Implementation of AB 32—Global Warming Solutions Act of 2006

POLICY BRIEF Implementation of AB 32—Global Warming Solutions Act of 2006 MAC TAylor • l e g i s l A T i v e A n A l y s T • April 14, 2010 Summary and Background lating the state’s sources of GHGs and identified a timeline by which ARB is to complete specified Summary of Analysis. The budget proposes implementation actions. Specifically, among vari- $39 million across twelve state agencies to ous other requirements, it directed ARB to: continue implementation of the Global Warm- ing Solutions Act of 2006, Chapter 488, Statutes ➢ Adopt regulations by January 1, 2008, of 2006 (AB 32, Núñez), which seeks to reduce to require reporting and verification of California’s greenhouse gas (GHG) emissions. In statewide GHG emissions. the following analysis, we provide an update on ➢ Develop a plan by January 1, 2009, en- the implementation of this legislation, commonly compassing a set of measures that taken referred to as “AB 32.” We discuss how AB 32 together would be a means by which implementation has been funded to date and the state could achieve its 2020 GHG provide details of the new AB 32 administrative reduction target. This plan is commonly fee included in the budget to provide the bulk of referred to as the AB 32 Scoping Plan. the program’s funding beginning in the budget year. We follow with an accounting of how the ➢ Adopt regulations by, and enforceable no Air Resources Board (ARB) proposes to spend its later than, January 1, 2010, to implement $33 million budget to implement AB 32. Finally, “early action measures” to reduce GHG we comment on the merits of the administration’s emissions. budget proposal and offer some recommenda- tions intended to ensure that (1) sufficient resourc- ➢ Adopt additional regulations by January 1, es are devoted to economic analysis of AB 32 2011, to be enforceable January 1, 2012, measures and (2) future AB 32 expenditures and to achieve the GHG emissions reductions fees are justified and set at appropriate levels. goals established by AB 32. These ad- Goals and Requirements of AB 32. Assem- ditional regulations may include those for bly Bill 32 established the goal of reducing GHG “market-based” compliance mechanisms, emissions statewide to 1990 levels by 2020. The as defined in AB 32. act charged the ARB with monitoring and regu- An lAo reporT Progress of AB 32 Implementation compliance with the due date specified in AB 32. To Date These regulations are currently being reviewed by the Office of Administrative Law. Emission Reporting Regulations Adopted Other Regulations Adopted or Under De- on Time. The ARB adopted regulations relating velopment. In addition to developing regulations to the reporting and verification of statewide for the early action measures and market-based GHG emissions in December 2007. This entails compliance mechanisms (discussed below), the requirements that certain emitters defined in ARB has adopted or is developing regulations for the regulations report each year to the ARB on other measures included in the AB 32 Scoping their level of GHG emissions. This information Plan. For example, regulations have been adopt- is aggregated in a statewide emissions inven- ed to reduce GHG emissions from (1) light-duty tory, which will be used in the future to measure vehicles (commonly referred to as the “Pavley progress in meeting the goals of the law and to regulations”) and (2) trucks used to haul goods at verify that emitters are in compliance with the ports. Regulations currently under development various AB 32 measures that apply to them. would implement a renewable energy standard Scoping Plan Developed on Time. In De- and reduce GHG emissions from (1) natural gas cember 2008, ARB adopted the AB 32 Scop- transmission and distribution systems and ing Plan which contains a list of 72 proposed (2) refrigerant systems. measures and regulations intended to meet the In a recent previous budget analysis, The state’s 2020 GHG emission reduction target. The 2010‑11 Budget: Resources and Environmental scoping plan documentation included an analysis Protection, we raised concerns about ARB’s of the economic impacts of the plan. The ARB regulatory efforts to develop a renewable energy released an update of this economic analysis in standard. We recommended that ARB immedi- late March of this year, attempting to respond ately cease spending funds for the purpose of to critiques of its initial economic analysis that developing a new renewable energy standard found it deficient on a number of fronts. or similar requirement absent the enactment of Regulations for Nine Early Action Measures legislation that authorizes such activities. Adopted; Three Not Yet in Effect. As required Cap-and-Trade Rulemaking Under Develop- by AB 32, ARB identified a number of mea- ment. The ARB’s Scoping Plan proposes the es- sures for which “early action” would be taken tablishment of a cap-and-trade mechanism to ad- to reduce GHG emissions. Assembly Bill AB 32 dress the