BOARD MEETING STATE OF CALIFORNIA AIR RESOURCES BOARD JOE SERNA, JR. BUILDING CALIFORNIA ENVIRONMENTAL PROTECTION AGENCY CENTRAL VALLEY AUDITORIUM, SECOND FLOOR 1001 I STREET SACRAMENTO, CALIFORNIA FRIDAY, JULY 27, 2007 8:30 A.M. TIFFANY C. KRAFT, CSR, RPR CERTIFIED SHORTHAND REPORTER LICENSE NUMBER 12277 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 ii APPEARANCES BOARD MEMBERS Ms. Mary D. Nichols, Chairperson Ms. Sandra Berg Ms. Judith G. Case Ms. Dorene D'Adamo Mr. Jerry Hill Ms. Lydia Kennard Mrs. Barbara Riordan Supervisor Ron Roberts Dr. Daniel Sperling STAFF Mr. Tom Cackette, Chief Deputy Executive Officer Mr. Tom Jennings, Chief Counsel Mr. Michael Scheible, Deputy Executive Officer Ms. Lynn Terry, Deputy Executive Officer Ms. Kathleen Quetin, Ombudsman Ms. Lori Andreoni, Board Secretary Ms. Edie Chang, Chief, Program Planning and Management Branch, Office of Climate Change Mr. Mike Jaczola, Stationary Source Division Mr. Chuck Shulock, Chief, Office of Climate Change PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 iii APPEARANCES CONTINUED ALSO PRESENT Mr. Mujahid Abdullan, Sustainable Capital Ms. Barbara Baird, South Coast AQMD Mr. Mike Barr Mr. Chris Busch, Union of Concerned Scientists Mr. Todd Campbell, Clean Energy Mr. Rick DeGolia, Environment Entrepreneurs Mr. Larry Goulder, Vice Chair, Market Advisory Committee Mr. Frank Harris, Southern California Edison Mr. Winston Hickox, Chair, Market Advisory Committee Mr. Mark Hite, Lucas Advocates Mr. Andrew Hoerner, Refining Progress Mr. Mike Jaczola, Engineering Evaluation Section, SSD Mr. Barbara Lee, CAPCOA Mr. Kirk Marckwald, Association of American Railroads Mr. Frank Sheets, Cement Manufacturers Mr. Mark Stehly, BNSF Railway Ms. Lupe Valdez, Union Pacific Mr. Nicholas van Aelstyn, Carbon Offset Providers Coalition Mr. Jeff Vance Mr. Barry Wallerstein, South Coast AQMD Ms. Devra Wang, NRDC PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 iv INDEX PAGE Pledge of Allegiance 1 Item 7-8-2 Chairperson Nichols 3 Acting Executive Officer Cackette 8 Staff Presentation 9 Mr. Hickox 16 Mr. Goulder 32 Q&A 52 Ms. Lee 70 Ms. Baird 74 Mr. Edgar 78 Mr. Fay 80 Mr. Sheets 82 Mr. Harris 85 Mr. Busch 88 Mr. DeGolia 91 Mr. Hoerner 94 Mr. Hite 97 Ms. Wang 98 Mr. Abdullah 101 Mr. van Aelstyn 102 Mr. Campbell 106 Mr. Hickox 108 Mr. Goulder 109 Q&A 112 Item Chairperson Nichols 118 Staff Presentation 120 Q&A 131 Mr. Wallerstein 132 Ms. Baird 134 Mr. Marckwald 147 Ms. Valdez 150 Mr. Stehly 154 Mr. Barr 157 Public Comment Mr. Vance 160 Adjournment 165 Reporter's Certificate 166 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 v 1 PROCEEDINGS 2 CHAIRPERSON NICHOLS: Good morning, everybody. 3 And welcome to the July 27th public meeting of the Air 4 Resources Board. The Board will come to order. And we 5 will begin with the Pledge of Allegiance to the flag. 6 (Thereupon the Pledge of Allegiance was 7 recited in unison.) 8 CHAIRPERSON NICHOLS: Thank you. 9 The Clerk will please call the roll. 10 SECRETARY ANDREONI: Ms. Berg? 11 BOARD MEMBER BERG: Here. 12 SECRETARY ANDREONI: Supervisor Case? 13 BOARD MEMBER CASE: Here. 14 SECRETARY ANDREONI: Ms. D'Adamo? 15 BOARD MEMBER D'ADAMO: Here? 16 SECRETARY ANDREONI: Dr. Gong? 17 Supervisor Hill? 18 SUPERVISOR HILL: Here. 19 SECRETARY ANDREONI: Ms. Kennard? 20 Mayor Loveridge? 21 Supervisor Roberts? 22 Ms. Riordan? 23 BOARD MEMBER RIORDAN: Here. 24 SECRETARY ANDREONI: Professor Sperling? 25 BOARD MEMBER SPERLING: Here. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 1 1 SECRETARY ANDREONI: Chairman Nichols? 2 CHAIRPERSON NICHOLS: Here. 3 SECRETARY ANDREONI: Ms. Chairman, we have a 4 quorum. 5 CHAIRPERSON NICHOLS: Thank you. And I 6 understand that Board Member Kennard is on her way and is 7 expected. That's what I've heard. So we can mark her 8 present when she gets here. 9 Well, good morning, everybody. It's a little 10 quieter here today than it was yesterday. But we're happy 11 to be back. I want to make sure that anybody who isn't 12 familiar with these proceedings knows that if they wish to 13 testify they need to sign up with the Clerk of the Board. 14 And there are speaker cards here at the table. 15 The Board normally imposes a three-minute time 16 limit on speakers other than those who are actually making 17 a formal presentation here. And if anybody has written 18 testimony, they should feel free to submit it. It will be 19 read and included in the record. And therefore, there is 20 no need if you have written testimony to read it orally as 21 well. 22 I also need to remind people that there are 23 emergency exists in the back of the room. In the very 24 unlikely event of an emergency or a fire alarm, we're 25 required to evacuate this room immediately and go down the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 2 1 stairs and out of the building. And we are not to return 2 until we get the all-clear signal to come back again. 3 I also need to tell you that the item on 4 appointments to the Research Screening Committee has been 5 withdrawn from the agenda. It will come back at a later 6 time. But in view of the need to look on the our whole 7 organizational structure, including the Research Program, 8 in light of our responsibilities under AB 32 and the 9 Scoping Plan, I asked the staff to go back and reconsider 10 whether we needed to look at some additional appointments 11 to the Screening Committee. So that will be coming back 12 later. 13 So it's now my pleasure to introduce the opening 14 item on our agenda that relates to climate change and to 15 welcome the representatives from the Market Advisory 16 Committee who are here to present their report and talk to 17 us this morning. 18 Before we get to their report, I did want to just 19 make sure that the Board members and any interested 20 members of the public were aware of the fact that I have 21 asked the staff to accelerate their review of the early 22 action measures that were taken up by the Board at the 23 June Board meeting. As you will all remember, of course I 24 wasn't here in June, the Board asked the staff to come 25 back in six months. I've asked them to take another look PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 3 1 at the entire list of measures that were developed there, 2 regardless of where they were in the hierarchy and to come 3 back also with some suggestions about measures that could 4 be moved up earlier. So we will be hearing back at our 5 October meeting on this. 6 And in addition, I also asked them to come back 7 with further evaluation of the recommendations from the 8 CAPCOA organization, the Air Pollution Control Officers, 9 the environmental community, and the Environmental Justice 10 Committee. I think imbedded in each one of those group's 11 testimonies were a lot of thoughts and suggestions about 12 how we can proceed to perhaps look at the whole issue of 13 early action in a little bit broader way than perhaps what 14 was the case in the past. 15 And, in effect, take credit, but mainly just 16 explain to the public some of the things that we are 17 already doing that are in the works that maybe could be 18 accelerated a little bit that clearly constitute early 19 action, even if they may not fit within the narrower 20 definition of new regulations that was applied the last 21 time the Board dealt with this issue. 22 So it would be both a broadening of the 23 definition and then also hopefully some actual regulatory 24 actions that we are working on that we can speed it up a 25 little bit and come back. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 4 1 So that brings us then to the report from the 2 Market Advisory Committee on its recommendations for 3 designing a greenhouse gas cap and trade system for 4 California. 5 And I'm pleased that we have our Committee report 6 here. The Market Advisory Committee was actually created 7 by the Secretary of our Agency, Linda Adams, pursuant to 8 Executive Order S 2006. The Executive Order charged the 9 Committee with developing recommendations regarding the 10 design of a market-based compliance program to reduce 11 greenhouse gas emissions. 12 We appreciate the time and effort that has been 13 donated to this task by its Chair, Winston Hickox, by 14 Larry Goulder, the Vice Chair, and other distinguished 15 Committee members who have invested a lot of time and a 16 great deal of talent and experience in putting these 17 recommendations together. 18 This report is going to be a very valuable 19 resource as the Air Board moves forward in dealing with 20 the market side of the implementation of AB 32. 21 I do want to make it clear that these 22 recommendations are not presented to us in a form that 23 requires us to take any formal action on them. That we 24 are not mandated by the Executive Order or by our agency's 25 directives to take any specific actions to incorporate PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 5 1 them. 2 But never the less, I think that what we have 3 here is a very valuable piece of work of analysis and 4 thought that we are going to want to draw on, both the 5 staff and the Board members. So I do commend this to the 6 entire Board to read and think about, because it's now 7 clear that the Board itself has some major 8 responsibilities that we're going to have to exercise in 9 the coming months to make this program move forward 10 effectively. And I want to make sure that we're as well 11 informed and well grounded as we possibly can be. 12 Just to reiterate what I know has been said by 13 others in the early stages of the passage and the 14 excitement about California taking steps to reduce our 15 greenhouse gas emissions, making good on the commitment to 16 reduce our greenhouse gas emissions is a huge challenge. 17 And it's going to require multiple tactics and efforts by 18 all sectors of our population and of our community. 19 I think most of us who have been involved in 20 different ways in our communities are excited about the 21 challenge, because we can see that it offers us also 22 opportunities to tie many of the voluntary actions, many 23 of the activities that are already going on to improve 24 environmental performance in all sectors of our economy 25 into the plan and to in effect capture and recognize some PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 6 1 of these good things as we move forward. 2 Never the less, we also have to have a plan that 3 can demonstrate that we actually can reach our goals. And 4 to do that, we're going to have to have a strategy that 5 includes both very specific regulations, some of which 6 we've already started work on, and that has other methods 7 used to try to reduce the remaining emissions as quickly 8 and as economically as possible. And it's the latter 9 part, of course, that the cap and trade program is 10 designed to deal with. 11 So fitting this into and around our current 12 activities, doing it in a way that's comprehensible to the 13 public which we know has concerns, some of which are 14 clearly based on experience and some of which are just 15 kind of instinctive, that somehow if you create a valuable 16 commodity that somebody will be getting away with 17 something and therefore we have to worry about it, all of 18 the aspects of design and implementation and enforcement 19 have to be addressed very carefully. And the intention is 20 to do that as part of the Scoping Plan that we're required 21 to be doing over the next 18 months. 22 But in starting out on that effort, we are very 23 well served by the work that's already been done for us by 24 the Market Advisory Committee. 25 So with that, I'd like to ask Tom Cackette to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 7 1 introduce this item formally. 2 ACTING EXECUTIVE OFFICER CACKETTE: Thank you, 3 Chairman Nichols. And good morning, Board members. 4 On your comment about accelerating the direction 5 on early action items, we have staff working on that. We 6 have a process we've identified leading up to a workshop 7 in September. And we'll be ready to bring you 8 recommendations at the October Board meeting. 9 On today's issue, today, Winston Hickox and Larry 10 Goulder, Chair and Vice Chair of the Market Advisory 11 Committee, which we fondly call the MAC, will be 12 presenting the MAC's recommendation for design of a Cap 13 and Trade Program to reduce greenhouse gas emissions in 14 California. 15 ARB was deeply immersed in that process that 16 reduced the MAC report, and we're very pleased to be part 17 of that team. As you noted, the market programs are only 18 one tool in our toolbox along with a suite of other 19 measures, including regulations, incentives, and voluntary 20 actions. In order to provide some context for the MAC's 21 recommendations, staff will provide a brief overview of 22 the development process of the Scoping Plan in their 23 introduction to the MAC's report. 24 This is an informational item only, and it's 25 intended to provide background that will be of value for PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 8 1 your later deliberations on this matter. We're not asking 2 you to take any action today. 3 With that, I'd like to introduce Edie Chang, who 4 will introduce the MAC's presentation. 5 (Thereupon an overhead presentation was 6 presented as follows.) 7 PROGRAM PLANNING AND MANAGEMENT BRANCH CHIEF 8 CHANG: Thank you, Tom. Good morning, Chairman Nichols 9 and Honorable Board members. 10 Today, you will receive a report from the Market 11 Advisory Committee, or MAC. The ARB staff were pleased to 12 take an active role throughout the development of this 13 report. The recommendations you will hear today reflect 14 the views of the Committee and are not ARB staff 15 recommendations. But in light of the tremendous expertise 16 of the Committee and the time and the effort they put into 17 developing their report, their recommendations will 18 certainly be given careful consideration. 19 --o0o-- 20 PROGRAM PLANNING AND MANAGEMENT BRANCH CHIEF 21 CHANG: The Market Advisory Committee was created by 22 Cal/EPA Secretary Linda Adams pursuant to Executive Order 23 S 20-06. With a distinguished array of national and 24 international experts, the MAC's objective was to advise 25 ARB on how best to structure a Cap and Trade Program that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 9 1 would obtain cost effective emission reductions from all 2 sectors of the economy. 3 --o0o-- 4 PROGRAM PLANNING AND MANAGEMENT BRANCH CHIEF 5 CHANG: This slide shows the members of the MAC. The 6 membership includes well-known experts with diverse 7 representation from industry groups, the financial sector, 8 environmental organizations, other regions of the 9 United States, Europe, and all levels of government. 10 Today, the Chair and Vice Chair of the MAC are 11 here to report on the Committee's recommendations. 12 But before their report, we thought it would be 13 useful to give the Board an overview of how the staff is 14 proposing to develop California's greenhouse gas Scoping 15 Plan and how the MAC's recommendations will be considered 16 in that process. 17 --o0o-- 18 PROGRAM PLANNING AND MANAGEMENT BRANCH CHIEF 19 CHANG: What is the Scoping Plan? It is, in essence, 20 California's Climate Action Plan. The Scoping Plan must 21 describe how California will achieve the goal of AB 32, 22 reducing the State's greenhouse gas emissions to 1990 23 levels by 2020. 24 Imbedded in the choice of measures will be 25 difficult policy decisions such as who bears what burden, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 10 1 which mechanisms are most effective, and what is the best 2 combination of measures. The Scoping Plan will be more 3 expansive than other clean air plans ARB has developed. 4 And we must coordinate extensively with Cal/EPA and the 5 Climate Action Team as well as local agencies to ensure 6 that the Scoping Plan measures can be implemented 7 efficiently and effectively, especially in the electricity 8 sector. 9 AB 32 also directs the ARB to consider what other 10 states, regions, and countries have done to reduce 11 greenhouse gases. ARB must evaluate how California's 12 Greenhouse Gas Program will affect the state's economy, 13 environment, and public health. And the legislation is 14 careful to ensure that environmental justice communities 15 will be heard as California develops and implements our 16 Greenhouse Gas Program. 17 The work must be complete, and ARB must adopt a 18 Scoping Plan by January 2009. 19 --o0o-- 20 PROGRAM PLANNING AND MANAGEMENT BRANCH CHIEF 21 CHANG: We are proposing a multi-step process to develop 22 the Scoping Plan. 23 First, evaluating the broad range of measures 24 that are available to reduce greenhouse gas emission using 25 a variety of tools. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 11 1 Second, assembling these measures into a few 2 scenarios for comparison. 3 And third, developing the staff proposal. 4 As we consider the best public policy approaches 5 for meeting the AB 32 goal, it will be vital for us to 6 keep both you, the Board, and the public informed and 7 involved as choices are made. 8 --o0o-- 9 PROGRAM PLANNING AND MANAGEMENT BRANCH CHIEF 10 CHANG: AB 32 requires the Scoping Plan to identify and 11 make recommendations on direct emission reduction 12 measures, alternative compliance mechanisms, market-based 13 mechanisms, and potential monetary and non-monetary 14 incentives. That is, the ARB should consider the whole 15 range of available tools to reduce emissions, from direct 16 regulation to incentive programs, to voluntary actions, to 17 market mechanisms, to any other measures. 18 In the near future, we will solicit stakeholders 19 and the public to get their ideas about greenhouse gas 20 reduction mechanisms. Our own list of possible strategies 21 will include the measures considered for early action, our 22 SIP measures, the actions identified by the Climate Action 23 Team, as well as other potential measures identified by 24 the staff. 25 We plan to evaluate the emission reduction PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 12 1 potential for all of these possible measures, as well as 2 the potential cost and implementation barriers. 3 The MAC report provides a valuable resource for 4 our evaluation of the one cross cutting approach, a cap 5 and trade system. Together with the input from 6 stakeholders, the staff's initial evaluation of all the 7 measures will be presented at a series of sector-based 8 workshops in November and December. For example, we will 9 hold separate workshops to discuss potential measures for 10 the electricity sector, the transportation sector, and 11 other important sectors. 12 --o0o-- 13 PROGRAM PLANNING AND MANAGEMENT BRANCH CHIEF 14 CHANG: As an example of the type of approach that we will 15 be taking, let's take a closer look at the electricity 16 generation sector. 17 Mechanisms to reduce emissions may include direct 18 regulations such as performance standards. In addition, 19 control strategies might include requirements that don't 20 look like ARB's typical regulations, but where other state 21 agencies may have expertise and experience, such as energy 22 efficiency standards for appliances and incentives or 23 voluntary programs to reduce energy usage. 24 Other measures may include renewable portfolio 25 standards or market-based programs like an emissions cap PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 13 1 and trade system. 2 --o0o-- 3 PROGRAM PLANNING AND MANAGEMENT BRANCH CHIEF 4 CHANG: Once we have compiled and analyzed the available 5 measures and tool, we plan to develop a few scenarios for 6 how California can meet the 2020 emission reduction goal. 7 We anticipate the scenarios will be illustrative. For 8 example, they may be structured to show the differences 9 between a strategy that relies heavily on direct 10 regulation, a strategy focused on incentive programs, and 11 a more balanced strategy. 12 ARB staff will analyze the impacts of each 13 scenario, including the timing of emission reductions, the 14 potential economic impacts, and how each scenario would 15 impact different industrial sectors, geographic regions, 16 and demographic groups. These scenario will be presented 17 at a workshop in March. 18 --o0o-- 19 PROGRAM PLANNING AND MANAGEMENT BRANCH CHIEF 20 CHANG: Based on the evaluation of the scenarios and 21 public input, ARB staff will then develop a draft Scoping 22 Plan. ARB must also consider the nuts and bolts of how 23 each measure will be implemented, as well as the impacts 24 of the measures on both criteria and toxic pollutants. 25 For some sectors, multiple measures, or a combination of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 14 1 measures, may be the most appropriate choice. 2 Staff will present the draft Scoping Plan at 3 workshops in June and July of next year, and based on the 4 public comment will revise the document into the final 5 staff proposal. The Board will consider the Scoping Plan 6 in November 2008. 7 --o0o-- 8 PROGRAM PLANNING AND MANAGEMENT BRANCH CHIEF 9 CHANG: Here's a summary of the time line for Scoping Plan 10 development. To give you a complete picture of what to 11 expect over the next several months, this time line 12 includes upcoming Board meetings focused on early actions, 13 the 1990 base line, and mandatory reporting. 14 As noted by the Chairman, we have accelerated our 15 review of additional early action measures. That item, 16 which was originally targeted for December, is now 17 scheduled for Board consideration in October. 18 I also want to note that we plan to hold 19 additional workshops on parallel tracks. One series of 20 workshops will discuss the mechanics of implementation. 21 For example, how an incentive program might work. A 22 second series of workshops will focus on community issues, 23 both the potential impacts of AB 32 measures on 24 communities, and also how communities can become more 25 engaged in California's greenhouse gas program. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 15 1 With that background, I'd now like to introduce 2 Winston Hickox and Lawrence Goulder who will provide the 3 MAC's report. 4 MARKET ADVISORY COMMITTEE CHAIR HICKOX: Thank 5 you. Good morning, Madam Chair and members of the 6 California Air Resources Board. 7 My name is Winston Hickox, and I appear before 8 you this morning as the Chair of the Market Advisory 9 Committee, joined by Larry Goulder, the Vice Chair of the 10 Committee. 11 The way we'd like to use our time with you this 12 morning is I'd like to take a few minutes to further 13 introduce the Market Advisory Committee to you in a little 14 greater detail. And in fact, I've asked a few of the 15 members of the Committee to prepare written statements 16 that I'd like to read into the record. 17 As you may or may not know, the 14 member 18 Committee was made up of four people from the state of 19 California and ten from outside the border of California. 20 In fact, a few from Europe. And I thought that hearing 21 from them would add to the discussion this morning as we 22 present the recommendations of the report. 23 I'll have a couple of overview comments of my own 24 as well, and then I'll turn things over the Larry to 25 basically discuss with you in brief form as well an PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 16 1 overview of the concept of cap and trade, some of the 2 guidelines that we kept in mind as we produced this report 3 that you have before you, and then a basic brief overview 4 of the recommendations of our report. And then lastly, 5 we'll take the time to be with you as long as you need us 6 here this morning to respond to questions you might have 7 about the individual recommendations contained in the 8 report. 9 So let me first begin by as has already been 10 indicated, reflect upon the incredible job that Linda 11 Adams and Cal/EPA did in selecting the members of the 12 Market Advisory Committee. All but one, the Chair. 13 The people that form this Committee that I'd like 14 to spend just a couple minutes reflecting upon in 15 additional detail so you have a sense of the expertise 16 that was brought to bare in the preparation and 17 presentation and the recommendations in this report are as 18 follows. 19 From the NGO community, Dale Bryk, a senior 20 attorney with NRDC, who you'll hear from in a moment as I 21 read her statement. 22 Daniel Dudek, a Chief Economist at Environmental 23 Defense. 24 From the Business Community, Paul Ezekiel is a 25 Managing Director at Credit Suisse, and he runs the bank's PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 17 1 global carbon trading business. 2 Steve Koonin is the Chief Scientist at British 3 Petroleum. And prior to that, he was a professor at 4 California Institute of Technology. 5 From the research community, Dallas Burtraw, a 6 senior fellow with the Resource for the Future, who holds 7 a Ph.D. in economics, was a key member of the Committee. 8 Actually, everyone was a key member. 9 Judi Greenwald, the Director of Innovative 10 Solutions at the Pew Center on Global Climate Change, was 11 also a member of the Committee. 12 And Jonathan Pershing, the Director of Climate 13 Energy and Pollution Program at the World Resource 14 Institute, who holds a Ph.D. in geology and biophysics. 15 From the public policy arena, and you all will 16 hear from Franz Litz this morning, he served as the 17 climate change policy coordinator for the New York State 18 Department of Environmental Conservation, and he was their 19 representative to RGGI. 20 Joe Nation, co-author of the bill AB 32 and 21 former member of the State Assembly and a consultant to 22 RAN and currently a professor as well. 23 Nancy Sutley, who worked for me at Cal/EPA, is 24 now the Deputy Mayor in Los Angeles for Energy and the 25 Environment and served in a number of key roles in the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 18 1 administration having to do with energy and water policy 2 as well. 3 And from the E.U., Martin Nesbit, the Director of 4 the National Climate Change Policy Division at Britan's 5 Department of Environmental Food and Rural Affairs, 6 DEFRA. 7 And Peter Zapfel, the E.U. Commissions Trading 8 Systems Coordinator for the European Commission. 9 And then there were a couple of others. 10 Representing academia, Larry Goulder, the Shuzo Nishihara 11 professor in Environmental and Resource economics. Larry 12 holds his Ph.D. in economics from Stanford University. 