July 27, 2017

Governor Brown signed the cap and trade extension bill (AB 398, E. Garcia) and an air quality companion bill (AB 617, C. Garcia) this week, marking an end to the political debate of extending California’s cap and trade program beyond 2020, and requiring a two-thirds vote of the Legislature.

In the end, the vote garnered bipartisan support in the Legislature and included several new provisions. These include the repeal of the State Responsibility Area (SRA) fee that was enacted in 2010, and the extension and expansion of the state sales and use tax (SUT) exemption available to qualified manufacturers and specified research and development firms for an additional eight years, until July 1, 2030. A plan to spend this year’s cap and trade revenues was not included as part of the deal and will most likely be taken up at the end of the legislative session.

Cap and Trade Extension – AB 398 (Chapters 135 of 2017, E. Garcia)

AB 32, the Global Warming Solutions Act of 2006, allowed the state to use a “market mechanism” to help California meet its overall GHG emissions reductions target by 2020. Beginning on January 1, 2013, the cap and trade regulation set a firm, declining cap on total greenhouse gas (GHG) emissions from sources that make up approximately 85 percent of all statewide GHG emissions. AB 398 extends California’s cap and trade system through December 31, 2030, with declining emissions limits. Beyond the extension of the program, the bill includes of number of provisions and requires:

• California Air Resources Board (CARB) to set cost containment measures, including a price ceiling, speed bumps, offset credit limits, and industry assistance factors for allowance allocation;
• Establishment of a Compliance Offsets Protocol Task Force to advise CARB on establishing new offset projects that have direct environmental benefits, while prioritizing disadvantaged communities, Native American or tribal lands, and rural and agricultural regions;
• Establishment of an Independent Emissions Market Advisory Committee to report to CARB and the Legislature on the environmental and economic performance of cap and trade;
• The California Workforce Development Board to report on the need for increased education and job training to help transition labor-market changes;
• CARB to update the Scoping Plan by January 1, 2018;
• Establishment of funding priorities for the allocation of cap and trade funds until January 1, 2031, as follows: air toxic and criteria pollutants from stationary and mobile sources; low and zero-carbon transportation; sustainable agricultural practices that promote the transitions to clean technology, water efficiency, and improved air quality; healthy forests and urban greening; short-lived climate pollutants (such as methane); climate adaptation and resiliency; climate and clean energy research;
• Prohibit local air districts from adopting additional emissions reduction rules from stationary sources that are subject to cap and trade;
• Suspension of the State Responsibility Area (SRA) fee effective July 1, 2017, until January 1, 2031;
• Extending the 3.94 percent state current exemption from sales and use taxes (SUT) for certain purchases of property used for generation of electric power until July 1, 2030; exempts city and county sales and use taxes.

According to estimates, the suspension of the SRA fee will reduce general fund revenues by $83 million annually beginning in 2017-18. In addition, estimates for the SUT tax expansion and extension come in at $89 million. However, this bill will replace all of these revenues with proceeds from the Greenhouse Gas Reduction Fund (GGRF), thus not resulting in lower general fund revenues. Additionally, the bill will backfill the General Fund reduction associated with the current-law SUT manufacturing exemption with GGRF funds. Thus, the net revenue impact to the General Fund resulting from this bill would be an increase of about $180 million annually.

The two-thirds vote to extend the cap and trade program also provides for the ability to use GGRF revenues for expanded purposes as it can be considered a tax and not a fee with the supermajority voter threshold. It remains unclear what impact this will have on the allocation of GGRF funds and whether or not the backfill will be taken before or after the continuously appropriated funds to transit, high speed rail, and affordable housing and sustainable communities are allocated. The past GGRF allocation dedicated funds to a variety of different sectors and programs, including fire prevention and forest health as well as low carbon transportation and vehicle rebates. The SRA fee also was used for programs such as defensible space and fire prevention. Thus, there is some cross purpose of funds and it is unclear how much of a direct impact local governments will see from this new fiscal arrangement.

New Air Quality Program – AB 617 (Chapters 136 of 2017,C. Garcia)

This bill will require the California Air Resources Board (CARB) to establish a uniform, statewide system for monitoring and reporting emissions of criteria pollutants and toxic air contaminants (TACs). Under previous state law, CARB was assigned with primary responsibility for control of mobile-source air pollution, including adoption of rules for reducing vehicle emissions and the specification of vehicular fuel composition. Stationary sources of air pollution, such as factories and refineries, are under the jurisdiction of local air districts (e.g., South Coast Air Quality Management District, San Joaquin Valley Air Pollution Control District). CARB and the local air districts share jurisdiction over emissions of toxics from stationary sources. This bill expands upon that structure and creates a statewide system of reporting, and mandates a number of new programs in response to concerns about the disproportionate air quality burdens faced by disadvantaged communities. 

Specifically, the bill will:

• Require stationary sources to report annually emissions of criteria air pollutants and toxic air contaminants;
• Require CARB to prepare a statewide strategy to reduce air emissions in communities with a high cumulative exposure burden and update the strategy every five years, determine high priority locations to deploy community level air monitoring systems, and authorize the local air district in selected locations to require stationary sources to deploy fence-line monitoring systems;
• Require local air districts to develop and implement plans for the communities that have high cumulative emission burdens to achieve emission reductions from mobile and stationary sources. Plans will be required to have reduction targets, specific reduction measures, and an implementation schedule;
• Require local air districts that have not attained air pollutant goals under the federal Clean Air Act to expedite retrofits of industrial sources;
• Increase the penalty for air pollution violations from $1,000 per day to $5,000 per day and increases the maximum penalty annually based on the Consumer Price Index.

According to the legislative fiscal analysis, this bill will have significant costs associated. This program is also listed as one of the top new funding priorities for GGRF included in AB 398.