Analysis of the 2008-09 Budget Bill: Resources

Implementation of “AB 32”—Global Warming Solutions Act of 2006

The budget proposes $55.5 million across several state agencies to continue implementation of the Global Warming Solutions Act of 2006 (commonly known as “AB 32”), which seeks to reduce California’s greenhouse gas emissions. In the following analysis, we present and evaluate the Governor’s budget proposals for AB 32 implementation in various state agencies, highlighting a significant number of augmentations proposed for the budget year. We then consider the administration’s plan for long–term funding of the AB 32 program. Finally, we recommend that the Legislature defer action on certain AB 32 budget items until the administration identifies an appropriate, stable, and ongoing funding source for the AB 32 program, as directed by the Legislature.

Goals and Requirements of the Global Warming Solutions Act of 2006 (AB 32)

Assembly Bill 32 establishes the goal of reducing, by 2020, California’s greenhouse gas (GHG) emissions to what those emissions were in 1990. The act charges the Air Resources Board (ARB) with monitoring and regulating the state’s sources of GHGs and specifies a time line by which ARB is to complete specified implementation actions.

Act Establishes Emissions Reduction Goals, Time Lines, Criteria, and Administrative Responsibilities. In 2006, the Legislature enacted Chapter 488, Statutes of 2006 (AB 32, Núñez)—The Global Warming Solutions Act of 2006. The act establishes the goal of reducing, by 2020, the state’s emission of greenhouse gases (GHGs) to what those emissions were in 1990. The act designates ARB as the sole state agency responsible for monitoring and regulating sources of GHG emissions and requires ARB to coordinate with other state agencies and stakeholders involved in implementing AB 32. The act also calls for the Climate Action Team—the multiagency body established in 2005 by executive order and led by the Secretary for Environmental Protection—to continue its coordination of overall climate policy.

In addition, the act establishes a time line by which ARB is to have taken specific actions. Significant among the actions included in that timeline are the requirements that ARB:

• Adopt regulations by January 1, 2008, to require reporting and verification of statewide GHG emissions.
• Adopt regulations, to be enforced by January 1, 2010, to implement “early action measures” to reduce GHG emissions.
• Adopt additional regulations, effective January 1, 2012, to achieve the GHG emissions reductions goals established by AB 32.

The act also specified numerous criteria that ARB’s GHG emissions reduction regulatory measures must meet, including cost–effectiveness and technological feasibility.

Existing AB 32 Funding and the Governor’s Budget Proposal

The budget proposes $55.5 million and 212 positions across 12 state agencies for continued AB 32 implementation. This funding reflects increases totaling $23.6 million and 61 positions above the current–year expenditure and staffing levels.

The budget proposes new funding of $23.6 million, mainly from various special funds, and 61 positions across a number of state agencies for the continued implementation of AB 32. This funding is in addition to the $31.9 million in ongoing funding, mainly from special funds, and 151 positions authorized in the 2007–08 Budget Act for AB 32 implementation. Figure 1 lists, by agency, total proposed AB 32 expenditures, number of positions, and funding sources included in the 2008–09 budget, while Figure 2 provides this information, along with detail on the activities funded, only for the increases proposed in the budget.

Evaluation and Development of Low Carbon Fuel Standard (LCFS) Is Central to Governor’s Proposal. In January 2007, the Governor issued an executive order calling for a 10 percent reduction in the carbon intensity of California transportation fuels by 2020, to be achieved through development of an LCFS for transportation fuels. (“Carbon intensity” refers to a measure of the carbon content of a unit of energy.) In the summer of 2007, ARB adopted the LCFS as one of its AB 32 early action regulatory measures to be enforceable by January 1, 2010. Development, evaluation, and implementation of the LCFS is the main focus of the additional AB 32–related positions proposed in the Governor’s budget for ARB, as shown in Figure 2.

Administration Fails to Provide Sustainable, Long–Term Funding Plan for AB 32

Current–year funding for AB 32 implementation mostly relies upon special funds, some of which face substantial future budgetary pressures and cannot support AB 32 implementation over the long term without significant fee increases. Contrary to legislative direction, the administration has failed to produce a sustainable, long–term funding plan for AB 32 implementation in the budget year. While not taking issue with the merits of the AB 32 program and the budget proposal, we recommend that the Legislature defer action on the departmental budgets for AB 32, pending the administration’s adoption of a sustainable, long–term funding plan that provides a stable, dedicated funding source for the program.  

Administration Continues to Put Off Difficult Decisions on AB 32’s Long–Term Funding. As was the case with the Governor’s AB 32 budget proposal for the current year, the 2008–09 budget proposal continues to rely on existing fee–based special funds. It includes neither fee increases nor new fees to cover program costs, even though the act provides ARB with the authority to assess fees in order to implement it. Rather, the bulk of the AB 32 funding for the budget year comes from continuing to draw down special fund balances that were either carried over from previous years or made possible by proposed loans or transfers from other special funds. Specifically, the budget proposes a $32 million loan from the California Beverage Container Recycling Fund (BCRF) to the Air Pollution Control Fund (APCF), which in turn provides about $32 million for AB 32 implementation activities.

