Joint Legislative Committee on Climate Change Policies

All right. Good afternoon everybody and thank you for your patience. We know the Senate always has a lot to say and so they finished way after we did. Welcome to the Joint Legislative Committee on Climate Change Policies hearing. California's cap and trade program, now known as Cap and Invest, has been operating for over a decade.

Not only is Cap and Invest central to achieving our state's climate goals, it is regarded internationally as one of the most successful cost emissions reductions programs ever created. California's leadership on climate is more critical than ever as the Federal Government backtracks on environmental protections and seeks to undermine any efforts to address climate change.

Last year, the Legislature and Governor Newsom came together to reauthorize CAP Invest through 2045. The passage of AB 1207 and SB 840 redoubled the program's focus on affordability and aligned Cap and Invest with our state's clients climate goals in the face of federal headwinds. Reauthorizing Cap and Invest represents California's bold affordability minded climate leadership.

Last month, CARB released the proposed amendments to the Cap and Invest regulation. The proposed amendments implement certain parts of the reauthorization bills that would update the programs both for the times we are living in and for the future that we are striving for.

It is important to note that CAR CARB is an ongoing has an ongoing rulemaking process on their proposed updates to Cap and Invest, including an open public comment period. This hearing is meant to complement that rulemaking process and provide a forum for a legislative discussion of CARB's approach for implementing 1207 and 840.

Would like to thank my Assembly and Senate colleagues for joining today. And Senator Stern, would you like to make some opening comments?

I'll just simply say my own or am I muted?

Let's see. Are you through?

How's that? How about now? All right. Appreciate everyone coming together, especially my Senate colleague here at the Chair of EQ as well as the Assembly Energy Chair.

That's exactly what this Committee was designed to be, is a place for leaders in multiple policy areas to be able to come together and focus on climate, which tends to cross cut. So I don't want to get too into editorial here. I'll just say let's get started.

I don't want to keep the Chair or the other Chair waiting.

All right. Assemblymember Petrie-Norris, do you have any opening remarks? Senator Blakespear.

I do, thank you. Well, thank you. Thank you Chairs for hosting this today. As the Chair of the Senate Environmental Quality Committee and a Member of the Senate's Cap and Trade Working Group last year. I'm interested to hear from today's panelists about how the legislation that we passed last year will be implemented.

I appreciate that there are many conflicting considerations that CARB has had to reconcile in writing these proposed amendments because we faced many of these same challenges last year. I'm generally glad to see CARB prioritized affordability for everyday Californians where they could. Although I do also want to make sure that we're implementing the legislature's intent and California's goals.

Cap and invest is so intertwined with our state's economy and climate ambitions. So I really look forward to hearing today about the many considerations that went into developing these regulations. Thank you.

Thank you, Senator. And we do have Assemblymember Petrie-Norris remembering she had something to say.

So before we begin, I think it's just really important to center our conversation and I think remind all of us and all of the Californians who might be watching why we continue to prioritize climate action in the state of California. We're not doing this because it's nice to have. We're not doing it because it's someone's pet project.

We're doing this because this is a must have. Climate change is dangerous, it's expensive and the cost of inaction is enormous. We've seen climate disasters devastate communities all around the globe and California has and continues to be on the front lines.

So I think in the world we're living in, with the misinformation machine that we're all navigating against, I just think it's really important for us to stay focused and grounded and be honest about why we're having these conversations and why we continue to do this work.

So thank you to our chair and Vice Chair for your leadership and look forward to today's conversation.

All right, thank you. Thank you, colleagues. Now I would like to welcome Chair Sanchez of the California Air Resources Board and Rajinder Sahota, Deputy Executive Director for Climate Change and Research at CARB. Welcome.

Thank you. Chairs, Chair, Chairs, Members of the Committee for inviting me here to speak today. Good afternoon. Today I'll provide an overview of the proposed amendments to the Caption Events Program, which was extended under Assembly Bill 1207 last fall.

But first, I want to acknowledge, as you did share, that we're here today at this point, the backdrop of the Federal Government's reckless and short sighted dismantling of national climate policy and irresponsible rejection of widely accepted science that even Californians up and down the state know to be true.

We saw this coming based on our experience in the President's first term.

But what we didn't anticipate was the speed and scope of the destruction, only made possible by a total disregard for the law and for facts. But this time around, the clean energy economy isn't just a plan or a goal that we're going at it alone.

It's an unstoppable global transition that continues to maintain momentum, fueled by the leadership of governments around the world, many of whom are now looking to California and our fellow states to carry the mantle of American climate leadership.

Your success in extending the Cap and Invest program to 2045 and and ongoing support for our climate and clean air programs shows the world that even as the Federal Government exits the global clean energy race, California is staying the course as a stable partner and a global innovator. I thank you and look forward to today's discussion.

Next slide please as was mentioned last month, CARB staff released proposed updates to the Cap and Invest program pursuant to legislative direction and are taking public comment through early March.

The updates are designed to ensure that California stays on track to meet its climate targets for 2030 and 2045 while supporting affordability, cost effectiveness and regulatory and market certainty for program participants. Next slide please.

Formerly known as Cap and Trade, the Cap and Invest program is a cost effective policy tool that makes polluters pay while reducing climate emissions over time. It's one of many programs that the state is using to reduce greenhouse gas emissions.

It sets a declining limit on major sources of climate pollution, covering the largest polluters, including factories, energy companies and oil and gas suppliers. These account for 80% of California's climate emissions. The limit is an aggregate limit set for all sources. There are no facility specific caps.

The program creates a powerful economic incentive to use cleaner, more efficient technologies and it is four to six times less costly than alternative approaches to addressing climate pollution like direct regulation or a carbon tax. The Cap and Invest program has been operating successfully for 13 years with nearly 100% compliance. Next slide please.

Cap and Invest has been working and has a track record of proven success. California met its 2020 climate target six years early while growing its economy beyond reducing emissions.

The program has already delivered $34 billion for climate investments across this state, funding over half a million projects like affordable housing and accessible transit, supporting 30,000 jobs and cutting millions of tons of carbon emissions. To date, over 70% of those investments have benefited disadvantaged and low income communities.

The Cap and Invest program has also returned over $15 billion in bill credits directly to household utility customers. The draft changes are designed to support affordability, to strengthen cost effectiveness features, and to send a clear and steady price signal that encourages investment in cleaner energy and more efficient technologies across this economy.

They also aim to support doing business here in California, provide market certainty to program participants and protect against market manipulation. Next slide, please. Next slide, please. One more. Thank you. These draft amendments. Nope. One back. Perfect. Thank you. These draft amendments ensure long term allowance budgets beyond 2030 support achieving the state's 2045 carbon neutrality target.

They make changes from a previous process to remove allowances from circulation when offsets have been used for compliance, where allowances would now be removed on an ongoing basis. They implement a new legislative requirement to transfer free allowances from natural gas utilities to electric utilities to address electricity affordability concerns and to further incentivize electrification.

We are continuing the ongoing protection for ratepayers on utility bills by providing free allowances that cover all of the compliance costs that utilities have for this program. These amendments make requirements make updates to requirements related to reporting business relationships to further protect against market manipulation.

They add post 2030 allowances to the allowance Price Containment reserve to continue and strengthen that mechanism which avoids price spikes and helps keep costs low. And they maintain the number of allowances that are provided to the industry to incentivize manufacturing in California, protect jobs and make sure that drivers won't pay additional pass through costs at the pump.

Next slide please. As required by law, staff completed an economic analysis of this proposal and found that the overall benefits of the program outweigh the costs. The estimated total cost of compliance is $124 billion over a 20 year lifetime.

This cost is negligible compared to California's current annual $4 trillion a year economy which is projected to grow to over $5 trillion by 2046. In being responsive to legislative direction and considering affordability, it's important to note that this proposal is $20 billion less costly than the scenarios initially analyzed in April of 2024. The benefits outweigh the costs.

The proposal delivers significant return on investment, including total statewide benefits of $180 billion, including $123 billion in avoided health care costs resulting from improved local air quality and up to $485 billion in global savings due to avoided climate damages.

The program is also projected to generate $56 billion to benefit utility ratepayers and $37 billion for additional climate investments. Next slide, please. As the Chair mentioned, we are in the middle of a formal 45 day period for the public to provide comments.

