our actions deliver net benefits to Californians. Our climate portfolio has delivered a significant return on investment.

Lowering fuel costs through more efficient vehicles, generating tens of billions of dollars for climate investments, offsetting costs in utility bills through the annual credit, launching new job creating industries as part of our clean energy economy, and all of this while helping to alleviate the price of climate impacts which experts project cost the state on average $16 billion a year.

But we admittedly can do better at communicating those benefits to the public and helping them access programs that benefit them and their communities. So we look forward to working with you on all of these fronts to help meet our collective goals for a healthy and sustainable future.

So I'm going to start with our overall approach to achieving our legislative climate targets. Since the first AB32 scoping plan, we've used a portfolio approach that includes prescriptive regulations, incentives and carbon pricing in the form of the Cap and Trade Program.

Our plan is updated every five years to identify actions needed across sectors to meet climate targets, assess progress and incorporate new legislative direction.

Importantly, the plan leverages our policies to achieve federally mandated air quality standards, meaning that even in the absence of climate targets, the plan includes actions that are needed to protect public health from harmful air pollution.

The most recent plan was adopted in 2022 and lays out a cost effective and technologically feasible plan to achieve the two climate targets in AB 1279 reaching carbon neutrality and reducing emissions to 85% below 1990 levels by 2045.

Through the combination of the Cap and Trade program and prescriptive regulations and incentives, including the Advanced Clean Cars Regulation, the the Low Carbon Fuel Standard, the Renewable Portfolio Standard and Integrated Resource Planning process, among others, the state achieved our 2020 emission reduction goal four years early and we are on track to achieve our 2030 goal of reducing greenhouse gas emissions by 40% below 1990 levels.

Since the adoption of the latest plan, we've been refocusing our programs to align better with that 2030 goal and and the 2045 net zero goal. Last year we updated the Low carbon fuel standard to both increase its stringency and to ensure it provides support for clean infrastructure and clean fuels.

The transportation sector produces more than half of California's greenhouse gas emissions as well as significant air pollution, and the LCFS program is a key complement to California's clean vehicle regulations in reducing emissions from those sectors.

While those amendments are on hold temporarily while we remedy the technical issues cited by the Office of Administrative Law, we expect them to be approved expeditiously once we resubmit them. We also started the informal pre rulemaking process for updating the cap and Trade program.

Over the last 18 months, staff held workshops on potential changes to the program regulation to align with the carbon neutrality target goal in in AB 1279 and with updates to our greenhouse gas emissions inventory along with adjustments to ensure efficient and manipulation free market operations and you'll hear more about the specifics of the program in the next presentation.

We're also working on the implementation of numerous other climate programs. Last year CARB updated oil and gas regulation to require oil and gas facility operators to act promptly upon notice of methane plumes, and this year we will be updating our landfill methane regulation to include similar provisions and other updates.

We will be releasing a draft report this year with updated greenhouse gas reduction target recommendations for the state's metropolitan planning organizations to guide them in reducing vehicle miles traveled.

We will also open formal rulemakings to advance three recently enacted climate bills, SB905 on carbon capture and sequestration and SB253 and SB261 on corporate greenhouse gas emissions reporting and climate risk disclosure respectively. This spring we also anticipate releasing the draft SB596 climate strategy for the cement sector.

We're continuing our work on climate smart land management and nature based solutions with our sister agencies and in January we started implementation of our regulation requiring the use of recycled refrigerants, which can be potent short lived climate pollutants. I want to share a few highlights from the AB617 Community Air Protection Program.

As of May 2024 of the $1.4 billion appropriated for community air protection since 2017, air districts have invested 559 million in disadvantaged communities, including the 19 communities selected for the program and other communities around the state. These investments are funding over 4600 projects achieving substantial reductions in health harming, air pollutants and greenhouse gases.

Seven of the 19 selected communities are developing final reports after five years of program implementation. We'll be sharing many of the results from these community emissions reductions plans, but as one example, the Bay Area Air District has measured a 31% reduction in diesel particulate matter in West Oakland, an area of 29,000 people.

These targeted emissions reductions will have substantial public health benefits for this community, which is one of the most burdened communities affected by diesel pollution. The issue of affordability, as you all discussed and the affordable cost of living, is at the forefront of all of our minds.

As I noted earlier, we understand Californians are facing financial pressure across the economy, and we are dedicated to ensuring that our efforts will achieve net benefits. In addressing this critical issue, it's important to consider how much we're already paying for climate impacts and how our efforts will help mitigate those impacts now and going forward.

A 2024 national report ranked California the worst state for natural disasters fueled by climate change, with expected annual losses totaling more than 16 billion statewide. And that was a report from last year. Home insurance is harder and more expensive to get. Seven of California's largest property insurers recently limited new homeowners policies in the state.

During seven extreme heat events over the past decade, California experienced $7.7 billion in losses and beyond the cost in lost lives and shattered dreams. The recent wildfires in Southern California are estimated to have caused over $250 billion in economic losses.

While California has always grappled with natural disasters, there is no doubt they are being made worse by climate change, and doing nothing is just not an option. The status quo will result in even more costly damage from climate change that will hit consumers, businesses and local and state governments.

And we know that California cannot solve the climate Crisis alone. But that's why AB32 included a literal statutory requirement for us to work with national and international partners to help build those durable climate solutions that the Chair talked about that reduce greenhouse gas emissions and that help achieve international climate goals.

We have successfully modeled strong emissions reduction strategies, including world leading clean energy policies and effective market programs. While there is a cost to our climate regulations, California's climate leadership has also provided clear financial benefits to Californians in particular, as the New Federal Administration continues to target programs that attempt to address cultural and historic inequities.

The environmental justice focus of the California Climate Investments, the funding derived from the cap and trade allowances becomes even more important. Per SB535 and AB1550, a minimum of 35% of cap and trade dollars must benefit priority populations. California Climate Investments has exceeded that requirement by 200%, with over 76% percent of the funds going to prior priority communities.

And this adds up to over $8 billion in funding since the program's inception. And these funds help remedy the disparities between the wealthiest and the poorest communities in California.

Programs funded by cap and trade dollars range from home weatherization projects that reduce electricity bills to urban forestry that eliminates urban heat islands to transportation opportunities that give California's cleaner and cheaper ways to get around their communities through zero emission vehicles, public transit, or better infrastructure for bicyclists and pedestrians.

As we look to provide Californians needed relief from the increasing cost of living, we must take care to consider all sides of the affordability landscape. Affordability is not just how much Californians pay for gas or groceries.

It's also about protecting them from the damage of unchecked climate change and about providing clean energy, clean transportation and energy efficiency options that reduce their costs. Transitioning to clean energy means consuming less fossil fuel to power our everyday needs.

The cents per gallon of gasoline metric used by the industry and aligned voices has created confusion about the transition to a more sustainable, sustainable, cleaner energy future for all Californians. Data shows that between the years 2000 and 2025, the average fuel economy of gasoline powered passenger vehicles operating in California's roadways has improved by 22%.

That means it takes 22% less energy to make the same trip as more Californians choose to drive zero emission vehicles. And with continued improvements in efficiency, the cost per gallon of gasoline metric becomes less relevant and a distraction. But the cost of climate damage created by polluting industries will grow. Affordability is real.

It's a critical issue, and I think California must serve as a model for considering affordability in a comprehensive manner, improving standards of living not just through reduced energy costs, but also through a safer environment and investment in cost saving climate policies, especially in overburdened communities. I'd like to offer one final thought.

For many of us, even those who have worked in climate change policy for years or decades. Climate change can be an abstract concept. Greenhouse gases aren't visible to the naked eye. You don't see them in the same way you see smog from diesel pollution from diesel pollution from a tailpipe or garbage in the street.

Their sources are disparate vehicle exhaust, power plant, smokestacks, landfills, broken air conditioning units. We can measure these emissions with scientific instruments. We can track their accumulation in the atmosphere. But it is very easy for them to become just numbers.

After the historic Southern California wildfires this year as well as those of the last several years, the cost of inaction has become much less abstract. Climate impacts such as wildfires, such as extreme heat, drought are only going to increase in scope, frequency and intensity. Climate change is not someone else's problem somewhere else. It's here.

It's our problem right here, right now in California. All of us have a responsible, a responsibility to take thoughtful action. Now I welcome the opportunity to work with you as we implement these cost conscious climate policies.

Thank you and I'm happy to answer any questions before I turn it over to Executive Officer Cliff and and Deputy Executive Officer Sahota.

Why don't we bring both of them up and then ask questions after the panel.

Perfect.

Good afternoon, Chair, Vice Chair and honorable Members of the Legislature. It's a pleasure to be here and be invited to talk about the Cap and Trade Program and share what the history of the program has been, the levers in the program, and the design features of the program.

I do have a slide presentation and I'm hoping that you have copies of it, but I'm also hoping that it's posted for folks on the screen. So I'm going to begin on slide 2 and talk about why we're doing all of this work on climate policies and programs at the Air Resources Board.

Going back to 2006, we've had targets to reduce emissions towards. zero, okay. Yes, California Air Resources Board. Yes, I know some Committee Members are watching remotely, so I'll take my cues from you, Chair, whether or not to continue yet or not.

See if we can get it up on the.

Can we get it up on the screen? zero, what's this? All right. Why don't we go ahead and get the presentation up as soon as it is found.

Okay, thank you. So I'm on slide 2, and if it is a graphic of the targets in the State of California, the 2020 target of achieving 1990 levels, the 2030 target of at least 40% below 1990 levels, and then the 2045 target of 85% below 1990 levels, and carbon neutrality, all three of these targets are in statute.

And that is what we are driving towards, is to make sure that we are putting in place programs and policies that can help us achieve these statutory mandated targets. Slide 3.

Because the CAP and Trade program has been in place and in its operation for over 12 years now, there is some program data that I think is important and helpful to share about it. We have looked at options other than the cap and trade program over the last decade.

We look at those as part of the AB32 scoping plan, which is updated once every five years in multiple scoping plans.

When we've evaluated a cap and trade program versus prescriptive regulations or a carbon tax, we found that a cap and trade program is more cost effective, four to six times more cost effective than those other options of a carbon tax or prescriptive regulations.

Even though the program's been in operation over 12 years, it has been updated eight times and that's to reflect implementation, experience, legislative direction and other information and science that has become available. The program covers 80% of the greenhouse gas emissions in the state. And over the last decade we've had over 100 or close to 100% in compliance.

It does have a statewide GHG cap, which means that when we talk about a cap on emissions, it's for all of those sources as one single cap. We have over 400 regulated businesses in the program and we have over 400 voluntary participants in the program.

The program today has been linked with Quebec's cap and trade program for a decade and we are evaluating future linkage with the Washington Cap and Invest program. Slide 4. The program has also had 50 quarterly auctions. Those auctions have helped to generate money that can be reinvested back into the State of California.

It has generated over 31 billion for the Greenhouse Gas Reduction Fund, with 70% of the appropriated dollars going back to benefit disadvantaged communities. Over 13 billion provided for residential utility consumer protection as the California Climate Credit on utility bills. We've also provided over 11 billion to protect California jobs and businesses by reducing cost impacts for compliance.

For the 400 or so regulated companies, the program has supplied and created 265 million compliance offsets. Some of those offset projects are created and administered by tribal nations and that has generated $1.5 billion in revenue for those tribal nations. Slide 5. So the program does have declining caps.

What that means is every year the amount of emissions that can happen goes down by a certain percent. With the cap going down and a steadily increasing price, it motivates companies to look within themselves and their operations to find ways to reduce emissions.

