In the 2006 legislative session, the California Legislature passed AB 32, a landmark global warming bill, which applies ubiquitously and will impact every Californian and every company doing business in this state. AB 32 not only sets emissions caps, but also will roll back certain emissions to 1990 levels by 2020. The reduction will be effected through an enforceable statewide cap on so-called greenhouse gas emissions that will be phased in starting in 2012. Governor Schwarzenegger signed the bill in an elaborate ceremony with British Prime Minister Tony Blair on September 27th signaling his strong commitment to this cause. But, SB 32 was not the only climate control bill. Three additional bills, SB 1368 (Global Warming Emissions Standards for Electricity Generation), SB 107 (Accelerated Renewable Energy Standards), and SB 1505 (Green Standards for Hydrogen Fuel Production) also became law.
This "introductory" alert summarizes each of California’s four new Global Warming laws, and is intended to provide background of interest to our clients who supply utility services in California. Nossaman expects AB 32 to become a broad catalyst for regulation. In addition, SB 1368, SB 107, and SB 1505 are intended to set standards that the California Energy Commission (CEC) and the Public Utilities Commission (PUC) will use to begin ratcheting down emissions from energy and fuel production activities. Significantly, these laws, especially SB 1368, will impact business activity not just in California, but throughout the country.
Background. The average temperature of the earth has warmed by about 1ºF over the past 100 years. This "global warming" is expected to change the climate, including changes in rainfall patterns, a rise in sea level, and impacts on plants and wildlife. Although the principal reason for global warming may be natural temperature fluctuation, which has occurred periodically over the earth’s 4.5 billion year history, many of the world’s leading climatologists and most environmental activists believe that human activity is a significant contributing factor to the current temperature rise, because of the "greenhouse effect."
The "greenhouse effect" occurs as certain carbon-based gases accumulate in the upper atmosphere, allowing incoming solar radiation to pass through the Earth's atmosphere but preventing most of the outgoing infrared radiation from the surface and lower atmosphere from escaping into outer space. The greenhouse effect is necessary for life as we know it, and over recorded history has kept the earth’s temperature at an average of 60º F. Greenhouse gases (GHG) are produced naturally, but increasing human activity has become a significant source of these gases, which include water vapor, carbon dioxide (CO2), methane (CH4), nitrous oxide (N20), halogenated fluorocarbons (HCFCs), ozone (O3), perfluorinated carbons (PFCs), and hydrofluorocarbons (HFCs).
AB 32 Summary. This statute creates a framework to: 1) establish mandatory annual reporting of GHG emissions; 2) set emissions limits to cut the state’s GHG emissions to 1990 levels by 2020; and 3) require the California Air Resources Board (ARB) to set annual emissions limits, or "caps," expressed in tons of CO2 equivalence, with each of the six greenhouse gases assigned an equivalence factor.1 The statute requires ARB to adopt and implement regulations, which fall into three general categories: 1) emissions reporting and monitoring; 2) emissions limits ("caps"); and 3) a comprehensive program of market-based compliance mechanisms. In addition, AB 32 requires ARB to monitor compliance with its implementing regulations and authorizes ARB to impose fees on the regulated community. Because many, if not most, of the initial GHG reductions will be achieved through controls applied to energy generation and fuel production activities, the standards and regulations adopted by the CEC and the PUC will figure prominently in the framework that ARB must develop to implement AB 32.
AB 32 Emissions Monitoring and Reporting. The Act regulates the same GHG’s that are the subject of the Kyoto Convention, CO2, CH4, N20, HCFCs, PFCs, and HFCs. ARB is required to identify significant sources or categories of sources of each GHG, and to establish protocols and procedures for monitoring, quantifying, and reporting the emissions by January 1, 2008.
AB 32 Emissions Limits. By January 1, 2008, ARB must calculate what California’s GHG emission level was in 1990, and establish this level as the statewide limit to be achieved by 2020. ARB must also quantify GHG emissions from individual sources. By June 30, 2007, ARB must adopt a list of "early action" GHG emission reduction measures that may be implemented within the next three years. ARB must formally adopt the "early action measures" as regulations by January 1, 2010, and the regulations will be enforceable as of that date.
State Plan. Once the early action measures are adopted, ARB must develop a comprehensive state plan of compliance mechanisms, considering the economic and non-economic costs and benefits of the proposed programs. The plan will be completed in two phases: a "scoping plan" that establishes the general regulatory framework, and "emissions reduction regulations" for specific sources and categories of emissions.
