For energy industry observers, the 2017 California state legislative session produced a few significant bills (concerning extension of the cap and trade program and regulation of criteria air pollutants and toxic air contaminants) along with a host of more minor bills. Two of the most closely watched legislative initiatives of the year—SB 100, which would have significantly increased California's Renewable Portfolio Standard (RPS) from 50% to 100%, and AB 817, which would have further facilitated expansion and regionalization of the California electric grid with neighboring states—ultimately failed to pass at the end of session, although it is expected the 100% RPS bill will resurface in some form in the 2018 session.
While protecting the environment, the legislature also sought environmental justice. A number of bills that passed include provisions related to "disadvantaged communities" and provide for regulatory action and targeted funding to reduce localized pollution: AB 398, (prioritizing offset projects benefiting disadvantaged communities), AB 617 (prioritizing monitoring and assessment of pollutants in disadvantaged communities), AB 523 (funding for energy technology demonstration projects in disadvantaged communities), and SB 338 (prioritizing reduction of pollutants in disadvantaged communities in utility Integrated Resource Plans). In addition, the 2017 legislation, as in past years, facilitated development and deployment of distributed energy resources, including rooftop solar, electric vehicles, and battery storage. There were also a number of bills related to consumer protection for rooftop solar, PACE financing, and retail utility service disconnection.
Most of the newly enacted laws will require implementation by state agencies, including the California Public Utilities Commission (CPUC), the California Air Resources Board (CARB) and regional air districts, the California Energy Commission, and municipal authorities, over the coming year. Affected companies and other interested stakeholders should monitor relevant regulatory proceedings.
For your reference, the energy-related bills enacted in 2017 are summarized below.
CAP AND TRADE
Governor Schwarzenegger signed the California Global Warming Solutions Act of 2006 (AB 32), which introduced "cap and trade," market-based regulations designed to reduce greenhouse gas (GHG) from multiple sources by placing a firm limit on GHGs. A decade later, the California legislature revisited the program, extending it and reforming it, in line with Governor Brown's proactive climate policies. With bipartisan support, the new cap and trade legislation solidifies the state's battle against global warming.
AB 398 (GARCIA) – CAP AND TRADE EXTENSION AND REFORM
Amends, repeals, and adds select provisions at §§ 38501 et seq. of the Health and Safety Code. Adds § 4213.05 to, adds Article 3 (commencing with § 4229) to Chapter 1.5 of Part 2 of Division 4 of, and repeals Chapter 1.5 (commencing with § 4210) of Part 2 of Division 4 of the Public Resources Code, and amends § 6377.1 of the Revenue and Taxation Code.
Extension. With AB 398, California extended its greenhouse gas cap and trade program through 2030; under AB 32 the program was scheduled to sunset in 2020. The bill also requires CARB to undertake specified carbon market reforms, including:
Allowance Price Cap. CARB must establish and implement a price cap on auctioned allowances. CARB retains broad discretion in setting the specific level of the price ceiling but must consider several factors, including "the need to avoid adverse impacts on residential households, businesses, and the state's economy." The mechanics of the price ceiling work as follows: (1) CARB must sell any allowances remaining in CARB's allowance price containment reserve as of Dec. 31, 2020 at the newly established price ceiling; and (2) issue new allowances at the price ceiling, and direct the proceeds from the sale of such allowances to projects designed to reduce GHGs, if allowances allocated for sale at the price ceiling are exhausted. Depending on how CARB implements the price cap, it could represent a significant change to the program and provide greater certainty regarding the maximum cost of compliance. Allowance costs, however, have not been a significant issue in the program to date and have generally remained closer to the price floor.
Additional Cost Containment. CARB must implement two interim "price containment points" below the price ceiling, at which CARB must offer non-tradable allowances at a specified price. This is similar to the existing price containment reserve.
Continues Free Allocations of Allowances. Under the current program, certain categories of covered entities are allocated free allowances that they can either use to satisfy their own compliance obligation, or, sell on the secondary market. Under the current program, free allocations were to phase out over time. AB 398 requires that CARB extend allocation of free allowances at the same levels applicable to the 2015-2017 compliance period. This provision was highly controversial with environmental groups insofar as it reduces the need to purchase allowances at auction and undermines the incentive to invest in actual GHG reductions.
Addresses Over-Allocations of Allowances. The bill directs CARB to evaluate and address concerns related to the over-allocation of allowances, which depresses prices of allowances and reduces the incentive to invest in GHG reduction. CARB must transfer allowances that remain unsold after 24 months to the allowance price containment reserve, which may reduce the amount of allowances available.
Addresses Speculation and Volatility. CARB is required to establish allowance banking rules to discourage speculation, avoid financial windfalls, and consider the impact on complying entities and volatility in the market.
Limits Use of GHG Offsets. Currently, the program allows covered entities to use GHG offsets to cover up to 8% of their compliance obligations. Historically, environmental justice advocates have opposed the use of offsets, which they claim enable higher levels of emissions from industrial facilities, such as refineries and power plants, which are more commonly located in or close to disadvantaged communities.
Under AB 398, from 2021 through 2025, covered entities may only use offsets for up to 4% of their compliance obligation; from 2026 through 2030, covered entities may use offsets to cover 8% of their compliance obligation. Additionally, beginning in 2021, AB 398 requires that half of the offsets used by covered entities are generated by projects that provide "direct environmental benefits" to the state. Finally, AB 398 calls for the creation of a new Compliance Offsets Protocol Task Force, which is responsible for increasing the development of in-state offset projects.
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