state’s GHG emission reduction goals. required that all of these early action regulations Cap-and-trade is a market mechanism whereby be put in place by January 2010. The board has an emissions cap is placed by the government adopted regulations for the nine early action on a defined set of emitters—in this case, enti- measures that it identified, the most prominent of ties emitting GHGs—that is decreased over time. which is the Low Carbon Fuel Standard, which Under one approach, emitters could be allocated requires that the carbon intensity of transporta- allowances equal to their current emissions out- tion fuels used in California be reduced over put, with the allowances reduced over time. Al- time. However, three of the nine sets of regula- ternatively, the right to emit a certain number of tions are not yet in effect, and thus are not in 2 Legislative Analyst’s Office www.lao.ca.gov An lAo reporT units of GHG emissions could be auctioned off enues from a new AB 32 administrative fee (not to any willing purchaser. (A mix of these two al- yet established at the time the loans were made). location strategies is also possible.) However they We discuss this new fee in further detail below. are allocated, an emitter that had excess emis- New Fee Will Now Be Primary Funding sion allowances (for example, because it was Source for AB 32 Implementation. Assembly Bill effective in reducing its GHG emissions) could 32 authorized ARB to assess a fee on GHG emit- sell them to other emitters still needing them to ters that are subject to state regulation to pay the comply with the regulation. In theory, as the cap state’s administrative costs for implementing the decreased over time, emitters would have an statute. The ARB has adopted such a fee, which incentive to either implement cost-effective tech- will go into effect beginning in the budget year. nological improvements to decrease their level The fee will be assessed on natural gas utilities, of emissions or purchase emissions credits from users, and pipeline owners and operators that others who could accomplish such reductions in distribute or use natural gas in California; pro- a cost-effective manner. ducers and importers of gasoline and diesel fuels; The ARB released a preliminary draft of its refineries; cement manufacturers; retail providers cap-and-trade regulation in November 2009. and marketers of imported electricity; and facili- A revised draft of the cap-and-trade regulation ties that burn coal. is expected to be released in late Spring of this For each of the first four years, the overall year. The ARB has indicated that it plans to con- level of fee collections will be based on a calcu- duct a hearing on the proposed regulation at an lation of (1) the total amount of funds needed to October 2010 board meeting and to adopt the implement AB 32-related programs in that year regulation by the end of the calendar year, with and (2) the amount required annually to repay an effective date of January 2012. the special fund loans that supported the pro- gram in its early years. (Under the ARB’s plan Funding for AB 32 Implementation to repay the loan over four years, it will need Majority of AB 32 Implementation Has to collect an additional $27 million annually for Been Funded Through Special Fund Borrowing. the first three years and $9 million in the fourth From 2007-08 through 2009-10, AB 32 imple- year.) Beginning in year five, the fee will be mentation has been funded primarily from spe- based primarily on the revenue needed to pay cial funds and bond funds. Over this period, total for the program’s annual budget. The fee that is funding has ranged from a low of $30 million in charged to any individual emitter will be based 2007-08 to a high of $48 million in 2009-10. The on the entity’s overall emissions and the carbon largest funding source by far has been the Air intensity of the fuel source associated with those Pollution Control Fund, supported by $84 mil- emissions. Invoices are to be sent to affected lion in various loans over a three-year period entities 30 days after the state budget is enacted. from the Beverage Container Recycling Fund and The revenues collected will be deposited into the the Motor Vehicle Account. Statute requires that Air Pollution Control Fund, and will be available these loans be repaid, with interest, from rev- upon appropriation by the Legislature. www.lao.ca.gov Legislative Analyst’s Office 3 An lAo reporT Governor’s Budget Proposal tion can be broken down into the following five activity areas: Governor Proposes $39 Million to Imple- ment AB 32 in 2010-11. The Governor’s budget ➢ Development and Implementation of includes $39 million allocated to twelve depart- GHG Emission Reduction Measures in ments for the purposes of implementing Scoping Plan—$23 Million; 99 Person- AB 32-related activities. The figure below sum- nel Years. The Scoping Plan’s GHG marizes, on a department-by-department basis emission reduction approach includes (1) base budget expenditures, and