By January 1, 2009, ARB must issue a "scoping plan" to achieve the "maximum technologically feasible" and "cost-effective" emission reductions from specific sources or categories of sources by 2020. The Act describes numerous other factors that must be considered in the development of the plan, including national and international practices for greenhouse gas emissions reduction, effectiveness of voluntary reduction practices, relative emission contributions of various sources, and potential effects on small businesses. To develop the plan, ARB must consult with other agencies having authority over GHG emissions, including the PUC and the CEC, as well as conduct public workshops. In addition, ARB must establish an Environmental Justice Advisory Committee and an Economic and Technology Advancement Advisory Committee. The Environmental Justice Advisory Committee’s function is to ensure that no one geographic area or population segment disproportionately bears the burdens or reaps the benefits of the Act. The Economic and Technology Advancement Committee’s charter is to identify investment and funding opportunities for research and development of technologies that will help reduce GHGs.
After the scoping plan is issued and no later than January 1, 2011, ARB must promulgate formal emission reduction regulations to implement each of the measures identified. One year later, on January 1, 2012, the regulations go into effect. Like the Scoping Plan, the Emission Reduction Regulations must also identify and consider the potential impacts on public health, small business, and California’s economy.
Significantly, the Act permits the Emission Reduction Regulations to include market-based declining annual aggregate emissions limits beginning in 2012. This type of program is commonly referred to as a "cap-and-trade" program, because entities that reduce emissions below the cap may generate credits, which they may sell to other entities that are unable to cost-effectively reduce their emissions to the legal limits. Any market-based program must be designed not to increase emissions of criteria air pollutants and must consider localized and cumulative emissions impacts.
In response to industry’s concern about the inflexibility of the reduction to 1990 levels, the bill includes an economic "safety valve," which allows the Governor to suspend the emission reduction measures for one year in the event of "extraordinary circumstances, catastrophic events or the threat of extreme economic disruption." The bill also explicitly states that the PUC’s authority is not affected by the Act.
SB 1368 Summary. Entitled "Greenhouse Gas Emissions Performance Standard for Major Power Plant Investment," SB 1368 requires the CEC and the PUC to adopt regulations to prohibit new capital investments in power plants serving the public unless their GHG emissions are as low as or lower than GHG emissions from new natural gas power plants. This GHG performance standard will apply to all in-state and out-of-state generators, whether fueled by coal or other fuels. This bill will make it more difficult to upgrade or develop coal-powered and other fossil fueled power plants throughout most of the West.
SB 107 Summary. SB 107, "California Renewable Electricity Standard," expands California’s existing Renewable Electricity Standard (RES) to require that regulated electric utilities increase their use of wind, solar, and other renewable electricity sources to achieve a goal of 20% renewable energy source by 2010. The bill also requires that electricity delivered into the state meet this goal, thereby offsetting the existing in-state fossil fuel generation. All investor-owned and municipal utilities must address carbon emissions in their long-term procurement plans. For the first time, municipal utilities must report progress toward meeting this goal. This law is considered an initial step to pave the way for the use of tradable renewable energy credits to achieve compliance.
SB 1505 Summary. This statute sets complete life-cycle emissions standards for hydrogen used for transportation in the state in order to ensure emissions are reduced. The new law also requires a certain percentage of this hydrogen be produced from renewable sources. SB 1505 requires that the GHG emissions of hydrogen vehicular fuel be reduced by 30% on a per-mile basis when compared to the average gasoline vehicle. Source-to-tank emissions of nitrogen oxides (N20) and reactive organic gases (ROG) must also be reduced by 50% compared to gasoline baseline, and the emissions of toxics must also be reduced to the maximum extent feasible. The statute also would require that 33.3% percent of the transportation hydrogen be produced from eligible renewable sources.
Steps our clients should take now. Clearly, the next few years will bring significant new regulations restricting the types of energy we use, and the way much business is conducted. Nossaman recommends that everyone plan for the coming sea change, whether they will be directly regulated under the new legislation or impacted indirectly. The following is a short list of items that our energy and utilities clients may wish to consider.
1) Identify specific areas that will be regulated under these new laws and determine how these new regulations will impact your operations.
2) Create a baseline of your GHG emissions. If possible, establish your historical GHG emissions in 1990.
3) Develop and implement a "Carbon Footprint Strategic Plan" (Document carefully all projects that generate "GHG" reductions.)
4) Participate in rulemakings before the PUC, ARB, and other state and local regulatory entities.
More information? Nossaman has prepared an AB 32 timeline and a brief summary of the status of the AB 32 rulemaking currently pending before the California ARB. For our energy and utilities clients, the Nossaman Global Warming Team is preparing an e-alert focusing on the PUC’s progress in implementing SB 1368. We will be pleased to provide it to you upon request. Please let us know if you would like others in your organization to be included on our Global Warming – Energy and Utilities distribution list, by clicking here.
[1] The Act defines "greenhouse gases" as carbon dioxide (CO2), methane (CH4), nitrous oxide (N20), hydrofluorocarbons (HCFC), perfluorocarbons (PFC), and sulfur hexafluoride (HFC).