Staff will present the proposal for consideration by the CAR Board at a public hearing at the end of May. As we hear from the public, affected industry and importantly, our partners in the Legislature, we have included time to make adjustments to the draft proposal prior to Board consideration.

I invite your offices as well to provide comment into our formal record. Importantly, we are working to have an effective date of September 1, 2026. A completed rulemaking is important to support regulatory and investment certainty in this program. Next slide please in addition to the proposed updates presented today, the legislation passed last fall includes several other requirements.

Assembly Bill 1207 requires CARB to present to relative legislative subcommittees on rulemaking materials and expenditures of the program's auction proceeds to report annually on the use of the value provided to the utilities through allocated allowances, and to consider developing new offset protocols, including for carbon dioxide removal.

Senate Bill 840 requires CARB to conduct a study of the compliance offset program by December 2026, including a study of the contribution of offset projects towards California's climate goals, and to update all offset protocols by January 2029 to reflect best available science and reevaluate protocols for every five years thereafter.

For evaluating existing offset protocols and developing new protocols, CARB has requested additional resources to begin implementing those provisions. In closing, I want to recognize the financial pressures Californians are facing and emphasize our commitment to striking a balance between the costs and benefits of all of our actions.

This balance is a primary goal of the legislation that extended the program. In addressing this critical issue, it is also important to consider how much we're already paying. Climate impacts once thought decades away are here now, and Californians are already paying the price.

For example, a 2024 national report ranked California the worst state for natural disasters fueled by a changing climate change, with expected annual losses totaling more than $16 billion statewide.

The cost of inaction is too great, and our efforts will help to minimize costly future impacts while also delivering significant benefits to Californians through the reinvestment of auction proceeds and the annual utility bill credit. That wraps up my overview today.

I'd like to invite Deputy Officer Executive Officer Rajinder Sahota to join me at the table and I look forward to your questions.

Thank you.

Afternoon.

She's just here to answer questions.

Oh, just answer questions. Okay. All right. All right. Do we have questions? Yes. I think it's easier to do when CARB is here to ask the question questions of CARB now. So why don't we start with the CO Chair?

Yeah. I'll start off high level. And thank you, Chair Sanchez and Deputy Executive Officer Sahota, for being here. Your second to last slide on next steps was encouraging. My first. My first question is just about timing. We know the world's watching. We know our markets are watching. We just had an auction last week.

Everyone feels, whether you're living in EJ Community on the front lines of things or you're a compliance entity, that everyone wants some certainty out there. So my first question is just we know how rulemakings can go. Things do take time sometimes.

I'm sure there's going to be a ton of comments that come in, a lot of competing interests. But, you know, there are significant problems with blowing through that May deadline, in my view.

I think if we go past June and deeper into the year, not just for our market and for our compliance entities, but also other states and even other countries sort of watching what we're going to do. So first question is pretty simple. Just do you feel like you're on track to hit that May 28th ish deadline?

I mean, do you think you can get this done before June?

Yeah. Thank you for that question, Senator. As you know, the Air Resources Board has a long track record of administering this program, including a number of amendments that have come to the board. So we are committed to making to meeting that May deadline.

I'll note, you know, we are in public comment through March 9th, but I, myself and the Executive team and our program staff have been meeting with stakeholders ever since the legislation was passed. So I think we have a good understanding of perspectives coming to the board.

And as I mentioned, we did allow time for changes to the staff proposal if needed. But as you know, it is incredibly important that we stick to that May timeframe so that we have an effective date of September 1st for the market and regulatory certainty.

I appreciate that's encouraging here. When I think about sort of some of the interlocking pieces that start to click in.

Beyond that, rulemaking incomplete, I think about things like our carbon removal industry trying to get on track and the related role of SB905 rulemaking, which I also hope you all keep on the front burner and stay on track with that. And we know that, that that industry is sort of waiting to see how crediting could work here.

So we're hoping that that continues to get fleshed out and stay on track. But also in terms of linkage, we know Washington's looking to us, you know, Quebec's looking Oregon. We're going to see how that system plays out.

They're going a little different route than us at the moment, but I'm hopeful that they'll, they'll consider in the future. Joining us, do you feel that is there still interest in pursuing those linkages with those jurisdictions and with that rulemaking timing, will that keep us on track to be able to stay linked to our two partners?

Yeah, thank you for that question. We are still working towards linkage with Washington and completing this rulemaking on the May timeframe is an important next step towards linkage, just as Washington has a current open rulemaking for their program as well.

I'll note that any future linkage would depend on the Governor's findings under SB 1018 and that process concluding as well. But we know that there could be many benefits to our program from linking with Washington. I'll also note that those conversations are done in close coordination with our current linkage partner, Quebec.

To your earlier comment on SB905, we've looked at our priorities coming to the Air Board this year and, and a lot of them start with an SB or an AB. There's been a lot of legislative direction our way and we look forward to working closely with you all and stakeholders across this state to implement that legislative direction.

Should have probably mentioned my own bill's implementation first as well as Senator Wiener, although we do have a hearing this week on SB253 and 261. So I didn't need to plug that. I'll defer to the rest of the Committee. I have some further questions, but.

Assemblymember Petrie-Norris.

Okay. So a couple areas that I want to dig into and I'll start with a couple of follow up questions related to the role of carbon capture and sequestration. So I think you mentioned that you're hoping that the rigs are on track. I think that SB 905 rigs were due last year, is that correct?

And they have not been promulgated to my knowledge. And I want to so I want to make sure that we don't miss an opportunity for the necessary investments that we need companies to make in order to implement these ccus technologies across the state. It's an area I've worked in, the Senator has worked in. I think it's Foundation.

I don't just think. I think it's in your own report. It's foundationally important to California's ability to achieve our climate goals right now. If I understand correctly, the draft regulations are somewhat vague and have a placeholder language.

So is there an opportunity for us to refine those regulations to acknowledge that CCUS is indeed going to be a viable compliance pathway at this stage?

Yeah. Thank you for that question, Assemblymember, and we completely agree with you. Carbon capture and carbon removal. We know we're going to play an incredibly important role in meeting California's climate goals, including carbon neutrality, by 2045.

You're right that our 2022 scoping plan says that, as does global science from the IPCC and others, we are delayed in part because of some delayed resources coming to the Arab Board. But now that we are adequately staffed up, we're confident that we can bring that regulation to the board later this year.

I'll ask Deputy Executive Officer on your specific question regarding the cap and Invest proposed amendments and how those relate to our activities under SB905 later this year.

Thank you, Chair. And to further expand on the Chair's response here, there's two pieces of regulatory action that we're undertaking. One is the broader SB905 regulation that is due that we are planning to bring to the Board by the end of this year for consideration.

But in the cap and invest proposal that is out for public comment right now, we have placeholder language in there and recognizing the role of CCUs and CDR. And I think the question that you're really asking, and you can correct me if I'm wrong, is can we further refine the language in the cap and invest proposal?

We can, and we are continuing to meet with stakeholders to invite what additional language or additional parameters they need in this regulation to keep those investments flowing to those technologies.

All right. So we're working on that. And I guess maybe what I'm unclear on is the delay on the regs from 905 going to adversely impact the ability of us to fully harness these technologies as part of our cap and trade or, sorry, cap and invest.

I think that's a really great question and I'm really happy to say that on our website for SB905, we just posted, I think several months ago, a list of projects moving forward.

And so we have about 44 projects moving forward in California that are in various forms of planning, planning, investment or even doing some of the technical quantifications around those. And over half of those are related to the energy sector.

And what we're continuing to do is meet directly with some of those project proponents to make sure that as they're laying out the planning documents, as they're structuring those projects, that there is nothing that will prohibit them from being able to be recognized under the language in SB905 and then in the future programs for cap and investors.

Okay, so you.

All right, so do you agree then that CCUs should be, you know, should fully count towards compliance obligations?

Absolutely. That's been a long standing position that it should reduce your emissions compliance obligation.

Okay. So then we just need to make sure that the letter of what's actually in the regs reflects the spirit that I think we share. All right. I have a couple of other questions related to electricity affordability, but I think that might be something you wanted to ask. I can ask follow ups after if you want.

Then I have some other.

The co chair has some other questions too. I think the feedback that I've heard the most about is the changes to allowances for the electric utilities. And so could you walk us through it? Obviously, affordability is a huge priority. It was like the lens through which we did everything last year.

