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Another Look at SB 1391

September 21, 2022 by Megha Jha

Key Takeaways

  1. Although originally written with a strong mandate, the amended version of SB 1391 had been stripped of its potency and included only recommendations.
  2. The latest version of the bill left too much room for interpretation, which many familiar with the Cap-and-Trade program saw as a serious issue.
  3. Expert opinion highlighted the key gaps in the making of this bill – additional expenses, unclear directions, lack of mandates – and raised the concern over allowing this bill to make oversized changes to the existing cap-and-trade mechanism.

Introduction

Over the year, cCarbon analysts have closely tracked California’s legislative session 2021-2022 and highlighted key bills that held the potential to make a significant impact on climate change. Among these was Senate Bill 1391 which focused on introducing measures to review allowance overallocation and the usage of offsets, ensuring offset additionality and linkage to Washington’s emissions trading system. The bill underwent significant changes through its legislative journey in this session but failed in the Assembly on 31st August 2022. This article provides a comprehensive analysis of the bill, decodes its failures, and offers another look at it through a legal lens.

An Evolving subtext: Stripping the mandate

While early versions of SB 1391 mandated changes to the Cap-and-Trade system and sought to prohibit the state from linking with other markets prior to a program review, the last version would have done neither. CARB veteran and CA environmental legislation expert Jon Constantino looks at it this way: “The things that it (SB 1391) wants CARB to do are all analysis. So, at the end of the day, it doesn’t require CARB to actually do anything and from that regard, it’s not very impactful.”

In addition to the lack of mandate in SB 1391, Mr. Constantino also brought up questions of legislative procedure. “CARB has rules which it has to follow, mainly AB 398. So they can’t change the AB 398 permissions unless the legislature changes the law. The best thing they can do is put in an analysis or a report, but they can’t change the number of allowances they’re issuing or the number of allowable offsets. The idea that CARB is just free to do whatever they want even if they have a recommendation isn’t quite right. They’re bound by SB 32 and AB 32, and other legislative bills. Again, CARB has to believe that there’s a problem for them to want to change it and even if they change it, they have to do it within the boundaries of the law that already exists. I would not say that this bill gives CARB the authority to change AB 398.”

EJAC, IEMAC and Allowance Banking Metrics

One thing that most experts agreed on was that while SB 1391 may not have had much potency in determining allowances, it would have altered the function of the CARB’s EJAC and CalEPA’s IEMAC advisory bodies. The bill specifically tapped IEMAC to help establish and publish allowance banking metrics. Many involved in the Cap-and-Trade program are familiar with the long-standing disputes between EJAC and IEMAC and the CARB administration. Some saw SB 1391 as a way for these bodies to win greater inclusion, giving them greater leverage in their long-standing debate over offset use and over-allocation of allowances. Others regarded IEMAC’s concerns about lack of transparency, in terms of issuance and management of offsets allowances, as being very valid.

The problem with Evaluating and Addressing Concerns

While the bill focused on addressing concerns, it does not explicitly mention who’s concerns needed to be evaluated and addressed, leaving it wide open to interpretation. Jon Costantino, Principal at Tradesman Advisors Inc. said, “CARB hasn’t said they have concerns. So is it IEMACs concerns, a few senators’ concerns, or general market concerns? It sort of implies that there’s a problem and CARB hasn’t said that they believe there’s a problem.”

A Final Look: The issues that the bill poses

A few key issues with SB 1391 may have been critical in ensuring its last-moment demise in the legislature. The lack of clarity in terms of allowance banking metrics was a primary concern. Additionally, without stringent and carefully thought-out measures in place, the bill likely would have proven to be problematic in its administration. CARB estimated staffing and contract costs of approximately $5 million in fiscal year (FY) 2022-23, $2.2 million in FY 2023-24, and $2.2 million in 2024-25 and ongoing (Cost of Implementation Account)to fulfill the requirements of the bill, costs which seemed excessive to many lawmakers and industry players. Furthermore, according to a coalition of business groups, the bill was “a blank cheque to undo the careful bipartisan compromise on cap-and-trade that was voted by this legislature with 2/3rds approval only a few years ago.”

Finally, and perhaps most importantly, SB 1391 included several open-ended pathways regarding how allowance reductions could be structured using offset issuance or retirement numbers. One avenue that particularly stood out was the possibility to reduce allowances based on the historical issuance of offsets. Although unlikely to be implemented by CARB, this wording would have opened the door for a possible reduction of more than 200 million allowances, a possibility that many saw as over-aggressive and potentially very disruptive to the CA cap and trade program.

Conclusion

While SB 1391 had the potential to address what some see as a problem of overallocation of credits, it was stripped of most of its strength.

If it passed, at best, it would have opened the door for greater discussion between CARB, IEMAC and EJAC. As noted, the proposed review process would have been expensive and time-consuming for CARB, which already goes through in-depth review in their Scoping Plan process. Additionally, some analysts saw SB 1391 as being overtly biased and questioned whether such pre-supposed language regarding the over-allocation of allowances and offset reduction measures would have constituted a fair starting point. Others were resistant to tampering with the existing setup of the cap-and-trade program at all. In the end, the bill lacked any real power to make sweeping changes and it was these loose ends that spelled its failure in the Assembly on 31st August 2022. As CARB seeks to make program adjustments to meet its newly established reduction goals, the role of offsets and a structure for reducing allowances based on offset use may come up again in the future. However, even if such changes are considered, they will likely be set out more specifically than SB 1391 would have allowed.

Analysts:

  • Megha Jha (mjha@ckinetics.com)
  • Gabriel Stoltzfus (gstotltzfus@ckinetics.com)
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