proposed new developing regulations, incentive pro- expenditures; and (2) the current number of base grams, voluntary actions, and public budget positions and proposed new positions. outreach programs. Figure 2 summarizes Largest Percentage of Funding Goes to ARB’s allocation of 99 personnel years in ARB’s AB 32 Programmatic Activities. As shown the budget year among various activities in Figure 1, while multiple departments have related to the development and imple- workload associated with AB 32 implementa- mentation of Scoping Plan measures. For tion, the bulk of this work is being conducted by the 13 of the 27 regulations described in ARB. The ARB has requested budget approval the Scoping Plan that have already been for 155 personnel-years and $33 million for the adopted, ARB’s role will shift to imple- continued implementation of the Scoping Plan. mentation and enforcement of these The ARB’s budget request for AB 32 implementa- regulations. The ARB will continue work- Figure 1 AB 32-Related Activities in the 2010‑11 Governor’s Budget (Dollars in Thousands) 2010-11 New Funding Totals in 2010‑11 Base Funding Proposed in 2010-11 Governor’s Budget Budget Item Department Amount Positions Amount Positions Amount Positions 0555 Secretary for Environmental Protection $1,821 6.0 — — $1,821 6.0 1760 Department of General Services 416 5.0 — — 416 5.0 2240 Department of Housing and Community — — $54 0.5 54 0.5 Development 3360 California Energy Commission 590 5.0 — — 590 5.0 3500 Department of Resources Recycling — — 501 6.0 501 6.0 and Recoverya 3540 Department of Forestry and Fire Protection — — 1,255 — 1,255 — 3760 State Coastal Conservancy — — 120 0.8 120 0.8 3860 Department of Water Resources 236 1.0 326 2.0 562 3.0 3900 Air Resources Board 32,932 155.0 — — 32,932 155.0 3940 State Water Resources Control Board — — 535 2.0 535 2.0 4265 Department of Public Health — — 299 — 299 — 8570 Department of Food and Agriculture — — 309 1.0 309 1.0 Totals $35,995 172.0 $3,399 12.3 $39,394 184.3 a Formerly the Integrated Waste Management Board. Note that 6 positions and $501,000 shown for the 2010-11 fiscal year is the result of redirection that was originally approved for the 2009-10 fiscal year. 4 Legislative Analyst’s Office www.lao.ca.gov An lAo reporT ing on the development of the balance of to comply with AB 32’s requirements for the regulations in the budget year. verification and enforcement of emission reductions. ➢ GHG Emission Inventory and Report- ing—$3.8 Million; 19 Personnel Years. ➢ Applied Studies and Scientific Analy- For the budget year, ARB plans to con- sis—$3.5 Million; Ten Personnel Years. tinue to update and maintain the Califor- For the budget year, ARB staff will nia statewide GHG emission inventory, continue to evaluate the technological including an update of GHG emissions feasibility and cost-effectiveness of GHG for the 2007 and 2008 calendar years. It emission reduction measures, and ARB will also continue to support the manda- will continue to fund contracted research tory reporting of GHG emissions data to that supports AB 32 implementation and the state, including ensuring third-party the state’s long-term goal of 80 percent verification of emissions data reports. In GHG reduction by 2050. addition, it will begin development of ➢ AB 32 Program Planning—$1.8 Million; compliance-based GHG emissions ac- 12 Personnel Years. For the budget year, counting protocols, which are necessary ARB plans to continue to track and coor- Figure 2 Development and Implementation of Scoping Plan Measures ARB Positions Fuel, Electricity, and Industrial Sectors 61 Major Activity: • Develop and implement the renewable electricity standard • Implementation of Low Carbon Fuel Standard Other Activities: • Develop and implement regulation to reduce sulfur hexaflouride emissions from gas-insulated electricity transmission and distribution equipment • Develop and implement energy efficiency audits for large industrial sources • Develop and implement mandatory commercial recycling • Develop and implement regulation to reduce greenhouse gases from natural gas transmission and distribution • Develop and implement regulation to reduce greenhouse gases from oil and gas production, processing and storage Mobile Sources 13 Major Activity: • Develop and implement new greenhouse gas emission standards for passenger cars and light trucks • Develop and implement amendments to the zero-emission vehicle regulation • Develop and implement regional greenhouse gas targets pursuant to Chapter 728, Statutes of 2008 (SB 375, Steinberg) Cross-Cutting 25 Major Activity: • Develop and implement the cap-and-trade regulation for greenhouse gases Other Activity: • Implement fee regulation Total 99 www.lao.ca.gov Legislative Analyst’s Office 5 An lAo reporT dinate the development and implementa- the Low Carbon Fuel Standard and the proposed tion of the 72 measures in the Scoping cap-and-trade regulation can be particularly com- Plan among multiple state, federal, and plex and break new