And it seems that this is moving in the opposite direction. It almost seems that if utilities were green faster that in some ways their customers are going to be punished. And so could you tell us a little bit about that and why and how perhaps you see that it doesn't affect affordability.

Yeah. Happy to share. Thank you for that question, for all of your efforts on this issue. Part of the legislative efforts to extend the program last year. I completely agree with you that energy affordability remains a top priority here at the Airboard.

But importantly, through these proposed amendments, I'll ask Deputy Executive Officer Sahota to walk through the specifics around utility allocation. But I would point out that we are staff is proposing allocating free allowances to cover all of the compliance costs for the program. That that is to say ratepayers should not see an impact from these proposed amendments.

Also, the Legislature gave us the explicit direction to transfer natural gas allowances over to electric electric utilities to further enable affordable electrification. So there are two components of your question. I'll ask Deputy Executive Officer to walk Sahota to walk through the detail.

Thank you, Chair. And that is probably one of the questions that we are getting a lot of incoming on, especially from utilities and stakeholders that are environmental organizations or just general members of the public.

So when it comes to the allocation to the electric utilities what we do is we take their submitted data to other energy agencies like the CEC or CPUC.

They're planning for how they're going to get closer and closer to the RPS of 60% by the end of this decade or even exceed it because we know some of them are exceeding that and then the targets for 2035.

So based on their reported data, that gets fed back into the same methodology that we've always used to allocate to the utilities. So over time, as they get greener, they have less carbon in their portfolio and they need less allowances for compliance.

But we understand that, as you stated so eloquently, are we punishing utilities for doing more and doing it faster? That is not the goal here. That is not what we want to do here.

And so we have been inviting the utilities to provide additional data and additional information that we could use to potentially adjust what we're providing them for their allocation. So we welcome that information and data during the formal public comment period from the utilities themselves and of course yourselves.

In terms of, you know, are we striking the right balance here? Do we need to consider something else?

Yeah, and I guess the part of the concern is they were there was planning based on what they assumed the allowances were going to be going out into the future. If they are greener, faster, it might have been that they just invested future allowances early. And so that would have an impact on their ratepayers.

So we will certainly comment on that later. Do you have anything specific to that issue?

Yeah, I think just a little bit of a follow up. And I think again, I think sort of the reason that this matters is that electricity affordability is, I mean, almost like the backbone of our ability to achieve our climate ambitions.

Like if we don't keep electricity affordable, we are never going to be able to effectively drive this transition. So I think that's why it's been such a huge area of focus.

So I think if there's one thing that cap and invest should to protect its electricity rates and what I'm, what I am confused about is that I think you said that there wasn't going to be a ratepayer impact as a result of the draft drags, and that is absolutely not what we're hearing from both IOUs and even more so from our publicly owned utilities.

So I mean they've been raising an alarm and saying that this will lead to increased cost ratepayers. So I guess how are you or how can you rethink the draft rig so that it better protects ratepayers from these increased costs when it comes to this aspect.

Okay, so there's two things there. One is we are continuing to give them all the allowances they need to make sure any cost impact of this program does not flow through to rate payers. So we're protecting rate payers from any cost of compliance for this program. Are there other reasons that rates may increase?

There may be other reasons like hardening of the grid, other things that need to be brought online in terms of renewables, transmission, etc. I think as we're talking through some of these pieces with the utilities, it will be important to hear from them what other early action they've taken.

How can we support giving them more allowances for that early action that they plan to take where they felt like they had made early investments? What's the data for that?

And if they're asking for more allowances beyond them protecting for the cost of this program, it will be important to have comments as to how any additional allowances will further protect rate payers. In the record, we're open to all of that data and that dialogue.

I think we're struggling to get to the point where we actually get things into the record that explicitly say if you give us this many more allowances based on this data or information, this is how it will further protect ratepayers in the state of California.

So are you saying that, you know, when these. So these stakeholders are saying that their allowances have been reduced to the tunes of billions and billions of dollars, are you saying that they were, I guess, confused about what the starting point was?

I'm not sure if they're confused because the methodology has always been about giving them enough allowances to cover the costs of this program. I think every time we update the regulation, we get a chance to look at new data and new information.

I think this disconnect that we're having in the conversation with the utilities is when we went to update their allocation. We have new data that's been submitted to CEC and CPUC and based on that new data, it shows that they are greener than we anticipated in the past.

What we need to do is try and bridge the new data that's been submitted since the last time we updated this regulation. And how do we smooth that path from what they thought they were getting under old data to what they're going to be receiving under the new data?

So we're asking for more information to understand what, what investments were made and what ratepayer protections can be in place if we smooth that path into the proposal that we have right now, which we are fully open to amending because we have built time for it. But I think we're just struggling with.

We have to use the latest and best data that we have. If they've made existing and early investments, how do we bridge that path between the two in terms of costs?

I just want to say, like the way I see it is you had sort of the original interpretation of the climate credit to be for compliance, to help with compliance. For us, though, in the Assembly, at least last year, we were just talking about keeping electric rates lower or driving electric rates down.

And so I think we had. We sort of changed the interpretation of the climate credit to make sure that we weren't not just with compliance, but in General, electric rates are too high to really push toward an electric future. And so to really make our climate goals, we need to make sure that people.

It's worthwhile for people, for instance, to purchase heat pumps and to move to electric cars, electric vehicles. All that is being stopped with the cost of electricity being so high. So I think it's a different interpretation than kind of the originalist idea is the way that I would put it. Do we have.

Can we switch modes to refining?

Oh, okay. Before we switch to refining, then, I just want to talk about the other thing. For us, it was very important to switch the natural gas credit over to the electric bill again for the reason that it's going to help electrification going forward.

When I look at CARB's proposal, it waits till the late 2000-30s, and we've all talked about how urgent the problem of climate change, how urgent it is to reduce emissions. Natural gas is a fossil fuel. And if we are Talking about another 14-15 years, I think we're really missing the urgency of the problem.

So could you talk a little bit about why it is going to take that long and what the Legislature can do to urge you to move more quickly to moving those gas credits over again? We need to drive down electric prices.

Absolutely. Thank you, Assembly Member. And as you know, this was a very important component of the legislative discussion in extending the program. Last year, staff had an early workshop after the Bill was signed into law to ask for feedback on how we might set up a framework to transfer those natural gas allowances over to electric utilities.

And what we heard from a number of the stakeholders was that it would be incredibly complicated based on the territories and the POUs not actually giving a climate credit yet. So the staff proposal puts forward both A framework that we are soliciting feedback on and, and a draft timeline.

We understand from conversations with you and from other stakeholders that they would like both changes to the framework and also an accelerated timeline. We look forward to additional feedback and engagement on that piece.

All right, thank you for that. Do we have any other questions on the natural gas credit or. No. Okay, so why don't we switch over?

I'll just echo your point, though. I think we can go faster. I think we should be. And that was one of the most meaningful contributions I thought the Assembly made last year was bringing that transition framework into place, especially if you want to accelerate decarbonization. So I'd second. Second the chair's point there.

I want to build on a line of questioning we went through in our Chair of Environmental Quality's hearing last week on refining.

And we heard from Vice Chair of the CEC Sivagunda about sort of evolving nature of our refining landscape and what will probably be an increasing trends, an increasing trend towards the importation not of crude to be refined here, but in fact, just imported gasoline.

We talked to Mr. Botil, who's part of your all's team at CARB, and he did clarify for us that imports of gasoline are not somehow exempt from our carbon regulations.

That just like a barrel of oil that's drilled in Kern County and refined, say in Los Angeles, likewise a barrel equivalent, I guess, of gasoline that came from who knows where would also be subject to, to our carbon rules. The who knows where question is the hard part. For me.

The world, and especially some of these trickier jurisdictions, tend to be a black box. We just saw last week announced that Russian oil had found a way to hide itself.

$92 billion worth of Russian oil found a way to hide itself basically through India's refining sector and Azerbaijani assets, where essentially now whenever that stuff comes into our port, we're burning Russian gasoline while we're at war with the petrodictator.

Similarly, you could foresee scenarios, especially given Chevron's outsized capacity in our state, their assets in Ecuador, right in the heart of the rainforest, or even say Venezuela continues on a path it's on, that suddenly now California drivers are propping up or destroying the rainforest or propping up Putin.