13 Lastly, I'll take a moment and offer a bit of 14 credentials in terms of my background. I had the pleasure 15 to serve with the Chair of your Board in the Jerry Brown 16 administration what is now called the roll of 17 Undersecretary for Environmental Affairs. We worked for 18 seven years in that administration. 19 I also served as the Secretary for Cal/EPA for 20 five years from January of '99 until November of 2003. 21 The other part of my working life has been in the 22 investment world, in the investment banking and securities 23 world. I held a Series 24 and Series 7 license. I was a 24 partner and managing director of a global investment 25 management firm investing capital on behalf of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 19 1 institutional investors like CalPERS and CalSTRS. In 2 fact, I just finished or will finish next Tuesday a 3 three-year stint at CalPERS as Senior Portfolio Manager 4 for their environmental investment initiatives. 5 Between the two systems, they've committed and in 6 many cases already invested nearly $2 billion in the 7 private equity space in clean technology in the public 8 equities arena and in a commitment to a 20 percent overall 9 improvement in the energy efficiency in their aggregate 10 $30 billion real estate portfolios. So I guess the reason 11 that I was asked to be a part of this group is the public 12 policy and investment banking background. 13 Now, as I indicated, I thought it important for 14 you to hear directly from some of the members of our 15 Committee. And so let me take a moment to read into the 16 record the following remarks. Too bad we're on Dale 17 already, because I'm going to start with Martin Nesbit and 18 Peter Zapfel. 19 "Serving on the Market Advisory Committee has 20 provided a fascinating opportunity for us to talk through 21 the theory and the practical experience of emissions 22 trading with a group of experts with profound knowledge in 23 the field. Although there were some differences of 24 emphasis among members of Committee, it was heartening we 25 were able to reach agreement on such a wide range of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 20 1 issues. 2 "Experience of emissions trading in the EU has 3 been an important contribution to the Committee's 4 recommendations for the design of emissions trading in 5 California. The first phase of the EU EGS was intended to 6 be a learning phase. 7 "On the positive side, it has proved it is 8 possible to get an emissions trading system up and running 9 in a short period with a high level of regulatory 10 compliance. 11 "On the less positive side, it has also shown the 12 importance of ensuring that caps are set to ensure 13 sufficient scarcity in the market so as to create a clear 14 carbon price signal. 15 "And we have learned of the potential of windfall 16 profits to participating firms when there are high levels 17 have free allocation. Public support for higher levels of 18 auctioning allowances is growing steadily in the EU. The 19 benefit of auctioning as a means of allocating allowances 20 efficiently and in a simpler manner, of rewarding early 21 reduction efforts, and of bringing forward low carbon 22 investment and innovation are now much more widely 23 understood. 24 "In addition, the decisions taken in the context 25 of the RGGI program to auction a significant share of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 21 1 allowances has been taken note of in Europe. Decisions 2 taken by the European Commission in recent months on caps 3 in Phase 2 of the EU ETS 2008 through 2012, the first 4 Kyoto protocol commitment period have now created high 5 levels of market confidence in the carbon price for 2008 6 and beyond. 7 "And political support for emissions trading 8 remains high in the EU. The approach here is to ensure 9 that a high level of ambition in reducing emissions is 10 accompanied by an emphasis on securing the most cost 11 effective means of achieving that environmental ambition. 12 Emissions trading by allowing reductions to be made where 13 they are cheapest is a central part of that approach. 14 "Reductions, whether at regulated installations 15 themselves or through project mechanisms like clean 16 development mechanism, need to be rigorously monitored and 17 pleased to ensure market and public confidence. 18 "Linking of schemes therefore needs mutual 19 confidence in levels of stringency and ambition. But once 20 that is achieved, it is clear to us that creating a wider 21 international carbon market, bringing together the EU 22 system with systems in California and elsewhere, has the 23 potential to supply the world with a powerful instrument 24 to tackle the shared challenge of climate change. 25 "We have been grateful for the opportunity of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 22 1 serving on California's Committee and wish you the best in 2 your efforts to develop a system which secures real 3 reductions in greenhouse gas emissions. At the same time, 4 we stand ready to share the carbon market experience as we 5 continue to learn lessons in Europe." 6 The next statement I'd like to read is from Franz 7 Litz. As I mentioned earlier, he worked for the state of 8 New York and was their representative to the RGGI program. 9 CHAIRPERSON NICHOLS: Excuse me, could I just ask 10 you to define or explain a little bit what RGGI is? 11 Because I don't think everyone is actually into the detail 12 of this. 13 MR. HICKOX: RGGI stands for Regional Greenhouse 14 Gas Initiative. And it's made up of those states that are 15 on the map behind you who have come together in their 16 joint effort to try and deal with climate change in a way 17 that does include the inclusion of a market program, 18 specifically cap and trade as one element of the program 19 to address climate change. And Franz and other members of 20 the Committee had a fairly amount of extensive experience 21 in the design of the program that was created at RGGI, 22 including Dale, who I'll read comments from in a moment, 23 and others as well. From Franz: 24 "I'm pleased to provide this statement 25 highlighting a few important aspects of the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 23 1 California Market Advisory Committee report. 2 "I'm the former Chair of the Northeast 3 Regional Greenhouse Gas Initiative multi state 4 working group and the former director of climate 5 change policy for New York's Environmental 6 agency. I am currently a Senior Associate with 7 the Center for Climate Strategies, a nonprofit 8 organization helping states and the nation tackle 9 climate change. 10 "The Secretary of Cal/EPA is to be 11 commended for assembling a diverse group of 12 expert thinkers for the Market Advisory 13 Committee. The final MAC report represents a 14 tremendous melding of diverse opinions and is 15 very much at the leading edge of thinking on the 16 design of market mechanisms to reduce emissions. 17 "Given the global scale of the climate 18 change problem, it is important that states and 19 regions develop programs that can be linked to 20 programs and in other states, regions, and 21 countries. In designing the Northeast Regional 22 Greenhouse Gas Initiative, we were careful to 23 construct a program that can be linked to 24 California's program. Linking was also a central 25 principle for the California MAC in coming up PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 24 1 with its recommendations. 2 "Two additional issues warrant special 3 mention. First, the Committee agreed that over 4 time all allowances in a Cap and Trade Program 5 should be auctioned. That is consistent with the 6 conclusion with most of the RGGI states where 7 100 percent of the allowances will be auctioned 8 from the start of the program. 9 "Lastly, on the question of offsets, or 10 project-based reductions from outside the sectors 11 covered by the Cap and Trade Program, in RGGI, we 12 determined that credible offsets were essential 13 to making our program affordable and effective. 14 The MAC report recommends a similarly prominent 15 role for offsets in California's program. 16 "Thank you for the opportunity to make 17 this statement." 18 And lastly, I'd like to read into the record a 19 statement from Dale Bryk, Senior Attorney with NRDC. 20 "I would like to thank the members of 21 the Board for considering the Market Advisory 22 Committee's report. I hope these brief comments 23 can give you some insight into the work of the 24 Committee and a better context in which to view 25 our recommendations. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 25 1 "As you know, the Committee was 2 comprised of a diverse group of experts with the 3 experience in market-based environmental 4 regulations including U.S. Acid Rain Program, 5 European Union's Emissions Trading Scheme, and 6 the Northeast States Regional Greenhouse Gas 7 Initiative. None of these initiatives are 8 perfect, but all of them provide valuable lessons 9 that can help California develop the package of 10 policies that will enable the state and 11 ultimately the region, the country, and the rest 12 of the world to reduce global warming pollution 13 on the scale and time frame needed to avert 14 potentially catastrophic impact. 15 "The Committee's report is an effort to 16 apply these lessons to the task that California 17 has set for itself: To reduce global warming 18 pollution statewide to 1990 levels by 2020 and 19 ultimately to 80 percent below that number by 20 2050. 21 "I'd like to highlight for you what in 22 my view are the key takeaways from our work. 23 "A mandatory cap, by which I mean a 24 regulation that requires entities in specific 25 sectors to meet a pollution limit under penalty PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 26 1 of law, is the only way to guarantee that 2 California meets emission reduction targets in 3 the largest polluting sectors. 4 "Other policies may be more important in 5 terms of delivering pollution reductions, and 6 especially in terms of driving innovation and 7 clean energy technologies. But many are 8 intensity based, such as the clean car and low 9 carbon fueled standards. And none guarantees the 10 state will reduce pollution to a specified level. 11 Only a mandatory cap can do this. 12 "Other policies are much more effective 13 than a cap at driving technological innovation in 14 specific sectors and may be part of the overall 15 package of policies that California adopts to 16 reduce global warming pollution. A cap alone 17 will not overcome the market barriers that 18 prevent investment and energy efficiency, 19 advanced vehicles and low carbon fueled. 20 Instead, the cap acts as an umbrella that will 21 ensure that all of California's other clean 22 energy policies add up to a specific emission 23 level. 24 "If California chooses to adopt a 25 mandatory pollution cap, it will put a tangible PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 27 1 value on the environment that does not currently 2 exist. The pollution allowances it would create 3 to implement the cap represent that value, which 4 California can and should use to reduce costs for 5 consumers, provide added protection to low income 6 consumers, promote investments in clean energy, 7 and improve the environment in the state's 8 overburdened communities. 9 "To the extent that California auctions 10 allowances to achieve these goals, the 11 controversial element of trading takes on a much 12 diminished role since each firm will purchase the 13 number of allowances it needs through the 14 auction. It will have a continual incentive to 15 reduce pollution in order to avoid the need to 16 purchase additional allowances. 17 "In the EU, governments gave allowances 18 to polluters free of charge and saw them enjoy 19 windfall profits. The RGGI states learned from 20 this experience, and every state that is 21 determined how it will distribute allowances has 22 decided to auction 100 percent of its allowances 23 and use the proceeds for public benefit. 24 "California should similarly ensure that 25 it distributes allowances in a manner that avoids PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 28 1 windfall profits and advances its public policy 2 goals. 3 "California cannot avoid the worst 4 impacts of global warming on its own. By 5 demonstrating that it is possible to reduce 6 pollution in a smart way that promotes investment 7 in new technologies, attacks high quality jobs 8 and brings economic benefits to the state, it 9 will encourage other states and nations to take 10 action. California also should be looking for 11 opportunities to link with other states and 12 nations in order expand the impacts of its 13 policies." 14 I appreciate you taking from the time to hear 15 from the other members of the Committee. I think it gives 16 you a better sense of the expertise that was brought to 17 bare in the production of that report and the 18 recommendations contained in it. 19 What I'd like to lastly do before I turn things 20 over to Larry, as I said earlier, I have a couple of broad 21 based overview comments of my own. 22 You know, it's been an interesting nine months as 23 I've watched this first from the perspective of CalPERS, 24 one of the world's largest institutional investors, and 25 recognizing as they have their fiduciary responsibility to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 29 1 respond to threats to the global economy, like climate 2 change, in their long-term investment policy. And then 3 watching the deliberative process as AB 32 went through 4 the process of becoming law. 5 And even more in the near term, there remains in 6 my mind some amount of misunderstanding potentially with 7 regard to some aspects of this. And I'd like personally 8 to associate myself with some comments that I think lays 9 to rest some of that controversy. 10 And Madam Chair, I think your opening remarks did 11 a better job than I would be able to in terms of setting 12 the context for this. But simply stated as I've mentioned 13 to you before, at least to some of you, the sense of this 14 being an either/or choice between market mechanisms, to 15 use the term of the legislation, or Cap and Trade Program 16 to be specific and prescriptive or command and control 17 regulations which are going to be incredibly important and 18 needed, which I commend you for your action yesterday in 19 bringing forth yet another well developed, well scripted, 20 highly defensible, well realized regulation on behalf of 21 clean air in California. 22 But these are the comments that I'd like to 23 associate myself with without attribution. Some may be 24 recognized. In reflecting upon this either/or dilemma, 25 someone say, "These two things can't be developed PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 30 1 separately. They have to be done in tandem." That person 2 also said you have to say a majority of emissions 3 reductions will come from regulations. I agree with that. 4 But we'll use the market to get whatever emissions we need 5 to get. That can only be effectively reached through 6 markets. 7 Another person said in the public medium, 8 "Fundamentally, it's a regulatory program" -- speaking of 9 markets -- "that's aimed at achieving a set amount of 10 emission reductions. It provides flexibility in how it's 11 achieved. But if not achieved, there are penalties." 12 And lastly, I'd look to quote another set of 13 comments on the topic of markets that is particularly 14 pleasing to me. It was published in yesterday's paper and 15 it's related to forestry products or the forestry sector 16 of the economy. "This rigor is critical because it 17 ensures that California's forest climate benefits meet 18 international standards, allow the state's forest projects 19 to be marketed globally for carbon reduction credits. The 20 market facilitates the sale of carbon emissions reductions 21 to entities and individuals seeking to reduce and 22 neutralize their carbon output and now exceeds 25 billion 23 annually." 24 So I would submit to you from my perspective that 25 this either/or is rapidly diminishing into the sunset. I PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 31 1 think as you framed it, both you, the Chair of CARB and 2 staff, this will be a tremendous exercise to undertake on 3 your part to meet the goals of AB 32 and to do it in a way 4 that takes into account all of the possible tools that you 5 might use. And I'd like to say as I turn it over to 6 Larry, I was pleased to have a chance to be associated 7 with what I think is a quality effort to describe for you 8 cap and trade and its potential. Thank you. 9 Larry. 10 CHAIRPERSON NICHOLS: Thank you, Winston. I'm 11 sure you'll be around to answer some questions. 12 (Thereupon an overhead presentation was 13 presented as follows.) 14 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: 15 Chairman Nichols and other members of the Board, I want to 16 say it's a privilege to be here today. I felt very 17 honored to have been asked to serve on the Market Advisory 18 Committee. It's been a pleasure working on that 19 Committee. I've enjoyed working with Winston and with the 20 staff, including Eileen Tut, who's here today. And I feel 21 it's been a great privilege to take part in this effort to 22 meet the stated goals on the environment under AB 32. 23 What I want to do is to offer as Winston 24 indicated very briefly a quick run through of what is 25 involved in cap and trade, indicate what were the criteria PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 32 1 that we focused on in order to evaluate different design 2 options for a potential cap and trade system in 3 California. And finally, to indicate again very briefly 4 what some of our main recommendations are. 5 I want to be brief in order to leave a lot of 6 time for your questions. 7 --o0o-- 8 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: So 9 the first thing I would like to do is give a little 10 context. This is a figure from our report that shows 11 greenhouse gas emissions in the state. This is for the 12 year 2004. But the general pattern is pretty similar 13 today. Hasn't changed much. And there are two things I 14 want to show from the figure. 15 First, I should say, it's showing for various 16 sectors of the California economy how many million metric 17 tons of CO2 or equivalents in terms of other greenhouse 18 gases were emitted in the year 2004. 19 There are two things that I think really are most 20 important from this figure. First, you'll notice that the 21 blue color here really dominates. Blue here stands for 22 emissions of carbon dioxide. A large share, I think 23 approximately 90 percent, maybe it's 85 percent, of the 24 emissions of greenhouse gases are carbon dioxide from 25 California. So when we're talking about reducing PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 33 1 greenhouse gases under AB 32, to a very large extent, it's 2 reducing carbon dioxide. Not exclusively so, but 3 primarily so. 4 The second item that stands out in the picture is 5 if you look at the first four labeled elements on the 6 horizontal axis, the three sectors of electricity, 7 industrial emissions, and transportation emissions, they 8 together account for the lyon's share of emissions in 9 California. So that trying to reduce emissions of 10 greenhouse gases you'll get a long way in that effort if 11 you can reduce emissions from these three sectors. 12 In particular, it shows the transportation 13 emissions are a very big contributor in California. With 14 that as background, we can ask, well, why introduce a cap 15 and trade system when California through the efforts of 16 the Air Resources Board has been so successful, indeed a 17 world leader, in reducing emissions of various sorts, not 18 just for climate, but for other kinds of environmental 19 protection over the years. 20 Well, I think there are many advantages or 21 strengths or potential attractions of cap and trade. But 22 I want to emphasize two. And the first is that 23 introducing a cap and trade system alongside, not instead 24 of, but along side direct regulation can significantly 25 lower the cost of achieving the statewide target of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 34 1 emissions reductions. 2 And as you know, AB 32 calls for approximately 25 3 to 30 percent reduction in emissions by the year 2020 4 relative to what would otherwise have been the case. 5 And this is not just a matter of theory. 6 Empirical studies of existing cap and trade programs, such 7 as the emissions trading under Title 4 of the U.S. Clean 8 Air Act in the midwest and northeast for sulfur dioxide 9 emission, existing studies indicate that relative to a 10 system without cap and trade, the presence of a -- 11 --o0o-- 12 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: 13 ---- cap and trade system lowered the cost of that program 14 by between 45 and 55 percent. Similar statistics apply to 15 the program that exists in the Los Angeles air shed under 16 the reclaim program for reducing SOX and NOx emissions. 17 And although the reclaim program has had its difficulties, 18 there's still broad consensus it did manage to reduce the 19 cost of emissions around 40 to 45 percent. 20 So we're talking about significant cost 21 reductions. And we are not just talking about reducing 22 cost to industry in particular. It's also reducing cost 23 that apply to workers in the sense it implies lower 24 impacts on employment. And it reduces the cost to 25 consumers since the prices -- since it means that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 35 1 regulation, including a Cap and Trade Program, would 2 involve smaller increases in consumer prices. 3 The second main advantage, and the reports 4 mentions others, but I consider these the two most 5 important, is that as the name suggests, it establishes a 6 clear, unambiguous cap on overall emissions. You indicate 7 by the number of allowances that are issued the total 8 amount of allowable emissions. And, thus, it is clear 9 what the total amount will be so long as the program is 10 enforced. 11 Now, incidentally, that cap need not be the 12 overall cap for the state in that there might be some 13 emissions that are outside of the Cap and Trade Program. 14 But for whatever entities are within the Cap and Trade 15 Program, there will be an unambiguous cap. So I think 16 those are two very important elements. 17 As Dale Bryk already commented, direct regulation 18 has had and will continue I would hope to have a very 19 important role in meeting the state's targets. But since 20 many direct regulations are really based on intensities 21 rather than absolute levels of emissions, they don't avoid 22 the ambiguity in terms of total emissions. 23 So as promised, let me indicate very briefly what 24 are some key elements of the Cap and Trade Program. 25 --o0o-- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 36 1 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: 2 First of all, you have to establish the cap. This would 3 be some amount that would be consistent with the overall 4 goals under AB 32 how much emissions would be allowed to 5 achieve the reductions that we -- consistent with 6 achieving the reductions that we want. 7 And just mention this does not mean it's the 8 overall cap for the state as a whole, as there might be 9 some entities outside of the program whose emissions would 10 need to be reduced in order to meet the state's target. 11 The second element is to allocate emissions 12 allowances, sometimes called emission permits, tradable 13 permits, to the facilities are that covered by the 14 program. So after deciding which sectors or entities 15 would be in the program, there has to be some method of 16 allocating or putting into circulation emissions 17 allowances. 18 Each allowance entitles the holder to a certain 19 amount of emissions say per year. And so the total number 20 of allowances indicates the total amount of emissions but 21 all facilities allowable per year. 22 A crucial issue is how to allocate the 23 allowances. You've already heard by the comments by 24 Winston and the letters that were submitted by some 25 members of our Committee that there's an important PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 37 1 question here as to how to allocate. One method is to 2 freely allocate the allowances, that is to give them out 3 according to some method, some rules to various facilities 4 without charging them for them. 5 The other extreme, you could auction all of the 6 allowances so that the regulator does not need to decide 7 specifically to whom to give the allowances, but let the 8 market decide that. Or it's possible to do something in 9 between. I'll say in a moment what the Committee decided 10 on this very important issue. 11 These allowances are valuable. So how you 12 allocate them, whether you charge for them initially, has 13 very important implications as to the distribution of 14 wealth within the state. 15 Third, as the name suggests, you allow for 16 trading. And trading is really crucial. It's the key to 17 achieving cost reductions. Through trading, it turns out 18 that the responsibilities or the efforts to reduce 19 emissions end up being done by those who can do it most 20 cheaply. 21 And finally, there's the part which would apply 22 under any regulatory program. You need to make sure at 23 the end of the compliance period each facility is not 24 emitting any more than is entitled according to the number 25 of allowances it is holding and submitting. So monitoring PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 38 1 and enforcement is important. 2 So I think a crucial question, at least a crucial 3 argument for cap and trade in California, is that it can 4 reduce the cost. We're all in favor of achieving the AB 5 32 targets. The reason that I, other members of our 6 Committee, and many people in California believe cap and 7 trade should be a part of it is the belief that we can get 8 to our goals at much lower costs if we include alongside 9 direct regulation a Cap and Trade Program. 10 --o0o-- 11 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: 12 How is it that trading can lower the cost of achieving 13 emission reduction targets? 14 Well, the idea is basically this. That with 15 voluntary trading, the buying or selling of allowances by 16 those who are currently holding them, two things happen. 