So instead of the state mandating that certain sectors take certain action on a specific time frame, it provides compliance flexibility across the entire program to identify and take action on the lowest cost emission reduction opportunities.

First, that long term certainty that the caps are going to go down, the amount of emissions allowed are going to go down, and the steadily increasing price also send a signal for innovation and deployment of clean energy and clean technology in the covered businesses. Slide 6.

This program also has a durable core design and that is several features that have been in the program since the very beginning. If you have the slides, what you'll see is on the right hand side.

The right hand side is a list of statutes and direction that's in statute on how we must move forward in reducing emissions in the State of California. In response to that direction, we include certain features in the cap and trade program.

Those include banking of allowances, a small option to use offsets, multi year compliance periods, trading price ceiling with cost containment, speed bumps, and some free allowances. And I'm going to go into each of these in a little more detail. But together these ensure that the program supports flexible compliance and is cost effective. Slide 7.

Slide 7 shows the caps declining over time. So you see, in 2013 and 14, the program only covered a small sector of the economy. And then in 2015, it also pulled in the energy sectors. And over time, the amount of allowances each year goes down by 4%.

That 4% between 2021 and 2030 represents going from 1990 levels in 2020 to 40% below 1990 levels by 2030. So it's 4% each year. There are two ways, major ways, that allowances get into the market. One is that we give them directly to companies. The other is that we sell them at auction.

We also remove some of the allowances to create a cost containment Reserve, which is a strategic Reserve to where we can sell allowances as the state in case there are price shocks or needs for compliance, and there are other exogenous factors that can impact the market. We have never had to hold any of those strategic Reserve sales.

Slide 8 really goes into the details about how we distribute those allowances. The pie chart looks at the aggregate of all of the caps through 2025. What we see is that over this time, we've given 15% of allowances directly to companies regulated by the program.

And that is to make sure that we protect California jobs and businesses and minimize for leakage. We've given 38% of these allowances to utilities that has been returned as the climate credit back to ratepayers are used by publicly owned utilities to procure green energy and to keep costs lower for their ratepayers.

There's that small sliver that goes to price containment. That is what we remove and put in that strategic Reserve, which we have never had to utilize. And then there's 42% that goes to auction by the state, and the monies get deposited in the Greenhouse Gas Reduction Fund.

Those monies have been appropriated as part of the normal budgeting process. And that QR code will direct folks to more information about the specific projects and the specific benefits of that money that have been implemented in the State of California. The number of projects is over half a million across the state.

So it's not insignificant in terms of how many discrete projects have been funded by that GGRF Fund. Slide 9. So I want to go into the core design features. And even though the program has been updated 8 times in the last 12 years, there are some core features that have always been there.

They have been adjusted, aligned and tweaked based on science, based on legislative direction, based on implementation experience. But these are core features that make this program cost effective relative to other options. The first one is banking. We do allow companies to bank some allowances and hedge for compliance costs in coming years.

That limited banking has helped mitigate against price shocks in the market. There was also an assessment in 2021 that showed that the bank across the entire program was about 5%. That bank of 5% is often called an oversupply or an excessive amount of allowances in the market. But that's 5% in the context of the entire program.

A savings account of permits for the entire program from 2012 through 2030. We also have multi year compliance periods. We know that things can change from year to year, whether it's hydroelectric power, whether it's economic impacts, whether it's drought. And so we do have multi year compliance periods that let companies smooth out their costs.

We also include trading, and that incentivizes companies to reduce emissions and sell some of those permits to others who may have a harder time reducing emissions or buy allowances if they are unable to reduce in any specific year. Along with trading, we have strong trading rules that prevent market manipulation and price spikes.

We also have cost containment with speed bumps. So if allowances get expensive in the General marketplace, we can hold Reserve sales and sell those directly to companies that need them for compliance. Those are not tradable. Those are only set aside to help support compliance for the regulated companies in the state. Next slide.

We also give that free amount of allowances to industry that covers about 60 to 70% of the compliance for the regulated companies in the program. And that again is to minimize for leakage, to protect California jobs and to support compliance and keep them competitive with other places where they don't have similar programs.

There's also a small percent of offsets that are allowed. These are a cost containment feature. They usually sell for about 80% below the cost of an allowance and they're limited in their use. The program for offsets often gets a lot of attention, even though it's such a small part of the compliance.

The design of the program has successfully been litigated and that lawsuit happened in 2012. The same critiques have persisted, but we also already litigated the design of the program that it meets the statutory requirements. In AB32, the offsets are under the cap.

And I think this is one of those areas that there's some confusion because of how they're under the cap in California versus how they're under the cap in Washington. In Washington, allowances are removed as offsets are used.

What we did Was we removed allowances at the very beginning of the program to make space to include offsets so we don't have an ongoing removal process. We did it when we set the caps for the program. And again, there's limits to how much offsets can be used. 4% is the current amounts, 6% starting in 2025.

And half of those offsets must provide direct environmental benefits to the State of California. There's rigorous annual monitoring, reporting and third party verification. Offsets provide a venue for private funding to support real greenhouse gas reductions in sectors not covered by the program. And based on science, we do update the protocols periodically.

For example, the Forestry Protocol has been updated twice since it was first adopted by the board. Slide 11. So all of these levers work together to help put a price in the market for those allowances. Changing one of these levers will ripple through the entire program.

And so what we've seen is a lot of recommendations over the years, as we've done updates to the regulations, to change one lever but not others, or change three or four levers and not the others.

And what happens is the staff have to go back and understand what the implications are of those changes on the total program because it is a closed system. For example, an extreme could be no free allowances to protect California business, no offsets for compliance flexibility, no trading for that flexibility, going to annual compliance periods, and no banking.

All of those individually would make the program more expensive. All of them together would make it even more expensive than just one or two.

And so as we think about adjustments and we do the technical work in our rulemakings, we always have to think of the system and the ripple effects through other parts of the program and how they work together. Next slide. So in 2022, as the chair said, we did adopt a scoping plan, and that was a periodic update.

What emerged were two key decarbonization tools for the economy. One is supported by SB905, that passed along AB 1279, and that is carbon capture, removal, utilization and storage.

And what we've always said since 2010 is that if a large emitter, because the program covers large electricity generation, cement plants, et cetera, if they were able to put a CCS carbon capture and storage unit on their smokestack, that would reduce their compliance in the program. So those emissions would not be going into the atmosphere.

They would be sequestered and put into some kind of storage that's durable and meets the SB905 requirements. We've also seen a lot of new innovation in technologies emerge for direct air capture where you capture carbon from the air and then sequester it. And that also has to meet the requirements of SB905.

Those kinds of tools could be part of the cap and trade program as an offset type that's made available. The carbon capture storage that can be put on a smokestack can be done sooner than later because there are many tools and that technology has been deployed for quite a while. And so the costs are coming down.

We see a future for that. In the near term. Direct air capture is going to need support to scale and come down in cost to be included as part of some of as a requirement in some of our programs.

But it has a huge potential because in the scoping plan we can't hit the 203048% that needs to be there to hit the AB1279 85% mid century. Without CCS and without direct air capture. We also see an opportunity for renewable or clean hydrogen to displace fossil gas and then simple heat pumps for simple industry.

Instead of a gas boiler, maybe having a heat pump, an industrial sized heat pump and then fuel cells which have the benefit of no air quality. Emissions and implications. Next slide.

As part of passing AB 398 that identified the role for the program through 2030, the Independent Emissions Market Advisory Committee was also created in response to annual reports by that Committee. We have $1.1 million towards two leakage studies and a study related to the Forest Protocol.

The two leakage studies are to look at how does the Cap and Trade program impact the competitiveness of California business relative to other places and are we seeing shuffling where electricity is being identified for California as being zero or Low carbon, but really it's just being redirected from somewhere else and, and backfilled with fossil energy for the Forest Protocol.

One of the things that we realized, and I think most experts we've talked to agree with, is that wildfires are becoming more frequent. Every project has to provide some amount of offsets into a buffer pool for unintentional reversals such as wildfire or pest and disease. Because that risk rating is now changing.

We are going back to work with researchers to identify if a greater contribution should be made to that buffer pool. So far we've only had a few instances that we've had to use that buffer pool. It's got 27 million offsets in it for the Forestry Protocol and we've used less than 10 throughout the life of the program.

We also held public workshops to look at removing allowances to align with the 2030 target because we've had an update to our inventory and to think about how to align the program with AB 1279, which requires us to accelerate beyond 40% to 48% by 2030. Other recommendations in those reports include removing offsets in total.

That would increase compliance costs, and it would remove a funding mechanism for things that actually produce real, tangible reductions in greenhouse gases. We've also seen a recommendation to create an emissions containment Reserve. That would be a change to the fundamental structure of the program, and it could also increase compliance costs.

Both of those options are worth discussing, but I think it's also important to recognize the overall impact they could have on the cost effectiveness of the program. So the last graph that I have is really thinking through the policy certainty. We began this afternoon hearing and again remembering that there's uncertainty at the federal level.

There's a lot of uncertainty about some of the programs at CARB, and there's uncertainty related to where investors can put their money. Policy certainty is really critical for private investment in clean technology and energy and this program. What that graph shows is how much money has come into GGRF at different auctions over the last 10 years.

What you see in that period in the yellow box is very diminished amounts of money that came in through the auctions to ggrf. That was during a period of policy uncertainty where there was a protracted debate about what role the cap and trade program could play in this decade.

The next time you see that kind of diminished amount of funds going to ggrf is in 2020. And that's the global pandemic where all commodities markets saw a jolt and saw reduction in the revenues. So today we released the auction results at noon. The auction Results were about 850 million in the last few auctions.

That would be the lowest that we've brought in as part of ggrf.

And so I think that we need to consider how we can find ways, not just through this program, but all of our programs, to have that policy certainty, to keep the momentum, to have that money flow into the things that we prioritize in clean technology and clean energy For California.

Thank you and happy to answer any questions you may have.

As I mentioned, we'll just wait for the questions till all three of you are finished.

That's it for our presentation.

That's it for your presentation. Okay. We are at your disposal. All three of you are finished. All right, questions? Do you want to go ahead or do you mind? Okay. Senator.

We'Re too friendly. We're all letting each other go first. Thank you guys for being here. And this was a super interesting conversation. I think there's a lot in here that I think there are lots of different ways to approach. Right. And I think that the presentation takes one pathway.

But I think what will be interesting about the conversations that we're going to embark on is that there are lots of different options about how we can approach this. And I think as you look at that slide on cost containment measures and how they can all lead to increased costs, that's both true and false, right?

I mean, if you remove one but utilize others to make sure cost doesn't go up, you can still contain costs in the same way, right? I mean, right now you have this grouping of options to contain costs, and you could change that grouping and you could still contain costs.

And so I think this notion that if we change any of it, costs are going to go up, I think is a false premise. I just want to say that because I do think, you know, you mentioned that there continues to be criticism of the offsets, and I think that's true.

And I think that if we have people questioning the way this program is working, we need to look hard at that. We should be responsive to it. And I am a huge believer in ROI and return on investment.

And I know that my constituents, they're willing to pay a little bit in a tax, in a fee and an increased gas price if they believe they're seeing a return on that investment. And as offsets have led to this question of would this have happened otherwise?

Why is this being sent to places that don't, I don't see a benefit in that leads to uncertainty about the program. And that's something that we really need to grapple with. And so I think just throwing that out there and saying it's going to raise costs, I think is not a fair assessment of that.

And I think it's an important conversation for us to embark on. Although, you know, as sort of, I think anticipated in this conversation, we do want to make sure we're not raising costs for Californians. I did. And I'll bring this up more when one of my favorite economists gets to testify next.