regulatory ground, thereby local agencies. This effort is intended to making the required economic analysis chal- maintain consistency with the require- lenging and labor-intensive. Our office and peer ments of AB 32’s regulatory mandates. reviewers have raised concerns about the timeli- Planned activities include coordinating ness and the comprehensiveness of the ARB’s the state’s several energy entities to meet economic analysis work connected with AB 32. A GHG goals; working with the local air committee established to advise ARB on its analy- districts on new federally mandated GHG sis of the economic impacts of the AB 32 Scoping permitting programs; coordinating with Plan voiced concern that insufficient ARB staff the U.S. Environmental Protection Agency members and resources were available to analyze on its mobile and stationary-source GHG the potential economic impacts of AB 32. programs; participating in the Western Given these concerns, we recommend Climate Initiative activities; and providing that the Legislature evaluate at budget hearings policy support to technical staff working whether sufficient resources are being devoted on GHG reduction regulations. by ARB to AB 32-related economic analysis work. To assist the Legislature in this evaluation, ➢ Support and Administration—$1.6 Mil- we recommend that ARB be directed to present lion; 15 Personnel Years. For the budget at budget hearings (1) its projected AB 32-related year, these staff provide legal, legislative, economic analysis workload for the budget year, information technology, and personnel- in terms of required hours of staff time or con- related support. tract resources, (2) the current level of staffing and other resources devoted to AB 32-related Evaluating the Budget for economic analysis, (3) the level of staffing and AB 32 Implementation other resources it deems necessary to adequately We do not have significant concerns with the address the projected workload, and (4) a plan to overall level of AB 32-related expenditures pro- redirect resources from lower-priority activities to posed for the budget year. The department has the extent that an unmet funding requirement for generally provided sufficient workload justifica- economic analysis is identified. tion for its requests. However, we are concerned Ensuring That Future AB 32 Expenditures that the board’s budget may not provide suffi- and Fee Levels Are Justified. The implementa- cient funding for the board’s economic analysis tion of AB 32 will soon be at a major crossroads. workload. We also are concerned that upcoming Already in the fourth year of implementation, shifts in the nature of the AB 32 workload as a the program’s initial stage of planning, regulation whole warrant careful budgetary planning. We development, and regulation adoption is nearing discuss these two matters in more detail below. completion. (Regulations must generally be ad- Is Economic Analysis Underbudgeted? Cur- opted by January 1, 2011.) The focus of the pro- rent law prescribes multiple requirements for gram will soon naturally shift from regulatory de- economic analyses as part of the regulatory adop- velopment to implementation and enforcement. tion process. Such AB 32-related regulations as As such, the “base budget” funding requirements 6 Legislative Analyst’s Office www.lao.ca.gov An lAo reporT for the program in future budget years could be Therefore, we recommend that the Legisla- substantially different than the program’s current ture direct ARB to submit, as part of the 2011‑12 funding requirements. Governor’s Budget, a zero-based budget and We believe that, beginning with the workload analysis for AB 32 program imple- 2011-12 budget, the Legislature should step back mentation across all state agencies in 2011-12. and reevaluate the base funding requirements of The administration should be directed to justify AB 32 program implementation. In other words, all expenditures proposed to support AB 32 the whole budget for AB 32 program implemen- implementation. This would enable the Legisla- tation going forward after the budget year should ture to better understand the overall size of the be justified. This exercise will also be important program and how funds are being allocated and from the perspective of ensuring that AB 32 ad- prioritized for particular programs and functions, ministrative fees are set at an appropriate level to as well as how the proposed expenditures will offset the costs of implementing the program. further the goals and objectives of AB 32. www.lao.ca.gov Legislative Analyst’s Office 7 An lAo reporT LAO Publications This report was prepared by Tiffany roberts, and reviewed by Mark newton. The legislative Analyst’s office (lAo) is a nonpartisan office which provides fiscal and policy information and advice to the legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the lAo’s internet site at www.lao.ca.gov. The lAo is located at 925 l street, suite 1000, sacramento, CA 95814. 8 Legislative Analyst’s Office www.lao.ca.gov