17 If a facility or source finds that it's very costly for it 18 to cut its emissions enough to be within the amount that's 19 authorized by the amount of allowances it originally 20 holds, it will find that it's most advantageous for it to 21 buy additional allowances rather than have to cut its 22 emissions back so much. That is, by buying the additional 23 allowances, that facility is able to emit a little bit 24 more than otherwise would be the case. And the cost of 25 buying those additional allowances ends up being less than PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 39 1 what it would have cost the entity to reduce its emissions 2 down to the original level dictated by its original 3 holding of allowances. 4 Some sources, particularly those for whom the 5 costs are especially high, will end up wanting to be 6 buyers of allowances. We are not going to change the 7 total of amount of allowances. For every purchase, there 8 has to be a sale. So there are these entities that also 9 will find it advantageous to sell their allowances. These 10 are the entities for which it's relatively inexpensive to 11 cut emissions. Why would they want to sell these valuable 12 allowances and thereby have to cut their own emissions 13 even more? Because the price of allowances dictated by 14 the supplies and demand for allowance ends up being higher 15 than what it costs the firm to take on more reductions. 16 So for these entities, it's worth selling the allowances, 17 getting the proceeds of the sale which more than 18 compensates for the additional emission reductions. 19 Notice that both entities, the buyers and the 20 sellers, end up lowering their cost by buying or selling. 21 And at the same time, the total amount of allowances in 22 circulation doesn't change, because you've just 23 transferred allowances from one entity to another. The 24 total amount doesn't change. So the total amount of 25 allowable emissions remains the same. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 40 1 And yet very importantly, the state would 2 benefit. Because more of the work now as a result of the 3 buying and selling is going to be done by those entities 4 for which the cost is relatively low. Those are the ones 5 that end up selling their allowances. 6 Now in theory you could do this through direct 7 regulation -- 8 --o0o-- 9 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: -- 10 by just telling each entity how much to reduce. If a 11 regulator had enough information to spot who has the very 12 lowest cost, it might be able to do that. But that would 13 pose very significant information requirements on the 14 regulating agency. 15 And that's where this 50 percent or so cost 16 reduction really comes from under the various studies. 17 It's that through the trading, the market ends up finding 18 those entities that can cut emissions very low. And it 19 thereby achieves the cost reductions. I'm not going to 20 promise or wouldn't promise a California Cap and Trade 21 Program would reduce costs by 50 percent. But I am saying 22 there's significant potential based on other studies. 23 One thing to note is that again I mentioned that 24 since the number of allowances in circulation doesn't 25 change, it's not the case as is sometimes claimed that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 41 1 introducing a market for emissions allowances is basically 2 providing an unlimited license to pollute. Just as under 3 direct regulation under cap and trade, there is a cap. 4 There is some something that limits the total amount. 5 --o0o-- 6 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: So 7 this isn't an unlimited license. You're restricted to the 8 amount of emissions that are associated with the allowance 9 that one holds. 10 The other thing -- and Winston mentioned this. 11 And I think there's a fundamental misunderstanding about 12 cap and trade that seems to have considerable currency. 13 And that is that there's this conflict between a cap and 14 trade system and direct regulation. In fact, it is not 15 the case. We tried to emphasize that in our report. And 16 this may be the most important item that I would mention 17 this morning. And that is you can think of a cap and 18 trade system as a kind of umbrella -- I believe Dale Bryk 19 used that same term -- for those sectors that are under 20 the program. 21 Suppose, for example, it's the electricity 22 sector. Maybe you could include other sectors as well. 23 Then to the extent that the electricity sector has direct 24 regulation in it, such as performance standards on utility 25 oilers or appliance standards that are proposed or on the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 42 1 demand side management programs, all of those things help 2 to meet the cap. It actually serves the cap. It makes 3 the direct regulations perfectly complimentary to a cap 4 and trade system. In many ways, you can think a cap and 5 trade system is relying on direct regulation to do some of 6 the work. Then as indicated in this graphic, because it 7 sets a price of emissions, it also provides incentive for 8 further reductions that may not be captured by direct 9 regulations. 10 But these are not at all at odds with the Cap and 11 Trade Program. This is part of the Cap and Trade Program. 12 And potentially just to logically complete it, there may 13 be some reductions that people do, not because of the 14 price incentive or because they're forced to from direct 15 regulation, but there are other incentives as well. But 16 all of those things fall under the cap that is for those 17 sectors captured under the cap. 18 --o0o-- 19 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: So 20 once again, to the extent that electricity or 21 transportation or large industry is under the cap, then 22 whatever direct regulation is used to help reduce 23 emissions, that would be welcome by a cap and trade system 24 because it helps reduce pressure on the cap. Helps lower 25 the allowance prices and helps California meet its goals. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 43 1 So there is not a conflict between the two in my view. 2 --o0o-- 3 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: 4 Now, finally, I want to indicate some design issues and 5 briefly mention some recommendations. 6 Some of the issues are how broad to make the 7 program. What sectors should be covered. It's a very 8 important issue. 9 A second issue is what greenhouse gases should be 10 included under the cap. Should it be carbon dioxide? 11 Should there be other greenhouse gases included? This 12 will depend in part on monitoring costs and administrative 13 feasibility. 14 A third important issue is as we've already 15 suggested, how should allowances be allocated. Give them 16 out free or should they be auctioned, or some combination? 17 As Winston discussed already and as was indicated in some 18 of the letters, giving all the allowances out free, 19 there's now a clear history that it does create 20 significant windfalls. And you don't need to give all the 21 allowance free to make whole some of the key regulated 22 entities. You can make whole these entities by providing 23 just a small share of the allowances free and the rest 24 could be auctioned, which would provide revenues for a lot 25 of important public initiatives. So this is a very PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 44 1 important issue as well. 2 I might just mention as an aside that there are 3 some academic work a number of people had contributed to 4 over the years on free allocation versus auctioning. And 5 they appeared in economic journals. And they said free 6 allocation, 100 percent would over compensate the 7 regulated entities, lead to wind falls. That didn't have 8 any big effect I think on policy compared to just the 9 experience over the last year or so in the European Union 10 trading system where we observed the windfalls. That had 11 far more impact I think on people's perception of things. 12 Should the program allow for offsets? Should it 13 allow for entities that aren't automatically under the 14 program -- suppose it's the forest sector, should an 15 entity that's under the program that's having a hard time 16 meeting its obligation in terms of emission reduction, 17 should it be able to get credit equivalent to emission 18 reduction for the financing of, let's say, sequestration 19 of carbon dioxide through tree planting or forestation or 20 other land use policies? Should we allow for these kind 21 of offsetting things outside of the program? 22 And finally, there's a very important issue of 23 leakage, especially related to electricity. Many people 24 are concerned appropriately that if you introduce a 25 program in California what that will do is it might lead PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 45 1 to changes in behavior whereby people escape the program 2 by purchasing, say, imports which lead to more emissions 3 outside of the state of California. And yet, those 4 emissions might not be captured under the Cap and Trade 5 Program. 6 So want to make you can't escape the program. 7 You either by buying electricity from outside, which of 8 course has to be generated and therefore would lead to 9 increased emission outside of the state. Want to make 10 sure the ultimate spirit of the Cap and Trade Program is 11 upheld. 12 So how do you avoid leakage? I'm going to 13 mention the recommendations in just a moment accompanying 14 each of these five bullets. But I think it's probably 15 worth mentioning the criteria we applied to arrive at our 16 recommendations. 17 --o0o-- 18 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: 19 One is environmental integrity. The system must be such 20 as to ensure that we actually do get real reductions, that 21 you can't escape the goals of the program. So 22 environmental integrity is crucial. 23 Second, cost effectiveness. That is other things 24 equal. We want the program to be such as to achieve its 25 goals at the lowest possible cost. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 46 1 And here, cost doesn't simply mean reduced cost 2 to industry. It also would mean lower administrative 3 costs, lower cost to the consumers. We interpret cost 4 very broadly here. 5 A third important issue is fairness. Obviously, 6 the environmental justice community and other stakeholders 7 are very concerned about this issue, and we wanted very 8 much to come up with a program that would not only be 9 effective, but would be fair in terms of which entities -- 10 in terms of how the burden of the program is shared across 11 various members of the state. 12 In addition, it should be fair in terms of the 13 environment. It would be hugely unfair to have a cap and 14 trade system that led to hot spots or a concentration of 15 emissions in one area as a result of trading. So we 16 worked very hard to assure that that would not happen. 17 And finally -- and I imagine you can sympathize 18 with us on this. Simplicity is at odds with the first 19 three criteria. That if we only had to do one thing, it 20 would be simpler. But trying to do all those things, and 21 yet as Chairwoman Nichols indicated at the beginning, this 22 important issue of simplicity and public perception. So 23 we wanted to keep this system as simple as possible. 24 --o0o-- 25 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 47 1 I'm going to conclude -- I guess I have two more slides. 2 First saying we were very committed to making use of 3 lessons from the past, designing a program as emphasized 4 that would complement rather than substitute for existing 5 and proposed regulations. And also designing a program 6 that meets environmental justice and other concerns. So 7 there will be no softening of the state's other rigorous 8 environmental laws to improve air quality or water 9 quality. And we would also prevent local pollution. 10 So, finally, here are our recommendations. 11 --o0o-- 12 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: In 13 terms of what sector to cover, we as a Committee felt a 14 broad system was best. And the reason is the broader the 15 system, the more there's the potential to exploit the low 16 cost opportunities, the low-hanging fruit. So rather than 17 have a system that just applied to electricity, we felt it 18 should apply more broadly to the industrial sector, the 19 manufacturing sector, and to transportation. 20 I'm sure there will be some controversy about 21 that. But we felt the potential to lower cost and to 22 provide a consistent price signal across the economy was 23 really important and it was worth having this broader 24 coverage and that administratively this is very feasible. 25 Second, what greenhouse gases to include. Well, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 48 1 as the very first graph indicated, carbon dioxide is 2 really 90 percent of the story. So, obviously, carbon 3 dioxide would need to be included. 4 And then we indicate some particular cases where 5 it's feasible and relatively low cost to monitor other 6 greenhouse gases, including HFCs, PFCs, F6. And we 7 detailed in the report where that applies. But in many 8 cases, we found it was just too difficult 9 administratively. 10 Now, I think in many ways our Committee would 11 defer to the Air Resource Board that has much more 12 expertise on these issues as to monitoring capabilities. 13 But we felt that to a large extent monitoring difficulties 14 would make it hard to capture in a big way a lot of the 15 other greenhouse gases. Maybe over time the technologies 16 will change so that becomes more possible. 17 In some sense, we were more ambitious with 18 respect to coverage across sectors than in terms of 19 coverage across gases. 20 Third, how should allowances be allocated? Our 21 Committee didn't achieve full consensus on this. Some 22 wanted 100 percent auctioning from the start for the 23 reason that it would prevent windfalls and the revenues 24 could be used for good purposes. Some could be rebated to 25 certain entities needed to make them whole so you could PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 49 1 achieve just as much through free allocation, and yet 2 administratively it would be much simpler. 3 But others on the Committee felt we should start 4 with a certain amount of free allocation. We ended up 5 saying we should move toward 100 percent auctioning, but 6 not necessarily start with 100 percent. Never the less, 7 consistent with what seems to now be the consensus outside 8 of California at RGGI and the European Union, auctioning 9 seems to be very much in favor. 10 Fourth, should we allow for offsets? This turns 11 out to be a very controversial issue. Many feel that 12 offsets run the risk of having phantom emission 13 reductions. And again, an offset would be an activity 14 that's not ordinarily covered by the cap and trade system, 15 but could count as equivalent to reducing emissions, such 16 as a land use change that leads to the biological 17 sequestration of carbon episodes. 18 So what we said is we want to apply a very tough 19 standard, but we don't want to rule out offsets from the 20 beginning. We want to just say we, in principle, say that 21 we're not making as sort of a blanket rule saying no 22 offsets. But we're saying if there are going to be 23 offsets, there are very tough rules in terms of 24 verifiability and additionality. That means they have to 25 truly be activities that wouldn't have happened otherwise. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 50 1 And, finally, how to avoid emissions leakage. As 2 the Air Resources Board I'm sure knows now all too well, 3 this is a really difficult issue. We laid out our report 4 a way which we think is not perfect but which gets at a 5 lot of the problem. In essence, what it says is that if a 6 wholesaler of electricity purchases electricity from a 7 generator outside of the state, the emissions generated to 8 make that electricity count just as much under the cap as 9 emissions that would be generated from within the state. 10 So you cannot escape the cap simply by shifting your 11 demand for electricity generated outside the state. 12 Now there are very serious problems as detailed 13 in the report as to knowing exactly how much emissions 14 really are coming from electricity generated outside of 15 the state. You sometimes have to make sure you don't let 16 the perfect be the enemy of the good here. You might want 17 to apply a certain averaging to try to figure out the 18 emissions. But we think that goes a long way to dealing 19 with the leakage issue. 20 So again, I want to thank you for the opportunity 21 first to be on the Committee and the opportunity today to 22 talk with you. And I hope that this has been helpful. 23 I'm looking forward to our discussions. 24 CHAIRPERSON NICHOLS: All right. Thank you very 25 much. There's a lot of content here. And I know a little PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 51 1 bit because of having watched the work of the Committee 2 through my friend and colleague Nancy Sutley about some of 3 the discussions that went on. And I can imagine that the 4 group of the kind of experts that you had involved here 5 that there were a lot of heated discussions about many of 6 these elements. So you're to be congratulated on having 7 reached such a high degree of consensus on some issues 8 that may sometimes take on almost theological overtones, 9 having seen some of these discussions at work. 10 I'd like to open up the discussion to the Board, 11 and just let's have at it for a while here starting out 12 with Dan Sperling. 13 BOARD MEMBER SPERLING: Thank you. 14 I do also want to add the compliments and the 15 thanks to the Committee for really a very thoughtful 16 quality document. And I know also that there were a lot 17 of discussions, and I think that's going to be very useful 18 to us here and to the state as we move forward. 19 I have a few thoughts I wanted to add. You know, 20 first of all, let me weigh in just briefly on this issue 21 about markets versus regulation. And I think it's a 22 little different. I think my thoughts are a little closer 23 to what Mr. Hickox said than Professor Goulder. You know, 24 it's presented as a dichotomy or sometimes as a 25 complimentary or is it a conflict. I think it's very PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 52 1 different from that. I think that in practice what we're 2 talking about are instruments that are hybrids of 3 regulations and so-called market approaches. There are 4 very few pure carbon approaches. The carbon tax would be 5 one, which I don't know how much consideration will be 6 given to that. But almost everything else is not a pure 7 market approach. And in fact, most of the so-called 8 regulatory approaches are not pure regulatory approaches. 9 And cap and trade is a good example of that. The low 10 carbon fueled standard is another example. 11 So I would suggest that it's not only not a 12 dichotomy, but it's misleading. It's inaccurate. And 13 it's polarizing as well. So I'd like to urge that we stop 14 using that -- characterizing the discussion in terms of 15 those terms. 16 One phrase I'd like to use is just 17 incentive-based approaches. And maybe that's a more 18 powerful and descriptive way of thinking about it. 19 But so, you know, the other part is that what 20 we're talking about here is something so huge, you know. 21 In some ways we can think this is going back to like the 22 early 70s, 1970s when we first started to regulate air 23 pollution and water pollution. Only it's even much bigger 24 than that. 25 And in the same way, you know, where there are PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 53 1 clashes of science and theology and ideology and politics, 2 also here we're going to be working through understanding 3 these different approaches and thinking about them in 4 different ways and what really works. And that's what we 5 need to do is figure out what really works. 6 Because what we are doing is much more pervasive 7 and much more expensive than anything we've even 8 conceived. We thought what we did yesterday was expensive 9 and difficult. What we're talking about here is far more 10 challenging and far more -- in my terms, far more 11 important. 12 So then getting to what this Committee did on cap 13 and trade. And as was indicated, the Committee was called 14 a Market Advisory Committee. And if we stick with that 15 word market for just one nano second more, there are lots 16 and lots of other market-based incentive-based approaches 17 that we can use and that we will be using and should be 18 using. 19 But looking at the cap and trade in this report 20 in particular, I do have a few concerns with it. And that 21 is, while I think it is a very powerful tool and I think 22 we definitely need to be pursuing it and implementing it 23 and it will be an important part of what we do, I do have 24 some concerns with it. 25 One is, first of all, thinking of it as this PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 54 1 umbrella. I'm not sure umbrella is the right way to think 2 about it. Because in some sectors maybe with electricity 3 generation that is what it will be. But it's not clear to 4 me that in other sectors that's what it will be. In other 5 sectors, it might just be one little piece of the puzzle, 6 that there will be other instruments that are more 7 important and more powerful and more effective than a cap 8 and trade. 9 And also this idea -- and I'll get into that just 10 a little bit in a second. The other idea this is an 11 unambiguous cap and why that makes it so precious and 12 valuable and desirable. You know, we had in a sense caps 13 in 1970 for air pollutant, criteria pollutants. You know, 14 just because we had specific numbers doesn't mean we 15 achieved them. And you can achieve them if you keep 16 tightening intensity targets, you can get to those 17 reductions arguably just as well. In other words, there's 18 lots of ways of getting at -- using the phase unambiguous 19 I don't think is a very useful way of characterizing it. 20 And probably the biggest concern is that I'm not 21 sure how well this is going -- I want to support cap and 22 trade, and I do. And I think it's very important. But as 23 I said a moment ago, I think it will work very well. It 24 will be very important in the electricity sector. But 25 beyond that, I don't know. I'm not convinced how PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 55 1 effective or powerful it will be. In the transportation 2 sector, which I know best, I don't think it will be, you 3 know, a dominant or important part of it. You know, the 4 1493 type rules that we have for vehicles, the low carbon 5 fueled standard for fuels and whatever we can do in terms 6 of users, which is the third leg of that stool that we 7 haven't dealt with yet, you know, that the cap and trade, 8 at least the way as I understood it that the Market 9 Advisory Committee characterized it, is really a cap on 10 oil refineries. And at the oil refineries, the emissions 11 from the oil refineries are a tiny part of the actual 12 emissions in the transportation sector, you know, 13 depending on how you define them, of course. But most of 14 the carbon comes about more upstream and it's combusted 15 down stream. 16 So I guess -- I know I've probably talked too 17 long, but I saved up my time from yesterday. 18 CHAIRPERSON NICHOLS: There's no cap on Board 19 members. 20 BOARD MEMBER RIORDAN: I'll trade him and give 21 him a little of my time for a price. 22 BOARD MEMBER SPERLING: I just want to conclude 23 by saying this idea of cap and trade is really 24 fundamental. We don't understand it. Part of my comments 25 are suggesting that we've got a long ways to go in terms PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 56 1 of understanding exactly how we're going to implement it. 2 There's the interfaces, interactions between a cap like in 3 the transportation sector that I know best. You know, how 4 do the caps on the oil refineries relate to the caps on 5 electric utilities that will be producing electricity for 6 electric vehicles and plug-in hybrids. How does it 7 interface with the low-carbon fuel standard? How does it 8 interface with the 1493 standards? That's just the first 9 order of questions that we're dealing with, before we even 10 get to the second order. 11 So we've got a lot of work here. This is going 12 to be difficult. We need everyone -- I want to be very 13 positive about this, because we really need everyone to be 14 participating and working together on it. And I would 15 call this an extremely important valuable first step. But 16 we have a whole lot more steps. 17 CHAIRPERSON NICHOLS: Thank you. Could I invite 18 Winston and Larry, the two of you, to actually come up and 19 sit? I realize we haven't deputized you as members of our 20 staff. But it will be more comfortable and less formal 21 than having you have to jump up and down so we can have 22 more of a conversation. Thank you. 23 MARKET ADVISORY COMMITTEE CHAIR HICKOX: Rushing 24 to the microphone as I was, I would simply like to say the 25 following. Thank you very much for sharing. And thank PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 57 1 you all for getting in the spirit by trading immediately. 2 And let my also further indicate that if I've ever seen 3 something that illustrates the point that we are all in a 4 learning phase already, even if we haven't established one 5 formally as they did in Great Britain or the EU system 6 rather, it's important to recognize we all do have a lot 7 to learn. 8 And what we hope more than anything is what we've 9 included in the 116 pages roughly of our report is that 10 the foundation for exploring this topic and understanding 11 as was part of our presentation, Larry's remarks in 12 particular, areas where there's obviously going to be 13 controversy and the need for further analysis by your 14 staff and probably further hearings to draw information. 15 But I find much that you said that I can agree 16 with, Member Sperling. Thanks. 17 CHAIRPERSON NICHOLS: Other Board members want to 18 chime in at this point? 19 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: I 20 appreciate your comments, Member Sperling. I'm largely in 21 agreement. 