And so the issue I've got, and I've heard it from my Republican colleagues as well, so I actually think there's some bipartisan consensus about this is how to ensure that we have the right data at that point of importation. You know, those who, you know, when we're dealing with the Europeans.

They do a great job of carbon inventory and we know what comes in from over there. We tend to trust that information. But from some of these other ships we don't always know. And so are there tools or new techniques that we can use to better come up with what is now basically an approximation exercise?

The way I understand it is, I think the way the OPG model works within the low carbon fuel standard at least is we give a broad average.

So we say if the, you know, the oil is coming from, you know, if it's Saudi and we sort of assume certain things about how they flare or how the refining sector works and we sort of take a rough estimate.

But are there, is there better data than that we can start to get out of the system so that we don't sort of put an unfair disadvantage on our in state refining or in state oil and somehow make it a lot better to just bring in wholesale gasoline to our ports and sort of end around our carbon math?

Is there, are there, can you, can you speak to that in terms of new tools, better data and maybe just clarify the point that our cap and invest regs apply equally to both imported gasoline as well as in state refined crude?

Yes, thank you for those comments, Senator. Several things. First off, as you know, the cap and invest program has several design features to protect California businesses and to keep in state refining here so that we can maintain a reliable and affordable supply of transportation fuels. Happy to go deeper into that in subsequent discussion.

But on the issue of reporting and data, it is true that Mr. Botil at the Committee last week shared our accounting gives us a life cycle analysis of the emissions for in state gasoline. But we would always welcome more refined tools for that data and analysis.

One regulation that you mentioned earlier, SB253, for example, may give us better insights into out of state refining operations and, you know, arm the airboard with additional data and tools.

Moving forward, I would certainly encourage you and I believe the statute already gives you the opportunity to the discretion at CARB to take some of that data into account if you're doing that sort of metadata analysis, in other words, of what the filings are.

I think we've already had 160 or so companies file under 253 even before the regs are complete.

Folks want to want to comply, it seems like so, you know, anything that is needed to get a more granular and accurate picture of the carbon intensity of these fuels that are potentially going to come into our ports at much higher regularity in the coming years I think would be welcome.

The thing I worry about right now is that those who want to of play the gasoline import game are going to wait on us and not. There's a Bushnell study put out I think last week, week before that.

If they play the waiting game on us, in other words, don't get proactive and buy carbon allowances or don't participate in the auction and just sort of hope they can stall on us and then make it hurt really, really bad. Unless we gave way all these foreign oil companies free allowances forever.

Like I, I just, I want to get ahead of that and I think sending the clear signal here today that the rules apply equally to everybody is certainly helpful. But I would certainly encourage you yet to just to use that 253 data and also, you know, any other tools that you feel like are going to help.

It's not so much that I'm hoping you all give a sweetheart deal to our in state refiners because I actually think we need to keep aggressive and I think we need to maintain ambition. To be quite frank, it's hard for me to look at dropping it down to a 40% ambition by 2030 and be okay with that.

I was the one who wanted 55%. So I don't mean to send you the signal that we're looking for you to go slow, especially in the near term. It's just to go in a manner that's fair and that doesn't sort of burden that in state commerce or result in this kind of leakage.

So I'm hoping we can start to work on that. I will have questions in the next panel and for the commenters, those of you out from industry going to testify a little later.

I think the corollary to this is if there is a deal to be had on on in this sort of refining and gasoline imports puzzle from a regulatory perspective, industry itself is going to have to find a way to make real commitments as well.

I think that's going to be the nature ultimately of a stabilized mid transition plan is not just that they want more out of CARB. We've seen the letters from the building trades. We've seen industry complaining about how the in state refining sector is being treated.

If they are willing though to commit, and not in a press release commitment, but in a contractually enforceable way to actually operate in this state in the midterm and say take that 10 year horizon and actually commit that to us.

That's a very different conversation than we demand the airboard Give us all the allowance we could ever want, but we still withhold the right to bail on you whenever our private equity or our shareholders say take off, because that's not going to be a durable deal.

So just the broader public watching, I want them to understand that this isn't, this has got to be a two way street here if we're going to figure out a way to solve this. And it's very difficult. But the one encouraging note I would say is that the US Congress just passed themselves the Prove IT Act.

So for the first time ever, the US Congress, led by Republican Senators said that we also want to know what the carbon intensity of imported oil is. So we may actually have some alignment there. And you know, rarely do we align with Washington these days.

But I hope that if our regs start to align with what the prove it act is going to do, that we find some path to a more transparent process, especially for those who want to import oil into the state.

I had one more question about mobile sources, but I can, I can turn it back to you if you had a comment on that.

Okay. So again, just to sort of frame this part of the conversation, I think there's sort of two things that I'll start with. So one, we all recognize that we are in a transition. We are working real, real hard to build a fossil free and a clean energy economy.

But spoiler alert, we are not there in 2026 and we are not going to be there for many, many decades. And California is going to continue to consume large amounts of oil and gas even under our most ambitious scenarios.

So I guess, you know, and second, you know, I think we recognized the end of last year the importance of keeping in state refining capacity. The Legislature, the Administration worked really hard to advance a proposal to stabilize refine in state refining for all of those reasons.

So we've heard, and I'm sure you've heard from industry since these draft, this draft proposal was released that this will drive them all out of the state. Because have you heard that?

Do you believe that and do you think that would be like leaving aside what that means for California's economy, what that means for California's labor force, all the bad things that would mean. Do you think that's a good thing for the climate?

Thank you for that question, Assemblymember. And in addition to feedback that we've been getting on the utility allocation, this is a primary area of feedback that we've been hearing from stakeholders. We continue to meet with regulated entities on the proposal and how it might affect business operations here in California, and we look forward to those continued conversations.

I personally have met with a number of our refiners. We I want to acknowledge and commend the Legislature for the efforts in passing SB 237 last year to stabilize in state petroleum refining and importantly, in extending the cap and invest proposal. AB 1207 continues the statutory direction on minimizing leakage.

So it's important to note that the staff proposal maintains a status quo both in terms of industrial allocation for refiners and also in terms of pegging them at high risk for leakage.

That said, we have heard that there may be additional considerations for why the regulated entities need more support, and we look forward to continuing those conversations with them.

Can you help us understand the process that you go through to first evaluate that leakage risk, whether for refiners or other industries, and then how do you quantify that and translate that into allowances and other mechanisms that will adjust for that leakage risk?

Yes, happily. For that detailed question, I will turn to Deputy Executive Officer Sahota. Thank you.

Thank you. Assembly Member when we initially did the regulation, we had three categories of leakage, high, medium and low. And that was based on industry surveys in California and looking at market share and market presence nationally and internationally for these industries.

And so we went through a robust process that we documented in our rulemaking package back then on which sectors of the economy fit into those three categories.

What we did last October was preview some of the technical work that we're going to be sharing in the coming months that we went back and looked at the leakage risk again, looking at trends in the sectors, looking at market share, looking at impacts, broader economic policy, certainly some of the whiplash that we've been seeing at the federal level more recently, and recognizing that some of that whiplash may continue, that what we expect industry to see is a steady pattern, a steady market share may not be there.

We decided to keep all industry at high risk for leakage, which is what AB398 had directed CARB to do for 2021 through 2030.

So we are continuing status quo through the end of this decade, recognizing that we still have a few more years under some unpredictable decision making that may happen and recognizing that long term planning for these companies is not over a year or two years, but it can be over five to seven years.

And so the way that we do that is to make sure we don't reduce their allocation more than what they expected under the existing regulation so that any plans that they've had for how to comply, how to invest and how to become more efficient over this decade.

Those plans are not disrupted and that compliance doesn't become more expensive for them.

The issue becomes when things are more expensive, then it's harder for them to compete with other market share that may be taken up by companies outside of California or companies outside of the US and so there's a technical appendix and we would welcome the opportunity to do a technical session, if you so choose, with any of the Members here.

But there's a methodology by which we look at all the data that we can for each of these sectors before establishing this. But again, in the abundance of caution, we did set everyone at high risk for leakage through the end of this decade to minimize disruption for them for their financial planning.

And so you kept them at like the same level that they have been, correct?

That's right. So when you think about the allowances an industry gets, one is what risk are they at leakage? And then how does that, how do their allowances change with a declining cap? So you can imagine that the cap, the overall program declines at about 4% average each year because we're dropping 40% over this decade.

