1. AB-32 THE GLOBAL WARMING SOLUTIONS ACT OF CALIFORNIA John A. McKinsey Stoel Rives LLP 770 L Street, Suite 800 Sacramento, CA 95814 916.319.4746 jamckinsey@stoel.com

2. AB-32 In 2006, California passed Assembly Bill- 32 which requires the California Air Resources Board (CARB) to reduce greenhouse gas emissions to 1990 levels by 2020. It is often referred to as requiring a 25% reduction.

3. 1999 California Greenhouse Gas Emissions Carbon Dioxide 84% Hydrofluorocarbons 2% Nitrous Oxide 6% Methane 8% Sources Carbon Dioxide (CO 2 )  Fossil fuel combustion Methane  Fossil fuels  Landfills, agriculture Nitrous Oxide  Agriculture, cars Hydrofluorocarbons  Refrigerants, solvents Source: Draft Greenhouse Gas Inventory Update, California Energy Commission, 2001 CO 2 equivalents In CO 2 equivalents

4. CO2 Emissions By Source

5. Major Questions “How” will CARB reduce emissions? Indirectly, directly, or a combination of both? “How much” will CARB reduce emissions? “What” will CARB reduce?

6. How Much 1990:  440 Million Metric Tons (MMT) 2004:  500 MMT 2020 Projected: 610 The Task: Reduce the emission rate by about 170 MMT in 16 years (includes reductions to counter further increases) CO 2

7. The Burning Question How will CARB reduce CO2 emissions? –Will trading of CO2 credits be allowed? –How will CARB find the reductions when transportation is mostly off-limits and electricity is already fairly lean?

8. Adopt a list of early action measures by July 1, 2007 that can be implemented before January 1, 2010 and adopt such measures by then. Establish by January 1, 2008, a statewide GHG emissions cap for 2020, based on 1990 emissions. Adopt mandatory reporting rules by January 1, 2008 for significant sources of greenhouse gases. Adopt a scoping plan by January 1, 2009 that indicates how emission reductions will be achieved from significant GHG sources via regulations, market mechanisms and other actions. Adopt regulations by January 1, 2011 to achieve the maximum technologically feasible and cost-effective reductions in GHGs, including provisions for using both market mechanisms and alternative compliance mechanisms. What AB-32 requires CARB to do:

9. AB-32: Early Action Measures CARB “Adopted” three measures -Low carbon fuel standard -Auto A/C improvements -Landfill methane capture CARB has announced six more measures: –Trucking (aerodynamic retrofitting) –Ports (plug in docked ships so they can turn off) –Tire pressure assurances –Semiconductor industry (standards) –Consumer products (standards) –Reduce use of sulfur hexafluoride

10. AB-32: Early Action Measures cont…. CARB has also announced five more measures to come: –Cement plant efficiency –Cement blending requirements –Ban on truck idling at rest stops –Recover refrigerants –Possible fertilizer standards

11. 167.8 MMT 170 MMT - 2.8 MMT

12. AB-32: Next Steps Reporting requirements (by end of 2007) Scoping plan (by end of 2008) Regulations to implement scoping plan (by end of 2010) Implementing regulations take effect (2011)

13. Reduction Measures and Limits (AB-32)- Thoughts CARB has broad task and vehicle emissions, though a major source, are not really an option for reductions right now. This endeavor is new. Expect delays, missteps, lawsuits, and lots of uncertainty. Lurking quietly in the background is the federal government. With one quick action, the California scheme could be gutted, eliminated, or significantly changed. California electricity generation is already very lean on CO2 and getting leaner. It may be very hard to squeeze many reductions out of that sector either.

14. Implementing AB-32: Lowering CO2 to 1990 Levels Reduce EmissionsIncrease Removals Transportation Electricity Buildings and Development Natural Systems Artificial Systems But How?.... Mandates Encouragements or

15. The Big Picture Need 170 MMT reduction Have 2.8 MMT from early measures Will get some from SB-1368 Will get some from RPS Total is maybe 36 MMT at this point so 135 left to go. Where will the other 135 or so MMTs come from? Answer: The biggest fruit: –Electricity Sector –Transportation (where allowed) –Buildings and development

16. The Electricity Sector SB-1368 imposes CO2 emissions standard on long term baseload electricity procurement. (translated: no more coal) The CPUC is taking the initiative to continue its GHG rulemaking. In Phase II it plans to adopt, as recommended to CARB, a load-based, cap and trade scheme for the electricity sector. CARB is not obligated to follow the recommendation. The battle over the electricity sector under AB-32 will come down to: –Load or source-based? –Trading, direct, or both? –How much? It is clearly significantly too early to predict the outcome.

17. Nuclear/ Hydro/ Wind*** CC CGTStandardSS CGTOilCoal 1100 1400 1,900 2,100 1000? Electricity Generation Comparative Emission Rates Units of 1000’s pounds per MW-HR Applies to Long term procurements (5 years) Applies to baseload (>60% CF)

18. Transportation Two methods: reduce emissions per VMT or reduce VMT Reducing emissions per VMT is blocked by federal law (so far) –Mostly: tire pressure, incentives to buy high mileage cars, etc. –But no tailpipe emission regulation for now. Reducing VMT –Nothing new here, carpooling, work from home, neighborhood/ community design –But is their political will to do this????

19. Buildings and Development Building Efficiency –The zero emission building –Insulation, natural light and heating and on site or linked renewable energy production –$$$$$$$$$$$$$$$$ Development Efficiency –How to force local jurisdictions to play along? One answer so far: environmental law Incentives? New state law –Building Standards

20. The Battlefront: CEQA The California Environmental Quality Act (CEQA) is, and will become more, involved –Ex: AG Brown forces SF Bay Refiner to pay $7M for mitigation of new CO2 emissions resulting from refinery expansion. –Ex: Environmental intervenor insists that peaker project EIR inadequately addresses potential impacts from CO2 emissions. Clearly, CEQA “projects” now have to include an analysis of the potential for significant impacts to the environment through greenhouse gas emissions.

21. Next Events More CEQA comments, challenges CARB rulemaking and AB-32 implementation. CPUC Phase II GHG rulemaking Outcome of vehicle emissions cases Outcome of EPA decision on whether to regulate GHGs (driven by Supreme Court Decision)

22. Forums to track CARB: www.arb.ca.gov CPUC: GHG Phase II Rulemaking 06-04-009 www.cpuc.ca.gov/proceedings/R0604009.htm CEC: 06-OIR-1 www.energy.ca.gov/ghgstandards Federal EPA: GHG decision epa.gov/climatechange/index.html

23. Final Thought How do you prove that a CO2 reduction or removal is real, permanent and accurate? –Answer: Indirectly by inference from science –Answer translated: “On paper” –Compare to air pollutants which we can measure concentration reductions over time –For CO2 it is a global concentration of which meager California reductions under SB-32 will be completely insignificant and unnoticeable.