22 In my university classes, I refer to cap and 23 trade as a hybrid. That is as a combination of a command 24 and control element, which is the cap, and then a market 25 element, which is the trading. And I think that the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 58 1 substantive issue is there are a lot of people out there 2 that are very worried about whatever we call it is 3 consistent with other forms of regulation. But I agree 4 with you on the terminology. I think I was adapting what 5 a lot of people used, even though I, myself, am not so 6 comfortable with it. 7 Secondly, I think that you bring out a very 8 important issue about the unambiguous cap or what's really 9 at stake here. I think it probably would have been more 10 to the report point if our report said this. Through a 11 cap and trade system, the limit on emissions is done at 12 once and you in some sense don't have to return to it. 13 Whereas, under other forms of regulation, like 14 intensity-based regulations or performance standards, if 15 the emissions turn out to be different from what you want, 16 then you have to make further adjustments. Maybe tighten 17 the performance standard or the intensity target. So I 18 guess you're absolutely right. The essence here is 19 whether you can sort of do it in one step versus have to 20 make later adjustments. 21 Just one thing to clarify. In terms of 22 transportation, we try to deal with the transportation 23 sector. We recommend dealing with that through a cap on 24 the fuel input to refineries, not the emissions. So in 25 effect, what that does is that constrains the fuels that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 59 1 then go downstream leading to price increases. And it's 2 in that way that we try to deal with discourage emissions 3 in transportation. 4 BOARD MEMBER SPERLING: Could I ask you a 5 question about that? Why did you have oil refineries in 6 your second stage? I see no reason why it couldn't be in 7 the first stage. There's already -- ARB already regulates 8 fuels. We have very extensive regulations and 9 relationships and data collection, enforcement. Why not 10 have that in the first tier? Why didn't that get moved 11 up? 12 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: I 13 don't feel I had the most expertise on that issue, in 14 general. Those to whom we deferred on the Committee made 15 the judgment that transportation might require -- 16 refineries might require more lead time. But in fact I 17 think the Committee would be very happy to hear what you 18 just said. This was only sort of acting as a caution, 19 saying maybe we should wait. If it's not the case, that 20 would be great. We think that deserves some close 21 attention. 22 BOARD MEMBER SPERLING: Just to emphasize that 23 point. Exxon has been running ads the last week or so 24 lauding, praising themselves for how much they've reduced 25 emissions and improved energy efficiency of their PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 60 1 refineries and the large improvements. So they've already 2 bought into this. 3 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: 4 The final comment is I very much agree with you on the 5 issue of regulatory interactions. And I think that needs 6 to be explored more, such as the interaction between 1493 7 and a cap and trade system. We touched on it in the 8 report, but I think that's deserving of a closer look. 9 CHAIRPERSON NICHOLS: I think it's interesting 10 that each of us seize the problems or the potential 11 problems of the market most clearly with respect to the 12 sector that we know the best. 13 So in my case, having recently served as a Board 14 member for a large municipal public utility, I'm full of 15 concerns about how the market would work with respect to 16 the utility sector. I understand there have been a lot of 17 people thinking about and advocating approaches in this 18 area. 19 But I know from the perspective of at least one 20 utility that serves the public of the city of Los Angeles 21 and which has far and away the most challenging task in 22 terms of having a very large emissions profile because of 23 investments that were made many years ago in out-of-state 24 coal facilities that everything that you mentioned from 25 the auction to the trading fills them with alarm. It's PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 61 1 really interesting to think about how you could adjust a 2 system in a way that would get the kind of benefits that 3 we're talking about without causing real relative harm to 4 the customers of that particular utility who happen to be 5 all the citizens and businesses in the city of Los Angeles 6 visive residents of other parts of the state who happen to 7 be served by utilities that for reasons of history and 8 geography serve their customers primarily through hydro 9 electric power, for example, rather than through coal. 10 So I'm sure there's going to be a lot of 11 attention given to that as time goes -- as we move 12 forward. And we'll just have to let those discussions 13 play themselves out. 14 But it's interesting that because of the relative 15 cleanness overall of California utilities and the relative 16 energy efficiency we have in this state versus other 17 states, the additional costs of meeting the CO2 targets, 18 however we end up doing it, I think does require us to 19 think really carefully about what possible methods we can 20 come up with to make those costs more disbursed throughout 21 the economy, having lived as did Winston through the 22 run-up in energy prices that happened with the California 23 electricity crisis under de-regulation and the hardships 24 that occurred as a result of all of that. I don't think 25 anybody wants to see anything like that ever happen in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 62 1 this state again. 2 So I'm not really asking you to ensure me that 3 won't happen, because it's everybody's responsibility now. 4 Your Committee has done its share. I'm just kind of 5 noting I think this is something we're all going to be 6 forced to really grapple with as we start to actually 7 think about moving forward. 8 If there aren't any immediate questions about the 9 report -- sorry. We do have one more comment. 10 BOARD MEMBER D'ADAMO: I do. Thank you. 11 Well, kind of following up, Madam Chair, on what 12 you just said about perhaps California already being 13 pretty clean in terms of energy efficiency, the question 14 that I have has to do with offsets. And I understand the 15 need for the offsets to be clear and verifiable. But I'm 16 just wondering if we don't have some type of strong offset 17 program, what other mechanism would we have to get at land 18 use and also further energy efficiencies within the 19 residential and commercial sector. I'm looking at the 20 first chart that you provided, and it's the first four 21 bars, the cap and trade, and also the regulatory scheme 22 would likely focus on, sort of hitting the wall over at 23 the residential section. 24 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: 25 Well, one thing is that I think it's easier to answer for PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 63 1 residential. As you may know from the report, we offered 2 two options for developing a program, but both end up 3 being comprehensive but by different routes. One is 4 comprehensive. It actually would capture -- would provide 5 incentives for reductions from the residential sector. To 6 the extent that you're capturing electricity costs and 7 you're capturing transportation, in that way it gives 8 consumers on various channels incentives to reduce 9 emissions. So that even though the caps were focused more 10 upstream, ultimately it does provide incentives at all 11 levels including downstream consumers. 12 As I answer this question, I realize that it's 13 kind of a win/lose situation. Because on the one hand 14 this is addressing your question about providing 15 incentives at the consumer level. But it's sort of 16 conceding to Chairman Nichols that there might be price 17 increases. And the question is is the price increase the 18 cost that one wishes to bare for the greater good of 19 dealing with greenhouse gas emissions? Clearly, a 20 narrower program, which might not succeed in achieving as 21 great of emissions reductions or at least from certain 22 sectors, could insulate the consumer sector, but I think 23 it would be more costly to the economy as a whole. 24 Regarding offsets, yes, I think you've 25 articulated exactly one of the attractions to us is that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 64 1 we thought it would be very difficult in general to 2 include the fourth sector initially under the program and 3 the way that you might include electricity or other 4 industrial sectors. But we also agreed that there is 5 potential for activities in the fourth sector to 6 contribute to the overall goal. And we felt that a good 7 way to do that is through offsets, because that means 8 rather than having a blanket policy that says the fourth 9 sector is included and that would require tremendous 10 monitoring capabilities we don't have, it leaves the door 11 open to isolate those particular areas in the fourth 12 sector where we could determine there was an effective 13 reduction or through the establishment of a carbon sink. 14 So I do think that offsets addresses that and is 15 consistent with the reality that to try to deal with the 16 fourth sector as a whole through a blanket policy would be 17 very difficult. But this at least leaves the door open 18 for specific projects that can be deemed whose 19 administrative costs are not prohibited. I hope that 20 clarifies. 21 MARKET ADVISORY COMMITTEE CHAIR HICKOX: I'd like 22 to simply add to that response that offsets ends up being 23 an area as has already been stated of some amount of 24 controversy. It first brings into mind the concern of 25 leakage, and it also brings to mind some of the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 65 1 sensationalized examples of misuse of the concept of 2 offsets on a global scale that many of us have been 3 reading about in the national and international media. 4 Setting that aside for a moment, I would suggest 5 that hopefully in the end, the counter balancing benefits 6 of offsets as part of a program would be the following. 7 It's in some ways a price or cost modulator. It 8 encourages innovation outside the parameters of the focus 9 sectors of the economy that would fall under a cap in a 10 cap and trade program. 11 And lastly, and I suppose at some level more 12 idyllic than I should state it, but if we don't come up 13 with a plan for how to reach the goals of AB 32 or dealing 14 with climate change on a global basis that harness the 15 creative power and involvement of all of us as individuals 16 than the solution to the problem, because I assure you we 17 are all part of the problem. We won't get there from 18 here. 19 And so all sectors of the economy -- and I think 20 specifically based upon you and your question and where 21 you come from, I think the agricultural industry has the 22 potential to be a participant as part of the solution. 23 How exactly they'll be measured as part of the 24 contribution is yet to be determined as part of your 25 overall inventory analysis. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 66 1 But I think the opportunity as I repeat myself 2 and make it simply as the statement that the process that 3 allows all of us to be part of the solution will be the 4 most well advised solution to this problem, I believe. 5 BOARD MEMBER D'ADAMO: Thank you for your 6 comment. I do appreciate that. 7 My last question has to do with next steps with 8 the Market Advisory Committee. How long is your life? 9 And I would hope that you'll be with through to the end, 10 because I've gotten a lot out of discussion with you and 11 also in reading the report. 12 And coupled with that question would like to know 13 what role could the Market Advisory Committee have to help 14 us to integrate our system with other systems throughout 15 the world. And I imagine that that job would be ongoing. 16 There would, I imagine, be constant need for tweaking the 17 system, tweaking the credits. And so I'm envisioning a 18 process that would really never end. I don't know if 19 you're up for the job. 20 CHAIRPERSON NICHOLS: I think their expiration 21 date has already passed. 22 MARKET ADVISORY COMMITTEE CHAIR HICKOX: You 23 stole my thunder. 24 First, can I say thank you for those kind 25 compliments. But my more dramatic way of saying it, we PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 67 1 died on June 30th. 2 The Executive Order and the implementation of the 3 Executive Order by the Secretary of Cal/EPA called for us 4 to be formed and produce a report by June 30th, which we 5 did. And as a result of having completed that task, we no 6 longer exist as a formal Committee. 7 However, each and every person involved in the 8 Committee exercise stands ready and willing and available 9 to a degree from Europe and from the east and from 10 California to consult and amplify upon the remarks that 11 were committed to writing as a result of this exercise. 12 We have continually expressed our appreciation for the 13 opportunity to serve and participate in this and I suppose 14 as a result have some stake and interest in where things 15 go from here. 16 And I can only speak for me personally. I live 17 in Sacramento, and I'm here and available to respond to 18 questions or further contribute. 19 Larry. 20 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: 21 Yes, I'd be very happy to continue to contribute. 22 CHAIRPERSON NICHOLS: Well, if I may just build 23 on that comment. I believe that it is going to be 24 necessary for the Air Resources Board to have continued 25 contact with experts, particularly people who have PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 68 1 familiarity with air pollution trading schemes and with 2 other markets that have been developed and are in the 3 course of the process of being developed, both the staff 4 and the Board I think are going to want to get more in 5 depth about how programs like RGGI have worked. 6 I've had the opportunity to visit the European 7 community and meet with some of the people who are very 8 actively involved in the trading programs there. But it's 9 a trip that I would hope others would be able to take 10 advantage of as well. Because in addition to the kind of 11 bullet points that we all hear about whether it succeeded 12 or failed and over allocated, et cetera, there's just a 13 lot of nuances to how these things got set up and how 14 companies are reacting, how governments are reacting, and 15 the public that would be really useful for us to know more 16 about. So I'm hoping that the Committee won't disappear 17 and that we can find a way to appropriately re-engage you 18 as we move forward here. 19 MARKET ADVISORY COMMITTEE CHAIR HICKOX: Can I 20 simply add -- I didn't mention it. But the California 21 Climate Action Registry, in fact, helped organize a trip 22 to Europe to meet with some of those same people. 23 Probably covered some of the same ground you did in your 24 visit. And I would second her recommendation that you 25 consider following in that same set of footsteps and meet PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 69 1 with some of those people as time permits. There's 2 sometimes nothing better than actually ground truthing 3 concepts and ideas and actual experience. So I highly 4 recommend, as the Chair did, that you take advantage of 5 any opportunity that presents itself to meet with some of 6 the people whose comments I read into the record this 7 morning. 8 CHAIRPERSON NICHOLS: We have a number of people 9 who have signed up to speak with us this morning from 10 various groups that have really been following this 11 process, including some who would be participants in the 12 market. And I would like to hear from them. We I think 13 will have to limit the time to three minutes per witness, 14 given the number of people who have signed up. But I'm 15 ready to start calling the list, if people are here, 16 beginning with Barbara Lee from CAPCOA. And she would be 17 followed by Barbara Baird from the South Coast AQMD, and 18 then Evan Edgar from California Refuse Removal Council. 19 MS. LEE: Good morning, Madam Chairman and 20 members of the Board. My name is Barbara Lee. I'm the 21 Air Pollution Control Officer in the Northern Sonoma 22 County Air Pollution Control District. I'm also immediate 23 past President of the California Air Pollution Control 24 Officer's Association, and it is representing them that I 25 am here today. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 70 1 We submitted a letter to you on July 13th that 2 has our detailed comments. There are a couple of things I 3 want to focus on today for you. Primarily, our concern is 4 on the enforcement elements for this program, which the 5 excellent report done by the Market Advisory Committee did 6 not stress we think as much will need to be focused on as 7 this process moves forward. 8 First of all, we'd like to recommend that your 9 Board establish a working group on enforcement to support 10 the ARB staff as they move forward developing the rules 11 that are going to set the structure and the function of 12 the market. Enforceability has to be a key consideration 13 at the earliest planning stages of a program like this in 14 order to make sure that it is fully enforceable once it's 15 in implementation. 16 We also recommend that the program rely on the 17 existing permits and the enforcement resources for the 18 stationary sources that are going to be subject to the 19 market. This is going to speed the development of the 20 market program and also increase certainty and reduce 21 costs, much as the Title 5 permit program supports the 22 acid rain trading program. 23 Specifically in terms of recommendations in the 24 report, we believe the penalty provisions do need to be 25 strengthened in a couple of circumstances. The report PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 71 1 recommends that the first ton of emissions in a violation 2 would be excused. And we don't think that that's probably 3 the most appropriate way to set up the enforcement 4 program. If there are concerns about the fairness and the 5 reasonableness of enforcement cases as they're brought 6 forward or the certainty of the emissions tracking, we 7 think those can be better addressed in the design of the 8 program and in the enforcement criteria that are set up, 9 rather than a blanket excusal of emissions violations. 10 The report also restricts criminal and civil 11 penalties to intentional violations only. And we think 12 that based on our experience and in the enforcement world 13 intent can be very difficult to prove. And we would like 14 to suggest that the California Health and Safety Code 15 currently characterizes classes of violations based on the 16 degree of fault, knowledge, and impact of those 17 violations. It's a well vetted system for looking at 18 violations of air pollution regulations, and we think 19 that's something that would be more appropriate here. 20 Specifically, you're going to need to have 21 penalties for violations of allowances monitoring record 22 keeping and reporting that are not strictly intentional in 23 nature and may occur due to negligence on the part of the 24 facility rather than a knowing and intentional violation. 25 And we also think you need to have enforcement PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 72 1 provisions that deal with violations that extend beyond 2 the compliance period and also for chronic and repeat 3 offenders. 4 I want to specifically acknowledge the concerns 5 that have been expressed by the environmental justice 6 community. In another role, I co-chair the California 7 EPA's Environmental Justice Advisory Committee along with 8 Joe Lyou. Winston Hickox appointed me to that Committee 9 when it was formed originally a number of years ago. And 10 although I'm not here on behalf of that Committee, the 11 concerns that have been expressed by environmental justice 12 advocates are very real concerns. They're facing very 13 substantial issues in their communities. And although we 14 know there is a real commitment on the part of the Market 15 Advisory Committee and on the part of the Air Board to 16 ensure that there is no backsliding against current 17 programs, I think the EJ community advocates would say 18 that's not a sufficient protection and we need to a little 19 bit better than that as we move forward here. 20 Specifically, the report recommends relying on 21 the ARB's ability to revise a local Clean Air Plan as a 22 mechanism of getting at this issue. We'd like to point 23 out, first of all, that's for criteria pollutants only, 24 not for toxic pollutants. It would be limited in its 25 usefulness in that regard. It's also a very long and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 73 1 cumbersome process of that negotiations and appeals and 2 probably would be better viewed as a backstop. Whereas, 3 we think the issues raised by the EJ community need to be 4 addressed through the development of the program at the 5 outset either in the program itself or through adopting 6 adjunct regulations. 7 BOARD MEMBER RIORDAN: Barbara, I hate to make a 8 comment, but you're well over your time. 9 MS. LEE: I apologize for that. I appreciate 10 your patience. It was an outstanding report, and we look 11 forward to working with the ARB as they develop this 12 program. 13 BOARD MEMBER RIORDAN: Thank you. And we look 14 forward to working with CAPCOA. I know you have some 15 written comments, and so we will certainly make those part 16 of the record. Thank you very much. 17 Barbara Baird, and you're going to be followed by 18 Evan Edgar. 19 (Thereupon an overhead presentation was 20 presented as follows.) 21 MS. BAIRD: Good morning, Madam Chair. 22 I do have a slide presentation. 23 My name is Barbara Baird from South Coast AQMD. 24 I'd like to compliment the Committee on a very excellent, 25 well written report which is comprehensive and does a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 74 1 great job of discussing the issues. We're presenting our 2 comments from the perspective of extensive experience with 3 reclaim, the first cap and trade program for air pollution 4 in California. 5 --o0o-- 6 MS. BAIRD: An often overlooked aspect of Cap and 7 Trade Programs is the infrastructure, including the 8 permitting system and computer systems which must be in 9 place prior to the program being started. You need to 10 allow lead time for this. 11 We also recommend that you make sure that in 12 giving out allocations or selling them you don't 13 inadvertently create a property right that prevents later 14 amendment of the program. 15 And we believe that a Cap and Trade Program is 16 not necessarily easier to manage than traditional 17 approaches. Although there may be sure rulemaking, 18 enforcement is much more complicated. It becomes more 19 like an audit than an inspection. 20 Next. 21 --o0o-- 22 MS. BAIRD: With respect to trading, we think 23 that CARB or at least some third party should collect and 24 monitor price information. This would allow you to 25 respond to concerns about whether there is imbalance in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 75 1 market supply and demand. 2 We also think if you're going to allow banking, 3 in order to make sure that the targets of the legislation 4 are met in 2020 and 2050, you should reduce the value of 5 the bank credits as those deadlines approach. 6 Next. 7 --o0o-- 8 MS. BAIRD: With regard to implementation, we 9 have found that facilities fail to plan ahead, even though 10 they should and have enough knowledge to do so. So we 11 recommend you require compliance plans, which would make 12 sure that facilities allow for the lag time between 13 receiving a market signal to install controls and the 14 actual emission reductions occurring. 15 We also think a three-year compliance period is 16 too long, because facilities frequently do not uncover 17 their mistakes until they are audited. And by the end of 18 three years, they may be very deep in the hole and unable 19 to make up the excess allocations. 20 And we concur with CAPCOA that the penalty 21 provisions need to be strengthened, in particular, 22 negligent and even strict liability violations need to be 23 enforced. And there need to be violations provided and 24 penalties for recordkeeping as well as allowance 25 violations. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 76 1 --o0o-- 2 MS. BAIRD: Our final key recommendation has to 3 do with whether to sell or give away for free the 4 allocations. And we recommend a mixed approach, which 5 would give free allocations to facilities based on their 6 current activity levels as though they were operating at 7 current BACT. And they would need to buy the excess. 8 This would allow the system to reward early reductions and 9 to avoid penalizing companies that are cleaner than the 10 norm for their industry. 11 Next. 12 --o0o-- 13 MS. BAIRD: In conclusion, we do support the use 14 of Cap and Trade Programs. But as has been mentioned, 15 it's just one element, one tool that would be used to 16 reduce greenhouse gases. 17 We agree with CAPCOA that you should establish an 18 enforcement working group to begin working on 19 implementation issues early. And our staff is committed 20 to working with your staff as we develop this important 21 program. Thank you for the opportunity to comment. 22 BOARD MEMBER RIORDAN: Thank you very much. We 23 know you have a lot of experience. And hopefully we can 24 call on some of that in the future. 25 Evan Edgar, followed by Kevin Fay, and then I'll PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 77 1 probably take a break for our court reporter, and then 2 we'll come back into session a little bit later. 3 MR. EDGAR: Chair and Board members, my name is 4 Evan Edgar, an engineer for the California Refuse Removal 5 Council. We've been integral in implementing the AB 939 6 to achieve a 54 percent reduction rate for California. 7 We are the people with the garbage trucks, the 8 fleets. We have the facilities for composting and for 9 recycling. And we have the feedstock that sell a lot of 10 stuff going into the ground. 