But I did note that when we looked at the increased gas prices that the backgrounder discusses, which is about $0.26, I think it said when I did the math. And to be fair, I became a lawyer because I'm not great at math. So bear with me.

That looks at about 150 a year and Washington has used some of their GGRF money to offset vehicle registration costs through directly affect those folks who are paying that price at the pump.

And those are the kind of tools that we should be paying attention to as well, is how do we help people in ways that they actually see. Because I think that we were talking about how nobody knows that those things are on their utility bills. Let's be real.

Did anybody in this room know that before they saw this presentation? Maybe if you work at an iou, I see you, but nobody else does. And, you know, so I appreciated some of the conversation about more direct driving down of utility costs, which we'll talk about more with Mr. Ware.

But I had two questions after those comments, and one was, you know, I think first of all, great backgrounder team. I don't know who wrote it, but I love a good backgrounder. And, you know, there was a discussion around the changes that came both as a result of the legislation, Mr.

Mehretsuchi's Bill, I believe it was, that increased those targets in 2030. You put out the new scoping plan, you then increase or you change the allowance numbers that was noted in here, removing 180 million total allowances from 2026 to 2030, et cetera. Do we know what the actual cost of those changes are on to consumers?

So you're right. In the 2022 scoping plan, we identified that you'd have to increase from 40% to 48% reduction. We have not made changes to the cap and trade program yet to align with that target.

And so when the chair was mentioning that we've been doing public workshops, it's actually running what kind of amounts of allowances would make sense to align with that target?

Okay, so these are the amounts that I assume your experts have come up with is what's in the background or I don't know where. Those are the options that we've been workshopping. That's right, yes. And so of those options, do we know what the cost to consumers are?

So we have done an economic analysis, and obviously, the more that you remove from the market, the more impact the cost will have. One of the options is to remove about 110 million allowances, and that's to align with the inventory. That's a technical adjustment. We haven't done that either.

Another one is the 265 or 285, which aligns with that 48% target. And then there's a middle option which allows us to smooth out the transition between now and 2045, which is about 190 million and so we've looked at all three of those. The the most expensive is the 265 million.

The change through the economy for 2035 and 2045 is very minimal. The amount of money that gets created for GGRF in our estimates that are publicly posted does increase, but it increases by a few million. It doesn't double the cost of compliance. It doesn't triple the cost of compliance.

And you're also right that we can think about levers to contain costs.

One of the things that we have to grapple with is if the program is going to be more costly because we remove something as a compliance option or limit something as a compliance option, do we then turn around and contain costs by giving the regulated industry more free allowances to blunt that higher cost as it comes back into the economy to consumers?

And so that's really the way that we think about it. The option I provided was like the very extreme. If you do all of these, but in the sense that you're saying you can remove one, you can deal with something else, but then it has an impact on.

Do I need to move the lever on free allowances to make sure that I still keep protecting California businesses? I still keep protecting consumers from that.

Cost pass through, of course, but so you, you said minimal impact on the economy. Okay. That was, I think, the answer to my question. Are you doing an analysis of sort of what you think the average consumer's cost would be based on each of the options you listed?

We do have numbers out on publicly in our three and we can send you the links.

Yeah, absolutely. That would be great. And then I know you mentioned it. It's also in here. The, the AB 398 required CARB to look at the leakage risk and what would happen to California businesses leaving. That seems to be forthcoming. I think it said. So when can we expect we do.

A report back to the Legislature? By the end of this year. And we've done some workshops on that study. We have a contract underway. And so we hope to have some of that in workshops this summer.

Okay, that'll be helpful because I think it'll give us a sense of how it'll affect jobs, which is obviously an important piece of this as well. And I know something that all of us pay attention to. So thank you.

Senator.

Senator.

Thank you. Thank you for the testimony. Getting back to that original point in terms of aggressive scrutiny on our own program but a sort of context for the headwinds we're facing from Washington.

I appreciate Chair you sort of emphasizing the grave nature of the threats coming for everything from you know, the foundations of the Clean Air Act and mass vpa, even certainly our waivers.

You know we saw Department of Justice Criminal Division official resign a day or two ago because she refused to weaponized the Justice Department to stop the Ira funds from flowing. I think $20 billion they they were trying to force her to freeze at Citibank and she wouldn't and got forced to resign.

So with, with all those big dollar sign X factors coming at us and also just structural challenges right again underlying prices in gas, electricity and gasoline all going up not because of anything we're talking about here, but because of a change in federal energy policy.

How when you're going to be getting us some of that feedback, I just, I wonder how to account for that.

Maybe that's an open question for you all going forward but in terms of consumer price impacts, I worry sometimes that with sort of a limited scope of information or scope of analysis that you're only really looking at okay A to B, but not sort of those exogenous factors.

And how to attribute those costs to the cost causers I think will be important going forward. I'll just say that as a sort of flag, as a technical point and I guess to that end further on process here going forward.

I think, I think you've heard from the leadership of both our houses and directly from Members too, frustration that it doesn't feel always like are the laws rewritten being abided to faithfully or the timing we expected or is this really what we signed up for and especially as big things roll out. You've heard that.

I think for us to move forward productively we're going to need to do not just more of this but I think a more technical layer of this kind of interaction.

I was listening to some barracahan and I was just, I really, I wanted a whole other layer to that conversation which is the details of this particular example of a design feature versus that toggling through all those different options that are out there really getting at okay, is this an accurate way to look at consumer cost or is that and as we look to set direction going forward to know and trust that we've got the best technical experts out there informing that decision making and there's some decisions that we're going to make, but there's a lot of details that are going to have to be sweated by your agency and you're going to have to just keep executing like you've been for over a decade now and doing competent and ethical and diligent work.

But I think, you know, I guess I'm looking to you Chair Randolph, just how do you, what do you, what have you already done? I guess that that can help inform at that, with, at that sort of level.

Not I guess technical but also from a stakeholder perspective, ideas that are vetted, consensuses that are reached, sort of agreed upon analyses that we can lean on. And so I guess maybe an update on what do you have. I think the Sriya was mentioned, but maybe you can go deeper on that.

How to really put some rigor to that technical ability. You all have to workshop through things where that workshopping sort of stands at this point basically. And how to help inform us.

Yeah, absolutely. You know, as we discussed, the CEREA was released last spring. Even before that there were stakeholder workshops and those stakeholder workshops have continued since then. I mean, I guess, I guess the key thing I want to say is, you know, we are at your disposal, right?

I mean we are the administrative agency charged with implementing this program and we have experts with deep, deep, you know, technical and market knowledge. And you know, that discussion about the different, the different potential tweaks think is a really important discussion, right. I mean if you, if you take one thing it, it'll have an effect.

And so you know, to the Members point, okay, so is there an opportunity to mitigate that impact by tweaking something else or if you tweak that something else, then do you break something else? Part of the closed system, as Deputy Executive Officer Soda mentioned.

So, you know, we are, we absolutely want to be available and you know, provide that, that technical expertise. And we also have an extensive stakeholder process that, that, you know, has, has been part of that workshop process and you know, will continue as we move forward.

And, and you know, I think, you know, you all probably hear a lot of the same things from the same stakeholders that we're hearing. And so just sort of having an opportunity to unpack it a little bit, understand it and sort of pressure test some of the information and opinions out there.

I think it's important for us to be available to you all to provide that.

If I could just, I guess follow up on this with something to consider going forward. Maybe it's more of a comment. But what I don't want to See happen is for so much to be expected of this legislative process that we have to solve everything this year.

I'm worried about if CARB isn't doing not just that sort of advice, support technical back end work, but also the public stakeholder facing work not by finalizing per se, any rulemaking before, you know, legislative action, but at least to get the process going. I'm worried, you know, I just don't.

I think some of those, the options on the table could actually help support us. So if we saw that initial statement of reasons come out and comments started to actually come in on it, we could see what's coming in from the stakeholder community and what, you know, CARB's best judgment on the most cost effective path forward.

I think that's going to help for us maybe work through issues too and sort of see a clear decision point. So just something I hope you consider not just being at our disposal, but also continuing to sort of build consensus and set that pace externally too, while with due deference to our process. So thank you, Senator Limon.

Thank you and thank you for the presentation. And I just, I think I want to piggyback and echo both of what my colleagues have said. You know, Cahan talked just a little bit about the connection and the return on investment for our constituents and that actually can be a different return on investment for other entities.

And I think that this is one of the issues that we've grappled with. We sometimes do really good things that don't feel like they're really good things to the people we represent and they don't see it.

And so I think certainly we're interested in exploring how to translate the return on investment not just for a market but for the consumer. And that might not be the same thing.

And so it's, I think one an acknowledgement we have just to be clear that both matter to the California State Legislature, both, but they might not be aligned in the same moments and times. And so we want to be delicate about how we do that.

But I think that that very much matters to the Legislature that both we're seeing a return on investment not just for the entities that are participating for a market, but also for our constituents.

So I appreciate that being said and I want to echo that as well and I think to Senator Stern's comment comments about moving forward and just overall timeline, the Legislature plays certainly a different role in examining our statewide policies.

And I appreciate the willingness and the, you know, openness to saying, hey, let's have, let's bring our deep subject matter experts into the conversation.

And I hope that that that is weighted again, based on my previous comment in, in a similar way to the weight that many legislators bring in terms of the everyday issues that our constituents are feeling. And so both of those things are very important.

And I, and I hope that as conversations go forward, I love that there's an openness to work together to bring in folks to figure out how we move forward, but that we don't pre prescribe weights to what is more important or who is more important in this equation, understanding that there's a delicate balance about how we, you know, move that forward.

So I just wanted to share that with you. I look forward to ongoing conversations.

And certainly we'll also say, you know, as someone that's done work on the voluntary offset side of it, you know, there's pieces that we are left with as a Legislature to deal with that aren't pieces we actually created that are now pieces where markets and constituents are responding and reacting, I think is a better word reacting to things that they see in ways that they're looking for more clarity.

They're looking for more trust in how government is or is not working for them. So certainly we'll see where that takes us.

But I think, I appreciate also that the focus and what was repeated multiple times was, you know, that for, for CARB, it's really looking at how you get to the biggest, you know, reductions in the most affordable way. I appreciate that.

It also has to be a way that our constituents and our communities trust that is working for them.

Thank you, Senator Limon. I have a few questions. So we had CARB withdrew from multiple clean air waiver requests from USCEPA consideration and it appears that large parts of the Ira are not going to be funded. And then today I just saw the headline that EPA is moving to strike strike, the finding that greenhouse gases cause harm.

So we are certainly looking at a very different Federal Government than we had previously. So what are our we were certainly counting on certain reductions with help from the Federal Government. Where are we right now? What are we going to do to make up for those losses?

Well, I'll start out and my colleagues can add anything. I mean, first of all, we are, as I mentioned in my opening remarks, we will defend as much as we can, as hard as we can. So I don't take anything, I don't make any assumptions.

I as far as I'm concerned, unless and until the Congress or the US Supreme Court tells us to stop, we are going to keep going, and we are going to keep moving forward, forward with regard to the waivers that we actually withdrew, you know, the Advanced Clean Fleets regulation, we are still moving forward with our Advanced Clean Trucks regulation and the Clean Truck partnership that we entered into with engine manufacturers.

So we continue to move forward with that. And we're thinking about, you know, sort of other potential levers. And, you know, and I know there's some bills introduced that are looking at strategies to achieve additional reductions.

And of course, with our, with GGRF and our lcfs, those are opportunities to help support the transition through incentives when it comes to sort of the scoping plan writ large. And, you know, the Ira and the ija, you know, when we did the economic modeling for the scoping plan, that was before those pieces of legislation were passed.

