Legislative Analyst's Office

Analysis of the 2001-02 Budget Bill

Air Resources Board (3900)

The Air Resources Board (ARB), along with 35 local air pollution control and air quality management districts, protects the state's air quality. The local air districts regulate stationary sources of pollution and prepare local implementation plans to achieve compliance with federal and state standards. The ARB is responsible primarily for the regulation of mobile sources of pollution and for the review of local district programs and plans. The ARB also establishes air quality standards for certain pollutants, administers air pollution research studies, and identifies and controls toxic air pollutants.

The budget proposes $308.3 million from various funds, primarily the Motor Vehicle Account and the General Fund, for support of ARB in 2001-02. This is an increase of about $65 million, or 27 percent, from estimated 2000-01 expenditures. This increase reflects (1) $100 million from the General Fund for grants to replace or retrofit older diesel engines with cleaner alternatives, (2) $50 million from the General Fund for grants to subsidize the cost of zero-emission vehicles, and (3) an increase of $8.5 million (various funds) for equipment, such as for air monitoring. The budget also reflects the elimination of a one-time expenditure in the current year of $50 million to replace or retrofit older diesel school buses.

Diesel Emission Reduction Proposal Raises Policy Issues

We find that the Governor's proposal for a $100 million grant program to replace and retrofit older diesel engines to offset emissions from proposed power generation plants raises a number of policy issues. Should the Legislature wish to fund this program, we recommend that funding be put in legislation that establishes the objectives for the program, sets grant criteria, and guides the sale of the emission offsets. Therefore, we recommend that the funding proposed for this program be deleted from the budget bill. (Reduce Item 3900-001-0001 by $100 million.)

Federal Law Requires Pollution Offsets. Federal law requires that new producers of pollution—for example, a new business—take steps to offset the pollution which they generate. They can offset the pollution they produce in several ways, including purchasing emission reductions (often referred to as "credits") that are made elsewhere by other businesses. Such an approach is intended to accommodate the development of businesses while mitigating pollution which they might generate.

Budget Proposal to Facilitate Siting of "Peaker" Power Plants. The budget proposes to establish such an emission reduction process in order to facilitate the development of specialized energy producers known as "peakers." These are power plants that operate for limited hours during limited periods of peak demand, primarily during the summer months. Since they operate for limited periods, peaker plants have a much smaller generation capacity than the typical power generation plant.

Specifically, the budget proposes $100 million in one-time General Fund monies for a grant program to encourage the replacement or retrofit of older diesel engines in trucks, farm and construction equipment, and marine vessels. Grants will be used to cover the incremental cost of retrofitting such engines or the purchase of a cleaner alternative. The replacement or retrofit of older diesel engines would reduce emissions of oxides of nitrogen (NOx) and fine particulate matter (PM). The budget intends that the emission reductions created would then be sold to peaker power generators who are required to offset air emissions they produce.

The Legislature recognized the role of peaker plants in addressing energy needs by enacting Chapter 329, Statutes of 2000 (AB 970, Ducheny). Among other things, Chapter 329 authorized local air districts to issue temporary permits for peaker plants with an expedited review process in order to facilitate the siting of these plants. Chapter 329 also required peaker plants to obtain air emission offsets, or pay an emission mitigation fee if offsets are unavailable.

Although only one application for siting a peaker power plant has recently been made to the State Energy Resources Conservation and Development Commission, as many as 50 may be in the planning stages throughout the state, mainly in urbanized areas.

Proposed Program Deviates From Existing Diesel Emission Reduction Grant Program. Since 1998-99, ARB has implemented a grant program to encourage the replacement of older diesel engines with cleaner alternatives. The Legislature established a number of criteria for the award of grants under this program—referred to as the Carl Moyer program—with the enactment of Chapter 923, Statutes of 1999 (AB 1571, Villaraigosa). The Carl Moyer program is funded at $45 million in 2000-01. The budget proposes no funding for this program in 2001-02.

According to ARB, the proposed program would use Carl Moyer program criteria to the extent possible. However, our review found that the proposed program will deviate from the Carl Moyer program in a number of important respects. These include:

Policy and Implementation Issues Raised. We think that there are a number of important policy and implementation issues that are raised by this proposal for the Legislature to consider. These issues fall into two broad categories. These include:

The Program's Overriding Goal: Balancing Power Plant Siting and Air Quality Improvements. Our review finds that the initial goal of the budget proposal is to create emission offsets for peaker plants (for two years), rather than to improve air quality. After two years, the emission reductions created by the program serve solely to improve air quality. Because funds will be allocated based on power plant siting needs (rather than a district's air quality), the proposed program will likely be significantly less cost-effective than the Carl Moyer program in achieving air quality improvements. According to ARB, the $45 million for the Carl Moyer program in the current year will likely result in 7 tons of NOx emission reductions per day. However, ARB anticipates that the $100 million from this proposal will result in only 5 tons of NOx emission reductions per day beginning in the third year.

Transferring Offsets to the Power Plants. Our review finds that the administration has not yet determined how the "trading" (that is, the transfer and sale) of an emission offset to a power plant will be conducted. For example, while some local air districts have established rules for the generation and transfer of offsets, others have not. Therefore, it needs to be determined who will "own" the offsets generated by the grants, who will be responsible for overseeing the trading of the offsets, and what rules are to govern the trading.

In particular, the question of how the price for the offsets will be determined is not resolved. According to ARB, offsets may not necessarily be priced at fair market value in order to make the offsets affordable to the peaker plants.

Issues Should Be Addressed in Legislation. The proposed program is consistent with Chapter 329's intent that the siting of peaker plants be expedited. However, we think that there are policy and implementation issues that should be addressed by the Legislature prior to approving funding for the program. Without prejudice to the merits of this proposal, we recommend that the $100 million for this program be deleted, and that the program and its funding be established in legislation, should the Legislature wish to proceed with the program. Such legislation should establish clear objectives for the program, set grant criteria, and guide the sale of the emission offsets that are generated.

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