What Is AB32,The Global Warming Solutions Act and What Is the Scoping Plan?

AB 32 FAQs

What is AB32, the Global Warming Solutions Act and what is the Scoping Plan? It’s a 2006 California law that requires greenhouse gases (GHGs), such as carbon dioxide, methane, and nitrous oxide, to be reduced to 1990 levels by 2020. AB 32 required the California Air Resources Board (CARB) to develop a Scoping Plan that describes how the state will reduce GHGs to 1990 levels. The Scoping Plan was first approved by the CARB in 2008 and must be updated every five years to evaluate the mix of AB 32 policies to ensure that California is on track to achieve the 2020 GHG reduction goal. Since the Scoping Plan was finalized in 2008 and again in 2011 (after court challenge), the CARB has been working to implement a comprehensive set of policies that meet the goals of the law in a cost effective manner, while also helping drive economic growth and improving the environment. As part of the scoping plan, the state’s utilities must meet 33% of their energy needs from renewable sources by 2020. Another part of the plan is a cap-and-trade system, which took effect in January, 2013. Still another important part is the Low Carbon Fuel Standard (LCFS), which aims to reduce the carbon intensity of transportation fuels.

What is cap-and-trade? It’s a system that sets a yearly maximum amount (cap) on GHG emissions for large energy users, such as electric utilities, oil refineries, and heavy manufacturers. Under a cap-and-trade system, a covered entity must hold enough emission allowances to cover their emissions. If, however, a covered entity exceeds the cap, they can buy credits from another entity that stayed under the cap, thereby helping the state meet its emission standards. For example, a utility operating a large number of coal-fired power plants might buy credits from a utility operating mostly solar or wind projects. These credits, also called “allowances,” can also be given away for free or sold in an auction by the state of California as part of the cap and trade program. Entities without enough allowances to cover their emissions face a fine. Each year, the overall cap is reduced to bring the economy closer to the target emission level. The CARB adopted the state’s cap-and-trade rule on October 20, 2011, and it implements and enforces the program. The cap-and-trade program applies to electric power plants and industrial plants that emit 25,000 metric tons of carbon dioxide equivalent (CO2e) per year or more. In 2015, the rules will also apply to fuel distributors (including distributors of heating and transportation fuels) that meet the 25,000 metric ton threshold, ultimately affecting a total of around 360 businesses throughout California.

How much money will California’s cap-and-trade auctions generate? Governor Brown’s budget for the 2013-14 fiscal year estimates revenue of approximately $400 million from the sale of carbon allowances. Utilities, which will be given their own allowances to sell, will earn between $650 million and $2.6 billion from the first year of auctions according to estimates from the California Public Utilities Commission, with 85% of this money returned to ratepayers.1

Have any other cap-and-trade programs been successfully implemented? The first ever cap-and-trade program was the Acid Rain Program implemented by the Reagan Administration in the 1980s, which limited sulfur dioxide emissions. In 2008, ten northeastern states created the U.S.’s first cap-and-trade system for greenhouse gasses, called the Regional Greenhouse Gas Initiative, or RGGI. Since then, regular greenhouse gas allowance auctions have generated close to $1 billion for the region, which has led to the creation of 16,000 new jobs in energy efficiency and renewable energy. In part as a result of this program, greenhouse gas emissions in the RGGI states have declined by 23%. California’s program is second in size only to the European Union’s Emissions Trading System based on the amount of emissions covered.

How will the cap-and-trade program affect California’s economy?

1 The dividend, estimated from $20-$40, will appear as an automatic credit on utility bills every 6 mos., starting July 2013.

1 Cap-and-trade auction proceeds, if invested wisely, can benefit large sections of the economy, while limiting negative impacts. In particular, energy efficiency expenditures multiply in value in a few ways, including:  Energy efficiency upgrades generate jobs and income. RGGI has created 16,000 new jobs .  States in RGGI have made energy efficiency retrofits that will save $1.1 billion on electric bills and $174 million on natural gas and heating bills over the next decade.  As a result of increased household energy savings and green jobs, the rest of the economy benefits from greater household expenditures.  According to the U.S. Energy Information Administration, California leads all U.S. states in electricity imports. Increased energy savings and renewable energy deployment will reduce the amount of money spent outside of California to import energy. This money will increase the multiplier effect within California.

What is the Low Carbon Fuel Standard? One of several programs under AB 32 implemented by the CARB is a low carbon fuels program intended to reduce the “carbon intensity” of transportation fuels. The Low Carbon Fuel Standard (LCFS) is a performance-based regulation adopted in California in 2009 that requires regulated parties (e.g., oil producers and importers to California) to reduce the carbon intensity (CI) of their fuel mix by at least 10% by 2020. Carbon intensity (CI) is a calculated number for specific categories of motor fuels and motor fuel substitutes (such as biofuels) that takes into account the life-cycle GHG emissions.2

How does LCFS work? Like cap-and-trade, the LCFS sets declining annual targets, starting with a 0.25% reduction in 2011, 0.5% reduction in 2012, and a 1% reduction in 2013. The speed of reduction quickens as time passes, with a 5% reduction mandated by 2017, and another 5% reduction by 2020. The regulated parties have several options to meet the standard. They can produce their own low carbon fuels, buy fuels from producers to sell on the market, purchase credits generated by others, or some combination of these strategies. Biofuels from waste and cellulosic materials, natural gas, electricity used in plug-in vehicles, and hydrogen used in fuel cell vehicles are potential low carbon fuel technologies. Petroleum and biofuels providers are the “regulated parties.”

Why is it necessary? LCFS is complementary to the cap-and-trade program. Cap-and-trade addresses the failure of the market to stop GHG pollution. However, cap-and-trade does not directly address specific sources of GHG emissions where innovation is needed, such as fuels. The carbon price signal provided by cap- and-trade is unlikely to spur large-scale investments in new fuels technology because the price signal will not be high enough and the cross-sector trading that is likely to be allowed means that most reductions under cap-and-trade will come from stationary sources in the near term. The state’s intent is to send a “price signal” to address GHG emissions from the transportation sector in order to reduce fossil fuel use; LCFS spurs research and development into a wider array of transportation fuels. This is why complementary policies like LCFS are needed.

What is the history of renewable fuels legislation? The Renewable Fuel Standard (RFS) program was created under the Energy Policy Act (EPAct) of 2005, and established the first renewable fuel volume mandate in the United States. The EPA is responsible for developing and implementing regulations to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel. Several US states are examining a comprehensive standard like the LCFS, such as Washington and Oregon. Some are hoping to create a “low-carbon fuels corridor” with harmonized policies and clear market signals that generate alternative transportation fuels. Similar legislation was also pproved in British Columbia in April 2008, and by the European Union in December 2008.

How will the LCFS program affect California’s economy?

2 Carbon intensity refers to the full lifecycle greenhouse gas emissions associated with a specific fuel “pathway,” including the production, transport, storage, dispensing, and use of the fuel.

2 Please see the accompanying brief on the LCFS for details.