So we do think that we can still continue to achieve a lot of what we analyzed in the scoping plan, even in the unfortunate event that, that some of those policies don't survive.

We are hopeful that as, as folks sort of see what's happening at the federal level, that they sort of recognize that there are some critical economic strategies that benefit the entire country, not just California, that should be retained. And we will advocate, along with our other states and NGO partners to retain those aspects of those programs.

Anything my, my colleagues want to add.

I'll simply add that we're committed to the outcomes of those regulations. So as the Chair said, whether or not those particular tools are in use for us to achieve those outcomes, we still, both under federal and state law, have a responsibility to reduce air pollution, to reduce greenhouse gas emissions.

So we will be using any tool at our disposal. The chair mentioned a few.

The CleanTruck partnership is an example of a type of voluntary agreement that we can work with industry to ensure those outcomes are carried out, and that recognizes for those particular industries that they've made very significant investments and that they want those investments to continue to provide benefits to their consumers.

So it's critical that the industry has certainty as well. And that's where these other types of tools can help achieve that certainty for industry. I'm not saying that any one tool will be the answer. We are using all of those at our disposal.

And that's something that we actively employ and have somewhat successfully during the fall First Trump Administration, which was equally hostile to our work.

Thank you. We also were fortunate a couple of weeks ago to have Reuven Carlile come down and talk about the Cap and Invest program that Washington State passed. It was 2022, and it is a better name, Cap and invest. I think we should use their, we should use their branding.

They, they did last year were able to fight off a ballot initiative to overturn the repeal of Cap and Invest. I just am wondering if there are any lessons learned from the way they handled. I mean, it failed by a very large margin in the last election, which we saw notably had was pretty conservative.

So what are the lessons there? What are they doing? Right.

Well, first, I'll note here in California we successfully defended AB32 back in the day as well. And I think that's an indication that voters recognize that climate change is real, that solutions are necessary, and that those solutions need to be as cost effective as possible.

And so really, as I mentioned in my remarks, telling that story, like communicating better to folks to understand why this work is beneficial, I think that's an important priority for us as we sort of grapple with kind of this affordability question.

And, and to the point that was made earlier, sort of, you know, ensuring that people are feeling the benefit of these programs. Rajinder, did you want to add anything specific around kind of, you know, sort of the ways Washington's program is similar to and different than California's?

Sure. We had the benefit of starting earlier down this journey in 2006 to reduce greenhouse gas emissions. And Washington began that, you know, several, several years ago, but didn't put in place an LCFS and Cap and invest until 2022. As you noted, we have been easing into a reduction strategy through many policies for almost two decades now.

And so we've got a lot of lessons in how to design the program to not have the price shocks.

And I think what really helped Washington not only was making sure that the benefits could, could be felt and were known to their constituents, as the Senator was saying, but also taking some lessons from us because they also made some updates in the last legislative session to add in some of the features in our program because it's really important for industry to have certainty.

And a lot of the industry backed the opposition to that ballot measure because they saw that if there's targets on the books and there's an overwhelming desire for the constituents to actually reduce greenhouse gas emissions and address climate change, something was going to happen.

And if that something wasn't something like a Cap and Invest program, what would it be?

So you actually saw not just that really deep connection to the people that were benefiting from the money that the program was raised, the money that was being raised by the program, but also industry that had a clear idea that if it wasn't this, the population of the state still cared about the issue and something else might be on the table alongside it.

You talk a lot about communication and I think Assemblymember Barrackhan brought that up. There is nobody know, nobody that knows what the climate credit on the, on the Bill, I didn't know what the climate credit is.

So we have to make it very clear to our constituents that, that if this program keeps going, that this is how one of the ways that they're benefiting. So just kind of a more technical question on Washington versus California, how do they set their caps?

And then specifically regarding to cumulative emissions reductions and offsets, does California account for offsets in our cumulative emissions, emissions limits?

So the caps are pretty similarly set. You find a year, you know your sources, you anticipate what that amount of emissions is going to be for those sources, and then over time you align the caps declining each year with your overall target.

And because they have a Shorter time frame to get to their 2030 target, they have a very steep year over year decline. We're sitting at about a 4% decline and theirs is greater than 4%. And that's really tied to the overall endpoint, 2030, and the stringency in 2030 that drives how you set the caps.

You can figure out through all sorts of data sets what you have today. And then you just draw that straight line for the caps. When it comes to the offsets, they, they allow offsets in the program, but as offsets are used, they also pull out allowances.

So that's not offsets on top of the caps, it's offset still within the capsule because they're pulling those allowances out when an offset is used in California, what we did was we had a limit and we pull those allowances out at the beginning of the program and used it for our strategic Reserve and then put in offsets to be able to be part of the program.

And our strategic Reserve has never been used.

And so for us, because we pulled out the maximum that could be used for offsets and the maximum has never been used for offsets in our program, we're actually even more stringent in our design than what Washington has because theirs is on an ongoing basis where ours is right out the gate, we assume everybody's going to use the maximum and we pull those allowances out and put them in the strategic Reserve.

Okay, and then what percent of allowances are freely allocated in 2025 and how does this protect the public from additional costs in California from leakage? And maybe like with leakage I've specifically been talking to or reading and talking about some of the concrete folks.

And it is of concern as the cap ratchets down, how do we make sure that we maintain those industries here as opposed to having them locate right across the border.

So maybe I can just give a brief background on how the free allocation program was established. So as you mentioned, leakage as defined by AB32 too is emissions that decline here in California that go up.

Can you go a little closer to yes, please.

How's that? Yes, thanks. So AB32 defines leakage as emissions going down here which go up outside the state.

The way that we decided to protect against leakage was to evaluate the potential that adding a new compliance obligation from a cap and trade program would increase costs to those entities in such a way that they would not be competitive with out of state or out of country competitors.

And so we looked at their emissions intensity, that that is how much compliance they would face and how trade exposed they are. In other words, do they face a global or out of state market for their particular product? Cement is a great example because cement is extremely emissions intensive.

It's about 1 ton of carbon for every ton of cement. And it's very trade exposed. Cement is made everywhere. It's a substitute product. You can bring cement in from out of state or you can make it here in California.

So we wanted to ensure that the type of protection that we provided for those industries would address the potential for leakage to occur consistent with our requirements under AB32.

To protect against that in establishing those rules, we also wanted to make sure that every industry was not overcompensated, that they would not get too many allowances and that there was no incentive for them to create more emissions as a result of this free allocation.

We also wanted to only ensure that the most efficient industries would be sort of fully compensated and there would be always an incentive to become more efficient. So we developed the benchmark for each product that is cement based on an efficient product. And then, and then that would decline over time in proportion to the cap.

So the idea being that the free allocation scheme was fundamentally to create an incentive to become more efficient to reduce emissions, but also to protect against leakage. And then Rajendra maybe can address a little bit more about the amount of that value that is going to industry for that purpose.

Sure. So in one of the slides I talked about how we've given about $13 billion worth of allowances to industry to minimize for leakage. Probably about half of that has gone to the oil and gas and refining sectors and the rest is manufacturing.

And that's a total of about 15% of all the allowances that have been available over the last decade. So total that we've given is about $13 billion worth and that's about 15% of the actual allowances through the last decade.

Cement has a little bit of a wrinkle because they are truly hard to decarbonize because their emissions aren't just from burning material to make their product, but they also have process related emissions which are anywhere from 60 to 55%. They actually don't get the normal cap decline that Dr. Cliff was talking about.

They get half of that in recognition that they are more difficult to decarbonize because that chemical process that happens within those facilities.

So we do have a regular decline for, for industry, but for the very hard to decarbonize because of those chemical reactions that you can't substitute a different chemical in for making it strong or making agile or heat responsive. For those sectors like glass and cement, we get them more.

Okay. And they're investing in carbon capture also.

That's right. It's the National Cement Lebec Net Zero project. And that's, I think it's $1.0 billion private public partnership.

Okay. And then the. So but in 20 you gave the number for free allowances, but what was the number for free allowances in 2025 or is the number for free allowances in 2025?

So right now in 2025 that's going to come in about probably for industry it's going to be about 2030%, but it covers up to 6070% of the compliance on average for all of that industry.

Right. Do we have, does anybody have additional questions? No. All right, then we are, we have another panel then. Well, thank you very much. We really appreciate this is going to be a, a process and we will be doing a lot of back and forth discussion and hope that we can come.

You've heard, I think, what our priorities are, hopefully, or you're starting to hear what our priorities are and hopefully we can work together to get something in place.

Thank you so much. Really appreciate the time and the discussion.

Thank you.

All right, Our second panel will be focusing on the cap and trade program and affordability. We are joined by Dr. Meredith Foley, who is the chair of the Independent Emissions Market Advisory Committee and a Professor at Berkeley, Dr.

Michael Wara, who is the Director of the Climate and Energy Policy Program and senior research scholar at Stanford University's Woods Institute for the Environment. Helen Kirsten, who is the principal Fiscal and Policy Analyst with the lao, and we will have Helen start first. Thank you all for joining us this afternoon.

Good afternoon, Chair and Members. Helen Kerstein with the Legislative Analyst Office. Thank you so much for inviting me to join you today in this really important discussion. I know kind of kicking off the discussion on cap and trade this year I'm going to be speaking from a handout.

The sergeants have extra copies, but hopefully you all have those already. The handout is also on our office's website for those who are watching at home, as well as I believe on the Committee's website as well. The beginning part of the handout is just background on the program and CARB covered that quite thoroughly.

And so in the interest of time, I'm going to skip those first pages and we're going to head right to page five with a little bit of discussion about affordability. So on page five we talk a little bit, just high level, what are the impacts of cap and trade on affordability?

And I want to put it really into two buckets. So the first bucket are areas where there's probably not much of an impact. And really that's related to electricity and natural gas prices. So you heard from CARB about those free allowances. So kind of roughly half of the allowances being given out for free.

A lot of those going to trying to prevent impacts to rate payers. So some of those go to electricity, you know, PGE and to SMUD and all of those folks who provide electricity in the state. And then the intent is that those are then used for ratepayer benefits.

And so I know there was discussion previously about that California Climate Credit that we see twice a year. And so that's because of those free, free allowances. And really that basically probably basically offsets the cost to consumers. Now there's a little wrinkle because those credits come in as a fixed payment to utility customers.

So those customers are probably feeling, you know, sort of a higher volumetric rate on their electricity bills and then they're getting a fixed kind of rebate. And some of them, you know, I think there is, there are some real questions about kind of is that the best structure or not.

But it really does have this very important kind of purpose and value in trying to hold those ratepayers whole. There's a similar type of rebate that goes towards natural gas consumers. So that bucket is a bucket that probably the impacts are pretty modest, if at all.

And then there's a second bucket where there are probably more substantial impacts on consumers from this program. And that's really mostly related to fuel, diesel fuel and also gas that folks get for their cars. We do think that this is an area where there are some consumer impacts. And part of this is that fuel is carbon intensive.

And so there are significant needs for allowances there. And part of it is that those costs are, we think, largely passed on to consumers. And we don't have these free allowances in the same way that offset those costs. So we estimate that the program probably currently adds around 25 cents.

We heard 26 cents, something around there, depending on the prices of allowances to each gallon of retail gasoline sold in the state. If you turn to page six, we then highlight some questions and sort of considerations for the Legislature as it's thinking about affordability in the cap and trade program.

The first issue we raise is how should the state set the cap? Right. This is probably one of the most fundamental questions before you. How should you set the cap to balance these considerations, to balance affordability against your environmental goals? And we heard this.