11 We support the cap and trade system. I think 12 it's an excellent report that the Market Advisory 13 Committee had, and we support the inclusion of offsets for 14 recycling. We support the strong recommendations that any 15 offsets need to be transparent and verifiable. And some 16 of the aspects of providing incentives to do more. 17 We believe there will be more aspects to do 18 landfill diversion in the future, and those incentives 19 from the cap and trade program will have us do even more. 20 There's 42 million tons of garbage still going in the 21 ground in California. 30 million tons are organic. We 22 believe we can make a low carbon fuel out of the 30 23 million tons of organics. And this type of cap and trade 24 system will allow us to go beyond the call of duty to have 25 incentives to make more low carbon fuels. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 78 1 We believe that there's protocols in place being 2 developed by the Climate California Action Registry for 3 recycling offsets. I've been working with them for the 4 last six months using the federal model. It's a protocol 5 in order to gauge the greenhouse gas emissions from using 6 recycled feed stocks. And there's a lot of good protocols 7 there. We'd like to make those enforceable and make them 8 verifiable and transparent. 9 So working with the Scoping Committee for the 10 next six to eight months, we'd like to discuss more about 11 recycling offsets and using these protocols through the 12 Climate Action Registry and the CARB staff to have that as 13 part of the incentive program to produce more low carbon 14 fuel with 30 million tons of organics going into the 15 landfill today. 16 Thank you. 17 BOARD MEMBER RIORDAN: Thank you very much. 18 That does bring up something that I would like to 19 say as a member of the Registry Board. We really do work 20 collaboratively. And staff has had I think a very close 21 relationship with the Registry. And we will continue to 22 do so. And we thank you, Mr. Edgar, for your testimony. 23 Appreciate that. 24 Mr. Fay. 25 MR. FAY: Thank you, Madam Chair and Board PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 79 1 members. My name is Kevin Fay. I serve as Executive 2 Director of the International Climate Change Partnership, 3 a coalition of manufacturers and industry associations 4 committed to responsible participation in the climate 5 policy debate here in California at the federal level and 6 internationally. We're here today to publicly commend the 7 Market Advisory Committee report. The report is generally 8 well done. We believe a strong endorsement for a 9 significant role for market mechanisms as part of the 10 state's AB 32 climate program. 11 We have highlighted in written comments certain 12 issues, allowance distribution credits for early action 13 and offsets. We will provide these comments for the 14 record in writing. 15 I would like to speak about the need for 16 market-based approach. The robust debate that began on 17 this topic during the legislative consideration last year 18 has continued into the implementation phase. 19 Market mechanisms such as Cap and Trade Programs 20 we believe are an essential element of an effective 21 climate policy. There are tools -- they are powerful 22 tools that can help achieve environmental objectives at a 23 cost well below what other command and control programs 24 may require. We urge the Board and the State to take 25 advantage of these tools to go to the maximum extent PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 80 1 feasible and recognize other initiatives may be used to 2 fill in gaps or address concerns, including those that are 3 being raised by the environmental justice community. 4 Because of the broad reach of climate policy 5 initiatives, we think it is incumbent on the Board to 6 speak to these issues contiguously with its consideration 7 of items such as the discrete early action list. Ensure 8 that it achieves the maximum benefit from the market 9 mechanisms and strikes that proper balance necessary to 10 have a climate policy that's environmentally and 11 economically effective. 12 Thank you. And we look forward to working with 13 you in the months and years ahead. Thanks very much. 14 BOARD MEMBER RIORDAN: Thank you very much. 15 Thank you for taking the time to be here to testify. 16 I think I will take a break at this time and 17 suggest that we be back ready to go at quarter of 11:00. 18 And let me tell you who the next three speakers 19 are so they can be prepared: Frank Sheets, Frank Harris, 20 and Chris Busch in that order. So if you would be up 21 forward by the microphone, I would appreciate that. And 22 we'll be back in session at quarter of 11:00. 23 (Thereupon a recess was taken.) 24 BOARD MEMBER RIORDAN: I'm going to ask that we 25 all come back to order. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 81 1 If I could invite Mr. Frank Sheets to join us at 2 the microphone. 3 Fifteen minutes goes by very quickly. So I do 4 want to get started again, because we have a number of 5 people yet to speak. So if you could take your seats. 6 And Mr. Sheets. 7 MR. SHEETS: Thank you. My name is Frank Sheets. 8 I'm Communications and Governmental Affairs Manager for 9 Texas Industries, Inc., more commonly known here as 10 Riverside Cement Company. 11 I'm also here representing four other California 12 cement manufacturers, namely Mitsubishi Cement, National 13 Cement Company, Cement Dos Mexiconas, and California 14 Portland Cement. 15 On May 15th and July 18th, we submitted comments 16 to the MAC at their website as well as additional comments 17 directed to ARB. We copied ARB on these letters to the 18 MAC, because ARB will have the ultimate say on how the MAC 19 recommendations are implemented. In the letters, we lay 20 out our guiding principles and a number of recommendations 21 for the cap and trade market system design. 22 Although we strongly support market-based 23 mechanisms as the primary regulatory mechanism under AB 24 32, we have significant concerns about a system based on 25 high percentage of auctioned credits. Although auctions PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 82 1 present theoretical benefits, the auction mechanism 2 remains largely untested and the ultimate impact on a 3 multi sector market are unknown. We do not believe a 4 regulatory program that has the potential to shape the 5 future of California should be based on purely theoretical 6 grounds. As demonstrated by California's experience with 7 energy de-regulation, what happens in practice does not 8 always agree with the theory. 9 Some of our specific responses to the MAC draft 10 report include: One, program scope; implementing a 11 comprehensive system. A cap and trade system should be as 12 comprehensive as possible from the outset. The 13 transportation sector should be included in the initial 14 phase with the program, and CARB should aggressively 15 pursue the development of work needed to do so. 16 Allowance allocation, addressing sector-specific 17 challenges. Allocation decisions should be based on a 18 bottom-up approach that considers the unique 19 characteristics and challenges of specific industries and 20 entities. The ratio of auctioned to freely allocated 21 permits should be determined independently for each 22 sector, ensuring that the overall reliance on auctions is 23 driven by practical economic considerations. 24 Allowance allocation, applying the equity value 25 neutrality criteria. To correct for competitive PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 83 1 distortions and minimize leakage, policy makers should 2 satisfy the equity value neutrality criteria through the 3 allocation of free allowances. Policy makers should 4 select and apply a method for determining free allowances 5 that satisfies the criterion while maintaining incentives 6 for early action. 7 Allowance allocation, avoiding an extreme 8 100 percent auction mandate. Policy makers should avoid 9 mandating a transition to 100 percent auction and should 10 maintain a role for regulatory discretion by permanently 11 designating a portion of the allowances for free 12 allocation. Where necessary to correct competitive 13 disorders and satisfy the equity value neutrality 14 criteria. Free allowances should be provided in 15 perpetuity. 16 Five, price safety valve, ensuring against 17 unacceptable costs. A price safety valve or comparable 18 mechanism that caps overall program cost should be 19 incorporated into any cap and trade system. The choice of 20 mechanism and trigger price should attempt to maximum the 21 program's environmental integrity and ability to link with 22 other trading regimes subject to an acceptable cap on 23 overall program cost. 24 CARB should immediately commence the modeling 25 analysis needed to sufficiently inform the choice of an PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 84 1 appropriate mechanism and trigger price. 2 BOARD MEMBER RIORDAN: Mr. Sheets, I'm afraid 3 your time is up. If you want to make a conclusion. 4 What we would be happy to do is to except any 5 written comments. I know you have submitted some. And if 6 you wish to submit more, we'll happily except those. But 7 I need you to draw to a conclusion. 8 MR. SHEETS: With that, I will conclude. Thank 9 you very much. 10 BOARD MEMBER RIORDAN: And the next speaker is 11 Frank Harris. 12 MR. HARRIS: Madam Chair, Committee, Professor 13 Goulder, Mr. Hickox, everybody else, my name is Frank 14 Harris. I'm an economist with Southern California Edison. 15 And I'm absolutely happy to be here. It is actually very 16 exciting. California is in a tremendous position of 17 leadership here. And I know that Chair Nichols mentioned 18 this earlier, and I was actually speaking with some other 19 people earlier about the excitement and the enthusiasm 20 that everybody has for this program. And I think it's 21 quite genuine. 22 We appreciate the opportunity to comment and 23 speak to you today. We've certainly read the report, and 24 we've participated in various MAC meetings and submitted 25 written comments directly to the MAC. And we've submitted PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 85 1 written comments to the Air Resources Board today. And we 2 do agree with the MAC's conclusion that cap and trade 3 program provides genuine opportunities for real and cost 4 effective sustained emission reductions. We feel that 5 that is a very powerful message that the report delivered. 6 One of the things that has not yet been mentioned 7 today was a particular detail in terms of how the cap and 8 trade is going to be implemented. The discussion of load 9 base versus source based cap or really load based versus 10 what the PUC is considering a deliver or first seller 11 approach. And at Edison, we absolutely support the first 12 seller approach. We feel it provides a great deal of 13 clarity in terms of reporting in-state emissions and 14 strengthens the integrity of the reporting of the in-state 15 emissions and still allows the Air Resources Board to 16 bring the emissions from imported generation underneath 17 the cap. So we certainly hope the Air Resources Board 18 will give attention to that part of the report. 19 Sorry. One other thing on the first seller. 20 When we talk about integration, of course, a first seller 21 or deliverer approach would much more easily integrate 22 with a regional or national program where the reporting 23 mechanisms would have already been established. 24 The report endorsed offsets to the extent it's 25 stated they did not support any geographic or quantitative PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 86 1 limits on offsets. Professor Goulder mentioned today that 2 those offsets need to be real. They need to be 3 verifiable. They need to be additional. This is a 4 position that Southern California Edison completely 5 supports as well. 6 California has been a leader in air quality and 7 environmental protection over the years. And the result 8 of that is that the most cost effective emission reduction 9 projects are likely beyond the borders of California. And 10 so to the extent to which the entities subject to 11 compliance can go outside the state for offset projects, 12 to the extent we can do that, we will see a substantial 13 improvement in terms of the cost effectiveness of the 14 program. 15 The last thing I want to talk about is the 16 allowance allocation. I'm concerned that we may be 17 looking at too much of the experience in the EU. It was 18 mentioned earlier that one of the problems with the EU was 19 that we saw a non-binding cap. This was not a means to 20 throw away a cap and trade. And the fact we have seen 21 some windfall profits among members in the EU is no reason 22 to discard a free allocation. Southern California Edison 23 supports an allocation method that matches the economic 24 exposure so that we mitigate the economic dislocation of 25 regulated entities. And we are putting together a paper PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 87 1 by which we think we can demonstrate how this can be done. 2 CHAIRPERSON NICHOLS: Thank you. We'll look 3 forward to seeing it. I'm sorry to tell you your time is 4 up. But we appreciate you coming. 5 Did you wish to comment, Winston? 6 MARKET ADVISORY COMMITTEE CHAIR HICKOX: Just 7 very briefly. I would like to admit that I think we did 8 not sufficiently take the time with you this morning to 9 share with you our overall emphasis and appreciation for 10 the concept of link-ability and scale-ability as an 11 important element in constructing the Cap and Trade 12 Program or market mechanisms for California. And I second 13 the comments of the prior speaker in emphasizing 14 link-ability and scale-ability. It was a very important 15 consideration for us. And we did not cover that well. 16 CHAIRPERSON NICHOLS: You have now. So thank 17 you. 18 Okay. Chris Busch. 19 Mr. Busch: Thank you. Yes, I'm Chris Busch, an 20 economist with the Union of Concerned Scientists 21 California Climate Program. We appreciate the opportunity 22 to offer our comments today. 23 Our view is is that the advancement of 24 California's successful sectoral policy should be the 25 foundation of AB 32 implementation. However, we would PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 88 1 support conclusion of a well designed Cap and Trade 2 Program as one instrument in a larger portfolio of 3 policies. 4 We find ourselves in agreement with many of the 5 MAC recommendations. On the issue of allowance 6 distribution, a new consensus is emerging on the 7 advantages of auctioning allowances, and the MAC report 8 presents a powerful integration of these arguments. 9 The MAC's rejection of price caps on allowances 10 is an important step towards ensuring the environmental 11 integrity of the program. And we also agree with the MAC 12 recommendation that the scope of the program should be as 13 broad as is practical and that transportation fuels should 14 be included. 15 We have serious concerns about the MAC 16 recommendation that there be no quantitative or geographic 17 limits on offsets, a recommendation that did not achieve 18 consensus. A key problem with such an unlimited offsets 19 approach is that this would make possible that very little 20 or even none of the reductions that the Cap and Trade 21 Program produces will be in California. Can California 22 really claim to be a leader on global warming if we 23 outsource much of the effort? 24 Investments in global warming solutions have 25 valuable co-benefits, especially lowered emissions of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 89 1 conventional air pollutants. Limiting offsets to ensure 2 that these co-benefits accrue to the people of California 3 is particularly important given the air quality challenges 4 facing California and the concerns of environmental 5 justice advocates. 6 Unlimited offsets would substantially reduce the 7 emission reductions required of cap sectors and would 8 weaken the innovation-forcing capacity of cap and trade. 9 Innovation both reduces the future cost of clean 10 technologies and will allow California businesses to 11 capture a larger share of the booming clean tech market. 12 Economic modeling typically does not account for 13 new technologies that could be spurred by climate 14 policies. Nonetheless, the state's own economic modeling 15 and U.C. Berkeley research suggests we can reach the AB 32 16 2020 target with net economic benefits even before 17 considering the ancillary environmental benefits. 18 Finally, an unlimited offsets policy could create 19 difficulties should California wish to link with other 20 programs, as previous Cap and Trade Programs, to reduce 21 greenhouse gas emissions have imposed quantitative limits 22 on the use of offsets as a compliance option. For these 23 reasons, we strongly urge that offsets be limited to a 24 modest fraction of emission reductions. 25 In closing, allow me to present the Board a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 90 1 letter to the MAC that was signed by 16 environmental 2 public health and other public interest organizations. 3 The letter addresses the draft report for public review, 4 but the MAC's final recommendations did not substantially. 5 Thank you. 6 CHAIRPERSON NICHOLS: Thank you. I expect we'll 7 be hearing from you and working with you as we move 8 forward. 9 We'll hear from Rick DeGolia, followed by Andrew 10 Hoerner. 11 MR. DE GOLIA: Good morning. My name is Rick 12 DeGolia. I'm here on behalf of Environmental 13 Entrepreneurs, which many of you know as E2. 14 I'd like to thank the Air Resources Board for the 15 opportunity to speak and commend the MAC and the Board on 16 the good work that's been done. I think the report was 17 very thorough. 18 I'm an entrepreneur and a prior business 19 attorney. I've helped launch two customer service 20 companies in California that build software. One is 21 Genesis Telecommunications and the other is Zaptara. 22 Today, they employ 1500 people in California. 23 One of those companies, Genesis, is today the 24 largest call center software company in the world. When 25 we started it seven years ago, it was a new found company PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 91 1 with no employees and no business. The reason we got 2 there is because we paid attention to the competitive 3 opportunities that we saw in front of us. We delivered 4 highly innovative solutions, and we happen to be lucky. 5 We were at the right place at the right time. 6 I think the opportunity that this Board has in 7 crafting this trading market is really significant. I 8 know that you're aware of that. I've got a couple 9 comments I want to make with regard to that. 10 E2 is actively engaged in discussions with 11 businesses throughout the state of California on what the 12 best policies are to reduce emissions in California. 13 We're very focused on reducing California's greenhouse gas 14 emissions while creating a net economic benefit to the 15 state. 16 We plan on making specific recommendations at the 17 scoping meetings in the fall. E2 members are actively 18 working on a variety of issues in this area. For example, 19 I'm personally leading a team that is looking at getting 20 significant greenhouse gas reductions from water policies 21 that encourage energy efficiency and water conservation. 22 E2 believes that California will need a broad 23 package of policies to achieve the 2020 limits, including 24 improved performance standards that encourage 25 technological innovation like the low carbon fuel standard PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 92 1 and market mechanisms that motivate emissions reductions 2 like the Cap and Trade Program. 3 As you know, when considering long-term 4 investments, investors want regulatory certainty. The 5 best way to provide this certainty is to set a strong and 6 enforceable emissions cap that declines over time. 7 I attended the California Climate registry 8 Conference in March, and the European attendees emphasize 9 that the most significant difficulties they face had to do 10 with the lack of strong caps. Only a strong cap can give 11 real value to the ensuing trading market. A strong cap 12 will also drive solutions created by California companies 13 to be highly competitive. And that will cause the rest of 14 the world to look to us as leaders in this whole area, and 15 it will generate an enormous economic benefit for the 16 state of California. 17 While creating new climate policies, we ask you 18 to consider the five critical questions. One -- 19 BOARD MEMBER RIORDAN: Excuse me, Mr. DeGolia. 20 I'm need you to really wrap up. 21 MR. DE GOLIA: I'm wrapping up right now with 22 these questions. 23 Will this policy help California reach its 24 reduction targets right growing the economy? 25 2. Will this policy give California's businesses PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 93 1 the opportunity to offer more competitive products and 2 services? 3 Will the policy attract investment to California? 4 Will the policy stimulate innovations? 5 And will the policy green our energy 6 infrastructure? 7 Finally, we believe that offsets should only be 8 considered if a strong and enforceable cap is set. If 9 offsets are allowed, they should be limited to a portion 10 of the compliance obligation and the project types that 11 provide direct environmental and economic benefits to 12 California. 13 Thank you for the opportunity to speak. 14 Environmental Entrepreneurs is available to work with you, 15 and we look forward to doing so. 16 BOARD MEMBER RIORDAN: Thank you. Appreciate 17 your comments. 18 Mr. Hoerner and followed Mark Hite. 19 MR. HOERNER: Madam Chair, members of the Board, 20 ladies and gentlemen, my name is Andrew Hoerner, Director 21 of the Sustainable Economics Program at Redefining 22 Progress. 23 I have the somewhat unusual distinction of having 24 spent the last 15 years studying market-based approaches 25 to climate change on more or less a full-time basis. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 94 1 You have my written testimony, 45 pages. 2 BOARD MEMBER RIORDAN: We have just been given 3 that. 4 MR. HOERNER: I want to say by now I think we 5 actually know what an optimal climate policy looks like. 6 We know it's comprehensive. It involves 100 percent 7 auction. That it's administered upstream. That it 8 combines technology promoting regulations with market 9 incentives in an intelligent way. That it returns the 10 revenue from auction efficiently in ways that promote 11 progressivity and income distribution, economic growth, 12 and the development of new clean technologies. 13 And we know that we can eliminate leakage and 14 competitive burdens by focusing on emissions associated 15 with consumption, rather than production, not only in the 16 electric sector, but also in a variety of energy-intensive 17 sectors. We know all these things. 18 I had hoped that what we would get from the MAC 19 would be a clean a-political public interest program of 20 best practices. And the MAC made a lot of progress 21 towards that, but it fell short of it in a number of 22 critical ways. And in particular, I believe they did that 23 largely because after recruiting some of the smartest 24 economists in the world on this subject, the majority of 25 the community chose to ignore their advise on several key PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 95 1 issues. 2 In particular, it's very clear that an upstream 3 system with perhaps ten percent of the compliance, 4 monitoring, and monitoring costs and ten percent of the 5 number of entities that have to be regulated and thus ten 6 times the enforcement per entity is going to be vastly 7 more efficient, more effective, and much less susceptible 8 to gaming. 9 So I've included in my report recommendations on 10 many things, but I do want to say just two recommendations 11 that sort of are to CARB in particular. 12 The first is that I think you should ask for a 13 staff report, which is what the MAC report aspired to be. 14 It starts with the MAC reports and takes it the next 15 couple of steps to a truly pure, clean public interest 16 program. Because it's going to get political. And when 17 it does, we want to have a pure, clean public interest 18 program from which we can compromise and still have a 19 world class program. The point of compromise is after we 20 get that pure, clean program down, well defined, and 21 distributed. Also we can estimate the deviations from 22 that program, what they cost the public. 23 And finally, I think it's going to be necessary 24 to incorporate some additional element of democratic 25 process in this. Because an allowance system can easily PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 96 1 raise $2 billion year. It's not really within CARB's core 2 competence to figure out how to spend $2 billion a year 3 without external advice. And I give some suggestions 4 about how you might do that in the last section of my 5 written testimony. 6 BOARD MEMBER RIORDAN: Thank you very much. 7 Mr. Hite, you're going to be followed by Devra 8 Wang. 9 MR. HITE: Yes. Mark Hite representing the 10 California Council on Environmental and Economic Balance. 11 Since our comments are here in writing, I'm not going to 12 read them. 13 I would say that the Council probably supports 14 over 90 percent of the MAC recommendations, but I would 15 like to raise just two brief points. 16 With respect to allowances, we would prefer that 17 allowances be based on historical or performance-based 18 methods. And to the extent that auctions are used, I must 19 admit which we opposed, they should be limited with their 20 revenues used solely for emission reduction activities. 21 Otherwise, it's just a tax and it might as well be called 22 one. 23 We disagree with the Committee's recommendation 24 that a safety valve is not needed. We do feel much more 25 comfortable with a periodic review period, coupled with PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 97 1 indicators that would trigger specific corrective 2 adjustments. A system, if you will, that would let us 3 know if the canary was not feeling well. Thank you. 4 BOARD MEMBER RIORDAN: Thank you very much. And 5 we appreciate your submittal. 6 Ms. Wang. 7 Ms. WANG: Thank you. My name is Devra Wang with 8 the Natural Resources Defense Council. I direct our 9 California Energy Program and lead our AB 32 10 implementation work. Thank you for the opportunity to 11 speak with you today. 