And so we kept them at that average 4% cap decline. So if you look at the existing regulation and the proposal through 2030, the numbers are unchanged. What they thought they were going to get last year for the rest of this decade is what staff is proposing that they continue to receive through 2030.

And I guess it just, it feels to me like, I mean, we've had what, two refineries announced closure just in the past year? It feels like things are getting worse. To me, it feels like the leakage risk is getting worse and that keeping them at that same level doesn't reflect the realities of where we are.

So we have heard the same input from some of the refiners in state and we have invited them to help us better understand and quantify what that leakage risk change is now for them and be able to adjust as necessary. And I think part of this is really what is that additional leakage risk that has occurred?

How does any recent legislation like 237 help or stabilize? And what other factors that are we doing that help, like transition some of these assets? You've seen some of the refineries turn to producing renewable fuels, especially if they produce sustainable aviation fuel. They're also going to produce gasoline to meet ongoing demand.

And so we're continuing those conversations to better, to better understand and to actually have some quantified information about how. How has leakage risk changed for them. In particular, how many more allowances do they believe they need and how does that help on actually stabilizing that sector?

You know, getting back to Senator Stern's point, we want to make sure that if we're going to give more allowances to the refining sector, they're going to actually be available to meet consumer demand and provide that reliable, affordable, you know, energy that we are going to consume. We want to make sure it's based in data.

Got it. And okay, so Senator Stern at 1.0 said that the rules apply equally to everyone, but that. Is that true? I mean, cap and invest doesn't apply equally to everyone. We can't apply that to foreign producers or foreign refiners. Correct.

So the point of regulation for transportation fuel, there's two points. One is the facilities in state where we give allowances to minimize for leakage for those assets in state.

And then when the fuel hits the rack, where it's subject to all sorts of other fees and assessments, all of that fuel, whether it's imported or whether it's produced in California, is treated the same when it enters the economy, that fuel is treated the same.

But I mean, they don't contribute to our cap and invest program.

They do because importers and in state suppliers of gasoline on road fuel, they have a compliance obligation just like producers of in state fuel does. And what they have to do to comply is they have to purchase allowances. And those allowances are what we sell at quarterly auctions.

And so that is at the same level as our in state. That is correct. All right. You learned something new with these, Harry. So, yeah, I think I'll just. Picking up perhaps on another threat of Senator Stearns, I'm very concerned about a strategy that doubles down on imports. I feel like that is incredibly risky.

I think it's bad for energy security, it's bad for jobs, it's bad for our economy. And I also think that's got to be bad for the planet and for our environment.

So I guess I'd love somebody to show me the math that shows that imports are actually going to be a better climate strategy than figuring out a way to support in state refining capacity.

Again, as we're in the midst of this transition, we know transitions are bumpy, and I think we got to be really mindful that we make it as smooth as we possibly can, acknowledging the challenge of what we're all trying to navigate.

So can we talk a little bit about the cap adjustment factor and that's for the hard to decarbonize sectors. Right now, it's only cement that's in there because of the chemistry. Are there other sectors that qualify for that?

The alternative cap adjustment factor, which is for sectors where their emissions are less than 50% combustion. So, let's take cement as an example.

Because it is a defined process, that product has to meet a certain chemical requirement for strength, tensile, heat tolerance, all of those factors, cement, glass, and a few of the other sectors that are more than 50% for process emissions, they all get the alternative cap adjustment factor.

If any sector meets that threshold, they automatically fall into that category. We don't hold anyone back from that category of the alternative cap adjustment factor.

The other thing that we recognize for some of these sectors is that it may be hard to come up with new chemical processes for that end product that they're producing, because that chemical characteristic has to be meet a certain strength or heat capacity or tolerance for cold temperatures.

We also included the manufacturing decarbonization incentive mechanism into this program because many of these industries were going to rely on federal incentives, federal funds to help them decarbonize. Those have now just disappeared and it's unclear if they will appear anytime soon.

And so we are looking for a way to make sure that their plans for continuing to decarbonize, at least on the combustion side, can move forward by having them invest in projects, invest in production in state that continues to reduce their emissions.

Right. And so I've heard some requests to have oil put in this carbon adjustment cap adjustment factor. It doesn't - you're saying it doesn't qualify, and what would the - but if it did, what would the cost be to the climate credit and GGRF over the years?

Proposal of the formal request: we've heard that the sector, the refining sector wants more allowances. I'm sure that, given the chance, everyone would like full compliance covered in perpetuity. But when you have a declining cap, you have a certain amount of allowances each year.

And if we're going to give more to one sector, it means we're taking from somewhere else.

And so as part of taking that data and comments that are due by March 9, we're going to take that and run a few scenarios to better understand what the implications are; whether it's to the climate credit or to GGRF or whether it's to the refining sector. Right.

Now, when you look at the staff proposal, the sector that is growing in their share of the pie is the industrial sector. And the climate credit is getting smaller. And then what's going to GGRF is getting smaller. So, we will continue that analysis.

We will wait to see what full ideas and data that we get from the sectors themselves for refining in particular.

It's really important for us to understand what their new leakage risk is based on any new data that they themselves can provide us to understand what that may mean for what more they need to keep those assets in state.

All right, so I guess, just to summarize, so everybody status quo, everybody has 100% leakage risk. The cap adjustment factor is just as it was before, but there were credits taken out of the utility, the electric sector and - but you're open to looking at making sure that we're using these credits in a way to help affordability.

Would that be kind of the? All right.

One last follow up on this point: So, this cap adjustment factor is one way to address the things that aren't dealt with, say in the leakage risk. I tend to agree with you all that it gets tricky when you're adjusting different folks caps at different rates and there's a parity issue.

And I mean why should a glass manufacturer, be it some different be adjusted differently than say oil or whomever, you know. It shouldn't just be rewarded based on the power of the industry. It should be based on data like you said.

But to Chair Petrie-Norris's point, I mean can you, can you just help us get in the weeds for one more quick second about why the gasoline imports are treated the same? The question I get is, you know, if you're a stationary source in India, you don't have, there is no allowance allocation to you. Right.

You're not subject to the cap and trade program. So, how does that assessment work at the rack and how are, how, yeah, with those kind of blind spots out there or those lack of external regulations beyond our borders? How is it a level playing field? Mind going a little deeper?

Sure. So when you, when you look at the rack, that is where all fuel, finished fuel enters into the economy.

That is where we have a good understanding of fuel that's being put into the economy from whether it's internationally provided fuel that's coming in by rail or ship or whatever, or whether it's fuel produced in state and put on the rack. At that point on the rack, all of that has to be reported to us under our mandatory reporting regulation.

And every one of those parties is identified as to who owns that fuel when it comes into the rack. So then, we calculate the volume of that fuel, the carbon associated with that fuel, and that is assessed a compliance obligation.

But the carbon intensity of that fuel being just gasoline but not the life cycle carbon intensity.

That's a very good distinction because in the cap and invest program, it is not based on life cycle, it is based on actual tailpipe and smokestack emissions in the state of California.

So, in theory, right now then all that carbon embedded in the gasoline that say has traveled here from India or from, you know, refinery in Venezuela, those emissions aren't currently accounted for at the rack?

Not in the cap and invest program, but they are picked up in the low carbon fuel standard.

Yeah. So, give us that piece then.

I know I threw out OPG earlier and that modeling that we use to assess carbon intensities beyond our borders, that has been incidentally upheld and federal court number of times and, you know, foreign importers didn't want to be subject to it but because it's sort of done across the board and in our state's police powers we weren't, you know, overturned on extraterritoriality or commerce clause grounds.

But can that LCFS backstop be enough to sort of level that playing field? Is OPG accurate enough to ensure that those emissions sort of aren't escaping our system?

So, there is a built in incentive in the low carbon fuel standard to give as detailed and disaggregated data as possible because if you believe you are more efficient than the benchmark, you will do that and you will go to all the trouble to give us that data.

And we see this because it helps to create more credits for that fuel that's brought into the economy. For fuel, where if somebody isn't doing that detailed assessment and providing that detailed data: you're absolutely correct.

We have the OPTI model which gives us estimates and average and, and that is where we are continuing to do work to improve our understanding of the intensity of the fuel, where it's produced, the energy used to produce it, and also the distance and how it's being brought into the state of California to be used in California.