You know, there's really an inherent tension here because the state has very ambitious, very critical, very important climate goals. But you know, the more stringent those goals are, you know, there are likely to be cost impacts. And so that is really a fundamental question before you as the Legislature is what do you want that cap to be?

How comfortable are you with those costs? We do note also that changes to this program are kind of coming at a time where affordability is a very pressing concern for many Californians and where there are other changes in state policy that probably are also putting some upward pressure, particularly on fuel prices.

There was mentioned previously about the Low carbon fuel standard. That's one example of another type of policy the state's implementing that largely affects the same sector. We do think it's also really important to note and to emphasize.

I know this point was already brought up, but really want to emphasize that while there are costs to the cap and trade program, this is probably one of the most cost effective programs that the state can implement to reduce greenhouse gases.

So to the extent the state is really committed to meeting those established statutory targets, this is probably about your best bang for the buck.

So I think that's an important kind of point I really want to emphasize, and I think another point that I think is important to note here is that there are some co benefits with this program.

So unlike many of the other programs, like those specific regulations on industry or lcfs, this program does generate revenues, and those revenues can be used to help offset some of the costs that consumers feel. So that's another real advantage to this program over some of the other alternatives that may be before you to meet those climate goals.

So if you turn to page seven, we highlight some of the steps the state could consider to the extent that there are these serious concerns about affordability. So we have a few different sort of categories of tools that we think are before for you as you're trying to think about how to structure this program.

One of them is the price ceiling. This is a pretty simple thing to do, right? You know, you can set a price ceiling that's lower then allowance prices, couldn't go above that.

And that would help reduce the price impacts on consumers because whatever that price is, you know, folks are going to be paying that the for the impacts of that. The second option before you is the allocation of the allowances.

So for example, more allowances could be provided to utilities and required to be used for ratepayer benefits like those climate credits. Of course that would come at the expense of the other things we talked about, leakage protection or you know, Ggrf, the greenhouse gas reduction Fund. So there's certainly trade offs, but that's one tool that's before you.

And then finally another tool before you is the use of those greenhouse gas reduction Fund revenues themselves. Historically, the state has not really used those for offsetting costs and ratepayer benefits. Instead, those have largely been used to support various climate related programs for the most part. But the Legislature could take different approaches.

For example, the Legislature could consider using some of those funds to rebate back to consumers. Sort of similar to a climate credit, but through a different mechanism or another alternative that's available to you is you could for example, use those funds to to support costs that otherwise would have to be paid by ratepayers.

So for example, those funds could be used to pay for wildfire mitigation costs that otherwise utilities would have to bear and potentially would earn a return on as well. And so there are probably a whole host of different options before you in terms of how you might want to use or you could consider using those funds.

But we think that's another broad category that you could consider. And then turning to page eight, this is my last kind of main point but really want to leave you with this. I think another really important high level question for the Legislature is what do you want your role to be in this process?

Historically, the Legislature has delegated quite a bit of authority to CARB, to structure the program, to set the number of allowances, to allocate those allowances among entities and to determine the price ceiling, for example. Those have been decisions that have been largely delegated.

The Legislature could continue to take that approach and have CARB make those decisions or if there were certain areas that the Legislature was particularly interested in, it's certainly within the Legislature's prerogative to provide some more statutory direction in those areas.

And so we think that that's a key question before you is which areas do you want to provide additional guidance, additional statutory direction, and which areas are you comfortable with CARB making more specific decisions? And you may have a hybrid approach.

You may want to provide some broad guidance or you may want to and you know, you may not want to do the sort of detailed specific guidance or in some areas you may want more detail, some areas you may not. So those are all really important questions we think that are before you in this coming discussion.

And we're happy to be here to answer questions and help along the way.

Thank you. And we'll wait till the panel is done before we go to questions.

All right.

Ms. Fowley. Thank you.

Thanks so much for asking me to be part of this conversation. My name is Meredith Fowlie. I'm a Professor at UC Berkeley and I'm also honored to be chair of IMAC. Although I should be clear, I will be drawing from our annual report, but I don't speak for my students esteemed colleagues on IMAC.

Helen's an impossible act to follow, but I'm going to be really trying to elaborate on some of the key points she made, quick framing observations and then I'll get to my key points.

So we've talked a lot about how California is grappling with the cost of climate change and wildfire, extreme heat, rising sea levels are all impacting Californians. I also want to draw attention to the cost of adapting to climate change that we're seeing in electricity prices and insurance prices like these.

These costs are showing up for people and are particularly acute for households with limited resources. We've also talked about how in response to changes at the federal level, state level policies could help sustain momentum behind the most promising climate solutions. But the state level action has to be balanced against mounting affordability concerns.

I'm going to put a finer point on the argument that carbon pricing offers a really powerful tool to identify and deploy the least cost abatement options and that this reauthorization conversation provides a really important opportunity to rethink some of the program elements with both cost containment and Affordability, top of mind. So we've covered a lot.

So I want to focus first on the role of cap and trade, which I do believe is central. We've got hundreds of thousands of sources of greenhouse gas emissions in the California economy, from cement kilns to vehicle tailpipes. Right. And greenhouse gas reduction costs vary significantly across these sources.

So it's very challenging to anticipate ahead of time which are going to be the least cost strategies. When you're designing an effective cap and trade program, you don't have to know ahead of time which which options are going to be most cost effective.

We need to design a market based system that can flexibly coordinate the deployment of the most cost effective abatement strategies. So if you think about the cap and trade program like the auction it is, we're raising the greenhouse gas price and as we do that, we're drawing more abatement into the market.

And so critics will raise concerns that cap and trade just allows sources to pollute, to purchase permits to pollute and not make reductions. And that's true, but it misses part of the big picture. So I'm drawing from slides, they're not essential. But on slide three, I've got a.

I don't want to insult you with a cartoon, but it's a cartoon version of a mark of a model of cap and trade where you're raising the price of carbon emissions to draw more abatement in the market. And what I've done is a stylized, you know, ordering and ascending abatement cost abatement supply curve.

And it's true that the high cost sources are saying, I'm not going to abate, it's too expensive for me to do that, I'm going to purchase permits instead. But the Low cost sources seeing that high carbon price say it's more expensive.

It's more expensive for me to purchase those permits than to invest in my greenhouse reduction opportunities or in house. So in that sense, the market is coordinating sort of the least cost way to meet our emissions reduction goals.

The second point we make in the IMAC report with this very simple picture is that as others have talked about, California is also deploying some companion policies which mandate specific abatement options and strategies. And there can be very good reasons to do that.

But it's important to keep in mind if we mandate relatively costly abatement strategies, saying we want this, this and this, that does increase the cost of meeting our greenhouse gas reduction goals. And it puts downward pressure on the carbon price because the carbon market has less work to do.

So we're not sending as loud a carbon signal everywhere. Greenhouse gas emissions are implicitly bought and sold. And make no mistake that the cost of those prescriptive mandates not so salient, but still borne by Californians in higher electricity prices, higher tax bills, higher consumer prices. So this brings us to the question of affordability. I think it's.

I maintain that cap and trade is a very important way to minimize contain costs. But I want to acknowledge the fact that there's no path forward feels particularly affordable.

And despite the cost containment advantages, carbon pricing can be a tough sell because it's partly due to the salience of that carbon price and partly due to some confusion around the consumer cost impacts of different climate policies. So it's true that a carbon price increases fossil fuel prices. That's kind of the point.

We're trying to signal that when you consume fossil fuels, that has climate damages. And we're passing signaling those with the carbon price. But I think there's some confusion about the role of carbon pricing in the rising energy prices that we're concerned with.

I included in the slide, in the slides on slide 5, a graphic that was generated by NRDC. It's very much in line with research we've been doing, but it's prettier, so I like it better.

And what it's showing you is the rise in this picture is from PG and E, the rise in retail electricity prices for PG and E customers over time, much faster than inflation. It shows that the primary driver is the cost of adapting to climate change.

Change is the distribution, the orange bin, which is undergrounding and other investments to make our grid more resilient to climate risk. The second biggest driver is subsidies for rooftop solar, which have inadvertently shifted costs onto households that don't have solar. You can't really see the carbon price impact. It's buried in the wholesale price.

In the IMAC report, we did some very basic calculations for the sake of transparency. They're quite stylized, but they give you a sense of the magnitude of the effects of carbon pricing on consumer energy prices. So what I'm showing you here is our little graphic of retail electricity prices, again using PG and e data from 2023.

And that little the orange bar is the carbon price impact. Right. So it's less than 5%. It's not very large, although it's not zero. It will be shrinking as the grid gets cleaner, holding carbon prices constant. But as Helen mentioned, if we tighten the cap, that carbon price will go up. Right. Importantly, as we've talked about this.

Impact on bills through higher prices is recycled to households via the carbon credit, which we certainly need to make more salient. So Bill impacts on average are negligible to close. I think that in terms of cost containment is the goal of carbon pricing. I think we can do better on the affordability front.

In contrast to other factors that are driving energy prices up, including adaptation costs, other climate policies such as mandates, LCFs, technology subsidies, carbon pricing generates revenues that can be used to mitigate impacts on households.

I think there's more to be done, and I think Michael will talk about this to target auction revenues to make electrification and decarbonization more affordable for everyone. So thanks for the time, thanks for all the work you're doing, really important work, and I'll turn it over to.

Good afternoon. Thank you for the opportunity to testify before you. I must say it is a really hard act to follow Two of my favorite people who work in this space. I'm Michael Wara. I direct the Climate Energy Policy Program at Stanford University.

Today my comments reflect my own views and not those of Stanford or the Woods Institute where I work. And if you you just show. I have some slides as well. I just wanted to reinforce something that was said earlier by Leanne Randolph and Rajendra Sahota in their comments.

I think we are experiencing the effects of climate change today. Most notably what happened in Los Angeles in January really is an effect of climate change. Certainly there are things we can do to make the Wildfire situation better. We're all working on those.

I think all of you are as well as folks in academia and in the private sector as well. Of course, the conversation today is about reauthorization and sort of the role of affordability considerations in cap and trade.

I would argue that more than any any kind of detailed market design question, what we do with the revenues is the most important thing to to ensuring that we have a politically sustainable cap and trade program moving forward. Next slide, the slide.

Slide three in the deck just shows what all of you probably know already, which is that affordability, particularly in electric rates but across the economy, housing, home insurance costs is a huge issue for California residents.

Electric affordability is a particular concern for decarbonization because and I'll talk about this more in detail later, but electrification and decarbonization of the electricity system is really the high level strategy by which the state will ultimately decarbonize most of its economy.

If electric rates are too high, it makes it hard for people to make choices in their lives that reduce emissions. To make this concrete in the LA context, if you're rebuilding a home in Altadena, will you rebuild a mixed fuel home that has gas appliances and electric appliances or will you go all elect?

If electricity costs are really high, you might opt to stick with gas and that's going to lock in a decision for decades for the residents, not just your home but also the neighborhood because of the obligation to serve gas customers that regulated utilities face. Next slide please.

Slide 4 just looks at some modeling that was done by Jim Bushnell and his colleagues at UC Davis on on contract CARB in the regulatory conversation that's been happening.

I would argue that the work by Bushnell and his colleagues is some of the best economic analysis of the cap and trade market that's been done and they've been Doing this work for more than a decade at this point, repeatedly as reauthorization came up last time and even before that.

And what their work shows is kind of a binary pathway for cap and trade prices. If we do not reauthorize or if the program is not extended beyond 2030, prices drop to the price floor.