12 We firmly believe that to meet AB 32's emission 13 limit, California is going to need to rely on an entire 14 package of policies implemented both by your Board and by 15 your sister agencies as part of the Climate Action Team. 16 AB 32 lays out a public process to consider this 17 package in the Scoping Plan, and it requires CARB to adopt 18 regulatory programs and authorizes CARB to use market 19 mechanisms as part of that package. 20 There's several different types of market 21 mechanisms that have been discussed. We would urge you to 22 consider these, including fees, incentives, rebates, as 23 well as the Cap and Trade or Cap and Auction Program that 24 we're talking about today. 25 We believe that the Market Advisory Committee PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 98 1 report provides very valuable information for you to 2 consider as you determine whether AB 32 implementation 3 will include this type of policy tool. And if so, how it 4 can best be designed. 5 It's important to note also that AB 32 requires 6 that your Board do several important things before 7 including this type of program in the Scoping Plan, 8 including considering the impact on air and toxic 9 pollution. 10 So at this point, we would really urge you to 11 engage all of the stakeholders and the public in a 12 detailed discussion about what cap and trade can and 13 cannot do as a policy tool so we can build the common 14 understanding of what role it might play as part of the 15 overall package. 16 We believe that a well designed program can 17 provide additional greenhouse gas reductions as part of 18 this package, supplementing the State's existing and new 19 regulatory programs. But as was mentioned earlier, we 20 would expect it to provide a relatively small portion of 21 the overall emission reductions. 22 It's an attractive policy tool, because whereas 23 AB 32 commits the state as a whole to reduce its 24 emissions, something the State is committing to do, a Cap 25 and Trade Program provides an enforceable limit on PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 99 1 emitters and can push emissions down below where we can 2 get to through the regulatory programs alone. 3 Of course, as with any policy, a poorly designed 4 program could be worse than no program at all. And it's 5 essential that we learn from some of those past 6 experiences that the MAC was drawing upon. 7 We agree with many of the MAC report's 8 recommendations, and I'd like to highlight four quick 9 points. It's important that the stringency of the cap be 10 a paramount consideration. That's what determines the 11 amount of emission reductions that you get from the 12 program. 13 We disagree with the report's recommendation on 14 offsets. As Chris Busch mentioned, we strongly believe 15 that if they're used at all, they should be limited. 16 Third, we believe that it's essential that the 17 allowances be used in the public interest, and auctions 18 are often the best way to achieve that. 19 And finally, we believe that the report's 20 recommendations for a "first seller approach" in the 21 electricity sector are premature given there is 22 significant unanswered, technical, and legal questions. 23 And we encourage you to rely on the process that's 24 underway at the PUC and CEC to analyze those issues. 25 Thank you for the opportunity to comment. We PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 100 1 look forward to fully engaging in your public process as 2 you consider these important issues. 3 BOARD MEMBER RIORDAN: Thank you. Great timing. 4 Mr. Abdullah, and you're going to be followed by 5 in Nicholas van Aelstyn. 6 Mr. ABDULLAH: Madam Chairperson and the 7 distinguished Board of the Air Resources Board, we thank 8 you for the time to voice our support of the 9 recommendations by the Market Advisory Committee. 10 I'm Mujahid Abdullah. I'm the co-founder and 11 managing partner of Sustainable Capital. We are a 12 boutique investment bank. We provide advise and capital 13 to clean technology startups. We also design green 14 financial products, many of them associated with carbon 15 trading. And again, we define success in our services and 16 our products based on a triple bottom line standard that 17 all of them have to generate a competitive and measurable 18 environmental impact, a measurable social impact, and also 19 financial returns. 20 And again, we see the beginnings of success in 21 the cap and trade system in the recommendations by the MAC 22 Committee. We've talked to various colleagues of ours in 23 the EU that are conducting carbon trading on a daily 24 basis. And many of the suggestions they've made we found 25 in the MAC report. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 101 1 Also I'd like to strongly encourage the 2 consideration of the auctioning of the allowances. Our 3 colleagues that are trading on a daily basis found that 4 the issues in the EU system, they found the genesis of the 5 challenges was related to the lack of the free allowances 6 in the beginning. 7 So again I want to thank you for the time. I 8 salute the efforts. And if there's any way that the 9 institutional investors that we know as well as our 10 colleagues can be of some assistance, please let us know. 11 Thank you. 12 BOARD MEMBER RIORDAN: Thank you very much. 13 Thank you for your testimony and for being here today. 14 Mr. van Aelstyn. 15 MR. VAN AELSTYN: Good morning, Madam Chairwoman 16 and members of the Board. Thank you very much. My name 17 is Nico van Aelstyn. I'm with Beveridge and Diamond. And 18 I'm here today representing the Carbon Offset Providers 19 Coalition. We have submitted comments before to the 20 Market Advisory Committee, and we just want to today 21 salute again the Market Advisory Committee for their 22 excellent work. 23 We support the vast majority of the positions 24 articulated in the report. As Franz Litz noted in the 25 comments that were passed along, the Committee represented PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 102 1 a diverse selection of experts, and they didn't sit on 2 their laurels. They generated a very good report that I 3 think is very helpful. 4 I do want to address one of the five design 5 elements Professor Goulder touched on. That is the issue 6 of offsets. As he noted, they are, as you heard already 7 today, they are somewhat controversial. 8 I do want to remind the Board of the benefits of 9 offsets. Let's not forget them as we emphasize the need 10 for additionality and verifiability, which we do support 11 as well. 12 But just to remind the Board why RGGI saw them as 13 a central part of that program, why they're central in the 14 ETS, and why they played, as Franz Litz noted, a prominent 15 role in this report. 16 Some of the benefits include -- I'll just note 17 four of them. 18 1. They provide immediate environmentally 19 beneficiary reductions in greenhouse gas emissions using 20 proven methodologies, methodologies that can be 21 demonstrated to be real, verifiable and additional. And 22 often those real reductions can take place as noted 23 outside of California in a most cost effective manner. 24 2. They provide flexibility in achieving 25 emissions reductions through efficient market mechanisms PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 103 1 that deliver real reductions at the lowest cost, wherever 2 those might be again. And they thereby avoid the early 3 retirement of assets here in California. In that sense, 4 they can act effectively as something of a market form of 5 a safety valve and avoid undue costs on emitters here, 6 which is important as you've heard from Southern 7 California Edison and others. 8 2. They enable reductions to be achieved from 9 all sources of greenhouse gas emissions, including those 10 that are in non-regulated sources, E.I. not under the cap 11 as the member pointed out earlier. And they can thereby 12 stimulate emissions reductions from those sectors of the 13 economy and the society that aren't covered by the cap. 14 Finally, four, they provide clear, direct 15 financial incentives for technological and business 16 innovation to enter into this struggle. A struggle to 17 mitigate climate change is a global one, and it calls upon 18 all of our energies, including those in business and in 19 technology to innovate and to generate means of reducing 20 today carbon emissions. 21 I just want to note as well on those the point of 22 controversy and just to touch on those very briefly. 23 BOARD MEMBER RIORDAN: Very briefly, because 24 you're out of time 25 MR. VAN AELSTYN: All right. I'm sorry. I just PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 104 1 want to state we will submit our comments electronically 2 this afternoon. 3 But the leading carbon offset providers support 4 the call of the MAC for standards, for standards on 5 additionality and verifiability et cetera. In the current 6 voluntary market, the problem is not a lack of standards. 7 The problem is a surfeit of standards. There are too many 8 out there. We call upon a single standards based approach 9 that we can all meet that will be transparent and, yes, 10 tough. Thank you very much. 11 CHAIRPERSON NICHOLS: Thank you very much. 12 That concludes our list of speakers. I'm going 13 to go back to either of the Committee members to make any 14 comments they would like in relationship to any of the 15 past speakers and then staff. And then I'll open it up to 16 Board members, if either of you have any comment you'd 17 like to make. 18 ACTING EXECUTIVE OFFICER CACKETTE: Madam Chair, 19 there was one more person on our list. 20 BOARD MEMBER RIORDAN: There was? 21 ACTING EXECUTIVE OFFICER CACKETTE: Todd 22 Campbell, he was written in on our list. 23 BOARD MEMBER RIORDAN: Well, Mr. Campbell, how 24 could we miss you? Now that I look over, they left it for 25 the Chairman and didn't put it on mine. I apologize. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 105 1 MR. CAMPBELL: No problem. Thank you very much. 2 I'd try to be right on time. 3 BOARD MEMBER RIORDAN: I know you will. 4 MR. CAMPBELL: Absolutely. Thank you very much 5 for having me. My name is Todd Campbell, Director of 6 Public Policy for Clean Energy. And I want to commend ARB 7 staff as well as the Board for passing the construction 8 rule yesterday. I think that was a huge milestone, and 9 you have a lot to be proud of. 10 Also I want to say that Clean Energy is a strong 11 supporter of the agency's efforts to reduce global 12 warming. It is an extremely important problem. And this 13 agency has quite a large work ahead of itself. 14 I want to certainly encourage the use of the 15 transportation sector within a Cap and Trade Program if it 16 is to move forward and certainly we hope that would also 17 include heavy-duty applications and medium-duty 18 applications, not just passenger cars. I would hope that 19 would apply for the low carbon fuel standard as well. 20 Of course, we'd like to thank Winston Hickox and 21 the Market Advisory Committee. 22 How are you doing? It's good to see you. 23 I think they did an excellent job. 24 There are some concerns -- not concerns with the 25 report, but just concerns that we should be aware of as we PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 106 1 move forward. And that real quickly is outside markets 2 may not have the same standards as this agency would. And 3 we want to make sure that we maintain standards. 4 Enforceability of whether or not the reductions 5 are occurring is also critical. And I say this because 6 when we generate credits, we want to make sure that they 7 retain a certain level of value. If they don't have 8 value, then I think that the advancement in progress will 9 be undermined. And that is one thing you certainly don't 10 want to see happen, especially when political forces do 11 play sometimes in these markets when a crisis occurs and 12 there's not enough advancement in technology and suddenly 13 there's some huge compliance issues that businesses 14 throughout the state of California have to meet. 15 So with that, I just would like to conclude. One 16 minor thing from my environmental past, just the inclusion 17 of environmental justice principles as well. I think 18 that's extremely important. We have to keep in mind that 19 some communities are impacted more than others. And I 20 believe that the Board Member Joe Lyou from the South 21 Coast Air Quality Management District is very accurate in 22 saying that where there are CO2 emissions, there are other 23 criteria air pollutant emissions as well. 24 Thank you very much. And we look forward to 25 supporting staff, working hard with them, and as well with PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 107 1 you. 2 BOARD MEMBER RIORDAN: Thank you very much, Mr. 3 Campbell. 4 Now the Committee, Mr. Hickox. 5 MARKET ADVISORY COMMITTEE CHAIR HICKOX: As a set 6 of concluding remarks and response to all of the public 7 comment, let me say this. If someone had framed the 8 question, please tell us what are the areas of controversy 9 or some amount of disagreement with regard to the subset 10 of your recommendations, I think today's discussion spells 11 it out very clearly. 12 100 percent auction, or not. 13 Offsets or not, with some amount of control in 14 between. 15 And we did not take any time really at all to 16 discuss a chapter in our report that's dedicated to the 17 electrical energy sector, which is really worth spending 18 some amount of time on, I assure you. And this 19 introduction of the concept of a first seller approach. 20 And as I understand it, PUC and the Energy Commission have 21 and perhaps CARB have committed themselves to look at this 22 as another alternative to the load-based cap proposal. 23 What I would say in conjunction with that as a 24 concluding remark, and I'll let Larry respond to any other 25 comments in a way which he chooses, I did not mention this PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 108 1 and I need to. CARB staff walked every step of this 2 journey with us day by day, meeting by meeting. And it 3 was very beneficial to us and I think ultimately will 4 prove very beneficial to you as well that they 5 participated very deeply in the development of this 6 report. It's our report. And they have some of the same 7 amounts of consternation and sense of frustration and need 8 for additional clarification as perhaps some of you and 9 certainly the public has. This is a very complex subject 10 and a very complex set of proposals. So I want to 11 publicly thank the CARB staff for their deep involvement 12 in the process of bringing this proposed or this set of 13 proposals in this report forward. 14 And I think again as I said earlier, whether we 15 officially designate or not, we are in a learning phase. 16 And we are in the process of learning about this as a 17 possible tool and how it might assist you in meeting the 18 goals of AB 32. And I thank you again for the chance to 19 be with you today. 20 MARKET ADVISORY COMMITTEE VICE CHAIR GOULDER: 21 Yes, I agree with Winston's comment that the public 22 comments we've just heard do bring out clearly some of the 23 important differences of opinion on various design issues. 24 I really don't have much to add. One thing I 25 would say, however, is that -- also agrees with what PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 109 1 Winston just said, is that there was a great amount of 2 effort put in by the California PUC, the California Energy 3 Commission, and CARB in working with the Committee to try 4 to work out the first seller approach. I agree there are 5 still some issues that need to be looked at more fully, 6 both in the first seller approach and in one of the 7 alternatives, the load-based approach. 8 That said, I would like to underscore the 9 importance of policy linkages, and in particular as it 10 relates to the electricity sector. As you know, the group 11 of western states, now six western states, have indicated 12 their willingness to work together with California to form 13 a western regional system. I think it's very important 14 that the Board try to facilitate that effort as much as 15 possible, rather than to focus on California system as if 16 it's always going to be independent. In particular, if 17 California is able to form this regional program rather 18 than a single state program, it would eliminate a lot of 19 the difficulties that we face with respect to leakage. 20 Many of the problems would go away. And I think the whole 21 west would be a lot better for it. 22 So I'm hoping there can be some coordination, 23 some proactive efforts to try to link the timing of this 24 western effort with the timing of the Air Resources Board 25 focus on California and to allow sufficient flexibility so PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 110 1 that if the other states really end up coming up with 2 implementation plans, California is prepared to really 3 coordinate and consolidate it into a regional program 4 rather than a state level program. That would solve a 5 whole lot of problems, including the leakage issue. 6 BOARD MEMBER RIORDAN: Thank you. I appreciate 7 what you've just said. We certainly would recognize that 8 as a great opportunity if we could all somehow coordinate. 9 Again going back to the California Registry, one of their 10 efforts has been to begin to talk to people to bring 11 people along and to work so that some day we really are 12 all speaking the same language and doing similar things. 13 Mr. Shulock. 14 OFFICE OF CLIMATE CHANGE CHIEF SHULOCK: On this 15 last point, I want to inform the Board and Larry as well 16 that the western states process we're working very 17 carefully with them. I'm actually the program 18 representative to that. There's a meeting in Vancouver at 19 the end of next week, and Cal/EPA will also be attending. 20 And on the agenda at that meeting is this issue of the 21 timing and sequence of the consideration of issues for 22 their process and how that winds up with us and we're in 23 touch with their consultants and contractors. So there's 24 quite a bit of synergy there, and we recognize that. 25 BOARD MEMBER RIORDAN: Thank you. And Madam PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 111 1 Chair, you've arrived just in time. And let me tell you 2 where we are at. The Committee members have just made 3 some final comments based on some of the testimony that's 4 been before us. And I was going to then move to -- maybe 5 staff had some final comments and open it up to comments 6 by the Board or questions by the Board. 7 CHAIRPERSON NICHOLS: Excellent job. Thank you. 8 Apologize I had to leave the room to talk to a couple of 9 editorial boards about the rule that we adopted yesterday. 10 They're still reviewing our performance. But this is 11 exciting. Okay. 12 Well, I will follow your plan then and ask if the 13 staff has anything more they would like to add at this 14 point about where we're headed. 15 DEPUTY EXECUTIVE OFFICER SCHEIBLE: Very quickly 16 on the behalf of the staff, we'd like to thank the Chair 17 and Vice Chair of the Market Advisory Committee and all 18 the other members. We learned a great deal, and we hope 19 to learn a great deal more from them as time goes on and 20 get them to share our pain some more. 21 CHAIRPERSON NICHOLS: Okay. Thank you. Board 22 members, you want to add any comments here? We'll start 23 down on the right here. 24 BOARD MEMBER BERG: Thank you, Madam Chair. 25 I would just really like to thank you for PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 112 1 honoring one of your key points, and that was simplicity. 2 And the report and your comments have been very well 3 received. And for a layperson that had no idea that cap 4 and trade didn't involve trading cards, this has been 5 extremely helpful. And I just thank you for your 6 approach, your enthusiasm, your passion, and look forward 7 to continuing to work with you on this very important 8 issue. Thank you. 9 CHAIRPERSON NICHOLS: Great. 10 SUPERVISOR HILL: Thank you, Madam Chair. 11 First of all, thank you, Winston and Larry, for 12 the briefing. I really appreciated that and the insight 13 that you shared with me and to the whole Committee. What 14 a tremendous effort. And you worked obviously quite hard 15 and diligently to come to the conclusions that you did. 16 Just wanted to make a couple of comments. I 17 think that obviously we should move carefully and slowly 18 as we go forward in terms of probably more carefully than 19 slowly. But I can see some limited use for the Cap and 20 Trade Program as we've discussed and have seen. 21 I particularly agree with the comments of 22 Professor Sperling earlier. I think he showed some 23 thought in determining the future of the cap and trade 24 theme that we have going forward. And also in reading the 25 letter from CAPCOA and listening to the comments and the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 113 1 presentation of South Coast and issues they raised, I 2 would like the staff to really -- hope the staff looks 3 carefully at those issues, particularly the offset issues, 4 the property rights question, compliance period, the 5 penalty provisions, and the environmental justice 6 questions that were raised. I hope they look carefully at 7 it. 8 And in keeping with the theme that Winston said, 9 we're in the learning phase, I think that's true. And 10 Devra Wang's comments, what it can and cannot do. I think 11 that's the future that I'd like to see as the staff kind 12 of wrestles with this and brings it forward is what are 13 the limitations and what are the positive aspects of this. 14 So thank you again. 15 BOARD MEMBER CASE: Madam Chairman, I would like 16 to mirror some of the comments of my appreciation for the 17 hard work of this group and just my respect for the broad 18 areas of expertise that came into play in this group, the 19 fact that only a small portion, less than half, were from 20 California, but experts around the world participated. 21 And also agreeing with those comments that having 22 that group remain as an advisory group in some capacity I 23 think there's a great deal we can learn from past 24 experience actually making a program that can potentially 25 be enhanced and avoiding the pitfalls of the past. But I PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 114 1 appreciate the work. 2 I appreciate the fact of having the opportunity 3 to be briefed by Mr. Hickox. That was -- it kind of gave 4 me a flavor for where we're going. He also commented 5 about the controversial areas of offsets and also how 6 credits get distributed. And I think we will continue 7 that dialogue. I heard that there are some folks starting 8 to see benefits in such a program. And I guess the thing 9 I really got clearly is it's one tool in the toolbox. And 10 as we look at various elements of what we're doing to our 11 earth, I think we have to look at many tools in the 12 toolbox. 13 Creating an efficient and lower cost system, I 14 think that's attractive. And we'll have many challenges 15 on the regulatory side also. But I'd really like to see 16 that relationship somewhat kept in tact, even though I 17 know you basically were put to death at the end of the 18 June. I don't see it in that regard. So I appreciate 19 your comments today, and we'll all be learning a lot as we 20 move forward. 21 BOARD MEMBER D'ADAMO: I won't take up a lot of 22 time, because I think I made my points earlier that we 23 really do hope we can continue working with the Committee 24 and the Committee members. 25 I would just maybe throw it out there to staff. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 115 1 We have the Research Screening Committee that's a formal 2 group that advises us. They don't go away after one year. 3 And I just think there would be a tremendous opportunity 4 for us in continuing the relationship with the Committee. 5 Thank you again. 6 BOARD MEMBER SPERLING: I've used up my 7 allowances. I'm not prepared to buy any more credit. 8 BOARD MEMBER RIORDAN: Just thank you. And I 9 recognize your wise recommendations on coordination with 10 those outside the borders of California. I think it's so 11 important if we really are to be effective. So thank you. 12 CHAIRPERSON NICHOLS: Thank you. I guess we will 13 conclude this item for today, but not for very long 14 because we will be back soon re-visiting these issues. 15 I want to add my thanks again to the other Board 16 members who have already expressed their gratitude for the 17 quality and comprehensiveness of the work that went into 18 this. We are very blessed in California to have so many 19 people with expertise who are willing to come in and help 20 us out in this program. I know that there were many 21 people who asked to be appointed to this Committee that 22 you chair that weren't able to be named because there were 23 simply too many of them to get the work done. 24 And in addition to all the people who came and 25 testified here today, there are many, many others out PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 116 1 there in all sectors, academia, the environmental world, 2 local government, and business, of course, who are 3 thinking about and working on these specific issues about 4 how you can bring down the cost of compliance and do it in 5 ways that also will provide additional environmental 6 benefits and bring on new technology. 7 So it's great to have this framework to start 8 with. I think it's just a terrific thing to have. I 9 really want to thank the Governor for having created this 10 in the first place. I think we would be way behind where 11 we are today if your Committee hadn't been brought into 12 existence. And as everyone else has said, don't go away. 13 We'll be talking to you. Thank you. 14 All right. We have one additional item to deal 15 with this morning. I'm sorry. Someone has just informed 16 me that we have a Spanish translator because there was a 17 request for these remarks to be translated into Spanish. 18 Is that happening? Translation services are available. 19 Okay. So if anyone wishes to have translation services, 20 please see the Clerk of the Board. I apologize. I didn't 21 understand the message. 22 MR. MARTINEZ: Madam Chair, my name is Leo 23 Martinez. I'm a certified interpreter. And if anyone 24 needs translation services, in Spanish, I will be 25 available. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 117 1 (Thereupon the announcement was translated into 2 Spanish.) 