And as Chair Sanchez mentioned, SB 253 gives us another opportunity to try and get that detailed information where people may not be choosing to provide it, but they are choosing to use the average values.

But let's say it doesn't come through 253 and for whatever reason we don't get that data: does the OPTI model need to be updated and do the LCFS regs need to feed that data. In other words, back into the cap and trade system? It doesn't really work that way.

It's not as if you would assign a different carbon intensity at the rack under cap and trade just because you had a higher or lower carbon intensity fuel, right?

That's correct. And I think it's because of the way that the cap and Invest program is designed, which is your actual emissions from your smokestack or your tail pipe and it aligns with how we do our inventory.

It would be hard to try and put into the cap and invest a lifecycle kind of assessment because it's hard to set a cap when you're thinking about emissions that are going back thousands of miles around the globe. How do you even set a cap: that kind of data.

So, it makes it very challenging to, to do a cap and trade program that way and mix that those two different accounting frameworks. For LCFs and the OPTI model, you know, we are continuing to have conversations and look at research to update those models as much as we can because we do believe that we should be incentivizing the least carbon intensive fuel to be coming to California.

And so that is work that continues at CARB.

And timing wise on that, I mean, we know you finished your LCFS regs last year. It's not as if there's an open rulemaking on that front. But is there still an opportunity to update OPG even without reopening the LCFS?

So the technical work on what OPG needs to represent can continue to happen right now, and once we have a sense of whether or not the changes warrant LCFS to reference an updated OPG, we could definitely initiate that rulemaking. But the technical work continues.

And you very eloquently talked about how complicated it is to understand where fuel is coming in, who's backfilling it and what's flowing to California. Those global markets are very difficult to try and track and to then quantify.

And so we are continuing to figure out, you know, who is best situated, which researchers are best situated to try and do some of this work to help us, you know, come to come to a place where we feel like we're ready to do an update to OPG.

Understood. Okay. Thank you for the indulgence, Madam Chair.

All right, well, I would like to thank both of you and we might be calling you up for more questions, but right now I'd like to just bring up the next panel. Thank you.

And I would like to welcome our panelists to the podium for an in depth discussion of the Cap-and-Trade Investment Program and CARBS proposed amendments. We have Helen Kerstein, who is the Principal Fiscal and Policy Analyst with the LAO.

We have Meredith Fowlie, the Faculty Director of the Energy Institute at Haas at UC Berkeley and the Chair of the Independent Emissions Market Advisory Committee. And we have Katelyn Roedner Sutter, California State Director for the Environmental Defense Fund and also a Member of the IEMAC.

And finally we have Natalie Seitzman, Government Affairs Manager for the Southern California Public Power Authority, also known as SCPPA. Thank you. Why don't we - let's see how we're starting. So, we will start with Helen, please.

Helen Kirstein with the Legislative Analyst Office. Good evening, Chairs and members. Thank you so much for inviting me to speak today. I'm going to be speaking from a handout. Hopefully you have copies. I have extras here.

I'm not sure if there's a sergeant who's available to help pass them out, but I do have plenty of extras for anyone in the room or for any members.

I'm going to try to move quickly because I know that the hour is late and you all are extremely familiar with the recent legislation that was passed, having authored some of it yourselves. So, really appreciate you bearing with me and I'll try to move quickly.

So, if we turn to page one of the handout, I'm going to go over what I'm going to talk about and very quickly summarize some of the high points in terms of the two pieces of legislation, AB 1207 and SB 840.

And then after I talk about some of those key features of those pieces of legislation, which basically changed some of the design features and allowance allocations, also added some reporting, evaluation and oversight requirements, and changed the distribution of greenhouse gas reduction fund revenues, then I'll close with some implications of those two pieces of legislation and try to tie it to some of the things you've heard in terms of the upcoming or the in progress regulations, I should say.

So, if you turn to page two, I'm not going to go over this. This is a very busy table and partly because there were a number of changes to the design features and allowance allocations that were made through these pieces of legislation.

But this is here for your reference. On page three, I highlight some of the kind of key ones. In terms of design features, I just wanted to highlight that one of the key things that AB 1207 did was to put offsets the cap. That was something new.

And so in under that approach, you're removing an allowance from the subsequent year's allowance budget for every offset that's used. Also, there were some key changes that were made to the utility and industry allowances, and we heard some about those in the discussion with CARB.

One of the key changes was that CARB is required to design regulations that, as you heard, by January 1, 2031, would shift those free allowances from natural gas to the electric side. That was a key piece of the legislation. And as you heard, that's going to be done over a several year time period that concludes in 2037.

There's also a change to the months in which the California Climate Credit will be provided. Then there are some changes to how industries are provided allowances. Specifically, there used to be a requirement that all industries be considered highest the highest risk for leakage, and that was replaced as of January 1, 2031.

So, if you turn to page 41 of the other changes I wanted to highlight was something I don't think we've talked too much about, but the use of the allowance value when we hit the price ceiling.

So, previously the value was used basically to purchase offsets, and now it's available for the legislature to use, for example, to provide rebates. So that was another key affordability provision that was included in that legislation.

If you turn to page five, we highlight some of the key reporting, evaluation and oversight requirements that were added as part of the legislation. Really, these are helpful to support your work as the legislature in terms of making sure you're comfortable with this program and where it's going.

That includes the creation of a new or intent, at least to create a new oversight entity included extending the work that our office does in an annual report and that the IEMAC does. And you'll hear from a couple of IEMAC representatives here today. And it also includes some new reporting work from CARB.

So, on page six, we talk a little bit about some of the modifications to the statutorily required DGRF appropriations under SB 840. I'm not going to go into those, again in the interest of time. And it's not the main focus of our discussion today. But that's also here for your reference.

So, starting on page seven, we highlight some of the key issues that we think are really before you. And I think one of the key things to note is that these pieces of legislation were very important in highlighting some of the priorities that the legislature has.

We've heard about them today, too, in terms of affordability while maintaining environmental ambition. So those were clearly two key goals that we really see throughout that legislation.

The legislation also kind of continued the prior approach of giving CARB quite a bit of discretion in terms of how to really design the specifics of the program in some pretty key ways. And we see that in the rulemaking that's before you, before the board.

And I wanted to just highlight a couple of key areas where CARB has quite a bit of discretion and that we really think are critical in terms of really affecting how this program operates, how it affects the environmental ambition, as well as affordability. So, the first is the number of allowances issued.

And that's a key decision that CARB is making a number of decisions about how many allowances to issue. That basically affects the size of that allowance pie. So, that's important in terms of looking at affordability. It's important because it affects environmental ambition. The more allowances, the less ambitious the program is, but also the fewer impacts on in terms of potentially costs on consumers.

So, that's a really key set of decisions, and CARB makes some choices there in terms of how many allowances to issue.

If you turn to page eight, I think perhaps this is perhaps the most important thing that I wanted to highlight, which is another key area where CARB has a lot of discretion and they're making a lot of choices in this rulemaking are related to how to divide up that pie of allowances.

And we heard quite a bit about that in the discussion previously, that basically once you decide how many allowances, then a key decision is who gets those allowances. And that really is the revenues from this program: which entities do you want to receive those?

The three main ones that historically have received allowances and are expected to continue to are utilities, and that typically goes to ratepayer benefit, so the climate credit we talked about. Industry to prevent and protect against leakage; we heard about both of those. And then whatever's left over goes to GGRF.

So, one of the key things to keep in mind is as you allocate more, for example, to industry, or if you were to increase the allocation to utilities, probably less is going to be available for GGRF. That may be good or bad, but there is that set pie.

And one of the key decisions that CARB has before it is how to allocate that pie. We think you'll want to make sure that you understand the implications of the decisions they're making. You'll understand how that pie is going to shift and that you are comfortable with that and if you're not, we really think this is a time for you to make your voices heard during this rulemaking and make any comments you have and suggestions or additional direction because it's much easier to change now before the regulation goes into effect.

Once it goes into effect, it'll I think be much more difficult to change that.

It'll be, you know, the train will be going. So, we think this is a key, key point. We're so glad you're having this hearing. I know it's late in the day, but really appreciate your attention to this matter because the stakes are high.

This is a critical program for the state and it allocates tens of billions of dollars over the program's lifespan. And so really it has a huge potential impact on consumers. The uses of the allowances have big impacts as well for industry, for ratepayers and for the programs that rely on GGRF. So, very important.