The recent last couple of auction results show that playing out as the market is beginning to to worry about extension of the program beyond 2030. By contrast, if we do reauthorize, if the program is extended either via regulation or via legislation, I would argue legislation is important for creating confidence in the market. While whatever the legal niceties.

And the chief counsel of CARB and I have had lots of conversations about this and we've agreed to disagree. But I'll just say, as she has said to me, it's complicated but we need to create market certainty.

If we're going to have a market in these not even pieces of paper ideas allowances are a notation in a computer ledger that's worth a lot of money.

But if we're going to have confidence in that market, we probably do need to have legislation from all of you that reauthorization will trigger a significant increase in prices and therefore consumer impacts.

And we need to be thinking about how we sustain that as a state, how we create a system where everyone can feel like they are both they're paying some extra cost in certain parts of their lives, but also receiving real tangible benefits in other parts of their lives. And that affordability challenge I think is key.

It's particularly challenging, as Senator Stern, you mentioned, in the context of what is going on in Washington right now. Next slide. Slide 5 just shows what we're doing in electric power in the State of California that's very successful.

We have cut emissions more or less in half thanks to leadership by all of the California agencies and the Legislature in and the governors, multiple governors in pushing changes to our electric system. And it's really making a difference to the carbon intensity of electricity. And that means that as we electrify other end uses, especially transportation. Right.

Statewide emissions fall. Next slide please. So how do we create affordability for regular people? We have done some work looking at the California Climate Credit and how it could be used to increase the affordability of electric bills for Low income people in hot places.

And it's really important to understand that there's really two California's in terms of electricity bills. There's folks like me that live at the coast where the fog comes in every night and my wife Complains because we can't eat dinner outside because it's drizzling.

And there are people that live in the Central Valley that face enormous run ups in electric bills during the summer months. This figure just shows what a warm season electric Bill looks like. That's the orange line on this figure for Low income care customers living in hot Climate zones in PG&E service territory.

The blue line is the care customer on the coast.

We have, we have proposed a scenario where you reallocate the climate credit, focusing it from the high income households on the coast or high high income households generally onto these customers in the that are Low income and are facing enormous electricity bills that really create not just a, you know, a Bill concern, like a liquidity concern, but a safety concern for people.

Right? Seniors living under these conditions struggling to pay electricity bills. We have data that suggests very strongly they do not consume enough electricity to be safe because of the cost. So we can use the climate credit more effectively, we argue to improve that situation and really make a meaningful difference. We're also doing work and this is preliminary.

I'm just showing a very preliminary figure to look at what has been referenced before, what we could do. This is in the next slide, slide 7.

If we just increase the utility allocation as has been mentioned, the utility allocation, the decision was made way back in 2012, I believe, back in the long ago times that the utility allocation should roughly match the consumer expense associated with the greenhouse gas allowances that utilities have to surrender to match their emissions. We can go further than.

That's a policy choice. We could go further than that and help people afford their electricity bills by giving utilities more allowances to then rebate directly to customers. I would absolutely agree with the sentiments that have been expressed that we need to make that much more transparent. I read my electricity bill because I am a electricity nerd.

My wife gets the bill in April and October and gets very concerned that PG&E has screwed up again somehow. Although I'm not sure they've ever screwed up our bill. But she alleges this across the dinner table because the bill is too Low. And I say, have you looked on page 25 at the Climate credit?

That's probably what it is because it's April or October. We need to make it very visible to people what is going on. And I would argue also that we need to move away from providing that credit when people need. At least we need to be giving it to them when they face like a monthly.

I call it a liquidity constraint because I'm from Academia, but like they're trying to pay the bills at the end of the month. In the summer they have a big electricity bill because of air conditioning in some places, a high bill in the winter because of winter heating costs.

And that is when the climate credit needs to be delivered. Because electricity prices are way beyond the point at which we should worry about like energy efficiency incentives. Next slide please.

Lastly, we are also working on a proposal and we will share this with you when it is done, hopefully soon, to look at how to buy down the cost of needed electric system investments.

We all know that to build the electric system we need to provide 100% clean electricity and to provide the energy to electrify all those end uses that we want to see electrified. We're going to have to build a lot of stuff, a lot of infrastructure. That infrastructure costs money.

One way to reduce the cost of that infrastructure would be to use cap and trade money to buy down its cost. Essentially provide a subsidy to the investor owned utilities, maybe take the investor owned utility debt out of the equation, reduce the equity component in certain kinds of investments and backfill that cost with cap and trade.

We think that could dramatically reduce the needed transmission build out that we need in California. And we'll be coming to you in the coming months with a quantitative estimate of what's possible using different amounts of GRF revenue. So in conclusion, I just say we need to get to 100% clean power.

We need to electrify end uses that is not free. Reauthorization of cap and trade is likely to raise allowance prices and therefore the cost that consumers feel. And therefore we need to focus on that issue as the key, the key move to sustain political support for this program out to 2045. We can do it.

There is a path to do it. And it'll ensure that the cap and trade program that ARB has worked so hard to develop and improve over the years is economically and politically sustainable for the state. Thank you.

Thank you. And we are going to go to questions from my colleagues. But I just because the slides are up, I just want to ask you two quick ones. We're always talking about the Central Valley and the coastal area.

But there are areas like the San Fernando Valley where Senator Stern lives, Santa Clarita, that are looking at 115, 120 degrees, that I would say temperatures that match the Central Valley. So I hope when we look at a potential solution that we understand that the coastal communities vary greatly in their temperature.

Absolutely. And what we did in our analysis was to focus on climate zones as defined by the utilities. So a hot climate zone is one where you have very high summer temperatures and so many of those places would be included. I would note that those climate zones were defined at some point in the very long ago.

When we discussed this with PG&E, they thought it was sometime in the 1980s perhaps that the climate zones were last revised and climate change is happening. It is not simple to revise climate zones as you know, that determine certain aspects of the rate design. It gets into the GRC process at the Puc.

There's back end billing infrastructure that has to change. But I think it's something for the Energy Commission as they work on other aspects of kind of climate proofing our electric system to be thinking about.

All right, and then the second one since I'm just looking at the slides and I'll have other questions after my colleagues speak, but I think it's something that I've been thinking of also reducing the cost of transmission. But in this I see you have projects picked up, but how do you picked out.

But how do you make sure that that savings actually goes to the customer, the consumer and not the investor for the IOUs? How would you, how would you guarantee that and how would the IOUs go along with it? Because they're not getting the rate of return.

Well, I think the IOUs face an enormous challenge in the next decade to 20 years. There is more to build than probably they can politically be allowed to include in rate base. Like if you look at the distribution system upgrades and the transmission system upgrades that are necessary, there's just more than we can afford.

And so what this would do is direct a source of revenue toward a limited set of projects. Right. So it's not destroying the IOU business model. I think that's really important because we need healthy IOUS in the State of California. I believe it would.

It would create a limited context in which the IOUS would, you know, typical typical capital investments from IOUS are 5050 debt equity. Imagine a construct in which there's 25% IOU equity, no IOU debt and a subsidy from cap and trade. That means that the investment, the IOU would earn a much lower.

They would still earn a return on the investment. They would have incentive to participate. It would be a smaller incentive from a shareholder perspective than maybe half as much as they would get from a normal transmission investment. But the reality is we are struggling to build the things we need to build and afford them in rates.

I think there's enormous concern when we talk about permitting of transmission to, to really do transmission permitting reform because it will unlock the ability of the IOUS to spend a lot of money. And we're concerned about that right now.

And so this is a way to get more infrastructure built but pay for it in a different way that reduces ratepayer impacts. Of course, doing any of this, any things I've said, means taking money away from other things. And that's the hard part. For all of you.

Thank you. Senator Limon,

Thank you. And I want to thank all of you for your presentations and your comments and your feedback and your expertise on this. Certainly appreciate Chair Foley, your comments, especially as it relates to carbon pricing and the debates or sometimes the attacks on whether or not it has significantly increased. Right. The price.

And I think that's good that you kind of clarified that for us. I look forward to seeing the report. It's a little long, but do look forward to reading more on that end.

As far as you know, from the Laos office, I appreciate that you've laid down one of the fundamental questions that this Legislature needs to grapple with, which is what is our role, what do we want our role to be and how we shape that. Because I think that sometimes doesn't get included in the pieces of the conversation.

We focus so much on the market, rightfully so. But it is a market that was created through legislative action by us. And so I think that that's going to be important. I certainly know that that will probably generate more discussion among colleagues. And Dr. Arara, I appreciate what you've said.

You started off this conversation by saying that when we think of the cap and trade program, it needed to be a politically sustainable cap and trade program.

A politically sustainable cap and trade program goes to my earlier comments in the previous folks of that's not always the same thing as the most cost effective program and the most outcome focused program. So do you want to expand on that or say anything else? I mean, I think your presentation certainly expands on that.

You give some recommendations. I appreciate that you talk about those in your last slide. But anything else you can say about that?

Well, I guess the we need to be honest about what Professor Fowley said. I think in particular that the kind of the point of cap and trade is to raise the cost of fossil fuels and their combustion.

And that means that certain aspects of our day to day lives as cap and trade programs get more stringent will go up in cost.

And then, you know, and we've had a political agreement in California and one that is also in Washington State, now that you know what we're going to do with that money is collect the money from the cap and trade and then invest it in programs that the Legislature finds valuable or important.

In California, we invest a lot of money in high speed rail. We invest a lot of money in transit and capital investments for rail programs and lots and in EVs.

And I guess the question I have about reauthorization as we go to deeper and deeper cuts below the 2030 target is whether that approach is sustainable or whether we need to be thinking about giving money back to people in ways that are very transparent so that they understand that the state is asking them to do some hard things because the state is on fire on occasion, unfortunately.

But at the same time the state recognizes that they are doing some hard things and wants to help them maintain their life and afford their life in California. And I guess I view that I'm probably like everyone in here, struggle to afford living in California despite the generous salary that my University pays me.

But it's an expensive place to live and we want to do these things, but we need to do them in ways that cap and trade climate policy in ways that maintain affordability.

And not just for the very Low income people, but I would argue for the moderate income people that also struggle to afford California, even if they are not on a care rate with an investor owned utility or receiving other forms of assistance.

Thank you all. And I want to reiterate the comments that my colleague made about the LAO's comments regarding our role in this. And I think it was interesting, especially in light of what we just heard from CARB around, you know, them really cautioning us about the risk of there being uncertainty in the market.

And of course they didn't suggest that one way to solve the uncertainty in the market is for us to take more legislative direction. But it is an option out there. So I think it's important that you brought it up and not surprising it was brought up by the LAO and not the Administration.

So I do think it's an important thing for us to think about as we think about how we create certainty in the market that does affect cost and sort of the direction it goes, the more certainty these entities have, I think they're more they're going to invest in driving those emissions down, which is really critical.

So I appreciate you highlighting that and Professor Ware, I appreciate you being here. I know that we have had many conversations over the years about how to invest in energy infrastructure. And this really, I think you're highlighting this is an opportunity for us to really look at that.

And as I saw in the backgrounder that we've spent $14 billion on that climate credit that no Californians know they got. I was sort of shocked by that number because again, I, like my colleague, didn't realize I was getting it either. So that is a very big dollar amount.

And I think I appreciate you being open and willing to give us more feedback on how we can direct that in a more efficient fashion so that it is going to the people who need it most and also is being used effectively.

But I think that as we think about the choices we make, you mentioned that and spending some of this GGRF funds on investing in infrastructure to drive down that guaranteed rate of return such that the cost on the ratepayers who pay that rate of return is lower. How do we balance those two things?

And maybe we can do both. I'm not suggesting we can't. But if we were to have to make choices, I think that you heard from my colleague about ensuring that we're not putting GGRF funds into the pockets of, of the shareholders.

