Assembly Committee on Transportation

AB 768 Page 1

Date of Hearing: May 2, 2011

ASSEMBLY COMMITTEE ON TRANSPORTATION Bonnie Lowenthal, Chair AB 768 (Gatto) – As Amended: April 25, 2011

SUBJECT: California Global Warming Solutions Act of 2006: Low Carbon Fuel Standard

SUMMARY: Requires the California Air Resources Board (ARB) to allow out of state producers of "renewable natural gas" (i.e. biomethane) to generate credits for compliance with the Low Carbon Fuel Standard (LCFS), notwithstanding the ARB's adopted regulatory requirement that affected parties demonstrate a physical pathway for delivery of the fuels to California. Specifically, this bill:

1) Requires ARB to allow out of state producers of "renewable natural gas" (i.e. biomethane) to generate credits for compliance with the LCFS, notwithstanding the ARB's adopted regulatory requirement that affected parties demonstrate a physical pathway for delivery of the fuels to California.

2) Establishes that allowed credits be generated through the sale of renewable natural gas produced out of state, but distributed to consumers in the state through displacement trade contracts (i.e. gas swaps).

EXISTING LAW:

1) Pursuant to the California Global Warming Solutions Act (AB 32), Nunez, Chapter 455, Statutes of 2006, requires ARB to adopt a statewide greenhouse gas (GHG) emissions limit equivalent to 1990 levels by 2020, and to adopt rules and regulations to achieve maximum technologically feasible and cost-effective GHG emission reductions. AB 32 also required ARB to adopt early action measures (EAM) to reduce GHG emissions prior to this date.

2) Pursuant to the Governor's Executive Order S-01-07, sets a statewide goal to reduce the carbon intensity of California's transportation fuels by at least 10% by 2020. The order required ARB to consider adopting a LCFS to implement this goal, either as an EAM or in another regulatory proceeding. In 2009, ARB adopted the LCFS as a regulation. The LCFS permits producers of certain alternative fuels, including biomethane, that inherently meet the 2020 standards to opt in to LCFS regulation for the purpose of generating credits, which can be banked and used for compliance, sold to other regulated parties, and purchased and retired by regulated parties. In addition, LCFS credits can be exported to other GHG emissions reductions programs, including possibly the overall cap and trade program ARB has adopted under AB 32. Entities that opt in are subject to LCFS requirements, including the requirement to demonstrate a physical pathway for delivery of the fuels to California to ensure that low carbon fuels produced outside of California are actually the source of fuels used in the state.

3) Requires, through the LCFS regulation, the Executive Officer of ARB to complete and present to the ARB two reviews of the LCFS regulation; the first by January 1, 2012, and the second by January 1, 2015. The regulation requires the Executive Officer to establish an advisory panel for these reviews. AB 768 Page 2

FISCAL EFFECT: Unknown

COMMENTS:

Background: In 2007, Governor Schwarzenegger issued Executive Order S-1-07, calling for a reduction of at least 10% in the carbon intensity of California's transportation fuels by 2020. The Order instructed the California Environmental Protection Agency to coordinate activities between the University of California, the California Energy Commission and other state agencies to develop and propose a draft compliance schedule to meet the 2020 target.

Furthermore, the Order directed ARB to consider initiating regulatory proceedings to establish and implement the LCFS. In response, ARB identified the LCFS as an early action item and adopted a regulation in 2009, to be implemented beginning in 2010. The adopted LCFS regulation includes provisions permitting credits to be generated from certain alternative fuels and requiring that all fuels, including those used to generate credits, demonstrate a physical pathway into the state. Credits are awarded based on fuel performance that exceeds a regulatory standard. Credits can be banked indefinitely and used for compliance, sold to other regulated parties, and exported to other GHG emissions reduction programs. To ensure that low carbon fuels produced outside of California are actually the source of fuels used in the state, the LCFS requires regulated parties to demonstrate that a physical pathway exists by which the fuel is expected to arrive in California, including any combination of truck delivery routes, rail tanker lines, gas/liquid pipelines, electricity transmission lines, and any other fuel distribution routes.

The LCFS recognizes that certain alternative fuels, including biomethane, inherently meet the 2020 standards and allows them to opt in to LCFS regulation for the purpose of generating credits. The anaerobic digestion of biodegradable organic matter produces biogas, which consists of methane, carbon dioxide, and other trace amounts of gases. Depending on where it is produced, biogas can be categorized as landfill gas or digester gas. Landfill gas is produced by decomposition of organic waste in a municipal solid waste landfill. Digester gas is typically produced from livestock manure, sewage treatment, or food waste. Like natural gas from fossil sources, methane derived from these sources can be compressed or liquefied, or converted to hydrogen, and used as a transportation fuel.

The Clean Energy example: Clean Energy is a supplier of natural gas transportation fuels. According to the company's website:

Clean Energy owns and operates a landfill gas processing facility in Dallas, Texas, that produces renewable biomethane that is currently delivered into the nation’s gas pipeline network and displaces conventional natural gas. The McCommas Bluff landfill gas operation is one of the largest biomethane landfill gas operations in the United States. The landfill, owned by the City of Dallas, is not scheduled to close until 2042, and it is estimated that biogas will continue to be produced for approximately 30 years after the landfill closes... Clean Energy has the ability to transport biomethane from its McCommas Bluff operations or other biomethane production sites to its national network of CNG and LNG fueling stations for use as a vehicle fuel. Clean Energy is actively pursuing additional opportunities to develop biomethane production sites and acquire biomethane for sale as a vehicle fuel to its customers. AB 768 Page 3

Clean Energy has indicated that it is possible to demonstrate a physical pathway via pipeline from its source in Texas to California, but gas utility pipeline tariffs make proving delivery of the same gas to California uneconomic, so it can't meet all of ARB's physical pathway criteria. The use of displacement trades, swapping the gas it injects into pipelines in Texas for gas withdrawn from pipelines in California, overcomes the commercial barriers, but is not recognized in the LCFS rules as an acceptable alternative to physical delivery. An additional issue is the fact that the gas withdrawn from the pipeline is not "renewable," so it would be less valuable as a source of LCFS credits.

Clean Energy points to the Renewables Portfolio Standard for electricity, which permits limited trading of unbundled renewable energy credits (RECs) from sources located anywhere in the interconnected western transmission grid, as an example in support of this bill. In theory, the REC example is analogous, although the RPS rules limit trading of unbundled RECs and impose a stringent tracking system to assure credits originate from eligible sources and aren't counted more than once. An additional distinction is that the western electricity transmission grid is generally west of the Rockies and does not extend to Texas.

ARB regulation review: The LCFS regulatory law requires the Executive Officer of ARB to complete and present to the ARB two reviews of the LCFS regulation; the first by January 1, 2012, and the second by January 1, 2015. The regulation also requires the Executive Officer to establish an advisory panel for these public reviews. The reviews will address a broad range of implementation topics and may include recommended amendments to the LCFS regulation. A final staff report is expected to be completed by the end of 2011. Accordingly, one can question why this legislation is necessary and should precede the advisory panel reviews that are currently underway.

Double referral: This bill is double-referred and passed out of the Assembly Committee on Natural Resources on April 11, 2011.

REGISTERED SUPPORT / OPPOSITION:

Support

Cambrian Energy Clean Energy Coalition for Clean Air

Opposition

None on file

Analysis Prepared by: Ed Imai / TRANS. / (916) 319-2093