So, glad you're so engaged and we'll be happy to take questions at the right moment.

Can we have. Oh, Meredith. Yes, yes. I think we'll go through all four before we ask questions.

So, thanks for the opportunity to participate in this conversation and thanks for all your leadership in this important area. So I'm a UC Berkeley economist. It's my day job. I work on energy markets and climate policy and increasingly thinking about climate change adaptation. Also honored to serve as the Chair of IEMAC.

But I should be clear, I'm not speaking on behalf of IEMAC. We'll have a report out shortly that will summarize our consensus views on the topics we're discussing today.

I want to reiterate a lot of what Helen just said and just kind of put a finer point on it and underscore that this is just why we're having this hearing at such a critical time. There's big decisions being made in the coming months that will sort of lock in some important features and trade offs.

And so this is I really appreciate the opportunity to have my time to focus your attention on some key issues. And I think the point of departure for my comments is this complicating reality that the program's being designed. We're in an opportunity right now where we're rethinking the program to make sure it's fit for purpose.

But the challenge is we have like seven purposes. We want to reduce our greenhouse gas emissions. We want to think very carefully and very seriously about affordability. We're worried about leakage and adverse impacts on competitiveness of industrial operations in California.

And we want to set an example that other jurisdictions can follow, other jurisdictions interested in following us down this path of climate ambition. So, designing a cap and invest program to advance all these multiple objectives. We got one program and multiple objectives. So, they're going to be trade offs.

So, that's what we're talking about today and I just wanted to dive into some of the weeds of those trade offs. So, these are non essential slides, but Helen talked about a pie. I'm using bars: same idea. So this is just a graphic from our annual report, the IEMAC annual report last year.

Just to remind you, you know this already, but this is just showing you the height of the bars or the billions of dollars of allowance value every year over the history of the program. And the colors are just showing you how those that value has been allocated across the three key uses that Helen mentioned.

The blue is the GGRF, the shades of orange are utilities, electricity and natural gas respectively. And the purple are the industrial allocations. So, those are really what I wanted to focus on today. Say a word about utility allowance value. We've already talked in detail about this. I want to just highlight a couple more points.

So, I'm going to show one more graph. I can't - I've made this graph, so I might as well show it. This is just showing that the font is impossibly small. So, what I'm just showing you here is inflation adjusted retail energy prices: electricity, residential, commercial on top, natural gas and gasoline on the bottom. The red is California.

The blue is the national average. Showing you what you already know. California retail electricity prices are relatively high in electricity. They're rising and increasingly out of line with the rest of the country.

And research that I have done with Berkeley colleagues and others have done has established that our retail prices and product particular are significantly higher than what it actually costs to produce and consume electricity. And as we've talked about, that is a barrier to electrification. If electricity looks artificially high, households don't want to electrify.

And so what CARB is doing and what the PUC will be involved in, and this is part of the reauthorization, is we're using the climate credit. But here again we're using one instrument, climate credit, to pursue three objectives, affordability, or thinking about affordability, and reduce the impacts on consumers and commercial customers. Energy efficiency, we talked about this.

We want to lower the electricity price so that electrification looks as cost effective as it can be. And I think there's another, you know better than me, but there's another objective in play here and that's public awareness. We want households to see those revenues coming back to them.

And notice that so briefly, CARB and the CPUC are proposing some design changes here and I want to focus on the how, the what and the where. So the ISR proposes to remove this prohibition on non volumetric returns.

And so this change would allow the CPUC to consider using allowances to reduce the electricity price versus handing it back to customers in this lump sum way. And that's really important. That's like a step in the right direction because we can reduce those electricity prices that we all agree are too high.

The what: CARB is required to design these regulations to transition the natural gas allocation towards electricity. Katelyn going to talk about like how quickly we will do this.

I want to get into like I just, I want to elucidate the connections between these objectives because if we don't use this climate credit to reduce the volumetric rate, handing lump sum credits back to households is not going to help with the electrification.

It's still going to be really expensive to charge an electric car or run your heat pump, so that how and what those are really important connections to be made. And then there's the when: there's this suggestion or requirement that these climate credits get concentrated in the four high use months.

And I think that could be important for salience. I might notice that more than if it's spread out over 12 months. But if we're concentrating in the summer, heating with the heat pump in the winter is still really expensive.

So, there again I think our competing objectives, we just got to think about how to trade, how to balance them as we redesign that credit. So may seem like weedy details, but important details, important choices being made that I think will make the difference between really realizing the potential of this credit or falling short.

Okay, I know I'm almost out of time, so let me talk about industrial allocations and let's put my rainbow staircase back just to remind you. So, we've talked a lot about this already. Reauthorizing this cap and trade, cap and invest program. Really important opportunity to reevaluate how our leakage mitigation strategy is working.

And CARB is revisiting as we heard, the industrial allocation methodologies. I want to make three observations about this; there's already been really good discussion. One, this is like theory shows, like it makes perfect sense. Allocating some allowances for free to leakage to industries at leakage risk is a very sensible thing to do.

It's an effective way to mitigate leakage risk. That said, second point, this strategy comes at a cost. There's an opportunity cost. Every allowance we give to a refinery for free, we don't give to a household as a climate credit. We don't put in the GGRF. So, there's that opportunity cost.

There's also an abatement cost because handing allowances for free to the cement industry or refineries does dilute that carbon price signal. So ,we're shifting more of the abatement requirements or obligations onto entities that don't receive that free allocation. That's not to say it's bad, it's just a cost.

So, we got to balance those costs with the real benefits, the leakage mitigation benefits that free allocation can secure. And so, that leads me to my third point. So, under allocation increases the likelihood of emissions and economic leakage, we don't want that. But overallocation to industry does increase opportunity abatement costs.

And so we just need to balance those. And so, I guess my third point is this is a really good time to be recalibrating and rethinking.

If I understand what CARB is proposing, they are proposing to calibrate these parameters in a way that would increase the share of the allowance value pie that's allocated to industrial allocations versus other sources. CARB has stated in workshops that this increase is warranted.

The assertions have not yet been supported with a lot of analysis and data, although Ms. Sahota says that's coming. But I just think it's going to be really important to think carefully and, in the interest of transparency, just try and bring all the information we can to this recalibration. Final point I'm going to make: Helen already made, but you know, the GGRF is kind of a residual claimant on the allowance is not allocated to these other sources.

Senate Bill 840, change the GGRF into sort of a four tiered strategy. and in the ISOR, the CARB staff analysis projects that the GGRF revenues will never meet the minimum spending requirements anticipated for SB840.

So, there just won't be, and this is a really hard projection to make. And this is based on carbon analysis, it's been made available. But I just think this could be the right thing to do. Like maybe that long list of purposes and projects that could be covered by GGRF.

We want to allocate more to industry or we want to allocate more to the climate credit. But underscoring what Helen said so clearly, like now's the time to look at the trade offs we're making, bring as much information as we can to understand those trade offs. Really appreciate all the work you've already done to get us here.

And just the next few months there'll be some important decisions made to understand how we're trading off priorities. In closing, I just want to say briefly, members already mentioned, you know, there's the months ahead. We're locking in some important design details years ahead.

We're thinking about how carbon capture gets integrated into the program, how we link with Washington. So, a lot more important design features to be thinking.

So, I appreciated that IEMAC's mandate was also extended in the reauthorization, and IEMAC members look forward to reinventing our own process to try and understand how we can best serve this important policy initiative that California is moving forward. So, I'll stop there. Thank you for your attention.

All right, Ms. Rodner Sutter, thank you very much.

Yes, I'm Katelyn Rodner Sutter. I'm the California Senior Director for Environmental Defense Fund. Thank you for the invitation this evening. I'm also the Assembly Appointee to IEMAC. But like Meredith, I'm just speaking in my non-IEMAC capacity, in my case: EDF.

So, I wanted to just start with a couple of overarching points, and I'm going to talk briefly about allowance allocation and then finish with my favorite favorite topic of climate ambition. My first overarching point was actually about balancing affordability and ambition, and I think both Helen and Meredith covered that really well.

So, I will move to the second, which is that it is essential that these program updates are adopted this spring. You know, there's a lot of pieces moving here, but we cannot afford to have any further delay. This rulemaking has already gone on for well over two years.