I know that I have received I don't know how many calls from my constituents who saw the record profits coming out of PG and E and do not feel good about the fact that their bills have skyrocketed this year. And it is abundantly clear to them that that all went into the shareholders pockets.

And so you know, given that we need to be really careful that this is not doing that and also we have the opportunity to use it to try to blunt some of that rate of return that is causing prices to go up on our utility bills.

So just wanted to expound a little bit on that and sort of how we balance it amongst our choices from an economic perspective.

Well, I'm not an economist, sometimes I play one on TV, but the real economists are over there.

Oh, it's funny, I thought you weren't an economics Professor.

I'm an energy lawyer.

Oh, I thought you were an economics Professor. You've definitely played one on this TV. Severin would be very upset then that I called you of my favorite economists.

Probably yes. That probably gave him some stomach upset. So it is a balance. The one way to think about this is we are going to need a lot of infrastructure, electric infrastructure, to do to achieve our goals.

And the standard way of paying for it is going to put more money in the pockets of investor owned utilities than alternatives like the one I suggest. This is a way to avoid growth in rate base which will ultimately mean growth of, you know, dividends paid to shareholders.

That being said, and I want to be clear about this, our utilities are not in good shape right now. Both, you know, both PG&E was about to be receive a ratings upgrade to investment grade prior to the fires in Southern California. That is off the table.

Edison is on credit watch and it is not in our interest to have utilities that are very sick as companies. And because that raises costs for ratepayers, that means they're paying a higher interest rate on all the debt used to finance this infrastructure.

And it means that there is upward pressure on rates of return that, that will come before the PUC for the equity that owns the companies. So this is a balancing act. We need, you know, unless we are prepared to, as a state, municipalize these utilities, which I do not think we are.

You know, that decision was considered in the PGA bankruptcy and clearly rejected by the governor's office. We need to have companies that are kind of, okay, Low risk, good businesses, not great businesses. They shouldn't be sweepstakes. They should be steady kind of widows and orphans kind of returns.

And that, you know, that that is a balancing act given the fire situation, given the, the, the need to allow these utilities to invest, but also the fact that the bills are so high because of fire and because of the need to do distribution system investments to manage fire risk and also for lots of other reasons like to charge my electric vehicle when I get home at night.

So I would argue that the GGRF and the sort of broader cap and trade revenue is an opportunity to think about whether we can spend in that space other kinds of money. Not ratepayer money, but money coming from other sources to avoid spending some ratepayer money.

I don't want to pretend like that's going to solve the electricity price crisis that we face, but I think it can help and that's why I'm proposing these ideas. We need to spend the GGRF in the heart of where we think decarbonization is going to happen in the state.

Thank you.

Thank you. I want to follow up on a couple threads I heard. Been a little, in my opinion, a little loose in terms of how we're talking about impacts and costs. I think I want to make sure that or understanding specifically what you all are saying.

Professor Fowley, to your point, I think you had said could see rates increasing, but that the impact of bills, impact on bills you anticipate to be negligible. Did I hear you right?

Just to be clear. So we look at the effective carbon price. So the rates are increasing in a way that is not negligible. They're faster than inflation and we all have appreciated that.

My point was that when you look at the cents per kilowatt hour increase associated with the carbon price that comes back in this carbon credit that no one but a few of us are noticing. So that's what I meant, that the Bill impacts are.

So in other words, is it fair to say that cap and trade has not increased electric prices, they've increased electricity per kil.

I know this is like splitting hairs. Per kilowatt hour electric bills.

The cap and trade is not increased people's electric bills.

And Michael's done the real careful analysis that is.

Yes, yes. Would you, would you concur with that, Professor Ware? That cabinetry is not increased people's electric. Bills in California bills are going up for other reasons.

And I will say just sorry to be. But I do think these high electricity prices put all climate policy at risk because people are worried about high energy prices and sort of confounding that with the climate policies that.

Yeah, no, I appreciate that. And I think that's why I've been trying to frame our conversation not just with a kind of circular blame game and all the things that California maybe has done wrong or what we haven't got exactly right.

Or do we push too hard on direct regulatory protocols here and look at the fact that companies made trillions of dollars off of oil and gas, that then that pollution is now driving billions of dollars of liabilities for our state and they're not paying for that.

And that because of energy insecurity and broader global trends that are making getting oil to us through the Straits of Hormuz or that our gas is being shipped off to Europe, that there's exogenous factors here that are driving. And you said there's other reasons prices are going up.

I just think we have to scope that conversation in an accurate way to help people understand that you can't just look at state policy in a vacuum of how prices are being increased. You could blame the State of California for egg prices too.

But the fact that there's been no tracking of the Avian Influenza Crisis or that USDA just melted down, those are factors too. So it's such an easy conflation to be made. And I want to get really precise just about the economic findings, since you guys are our experts to that point.

I just want to refine one other observation you made, Professor Ware, about when we extend the market based mechanism that some of the modeling you've seen says prices will go up. How. That there will sort of be an instant price increase for people. I want to be accurate in how we're describing that.

Right now we're seeing a precipitous drop in carbon prices because we haven't moved authoritatively enough yet and because CARB still needs to get some of their work out the door. And so, you know, when we say, zero, if as soon as the Legislature should extend this, carbon prices will increase relative to what and if.

And if we're sitting here basically at the price floor now for the remainder of the year and then at the end of this session, we reauthorize cap and trade and prices stabilize and they come back to basically what they were on average over the last, say, eight years. That. Well, or they could go, in theory, higher.

But the point is that a. That's not going to directly lead to immediate impacts for consumers, depending on how we design the policy. Right. Doesn't increase your Bill automatically. We designed it wrong. It could, but.

And that overall, that that's not sort of the driving factor, that how clean cars rolls out, how the Low carbon fuel standard fares, how the RPS compliance goes, a lot of the other direct regulatory measures, as well as some of the exogenous factors.

To me, those are the bigger blips in the system to sort of understand price impact. So I just want to be really precise in saying the presumption, zero, as soon as you extend cap and trade up, prices go up. It's actually not quite cause and effect like that.

Is that you think it's fair to nuance the point that way.

I think there is nuance. I don't think there's any question, though, Senator Stern, that if there is a clear path to extending cap and trade to 2045, that will mean that I think it's about 300 million tons are held in the private bank right now.

That 300 million tons under current regulation and statute is only useful until the end of 2030. That means that there's a lot of allowances sloshing around between now and 2030.

If we extend the program to 2045 via regulation or legislation, that will mean that that bank of allowances all of a sudden can be spread out over that time frame and that will increase its value and that will have market impacts that are real.

I would agree with you that those market impacts are small in the electricity space, in the natural gas space. They are more noticeable for gasoline purchasers. And that's my concern. Is that we need to be.

And that being said, they are still small relative to gyrations that have occurred historically and even in the recent past in the price of crude oil and therefore gasoline. Right. But they will be noticeable.

There will be millions of dollars spent to make sure they're noticeable. I mean there will be absolutely. There will be very loud propaganda campaigns blaming solely that for gas prices. And meanwhile they hide the ball on us on record high profits, market manipulation and shipping our energy off to foreign nations.

So that's my pointed point I guess is that I hear you and I hear that technically speaking, allowance behavior modeling, but that the cost drivers here, you know, we have to be comprehensive in how we describe this.

And if we want to blame climate for what's happening at the gas pump, I think it's a dangerous presumption as we've seen just the relative price impacts of say the mystery surcharge of trading behavior, of shutdowns that you don't see coming because a refinery explodes.

Those are bigger price drivers than anything we will do on carbon and climate policy this year. Do you think that's fair?

I think it is uncertain certainly as the market, the refinery market consolidates because of the success of California climate policies, because we are electrifying transport and requiring that more efficient vehicles be sold in California. The refinery sector is contracting. It is consolidating the gas station as the CEC.

I'm forgetting the name of the component of the Energy Commission that does all this. Great, thank you. DPMO work has shown there's a lot of stuff going on in the gasoline retail market that raises antitrust concerns and that is raising prices probably too. The fact that we rely on Car Bob raises prices in the California market.

That may be a good thing to do. It may be less important as we get further and further along toward electrification. We may want to think about that as an issue that's probably causing heads behind me to get a little hot under the collar. But like these are things we need to think about.

There are many components to the gasoline price. Carbon, as we ratchet that cap down, is going to become a larger component, larger than we have been used to in the past.

And that is why I think personally this is me talking, not, you know, that we need to have a response that is really clear and visible to Californians about how we are addressing that in their day to day lives.

And that could be a rebate as, as Helen mentioned, like that we're just giving people a check and they can spend it at the gas Pump if they want to, or a direct deposit into their account. It could be that we cycle that money into the electricity price.

But we need to have an answer because not having an answer is going to get harder and harder to defend as a position as we ratchet the cap down beyond 2030.

Thanks. We're going to have hopefully really solid answers. I just think it's a fool's errand to assume that we can solve the entire problem here just within the confines of this closed system cap and trade program.

100% agree.

So that just as a level set for expectations. Right. But I think this is going to be a great tool to get a handle on this stuff. So thank you, Madam Chair.

Thank you, Senator. I want to talk a little bit more about fire and fire mitigation. I know that you've done extensive work on that fires and the effect on utility bills. So one of the conversations that I've heard is paying for fire mitigation out of GGRF. What are the pluses and minuses with that?

I did not discuss that in my slides. No, I didn't say discussed it, but. I think it's in. I have heard it. Not here yet. And I would just also commend Professor Fowle's work on this as well and her colleague Duncan Calloway.

I think it is something that we need to consider, but I would sort of shift if it were me. You know, the focus we've had with cap and trade funds and fire has mostly been a kind of landscape level type of approach.

And the fires that we are experiencing that are causing the most harm to the state systemically. Right. In terms of our insurance markets, in terms of housing. Those are not wildland fires, principally they are urban fires. They're still a wildfire in the sense they're completely out of control and we have to get people out of the way.

But they're houses burning houses down. And that is a place where we need to focus. The Governor recently issued an Executive order saying directing the Board of Forestry to finalize the Zone Zero regulation, which is the the most important regulation for fire safety in the State of California. It was due to be finalized January 12023.

The insurance industry is just desperate for this. They really want it. Implementing it is going to be really hard and really expensive for existing homes. It's about going up to people's door and saying, hey, guess what, you need to change your garden. Your curb appeal is going to be different.

That is a super hard conversation and we need to come with sticks to make it happen, because we need it to happen, but we also need to come with carrots and assistance. My neighbor who's on disability has a giant tree in his backyard. He's a vet from Vietnam, bought his home in the 70s in Mill Valley.

He can't afford to pay $10,000 take that tree out, but it probably should come out. And we need to have a policy in place at the local level to support that kind of change and find money at the state level to support it, I think because there's a state interest in having a healthy insurance market in particular.

So this stuff is all connected and there is an opportunity there if we could do that. You know, one of the reasons our utility bills are so expensive is that our utilities are trying to eliminate every single last ignition rather than trying to reduce the, rather than state trying to reduce the consequences when ignitions occur.

I don't think we can prevent ignitions in a state with 40 million people. Climate change is going to make those ignitions much more consequential unless we manage the environment differently. And you know, the environment in terms of our forests, our lands, but also our communities.

And it may, you know, right now we spend $7 billion a year on utility wildfire mitigation. We spend 500 million a year out of GGRF on fuels reduction projects, and we spend about 50 million, if, if I'm not mistaken, on the CAL FIRE home hardening grants. And so that balance probably needs to shift in some way.