Legislature Directed Administration to Report on Long–Term Funding Plan for AB 32 Implementation. In response to the administration’s lack of a long–term funding plan for the AB 32 program, the Legislature, as part of the 2007–08 budget process, expressed its intent that the administration find appropriate, stable, and ongoing funding for AB 32 implementation for the budget year. To that end, the Legislature directed the administration to submit, in conjunction with submittal of the 2008–09 Governor’s Budget, a long–term funding plan for AB 32, that was to include:

• An estimate of future–year costs of the state’s GHG emissions reduction programs.
• A description of how future–year costs would be funded.
• The administration’s intention to increase existing fees and/or impose new fees to support the state’s GHG emissions reduction programs.
• An explanation of the method by which the APCF is to be paid back for the funds used in 2007–08 for climate change–related programs.

Despite Legislative Direction, Administration’s Long–Term Funding Plan for AB 32 Remains Illusory. While the administration submitted a report on AB 32 funding in conjunction with its budget proposal, it did not comply with legislative direction in that its report fails to identify an appropriate, stable, ongoing funding source for AB 32 activities for the budget year and beyond. Rather, the report indicates the administration’s intent to continue to borrow from the carry–over balances in special funds from 2007–08 through 2009–10. The report also expresses the administration’s intent to delay identification of a stable, long–term, fee–based funding source until after the board has adopted the statutorily required AB 32 scoping plan in January 2009. The report also indicates that ARB will not begin to collect fees—from whatever fee base the administration eventually identifies—until July 2010, at the earliest. The administration intends that, once established, the fee will support ongoing AB 32 activities and provide for repayment of the loans made from special funds during the program’s first three operating years. Figure 3 summarizes the administration’s broad intent for AB 32 funding as indicated in its report.

Administration Could Identify Now an Appropriate Fee Base to Fund Implementation Costs. We understand the administration’s claim that the sources of GHGs that will ultimately be regulated under AB 32 will not be comprehensively known until completion of the required scoping plan in January 2009. But the scoping plan, as described in AB 32, will not newly identify the significant sources of the state’s GHG emissions. Rather, it will form the foundation for the development of a regulatory regime that is in keeping with statutory requirements. As the administration already knows, in broad terms, the state’s primary sources of GHG emissions, such as automobiles, electricity producers, and agriculture, we think it could develop now a fee structure to pay for AB 32 implementation in its initial years. The administration could refine the fee structure in later years to reflect the scoping plan and the program’s regulatory regime that will govern for the longer term. Instead, the administration has chosen to delay identification of such a fee base while continuing to borrow from other special funds.

Ensuring Legislative Oversight of AB 32 Implementation. We recognize that, in passing AB 32, the Legislature expressed the importance it places upon implementing a regulatory program to significantly reduce the state’s emission of GHGs. We also recognize that, subsequent to passing AB 32, the Legislature clearly indicated its desire that the administration submit to the Legislature a plan for the 2008–09 budget year that provides for long–term, stable funding for AB 32 implementation. However, the administration failed to follow legislative direction by proposing to continue to fund AB 32 implementation over the next two years largely by relying on loans from an unrelated special fund—BCRF—that happens to have a large balance, but is hardly a stable, long–term funding source.

While not taking issue with the merits of the AB 32 program or of the activities that would be funded by the administration’s AB 32 budget proposal, we nonetheless seek to preserve the Legislature’s oversight role with respect to AB 32 implementation. For this reason, we recommend that the Legislature defer action on the AB 32–related budget proposals funded by APCF—$30.5 million under ARB and $1.3 million under the Secretary for Environmental Protection—until the administration provides a long–term funding plan that satisfies legislative direction. Such a plan would need to include identification of an appropriate, stable, and ongoing funding source for the AB 32 program in the budget year.

Administration Needs to Provide Legislature With Timely, Comprehensive AB 32 Budget Information. While AB 32 charges ARB with monitoring and regulating sources of GHGs, implementation of AB 32 is necessarily an interdepartmental effort. In order to effectively evaluate both progress in achieving AB 32’s goals and new budget proposals to further implement the act, the Legislature requires timely and comprehensive budget information on AB 32 implementation. To ensure the Legislature’s access to such information, we recommend adoption of the following supplemental report language:

The Air Resources Board, in conjunction with the Secretary for Environmental Protection, shall provide to the Legislature, at the time of the annual submittal of the Governor’s budget, a budget that shows all funding proposals across all state agencies included in the Governor’s budget (including base funding and budget change proposals) that the administration classifies as part of its implementation of Chapter 488, Statutes of 2006 (AB 32, Núñez)—the Global Warming Solutions Act of 2006.