When we go back to all of the informal workshops that started this, and that delay is causing a lot of uncertainty still, which makes it harder for compliance entities to plan, but also is contributing to the low auction prices and depressed GGRF revenue that we've seen. So, there is urgency to get this adopted.

You know, get the whatever the final package looks like to complete this rulemaking in the spring. I'll touch quickly on allowances to electric utilities, and Meredith already covered part of this.

But in terms of timing, as you know, AB 1207 required CARB to design the program to transition support from natural gas utilities to the electrical distribution utilities by January 1st of 2031. The proposal from CARB, though, has that transition taking place between 2029 and and 2036.

So, I think it's very reasonable to phase this transition in over multiple years. And I appreciate that the transition is complex, but this proposal is completing that transition a full five years after the date sent by the legislature.

And I think that's a real missed opportunity for addressing electricity costs, as Meredith talked about all the implications of that. I also want to talk briefly about allowances to industry. Some of this is in your background. There are four factors that go into determining industrial allocation.

The industrial assistance factor, the product benchmark cap adjustment factor, and the annual output of a facility. So, I'm going to talk about the first three quickly. Those are the ones that are set by the state. So the industrial assistance factor, this was set at 100% for every sector under AB 398.

It is important to note that does not mean they get 100% of the allowances that they need. But AB 1207 rightly directed CARB to go back and set those based on, you know, real leakage risk.

However, CARB is planning to leave that industrial assistance factor at 100% through 2035, which I have to say I find personally very frustrating. But it is an acknowledgement that industry does need assistance. I mean, they are still getting free allowances through this, this program. The product benchmark is the second piece.

And this is a measure of how efficiently a product is produced. These have not been updated since the original rulemaking back in 2011. And CARB is good, proposing to update some of those. Some of those will result in fewer free allowances to certain industries, including oil and gas, after 2031.

The third piece is the cap adjustment factor, and that's how fast the free allocation declines with the cap. And CARB is proposing to keep that the same through 2031 and decline after that.

But because the cap itself is proposed to be somewhat tighter before 2031, that means the overall percentage of allowances allocated to industry for free is actually increasing. The proposal also adds a new industrial allocation for innovative decarbonization strategies, which would make more free allowances available to producers that are, you know, using innovative technology to decarbonize their production.

There's a lot to still be determined in what that looks like. But I, you know, potentially see that as a positive step to both, you know, build out some new technology as long as we can get the rules right for building that technology and avoid unintended consequences for host communities.

But the point of all of this is saying is that there is a mix of gives to industry and takes from industry in this system of industrial allocation. And CARB is really seeking to find this balance between ambition and affordability.

So I just - as you hear that this is going to close down industries or what have you, there is a mix here of things that I wish were more on the climate ambition side and less on the free allocation side and vice versa. I think CARB is really hitting for a balance here. And then there's climate ambition.

And this talks, this gets back to Helen's point about sort of that overall pie of how many allowances before we talk about how they're allocated, just how many allowances are there in the first place? And from analysis that EDF has commissioned, we really think that CARB could afford to be moderately more ambitious in the near term.

And it is the near term that matters most for impacts to the climate. And they could do this while still preserving the cost containment of the program and maximizing net benefits for California households.

So, specifically, we have some preliminary modeling updates from Greenline Insights that finds if California were to adopt a tighter near term emissions cap by removing 180 million allowances through 2030, instead of the proposed 118, that would significantly incentivize decarbonization while still saving money for working families.

Specifically, over 860 million in net savings through 2045 for families earning $100,000 or less annually, which is more than half of California households. And importantly, that is done without hitting any of the price containment points in the program, those APCR tiers. So, we're keeping allowance prices manageable and steadily increasing, not spiking.

This would cumulatively generate about an additional 1 to $1.5 billion for the Greenhouse Gas Reduction Fund. It would also help to increase near term confidence in the market and counteract some of these very low prices we're seeing right now and the resulting anemic GGRF revenue that we're seeing in the market.

The very last thing I want to say on ambition is I want to acknowledge the legislature's direction to retire allowances equal to the offsets turned in for compliance offsets under the cap. This also provides an important increase in ambition.

Specifically, after the last compliance period, we would have had 26 million cumulative fewer allowances in circulation had this previously been in place. And I think that increase in ambition is a very important part of AB 1207. And I think the way CARB is proposing to implement it appears effective and reasonable to me.

So, I think that is looking like a good win all around. So happy to take any questions and appreciate this.

Thank you so much.

Ms. Seitzman.

Thank you. Chairs, Assembly Members, I'm Dr. Natalie Seitzman, Government Affairs Manager for SCPPA. SCPPA is a joint powers agency comprised of 12 publicly owned utilities, or POUs. POUs are distinct from investor owned utilities, as not for profit full service utilities, with governing boards that are either elected officials or appointed by elected officials.

As such, POUs are directly accountable to their local communities. SCPPA as a public agency performs joint procurement of generation and transmission projects for our members, allowing them to achieve economies of scale. So, thank you for having me here today to share my concerns with CARB's proposed changes to the cap and invest program, particularly in the near term.

Under the proposal published by CARB in January, SCPPA members, our 12 POUs, stand to lose 9 million allowances from 2027 through 2030, equating to hundreds of millions of dollars of revenues that are not collected from ratepayers.

So, before explaining precisely why this is so problematic for the maybe more general audience, let me offer some background of how POUs fit into CAP and Invest. I know you're all pros at this. So California's electric sector, as you mentioned assemblymember, is the backbone of the state's decarbonization strategy.

So, through bold legislative action with SB 100, the Renewable Portfolio Standards, utilities have been set on a direct path to decrease their greenhouse gas emissions. So, that puts us in a unique position with the market based mechanism of cap and invest.

So as CARB alluded, utilities are allocated allowances sufficient to cover the GHG emissions that are left over in their portfolios as they comply with clean energy policies, thus protecting electric ratepayers from extra costs that don't provide commensurate climate benefit. There's also a big difference between how IOUS and POUs interact with cap and investors.

IOUs distribute allowance value as climate credits. POUs have more options. So, we are authorized to do a climate credit, but they primarily invest those funds into buying renewable energy projects and funding programs to help customers decarbonize. These other options allow POUs to give their ratepayers the biggest bang for the buck.

When POUs - so because of that, when POUs think about cap and invest, long term planning is key to actually achieving those ratepayer savings. So, unlike a climate credit, which can vary in amount from year to year, infrastructure investments operate on a 5-10 year timescale.

So,, it's critical for us to know how many allowances are going to be allocated for as many years in the future as possible. In the last update that CARB did to the then cap and trade program, CARB gave utilities a ten-year projection of our allowance allocation.

But now CARB is proposing to change the utilities allowance allocation in year seven of the ten. This is the reason for our deepest concern about the proposed regulation, One of the major benefits of this ten-year projection was that it allowed utilities to rely in good faith on those allowances to accelerate their decarbonization plans.

They had confidence that by outpacing CARB's projections, their early action would free up more allowances, thus creating a revenue stream that would offset the costs of that early action.

So, for example, six of SCPPA's 12 members were participants in a coal plant in Delta, Utah called Intermountain Power Project, which was constructed in the 1980s in the wake of the oil embargo. SCPPA's members contract with IPP was set to expire in 2027.

But seeing an opportunity to decarbonize more quickly, while the cap and invest program could provide benefits to their ratepayers that would offset the extra costs, they accelerated their plans, amended the contract, and got off coal in 2025. And IPP is just one example.

Another SCPPA member has been nearly 1000 carbon for several years, making big investments early on and relying on the long term benefits of their allowance allocation. So CARB changing the allowance allocations midstream erases the benefit of that early action and is creating costs at a time when maintaining affordability is one of our greatest challenges.

So what does this mean for ratepayers in California, and specifically POU ratepayers? First and most importantly, rate increases are a real possibility. When you have additional costs, as a nonprofit utility, there are only two things you can do: raise rates or pull back on spending, including decarbonization investments.

POUs have long said that a well designed cap and invest program can be a benefit to electric ratepayers. But if CARB's proposal is finalized as currently written, we are deeply concerned that POU ratepayers will be adversely impacted as cost pressures mount on their local utilities.

So thank you very much for the opportunity to speak and I'm happy to answer any questions.

All right, do we have questions for the panelists?