3 CHAIRPERSON NICHOLS: Thank you. I apologize for 4 not having made the announcement earlier. This is a new 5 procedure for me. So hopefully we'll do this more 6 smoothly in the future. 7 We're going to shift our attention now to the 8 next agenda item, which is the semi-annual update on the 9 implementation of the 2005 ARB railroad statewide rail 10 yard agreement. 11 This is an agreement that was entered into by the 12 Executive Officer in June 2005, considered by the Board at 13 the October 2005 meeting. And the Board directed the 14 staff to provide semi-annual updates. The last update was 15 in January 2007. This is the fourth under that 16 requirement. And basically as I think we can agree, 17 progress is continuing. 18 Tom Cackette is going to provide some additional 19 background on this item. And then we'll hear from Board 20 members. And if there's any public testimony, we'll hear 21 from the public. But this is not an action item. Thank 22 you. 23 ACTING EXECUTIVE OFFICER CACKETTE: Today, we're 24 going to be presenting another semi-annual update on the 25 implementation of the 2005 statewide railroad pollution PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 118 1 reduction agreement between ARB, Union Pacific, and 2 Burlington Northern Santa Fe Railway. 3 As mentioned, the last update was in January '07. 4 And since that time, and staff and the railroads have 5 continued to implement the agreement. Both railroads are 6 exceeding requirements to install idle reduction devices 7 on 70 percent of their intrastate locomotives and to use 8 ultra-low sulfur diesel fuel. 9 In addition, pursuant to state law, both 10 railroads are complying with the requirement to use 11 cleaner CARB diesel fuel for their intrastate locomotive. 12 We have also conducted a third round of locomotive 13 inspections. In these inspections, staff inspected about 14 960 locomotives. We issued 40 Notices of Violation for 15 excess idling, which means that's roughly a 96 percent 16 compliance rate. 17 Major workload in the last six months has been 18 associated with the completion of the draft health risk 19 assessments for nine designated rail yards. Two sets of 20 public meetings have been held in affected communities to 21 release the assessment and hear public comments on the 22 assessments. 23 In general, the draft assessment showed the 24 diesel PM emissions from rail yards result in 25 significantly higher pollution risks in nearby PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 119 1 communities. The largest impacts are associated with the 2 four rail yards in the city of Commerce. 3 The draft assessments for the other rail yards 4 have lower potential cancer risk and exposed fewer people, 5 but are still significant and the emission reductions are 6 needed. 7 These risk assessments provide an excellent tool 8 for the evaluation of effective mitigation on a rail yard 9 specific basis. Our next step is to meet with the 10 community and other stakeholders to identify and evaluate 11 possible mitigation measures that can be applied to reduce 12 the risk. 13 Mike Jaczola of the Stationary Source Division 14 will present the staff presentation. 15 (There upon an overhead presentation was 16 presented as follows.) 17 MR. JACZOLA: Thank you, Mr. Cackette. Good 18 morning, Ms. Nichols and members of the Board. 19 Staff is here today in response to the Board's 20 direction to provide semi-annual updates on the 21 implementation of the ARB railroad statewide agreement. 22 The agreement between the ARB and the railroads 23 was signed in June 2005 and was developed with the primary 24 objective of reducing diesel particulate matter emissions 25 in and around rail yards by approximately 20 percent. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 120 1 The agreement has numerous program elements and 2 also includes requirements for the preparation of health 3 risk assessments at the larger rail yards. 4 --o0o-- 5 MR. JACZOLA: Today's progress report will cover 6 elements on this slide with a particular emphasis on 7 recently released draft health risk assessments. 8 --o0o-- 9 MR. JACZOLA: Essentially the agreement requires 10 UP and BNSF to install idle reduction devices on all of 11 their California based fleet by June 30th, 2008. 12 Currently, UP and BNSF operate about 450 intrastate or 13 California based locomotives. 14 As of July 1, 2007, the new cumulative 15 installation total was 383, or 85 percent of the 16 intrastate fleet. 17 Both railroads are currently on schedule to meet 18 their remaining idle reduction install device requirements 19 by June 30th, 2008. 20 --o0o-- 21 MR. JACZOLA: Because of the agreement, the rate 22 of idle reduction device installations in California is 23 more than twice the level of the rest of the country. 24 --o0o-- 25 MR. JACZOLA: With respect to locomotive diesel PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 121 1 fuel requirements, both railroads are continuing to comply 2 with ARB regulation, which mandates the use of CARB diesel 3 fuel for intrastate locomotives. 4 ARB staff estimates that compliance with CARB 5 diesel fuel regulation would be achieved with 7 percent of 6 the diesel fuel dispensed by UP BNSF into intrastate or 7 captive locomotives. 8 Recent data indicates both railroads combined are 9 dispensing about 70 percent CARB diesel exceeding the 10 necessary regulatory levels by nearly 10 times. 11 As required under the agreement, both railroads 12 continue to meet the requirement to dispense a minimum of 13 80 percent low sulfur diesel fuel, either U.S. EPA on road 14 or CARB diesel to interstate locomotives. For example, 15 trains going from L.A. to Chicago fueled in California. 16 Recent data indicated both railroads combined 17 dispense U.S. EPA or CARB diesel into locomotives at 18 levels greater than 99 percent. 19 --o0o-- 20 MR. JACZOLA: As mentioned in the previous 21 updates, the railroads established employee training for 22 idling and visible emission reduction programs. The 23 railroads combined have trained over 11,000 employees on 24 both the idle reduction and visible emission program 25 requirements. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 122 1 --o0o-- 2 MR. JACZOLA: As specified in the agreement, UP 3 and BNSF are required to perform inspections to identify 4 and repair smoking locomotives. During the last 5 six months of 2007, the railroads conducted over 12,000 6 visible emission inspections with an overall 99 percent 7 compliance rate. 8 --o0o-- 9 MR. JACZOLA: As required under Assembly Bill 10 1222 and referenced in the agreement, ARB staff, the 11 railroads, South Coast, and the Sacramento Air Quality 12 Management District, and several community representatives 13 are implementing the pilot program to evaluate the 14 feasibility of using remote sensing devices to identify 15 high-emitting locomotives. Phase I testing identified a 16 number of technical challenges which results in a number 17 of schedule delays. Phase II field, Phase III testing 18 should commence by September, allowing a report to the 19 Legislature on the feasibility and cost effectiveness by 20 mid fall 2007. 21 --o0o-- 22 MR. JACZOLA: A number of locomotive technology 23 assessments are also underway. U.S. EPA and UP are 24 evaluating the use of a diesel oxidation catalyst on an 25 older line haul locomotive. This locomotive was placed at PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 123 1 the California service for evaluation in Los Angeles about 2 six months ago. 3 The railroads through a contract with Southwest 4 Research Institute in Texas have retrofitted two older 5 switch locomotives with diesel particulate filters. One 6 of them was placed in the California service at the UP 7 Oakland rail yard last December. 8 The BNSF unit is still being tested in Texas and 9 hopes to be placed into service in California by the end 10 of this year. 11 Also, ARB staff initiated a contract with 12 Southwest Research Institute to begin efforts to research 13 and demonstrate the use of exhaust after-treatment 14 devices, with a particular focus on selective catalytic 15 reduction to reduce oxides of nitrogen or NOx emissions on 16 existing line haul locomotive engines. 17 --o0o-- 18 MR. JACZOLA: Under the agreement, ARB and the 19 railroads agreed to hold technical evaluation meetings 20 with public every six months. 21 U.S. EPA, locomotive engine manufacturers, 22 railroads, community members, local air districts, and 23 other interested parties have attended and offered their 24 perspectives at these meetings. A report summarizing the 25 two symposiums held in 2006 was released last December. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 124 1 The third technology symposium was held in June 2 2007 with a focus on the technology that would be needed 3 to meet U.S. EPA's proposed Tier 4 emission standards for 4 future new line haul locomotives. This next technology 5 symposium is scheduled for this fall. 6 --o0o-- 7 MR. JACZOLA: There have been a number of other 8 activities that have occurred to reduce locomotive 9 emissions and to support the implementation of the 10 agreement. 11 --o0o-- 12 MR. JACZOLA: UP and BNSF currently have 450 13 intrastate or California based locomotives. One 14 significant change is the replacement of many of 15 California's 30 plus year old yard or switch locomotives 16 with the new low-emitting switch locomotives. 17 California has about 12 electric hybrid or green 18 goat switch locomotives. BNSF has been operating four 19 liquefied natural gas switch locomotives in the Los 20 Angeles area since the mid 1990s. 21 A total of 70 new gen-set switch locomotives are 22 expected to be in service by the end of 2007. These 23 low-emitting switch locomotives significantly reduce fuel 24 consumption and can provide up to a 90 percent reduction 25 in NOx and diesel PM emissions as compared to an older PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 125 1 California switch locomotive. 2 The goal is full replacement of California switch 3 locomotive fleet by 2010. This will likely require the 4 use of incentive funds like bonds and other funding 5 sources like the Carl Moyer Program. 6 --o0o-- 7 MR. JACZOLA: Since your last update in January, 8 the ARB Enforcement Division staff completed a third round 9 of rail yard visits. These inspections involved all 31 10 designated and covered rail yards and resulted in an 11 inspection of 964 locomotives. 12 Staff issued 40 Notices of Violations for 13 improper idling. No visible emissions or smoking 14 locomotives were identified during the inspections, which 15 is consistent with the railroads' determined compliance 16 rate of 99 percent. This round of inspections also 17 included testing of diesel fuel dispensed. Confirming 18 diesel fuel dispensed into intrastate and interstate 19 locomotives met both state and federal standards. ARB 20 enforcement staff will conduct future inspections at the 21 designated and covered rail yards about every six months. 22 --o0o-- 23 MR. JACZOLA: The railroads have continued to 24 implement and improve community complaint process and 25 continue to work with the ARB staff and the public to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 126 1 improve the responsiveness of the system. 2 --o0o-- 3 MR. JACZOLA: Under the agreement, ARB staff and 4 the railroads committed to prepare health risk assessments 5 for 16 designated large rail yards. This was done to 6 quantify pollution risk levels near rail yards, identify 7 specific emission sources, and to provide a blueprint to 8 identify and implement effective mitigation measures to 9 health risks associated with rail yard diesel PM 10 emissions. 11 The assessments were to be completed in two 12 phases, with nine designated rail yards in the first phase 13 and seven designated rail yards in the second phase. 14 --o0o-- 15 MR. JACZOLA: A health risk assessment is a tool 16 that is used to evaluate the potential for a chemical to 17 cause cancer or other illness. Emission data, 18 meteorological data, and mathematical models are used to 19 estimate the theoretical maximum health impacts from 20 exposure to certain concentrations or levels of toxic air 21 contaminants released from a facility or found in the air. 22 The railroads prepared emission inventories and 23 prepared air dispersion modeling. Also, ARB staff 24 identified significant sources of emissions nearby the 25 rail yard. For example, freeways, refineries, and trucks PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 127 1 operating outside the rail yard. 2 Using the information from the railroads and 3 staff data on nearby sources, staff estimated air 4 pollution exposure and developed the health risk 5 assessments for both rail yards and sources nearby. 6 --o0o-- 7 MR. JACZOLA: The first nine draft health risk 8 assessments were released in May 2007. The second group 9 of draft health risk assessments are scheduled to be 10 completed by the end of 2007. 11 --o0o-- 12 MR. JACZOLA: Public meetings were held in the 13 affected communities on the first nine draft health risk 14 assessments in May and June of 2007. The purpose of those 15 first set of meetings were to release and explain the 16 draft assessments. Each initial meeting was followed 17 about a month later by a second meeting to allow for 18 questions and comments for the public to discuss possible 19 mitigation measures. 20 --o0o-- 21 MR. JACZOLA: The draft health risk assessments 22 results showed that the estimated excess cancer risk at 23 the locations close to the rail yards are higher than the 24 surrounding areas. 25 Diesel PM emissions from the rail yards result in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 128 1 significantly higher pollution risks in nearby 2 communities. The largest impacts are associated with the 3 four rail yards in Commerce, primarily because of their 4 emissions are concentrated densely within the rail yard 5 and occur next to populated areas. 6 --o0o-- 7 MR. JACZOLA: After considering the public 8 comments, staff will complete the health risk assessments. 9 In addition, the staff will work with the local air 10 districts and community members to form working groups. 11 One working group will be formed to more fully address 12 non-cancer health impacts around the rail yards with the 13 participation of the Office of Environmental Health Hazard 14 Assessment. 15 A second working group will be formed to identify 16 and evaluate potential mitigation measures that are needed 17 to reduce diesel PM emissions and thus the cancer and 18 non-cancer risks at each individual rail yard. Both 19 working groups will begin to meet with the public this 20 fall. 21 --o0o-- 22 MR. JACZOLA: During the recent health risk 23 assessment public meetings, ARB staff identified a menu of 24 existing mitigation measures for diesel PM emission 25 reductions that can provide a range of 25 to 50 percent PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 129 1 reduction in rail yard diesel PM emissions by 2010 over 2 the 2005 levels. 3 --o0o-- 4 MR. JACZOLA: In addition, there are a number of 5 measures that are approved or proposed that go into effect 6 just after 2010 that can add to the earlier mitigation 7 measures and reduce diesel PM emissions by cumulative 8 amount of 50 to 80 percent by 2020. 9 --o0o-- 10 MR. JACZOLA: In summary, the agreement is being 11 successfully implemented on schedule to achieve the 12 anticipated emission reductions. Lower emitting line haul 13 and switcher locomotives continue to enter California 14 service. The health risk assessments are underway with 15 the first nine rail yard health risk assessments released 16 in spring and the remaining seven scheduled to be released 17 by the end of this year. Mitigation efforts have begun 18 and development of rail yard specific measures are 19 beginning. Enforcement efforts are ongoing and show 20 compliance with the agreement. 21 Staff will return in six months with the next 22 update with a goal of reporting near or full 23 implementation of all of the key requirements of the 24 agreement. 25 This concludes the presentation. And I'll be PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 130 1 glad to answer any questions. 2 CHAIRPERSON NICHOLS: Do you have a question? 3 Question. 4 SUPERVISOR HILL: Thank you, Madam Chair. 5 In regards to the Oakland health assessment -- 6 and the Bay Area district has been waiting with bated 7 breath to get ahold of that, take a look at it, and start 8 working on it. The time frame seems to be slipping a 9 little bit. When I raised this question three or four 10 months ago, we were talking about the fall or sometime in 11 September, October, and now it looks like December. So I 12 guess the question is when. 13 ENGINEERING EVALUATION SECTION MANAGER HOLMES: 14 We are not directly involved with the West Oakland HRA 15 study except for the element. One of the elements is the 16 UP Oakland rail yard study. And actually as it relates to 17 what you're suggesting as a schedule, that's consistent 18 with what our proposed schedule is for the rail yards. It 19 wouldn't have any effect on the rail yards. I can 20 certainly contact our staff working on that particular 21 effort and find out what the exact schedule is. 22 SUPERVISOR HILL: I'd appreciate that. Thank 23 you. 24 CHAIRPERSON NICHOLS: Okay. We have several 25 witnesses who want to address this issue, beginning with PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 131 1 Barry Wallerstein from the South Coast. 2 We have a letter in the file from Dr. Burke on 3 this. 4 MR. WALLERSTEIN: We would like to express our 5 first our appreciation for your bold action yesterday on 6 the off-road engines. It will provide significant 7 progress in South Coast. 8 And I would ask you today as we enter this 9 discussion to take some of the context of what you asked 10 those fleet operators to do and put it into the 11 perspective of what's being asked of these two very large 12 companies. 13 There has been no single item that has been more 14 contentious between our two organizations than this 15 railroad MOU. And, unfortunately, we have to be here 16 again today to put some items on the record. 17 But let me say that we also want to recognize two 18 things. Number one, you have a truly excellent staff, as 19 was indicated yesterday. I've worked with many of these 20 folks for 25 years, and they are very well respected by 21 our organization. And there has been some things done. 22 We are not here to say that nothing has occurred through 23 the implementation. 24 However, we still believe that on the whole that 25 this MOU has been used as a tool to undermine our local PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 132 1 efforts and that there are many weaknesses that continue 2 in the agreement. 3 With that, I'd like to show a video very briefly. 4 And then Barbara Baird will have a few brief comments. I 5 didn't bring six or eight staff members to occupy a 6 half-hour's worth of presentation. If you can run the 7 video. As they bring the video up, we showed a video 8 six months ago that was different than that video. 9 (Thereupon a video presentation was made.) 10 MR. WALLERSTEIN: Last two points before Barbara. 11 There's been a big issue about legal authority, 12 and we think that there's some new information Barbara 13 will share with you that suggests you have some authority 14 that maybe you previously were not aware of. 15 Secondly, I want to point out the Prop. 1B funds 16 both here at CARB and the California Transportation 17 Commission offer this Board tremendous leverage in dealing 18 with the railroads over the next few years. You literally 19 have anywhere from a half a billion dollars to more than a 20 billion dollars of California public funds that they are 21 asking for for rail yards and other expansion activities 22 which will net them tremendous revenues. And so we would 23 encourage you to use those funds wisely to bring this 24 eighth largest source of NOx emissions to the same level 25 have control that we see in other source categories. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 133 1 With that, Barbara. 2 CHAIRPERSON NICHOLS: Thank you, Ms. Baird. 3 (Thereupon an overhead presentation was 4 presented as follows.) 5 MS. BAIRD: Good morning, Madam Chair. Thank 6 you. I do have a slide presentation. 7 --o0o-- 8 MS. BAIRD: The AQMD has long had concerns with 9 this MOU, starting out with the formation of the MOU -- 10 --o0o-- 11 MS. BAIRD: -- without any public process or 12 Board involvement. But we do thank this Board for 13 adopting a Resolution back in 2005 that will change that 14 for future MOU actions. 15 And just to touch on another concern, inadequate 16 enforcement provisions, the penalties per locomotive under 17 this MOU range from 400 to $1200. In comparison, for a 18 major public nuisance, the South Coast district recovered 19 $500,000 in a nuisance action again one railroad. 20 Next. 21 --o0o-- 22 MS. BAIRD: Your staff touched on the health risk 23 assessments that have been prepared. We have some 24 concerns about how these HRAs are being presented to the 25 public. First, the staff presentations do not include the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 134 1 maximum risk posed by these railroads to the maximum 2 exposed individuals, unlike the way we treat stationary 3 sources under AB 2588. 4 And second, the staff presentations do not place 5 the risk in context compared to stationary sources which 6 are generally limited to 25 in a million maximum risk. 7 And refineries, for example, generally come in at under 8 ten in a million. The HRA's underscore the urgent need to 9 significantly reduce risk. 10 --o0o-- 11 MS. BAIRD: This chart shows on the red bar the 12 difference between the maximum risk, which is revealed on 13 the red bars for these rail yards, and the risk reported 14 in your staff presentations, which while still significant 15 can be considerably less. As you can seek at the Commerce 16 four rail yards, the maximum risk was 3,000 in a million. 17 Next slide. 18 --o0o-- 19 MS. BAIRD: Unfortunately, the MOU does not 20 contain much in the way of requirements to mitigate risk. 21 Next slide. 22 --o0o-- 23 MS. BAIRD: As you've heard, we have adopted 24 rules to control rail idling and to require rail yards to 25 repair HRAs. The railroad sued us, and in the litigation, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 135 1 we learned some important facts. Their key executives 2 testified they had not changed their idling procedures due 3 to the MOU. And their data showed that anti-idling 4 divisions are a good financial investment for the rail 5 yards. And finally we learned that CARB idling 6 inspections are done on an announced basis, but we don't 7 think that is good enforcement practice. 8 --o0o-- 9 MS. BAIRD: Despite the MOU, significant idling 10 violations continued. Out of those locomotives that were 11 actually idling, 40 received NOVs from your staff. And 12 while we don't know how many violations actually occur, if 13 40 occurred on the day your staff inspected and that was a 14 typical day, that amounts to over 14,000 violations in a 15 given year. 16 Next. 17 --o0o-- 18 MS. BAIRD: We'd like to suggest that you require 19 immediate mitigation such as those on this chart. And to 20 mention one of your staff's slides showed at the Hobart 21 rail yard a lot of the risk was due to trucks. I'd like 22 to point out these are virtually all 93 percent trucks 23 owned by BNSF and almost all of the rest contractors' 24 trucks. So they can be controlled. 25 Next. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 136 1 --o0o-- 2 MS. BAIRD: Perhaps most importantly, we would 3 like to encourage this Board the reconsider its approach 4 to dealing with regulation with the railroads from the MOU 5 to a regulatory approach. In the court decision that was 6 recently ruled upon and the railroads' lawsuit, the court 7 indicated only CARB can regulate locomotives. We believe 8 that that decision will be reversed on appeal. But in the 9 mean time, it's up to you to consider effective 10 regulation. 11 And the court reiterated statements -- and this 12 was new that was not presented previously in your 13 consideration of your own authority -- statements in cases 14 indicating that the ICTA, which is the statute that 15 provides federal preemption, is not intended to interfere 16 with the role of State and local agencies in implementing 17 federal environmental statutes, such as the Clean Air Act. 18 In essence, the court practically invited CARB to act. 19 You can get concurrent toxic reductions by adopting rules 20 which implement the Clean Air Act, and we urge you to do 21 so. 22 I'd be happy to answer any questions. 23 CHAIRPERSON NICHOLS: Okay. Thank you. 24 Question. 25 BOARD MEMBER D'ADAMO: I have a question of staff PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 137 1 on the idling issue. How is this happening? 2 ENGINEERING EVALUATION SECTION MANAGER HOLMES: 3 Are you talking about the Lakewood incident? 4 BOARD MEMBER D'ADAMO: Not just the Lakewood 5 incident, but the issue of enforcement was on the third 6 slide that inspections are announced. Is that true? And 7 do you agree with the witness's rough calculations that if 8 40 were found in one round, should add up to 14,000 9 violations? 10 ENGINEERING EVALUATION SECTION MANAGER HOLMES: 11 Let me respond to the latter question. First of all, the 12 inspections are done semi-annually. Our staff goes to 31 13 covered rail yards. And that's over a two-month period if 14 you include the travel time to the rail yards. So the 15 estimate of 40 violations occurring in one day is clearly 16 erroneous. 17 As it relates to the unannounced inspections, 18 this is an agreement. And there are safety considerations 19 when you walk into a rail yard. We are the only agency in 20 the country, including U.S. EPA, to be allowed to walk 21 into rail yards to perform inspections. 22 So what we do with the announced inspections is 23 to coordinate, and it's done only at the highest level so 24 we have the appropriate staff there so we can conduct 25 inspections. For example, if we are to look at an idling PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 138 1 reduction device that is operating on a locomotive, we 2 will probably need maintenance personnel to do diagnostics 3 to determine if it's doing essential or non-essential 4 idling. So there is a reason for the announced 5 provisions. 6 However, I want to put it in proper perspective. 