And by doing so we could reduce the pressure, the upward pressure on utility bills, but we'd be spending other kinds of money, maybe getting more bang for our buck.

Did you have something on that?

I mean, the only thing I would add is to reinforce. We did a lot of work thinking about the trade offs between risk reduction, reliability of electricity service and cost. And to just underscore Michael's point, I mean, we can't eliminate wildfire risk in California.

And as long as we try to do that, the costs are going to be just. We're not going to be able to absorb them. So I guess one thing I just want to make sure to elevate in this conversation is not to take the cost as we, as, as projected as given.

Like there is cost containment work that can be done to bring some of those costs down in the power sector, if we're willing to think about this as a trade off and think about some of these.

So you're, you're basically saying don't underground everything.

I'm saying that question. The undergrounding plans. There's rapid innovation in grid management, increasing the sensitivity of lines so they trip off when the fire risk is high. That imposes reliability costs on people living nearby. But it could radically reduce the costs that are borne by all ratepayers when we underground.

So I'm not saying no undergrounding, but I just think thinking very judiciously about where that undergrounding goes because of the massive cost implications on ratepayers, which exacerbates all the issues we've been talking about.

Well, and that's. You don't. That's the one of the questions. Also if, let's say some of the undergrounding money was coming out of ggrf, you want to make sure there's a motivation that it, you do it for the least cost possible with, you know, high safety level. So, and, and that's not necessarily.

Is that the utility is that same calculation that they have. If they're getting 12%, I would be.

Remiss to not mention Senator Becker's SB 3326 which is a bill. So the utilities do a lot of evaluation of risks, what they call risk, spend efficiency or the cost effectiveness of the investments they're making. But it's limited to the utility space.

California, in terms of all of our wildfire risk reduction investments does not do that kind of work. We sort of, we hand out grants when people apply for them. The better grants get funded, the less high quality grants don't get funded.

But that's not asking how effective will the intervention be and how does that compare, say to the utility spending money?

It might be much more cost effective for CAL FIRE to say we're going to Fund shaded fuel breaks around all the high risk communities or we're going to Fund home hardening or, or Fund Fully Fund defensible space inspections. So they really happen every year than it is for PGE or Edison or San Diego to underground.

We don't know because we don't do those calculations. That's what Senator Becker's bill would facilitate.

But I will say that, I mean last year there was a decision by the PUC administrative judge on a PG&E wildfire request that did that analysis and decided that undergrounding was not the most cost effective choice. Now the PUC commissioners overruled that and funded the entire thing. But that analysis was done at the initial step. Right.

Was it most cost effective?

That was a comparison. I'm familiar with the ALJ decision that you're speaking of. And that was a comparison of undergrounding compared to conductor and that is a.

Oh, and you're saying a much broader spending on all of our tools to models.

To evaluate shaded fuel brakes. How much do they reduce risk? We know how much they cost to create. We can compare that risk reduction cost effectiveness calculation to what the utilities do in the wildfire mitigation planning process and the ramp process that where they're evaluating their cost, the cost effectiveness of their investments.

And I would argue that, I think it is likely that we will find that paying for gardening is cheaper than paying the very skilled, experienced, highly qualified workers who have to go up on a transmission line and redo something up there from a helicopter to do that work.

And in addition, we can do it faster because there's a lot more gardeners than there are IBEW 1245 workers. I mean, we need to train more of those people.

And unfortunately, they also are driven by like they have extreme liability if anything goes wrong. So that they have to. That has to be weighed for the utilities. For the utilities also. One, and I would say with home hardening, it is really important.

First of all, the insurance companies are going to force people to comply or they're not going to get insured. So it's, you know, there can be grants, but they're the ones that are really going to be the hammer, I think very soon, if not already.

But I think it's, I've looked at, because we had all the fires in our area, we were all looking at what do we do for home hardening.

And it could be, you know, we really need to know how we tell folks to do it in the least expensive, highest efficient effectiveness way because you could spend $150,000 hardening your home. So. And I've seen that. So I know we've kept you here for a very long time, but I just had one more question on the.

One of the big issues coming up is on data centers and like this extreme energy utilization that is going to be coming up. I know a lot of them are being placed out of state, but we know that companies would like to have them closer so they don't have the lag.

What does that do to rates and how are we. I mean, the numbers, the amount of energy that has to be supplied is astronomically higher than what we've been dealing with. We've had really flat demand for a very long time.

So how are the utilities, how do you see the utilities dealing with this and what does that ultimately mean for consumers?

I mean, I think this is a really good question and I don't, I Mean, it's not. It's one we've deliberated over at the lunch table at UC Berkeley and not really thought deeply about, although there's some research. I mean, I think it's a question to ask.

I mean, if I want to start a cafe, it seems reasonable that, you know, ratepayers will help. If I need help, bring me, bring me the service I want and need relatively quickly.

But there could be, and we've seen this in Virginia and other places across the country, massive costs of supplying these data centers that are sort of spread over customers. So I think it's a really important question to raise for the PUC.

This is sort of uncharted territory when we're thinking about who should be responsible for the upgrade and costs of bringing these data centers online.

So I don't have a good answer, but I think it's a great question and one we should get ahead of so that we have policy to guide these questions when we're having to make them quickly.

I'd just say there's a wonderful paper by Tyler Norris and colleagues from Duke University that I can share with the Committee if they're interested about creating flexible interconnection for data centers and other large loads where the typical, the cost, a lot of the cost associated with these large loads is from the fact that when they interconnect, they're required, the system is required to be able to serve them 247365 no matter what, on the hottest July afternoon.

And if you say, you know what, there's going to be 100 hours a year where this data center has to reduce its consumption of energy from the grid, the costs fall enormously. And that is not that kind of flexible interconnection where the buyer of energy has to kind of self restrict purchases under certain circumstances.

We call that demand response sometimes, but it typically hasn't been a part of the interconnection and planning process. We still plan connections for large loads and build the infrastructure as if they're going to demand energy even when the system is maxed out. If we could move away from that, we can really reduce the cost.

And if California could lead on that, it might even be possible to site more data centers here, which wouldn't be a terrible thing. They would. Load growth is good because it spreads the cost of the system across more kilowatt hours.

That will help drive down electricity prices if the load is interconnected in smart places and with smart agreements that limit the cost it imposes on the system.

All right, okay. Well, I want to thank all three of you for this very informative briefing. And we will call up folks for public comments. And then I can see with the volume we have, we will have public comments limited to a minute, but if you could do less than that would be that would appreciate.

Be appreciated, too, because it looks like everybody in the room is in line. So I don't, I don't think your mic is.

There we go. Oh, look, you can hear me now. Thank you. Katie Valenzuela, on behalf of The Center on Race Poverty and The Environment, which does work in Kern County. First of all, just to express our frustration in that environmental justice voices weren't included on the panel.

We were part of advocating for this Committee to be established. I was the first consultant for this Committee. We represent communities that are acutely impacted by all of the issues, including high electricity bills, high health care costs, high wildfire risk, you know, you name it.

And would love to be a partner with the Committee as you consider these changes. We also hold a lot of institutional knowledge. You were asking some really important questions to CARB that weren't quite answered. When you talked about leakage, for instance, AB398 in 2017 actually set the assistance factor at 100% for all sectors under cap and trade.

So it's not based anymore on your relative risk of leaving the state. Everybody gets it. So that equated in 2017 to about $300 million that were given away to the oil and gas industry, taken out of DJRF and given to the oil and gas industry.

Money that could have been invested in our communities to help improve our resiliency. So what we want as communities that are more impacted by these issues is for you to stop giving industry a free pass and to really start looking at how we collect more of that revenue to invest in our communities.

And finally, I will just say, if you're concerned about market prices and carbon prices, you need to be low carbon fuel standard. Those credits go over $250 a ton, while the cap and trade system is less than $30 a ton.

Thank you.

Good afternoon. Catherine Garoupa with the Central Valley Air Quality Coalition and Co Chair of the Air Resources Board's Environmental Justice Advisory Committee, or EJAC. EJAC was created as a part of AB32, long before AB Mac and as a course of law,

It is our role to be consulted on these issues that impact our communities and that involve implementation of the scoping plan. We would also welcome the opportunity to advise the Legislature in our role. It's disappointing that EJ concerns and recommendations are not in the background documents or represented on the panels today.

Any program extension must involve reform, and EJAC has put in a robust body of work developing recommendations. We recently passed resolutions on cap and trade as well as carbon capture and the low carbon fuel standard. Because these are interrelated programs. Affordability is at the heart of environmental justice concerns.

We know frontline communities bear the highest costs while often contributing the least to emissions, public health and social costs. Our economy externalizes and those must also be factored in and prioritized. More people die each year in the San Joaquin Valley from air pollution alone than car accidents.

And our region is hurting to billions of dollars per year in lost productivity.

Thank you. I just want to remind everybody one minute. And the panel today was only academics. We are going to be talking to all stakeholders, but for today it was academics just to explain.

So next speaker, thank you very much.

Good afternoon, Kyle Jones, Policy and Legal Director with Community Water Center. Just wanted to mention that in addition to the energy issues that are that the Committee's dealing with that the cap and trade program does fund the SAFER program, which helps build water security and protect communities from climate change, including drought and sea level rise on the coast.

The program is also critical in helping improve affordability for residents across the state. If you're on a, you know, a long term drinking water solution, you're not buying bottled water. That's a huge cost savings there. But also the program is providing direct bill credits for many communities and trying to seek that to make more affordable.

It's a model that's working and we're looking to expand it this year with Senator Durazo's SB350. Thank you.

All right, thank you very much.

Good afternoon. Bill Magavern with the Coalition for Clean Air. The short lived climate pollutants are a big part of the problem and also the solution. And so I was very encouraged to hear Chair Randolph prioritize CARB strengthening the landfill methane rule.

And I want to thank you, Madam Chair, for your recent article on that topic. Moving to cap and trade. I think what we need to do to help with affordability is to make the big polluters pay.

Let's plug the loopholes that are letting them pay less than their share and then take that money and give it to low and moderate income Californians in the form of cleaner transportation and lower household energy costs through equitable building decarbonization. On transportation we have programs like Clean Cars for All, and let's target that assistance to those who need it most rather than giving a broad based rebate that will be so small most people won't even notice it.

Thank you.

Thank you.

Good afternoon. Stephanie Estrada with Crew Strategies on behalf of San Diego Gas and Electric and Southern California Gas here in support of extending the existing Cap and Trade program beyond 2030 with the needed cost provisions to include directly allocated allowances for electric and natural gas.

These Allocations are critical to our customers who benefit from the climate credit program. Additionally, we support a fresh focus on how GGRF funds are utilized to advance current legislative priorities, including energy affordability. Thank you.

Thank you.

Can you hear me? Great, thank you. My name is Christian Theuer. I'm with Heirloom Carbon. We know we need to do two things in order to get to net zero. One, is dramatically reduce emissions, and two, in order to avoid the catastrophic cost Chair Randolph named at the start of this hearing,

We need to also remove CO2 that's already present in the atmosphere. We know this from UN Climate Science. We know this from ARB's Scoping Plan for California. We need in California and everywhere in the world to remove CO2 in order to get to net zero. That's what Heirloom does. We take CO2 out of the air.

We store it permanently so that it can never contribute to climate change again. Our customers are companies like Microsoft, Meta, Stripe, Shopify, and recently, as of this week, United Airlines, who partners with us to remove 500,000 tons of CO2 that can either be removed or converted into sustainable aviation fuel. It's important.

These types of incredibly difficult to decarbonize sectors of the economy need carbon removal as a solution. It's how you protect the state from the most expensive to abate parts of getting all the way to net zero.