7 If you go to UP Colton rail yard, you're looking at 100 8 trains per day. I can certainly guarantee with the amount 9 of money at stake here the rail yards are not concerned 10 about two inspectors showing up at a Colton rail yard and 11 halting all of their locomotives because of our 12 inspections. 13 BOARD MEMBER D'ADAMO: Well, just wondering if 14 there's anything that can be done here. I support the 15 MOU. But on these reports, we continue to see progress, 16 but there is that lingering issue of idling. And is it 17 that we need more staff? Is it that the MOU precludes us 18 from doing more than what we are doing? What can we do to 19 improve the situation? 20 ENGINEERING EVALUATION SECTION MANAGER HOLMES: 21 There is no precluding of doing additional inspections. 22 As a matter of fact, the air districts participate in the 23 program, the ones that have been trained by our staff and 24 they augment our inspections. There's more inspections 25 going on than just ours. The South Coast has chose not to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 139 1 participate in our program. However, what we do want to 2 do is to enhance that. 3 And the issue that's limiting us from doing more 4 than four months out of the year at these rail yards, 5 which is pretty extensive effort, is simply staff 6 reinforces. That's true with all enforcement efforts. 7 CHAIRPERSON NICHOLS: So if the South Coast 8 wanted to cooperate in this admittedly less than perfect 9 program from an enforcement perspective, there would be 10 nothing to preclude them from doing that? 11 ENGINEERING EVALUATION SECTION MANAGER HOLMES: 12 That's correct. 13 CHAIRPERSON NICHOLS: Okay. 14 DEPUTY EXECUTIVE OFFICER SCHEIBLE: And the other 15 thing to point out is the compliance rate is still high. 16 What we want to find when we go out there is locomotives 17 that are turned off when they are sitting still. It's 18 very hard to go through and figure out whether or not that 19 was just something that's been turned off a long time ago 20 or functioning properly. 21 The other thing is the very high compliance rate. 22 When the South Coast did their rule, they concluded that 23 the same strategy that we pursued in the MOU, which was 24 getting automatic on-off devices on the locomotives was 25 the first strategy. And we are being very successful with PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 140 1 that. And we are finding times when they are not 2 operating properly and we are going through that and 3 trying to get that upgraded. 4 The other thing is typically we're pretty 5 generous with our NOVs. If we see a locomotive that might 6 be a violation, we issue an NOV and then work through the 7 process to find out whether or not it was idling that 8 isn't allowed or there was some reason that actually 9 permitted it. So the violation number typically goes down 10 after we complete that process. 11 CHAIRPERSON NICHOLS: I guess from my perspective 12 I can readily endorse the view that living next to a rail 13 yard is not a healthy thing. And I tend to be more 14 interested in the health risk assessment approach, because 15 I believe that if communities are given the information 16 about this -- and I'm concerned about the comment that 17 perhaps we are not communicating the results of these in a 18 way that is, not to be alarming but to put it in 19 perspective, so people know what this us adding to their 20 level of overall health risk that that would lead to 21 actions this would accelerate the process of bringing down 22 to a level of emissions from these rail yards. And we're 23 not going to -- we can't and we don't want to remove rail 24 operations from our state. But we have to be doing 25 everything we can to make them less unhealthy for the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 141 1 people who live nearby. 2 DEPUTY EXECUTIVE OFFICER SCHEIBLE: I believe we 3 communicated to the communities that the level of risk 4 associated with those who lived close to the Commerce yard 5 is far, far too high. That it's amply high enough so that 6 we need to do everything we can to figure out that the 7 risk assessments not only told us the risk, but they told 8 us the sources of the risk. So we now have a tool to go 9 in and say what effective actions can we do to make the 10 risks lower. 11 Just a quick comment on the point of maximum 12 impact. That is disclosed in our documents. Typically, 13 that occurs right next to the fence of the rail line. And 14 in the Commerce area, it occurred in areas where no one 15 lived. So we went and translated the risk that was 16 occurring to where the people lived. And I think we 17 portrayed that very fairly. So I think we effectively 18 communicated risk. It is done differently for stationary 19 sources. And our comparison point was things like ports 20 and freeways. And we acknowledge that it's much higher 21 than any normal risk level in terms of trigger. It's 22 higher than one in a million. It's higher than ten in a 23 million. In most cases, it's higher than a hundred in a 24 million. 25 So risk reduction activities and maximizing the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 142 1 effectiveness and the speed at which we pursue them are 2 needed, and I think everyone agrees to that. And we look 3 forward to working with all the districts where there are 4 rail yards to pursue that process. 5 BOARD MEMBER CASE: Madam Chair, I'm reacting a 6 little bit to the video. But that in concurrence with 7 knowing that residents in the Fresno area there's a 8 railroad track that goes right through the middle of the 9 town, and there have been complaints about residents 10 having a train right behind their home idling for long 11 periods of time. And I'm really pleased to see there are 12 idling rules. 13 But my question would be -- and there's also a 14 letter in our packet from Union Pacific to the 15 neighborhood saying we're really sorry this happened. It 16 shouldn't have happened. It was equipment failure. Do we 17 have any public outreach, or does the rail yard, which 18 would probably be the more appropriate place to go, a 19 hotline that's well published that when this happens the 20 public knows where to call, who to call, and they have 21 some sort of opportunity. 22 Because it is a significant health impact for 23 those who are very adjacent to that particular incident. 24 And it's a highly damaging pollutant. So what do we have 25 to share with the public? I think, you know, for South PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 143 1 Coast that would be just as important. But I think it's a 2 broader issue. 3 STATIONARY SOURCE DIVISION CHIEF FLETCHER: 4 During the development of the MOU and the implementation 5 of the MOU, the complaint process was one that was a very 6 high priority for us. We have been working very closely 7 with the rail yards and have tried to publicize, as the 8 slide will come up, complaint lines in all of the 9 community meetings that we've had in this entire process, 10 and including the HRA meetings in the last couple months. 11 We always put up the complaint line. 12 So there is a line that we have been working with 13 the rail yards on to try to be responsive back to the 14 community. And it's getting on the order of probably 20 15 to 30 complaints a month. But then the railroads follow 16 up. 17 So we've tried to make this information as 18 available. It's posted on our website. As I said, when 19 we were going through the entire MOU process, this was a 20 big part what of we're trying to do it. We try to get it 21 out there. We were trying to work with the rail yards to 22 track and improve how these calls were processed. But 23 we're trying. And there is numbers that are available. 24 CHAIRPERSON NICHOLS: It would be helpful again 25 if through the Board members who represent local districts PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 144 1 and others we could use the local district facilities to 2 get this information more widely disseminated. 3 BOARD MEMBER CASE: Madam Chair, I don't know how 4 well it fits within the website, but a very visible spot 5 on our website might be very helpful to the public. It's 6 not a lot of people. But for those people that get 7 impacted, it's a huge impact. 8 ENGINEERING EVALUATION SECTION MANAGER HOLMES: I 9 would add to that that we currently have a process for 10 conducting or providing or requesting complaints with the 11 railroads through the ARB and they go directly to our 12 enforcement division. These 800 numbers are available as 13 well. That process has been in place for over a year. 14 CHAIRPERSON NICHOLS: Well, I think we need to 15 expand our efforts and take advantage of all the web sites 16 that we can possibly get this information out on. Really 17 good suggestion. 18 Okay. 19 BOARD MEMBER BERG: Madam Chair, may I just ask a 20 question? Do we know on this incident that was 24 hours 21 if phone calls were made to the hot line? 22 ENGINEERING EVALUATION SECTION MANAGER HOLMES: 23 There were phone calls made to the hot line. I received 24 many of them that day. UP would was in an unusual 25 situation. We had a couple of engineers that were removed PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 145 1 from the locomotive because of some adverse action. And 2 unfortunately, when they left, they left the locomotives 3 on. And operational personnel were not appropriately 4 contacted. But I'll let UP explain. It was an unusual 5 incident, and there were a lot of people who knew about 6 it. 7 BOARD MEMBER BERG: And then I have a second 8 question. When we had the last update, we also had an 9 incident out in Riverside. And that was also shown. Were 10 there other incidents during this six-month period that -- 11 does the railroad have bad timing every time we get to 12 come before us? 13 ENGINEERING EVALUATION SECTION MANAGER HOLMES: 14 From my knowledge, it's just bad timing. These are 15 unusual incidents that have occurred. They're pretty 16 rare. And we've tracked most of the incidents. 17 One thing that was not mentioned earlier with 18 these 800 numbers, if people feel like they're not getting 19 an appropriate response, unfortunately I end up getting 20 phone calls because they follow up with the Air Resources 21 Board. So we are able to track statewide where there are 22 some hot spots with issues. 23 CHAIRPERSON NICHOLS: I think probably one of the 24 benefits or disbenefits of being old is you can remember 25 early days of these programs. And when I first started PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 146 1 working on air pollution issues back in the '70s, the 2 single biggest source of complaints from the community and 3 I think the single biggest area of inspections by the 4 local districts was smoke from the rail yard. That was 5 the smoking locomotives were the biggest issue that people 6 had. So I guess we can see that there's progress. But at 7 the same time, it's sad that it's still such a big issue. 8 BOARD MEMBER BERG: I think in fairness to put 9 everything in perspective, the rail yards are big pieces 10 of equipment that are going to be noisy. And it is trying 11 to mesh two very incompatible situations. And so I just 12 try to be careful. 13 It is a land use issue. So absolutely one noise 14 is one too many. But on the other hand, as our Chairwomen 15 said, we are not willing to shut down our railroad system 16 and so we got to figure this out in a positive way. Thank 17 you. 18 CHAIRPERSON NICHOLS: Okay. We'll hear next from 19 Kirk Marckwald, followed by Lupe Valdez, and Mark Stehly. 20 MR. KIRKWALD: Thank you, Madam Chair and 21 members. I'm Kirk Marckwald. I represent the Association 22 of American Railroads. 23 We need to add one minute of piece of information 24 that I think Mike Barr needs to put before you in terms of 25 some of the information that were put forth by the South PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 147 1 Coast District about the lawsuit and what it means or 2 didn't mean. 3 I think I believe we've had passed out to you -- 4 I have really just three things I want to mention this 5 morning. You've had passed out to you the matrix that 6 we've used to track basically the incremental air quality 7 improvements and investments that the railroads have made 8 both for the 2005 and the '98 MOUs. And I call your 9 attention to particularly the ultra-low emitting 10 California switchers in service. When we were last here, 11 there were 24. Today, there are 67, which is 45 percent 12 of the fleet. By the end of the year, there will be an 13 additional 24, bringing the total to 91, which will be 14 about 60 percent of the switcher fleet. 15 What's very important here is these units are 16 able to far exceed by 70 or 80 percent the current U.S. 17 EPA standard for line haul locomotives. These are in 18 service. All 91 will be in service in California 19 providing these especially lower emissions exactly where 20 we want them to be and you want them to be, which is in 21 and around rail yards. 22 The second thing I would note is when we were 23 last here in January, the total investment in these 24 programs was about $300 million. So it's about $60 25 million more in the last six months. And we'll continue PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 148 1 to use this so we can all track the progress made. 2 Attached to that are two examples, one from the 3 Fresno Bee on a UP train tour on new and emerging 4 technologies. And finally, an article about the BNSF 5 creating its natural gas trucks at Hobart, which is also 6 Commerce. And Lupe or Mark can talk specifically to that. 7 They also will speak specifically to the health risk 8 assessments and what the railroads are doing in the next 9 step on that. 10 Secondly, I want to let you know that we continue 11 to work cooperatively with the three air district partners 12 we have who have signed separate implementation protocols, 13 the Bay Air District, the San Joaquin District and Placer 14 County. They've been involved in the HRAs in their area 15 of alerting the public of doing some of the actual 16 outreach the Chair spoke to to make sure citizens new 17 about the meetings and could effectively participate. 18 So finally I think that, you know, the railroads 19 remain committed to carrying out this fact-based 20 cooperative program. I think what has been particularly 21 useful and I was able to sit in on some of the HRA 22 meetings. Clearly, we have set the stage for the next 23 round of conversations about what mitigations are 24 possible, meeting all of the standards of the MOU, and 25 meeting the needs of the community. So I think by when we PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 149 1 come back next six months from now, we will be able to 2 have that in front of you. 3 I'd like now Lupe to talk specifically. She will 4 touch upon the incident. 5 I do want to say briefly there will be from time 6 to time in the course since we've been here, there have 7 been thousands and thousands of trains that have operated 8 in southern California. And yes, there is a blocked 9 crossing. Yes, there is an idling incident behind some 10 homes. Yes, there is a malfunctioning piece. That will 11 happen. Once is too many because of the specter that it 12 raises. But I mean, the numbers that your staff has 13 pointed out are important to remember in terms of all the 14 trains that operate and how many clips do you see in the 15 course of six months. I think that's the perspective that 16 Member Berg was noting. And we think it is the right 17 perspective. So -- 18 CHAIRPERSON NICHOLS: Okay. Ms. Valdez. 19 (Thereupon an overhead presentation was 20 presented as follows.) 21 MS. VALDEZ: Thank you. I have a few slides. 22 Good afternoon, Madam Chair and members of the ARB Board. 23 My name is Lupe Valdez. I'm here in front of you today to 24 discuss both the outreach activities as well as some of 25 the HRA next steps that we are taking. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 150 1 I serve as the Director of Public Policy for 2 Community Affairs for Union Pacific. Previously, I served 3 as the Deputy Executive Officer for the South Coast AQMD, 4 as well as the Public Affairs Officer for Metrolink, which 5 is a southern California commuter rail system. 6 Today, I wanted to bring you up to date on new 7 developments. Both railroads continue to be involved with 8 various local efforts such as the City of Commerce's 9 Railroad Task Force, the AQMD Port Monitoring Project, 10 City of Riverside's Transportation and Accountability 11 Performance Group, as well as -- I can truly attest to 12 numerous, numerous goods movement meetings, task forces, 13 et cetera, in southern California. It's a major issue for 14 southern California, as well the state. 15 Since January, we have co-convened with CARB two 16 rounds of meetings to discuss the HRA. What I have before 17 you today was what we presented at our meeting in 18 Commerce. Just to give you an idea of type of slides we 19 are presenting. They give people a perspective of what's 20 going on. Clearly, at our rail yards -- this one is in 21 our UP yard in Commerce. All of our rail yards are 22 somewhat different. Yes, they involve trains. They 23 involve switcher locomotives, but they all have different 24 uses. And that is the one thing that we are really 25 focusing on, specifically with the HRAs. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 151 1 Next slide. 2 --o0o-- 3 MS. VALDEZ: This also gives you over time our 4 emissions by sources. And it shows it goes all the way to 5 2020. But it shows the reductions that have indeed taken 6 place. But it also attributes them to what type of 7 situation, whether it's locomotives or cargo handling that 8 has been reduced over time. 9 Next slide. 10 --o0o-- 11 MS. VALDEZ: That has not yet been shown to our 12 community, but is one that we are looking at. And I just 13 showed this as an example, because the next step in our 14 HRA process is to discuss mitigation. We will hold 15 another set of community meetings with CARB once the HRAs 16 and finalized and use their results to guide future 17 actions. We plan to present aerial slides like this one, 18 and you can go also to the next one. 19 --o0o-- 20 MS. VALDEZ: That will for each rail yard show 21 where the emissions are and what kind of efforts and where 22 we need to focus our attention. Again, these yards are 23 not -- you see them from the outside. You don't see them 24 from the inside for many of our communities that live near 25 them. We get the complaints -- I'll be honest with you. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 152 1 What I get complaints on -- and it was commuter rail as 2 well as now Union Pacific private is horn blowing and 3 noise after hours. I mean, that is -- when you're living 4 next to these, the requirements of safety that are upon us 5 with the communities, that is truly an inconsistent, 6 incompatible land use. 7 But this is what we're going to try to show to 8 demonstrate where the emissions are coming from and focus 9 our attention on them. 10 --o0o-- 11 MS. VALDEZ: This is an opportunity evaluation 12 matrix. We're going to look at each yard and look at all 13 the work we're doing in terms of summarizing all the 14 information in terms of using this. This is one we did 15 for Roseville. We are going to use the same game plan for 16 Roseville. 17 CHAIRPERSON NICHOLS: You have exceeded the three 18 minutes. If you can try to summarize. 19 MS. VALDEZ: Our goal obviously is to work with 20 the communities. 21 I do at least want to mention, as was mentioned 22 earlier, for the Lakewood incident, we did send a -- we 23 don't get a lot of complaints from that area, so they may 24 not know how to get ahold of us. They really didn't. So 25 we sent the 800 number in the letter to us. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 153 1 Land use is a critical issue and I continue to 2 say that. I testified before the Riverside County. They 3 are planning 300 homes next to our Mira Loma facility. 4 L.A. Unified wants to build a 2,000 school site high 5 school next to our railroad tracks. It's a continual 6 battle these situations occur. So that is a big issue. 7 And that's all I will say. 8 CHAIRPERSON NICHOLS: Thank you. Questions? 9 Board members are saying to themselves, why do they allow 10 that? Unfortunately, we don't get to make this decision. 11 Mr. Stehly. 12 MR. STEHLY: Madam Chair and Board members, my 13 name is Mark Stehly. Thank you for letting me speak to 14 you today. I'm the Assistant Vice President of 15 Environment and Research and development for BNSF 16 railroad. UP and BNSF are the two largest railroads in 17 the state. 18 I'd like to touch upon two points and make myself 19 available for any questions you have of me. 20 As staff has pointed out in January and again 21 today, the MOU is working as intended and in some areas 22 working even better than anticipated. It's creating 23 incentives for us to make emission reductions happen that 24 otherwise might not happen. 25 We've spoken before that both railroads have PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 154 1 ULEL, ultra low emitting locomotives, especially in the 2 form of switch engines. And I'd like to talk to you about 3 another technology that's being developed that build off 4 of the multi-engine gen-set switch engines. And it 5 relates to MOUs, but especially the 1998 MOU. 6 We're in a unique position that we have a 7 classification yard in Barstow. And it's outside the 8 South Coast Air District. And it creates -- it builds 9 special trains that go into the South Coast basin and the 10 trains come out to Barstow. And it's mixed freight. It's 11 box cars. It's tank cars. It's covered hoppers. It's 12 not intermodal equipment. It's not port related 13 equipment. 14 But it's a niche because of where it's located in 15 these trains and the fleet average agreement where we have 16 these sort of captive locomotives. And we need about 46 17 of them, but we're going to the manufacturers of the 18 multi-engine gen-sets that produce strict diesel engines 19 without after treatment. And we're telling them that we, 20 BNSF, need 50 locomotives with selective catalytic 21 reduction to meet our fleet average agreement. Because 22 they're truck-like engines, it's people that are 23 non-traditional suppliers of the railroad market like 24 Cummins and we need them in 2009. So they are working 25 very hard and giving us some very unique equipment. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 155 1 These engines are not durable enough for line 2 haul locomotives. They wouldn't last in that service. 3 Because they're truck engines with millions of dollars of 4 Department of Energy funding, they are ready for selective 5 catalytic reductions. It's an unintended consequence 6 that's put in play our need for newer technology to find 7 creative ways to meet our requirements under the MOUs. 8 Secondly, I think the HRA process is working as 9 envisioned. We've had a lot of public meetings going back 10 time and time to the communities that are there, talking 11 to them about what they think about us, and what they 12 think we should do and their options as to how we deal 13 with some of the sources. 14 In our case at Hobart, 40 percent of the 15 emissions come from on-road trucks. And contrary to the 16 assertion made by the South Coast, we don't own any of 17 them. Not a one. And we are a common carrier. If it's a 18 legally tendered good that comes in the door, we need to 19 take it regardless of the type of truck that pulls it in. 20 You will address that in your rules on truck rules. And 21 that's an important way to reduce these emissions, but 22 it's beyond our control and it's our single largest 23 source. 24 CHAIRPERSON NICHOLS: Mr. Stehly, I have to ask 25 you to finish up. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 156 1 MR. STEHLY: With all the things that you are 2 doing and have done that will bring about a lot of 3 reductions from our yards, even the rule that you passed 4 yesterday affects our maintenance of weigh -- track 5 maintenance of weigh equipment. And we will retrofit and 6 repower and replace that. So all of the sources in our 7 rail yard get attention from us. And there will be 8 significant reductions and significant reductions of the 9 impact to our neighbors. 10 One last thing, if Commerce -- the freeways 11 impact the same people that we impact, only they impact -- 12 the freeways impact them two and a half times more. It 13 doesn't relieve us of any duty we have to reduce our 14 impact on them. But when you put it into perspective, 15 they are impacted by a lot of other things. Thank you. 16 CHAIRPERSON NICHOLS: Thank you. 17 We also added Mike Barr to the list of witnesses. 18 It's an issue of legal authority came up. 19 MR. BARR: I'll be very brief, Madam Chair. 20 Thank you. The MOUs as everybody knows, the 1998 and 2005 21 are legally enforceable agreements. In fact, the 1998 is 22 recognized by EPA in the State Implementation Plan and 23 provided a credit there. They are both, of course, 24 excellent examples of how a public/private partnership can 25 work constructively over many years. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 157 1 The federal district lawsuit that was referenced 2 earlier was really only about the legality of the South 3 Coast District's regulations. It's not about the legality 4 of anything ARB did. The federal district judge did not 5 invite ARB to regulate. The federal direct judge did not 6 opine on the legality of any ARB action. ARB was not even 7 a party to the case. 8 The South Coast District was a party to the case, 9 as you know, and it and its staff and Board were 10 permanently enjoined from implementing or enforcing its 11 rail regulations. And thanks for focusing today instead 12 on what we can all do together in a public/private 13 partnership that can last over many years and decades. 14 Thank you. 15 CHAIRPERSON NICHOLS: Thank you. 16 That concludes the testimony. There's no action 17 that's required of the Board. Any final comments? 18 Ms. Kennard. 19 BOARD MEMBER KENNARD: Thank you, Madam Chair. 20 I certainly remember the very controversial 21 meeting we had in southern California on this very issue 22 and as our Chairwoman had couched it, this was considered 23 by many a less than perfect MOU. But kudos to the staff 24 and particularly Catherine Witherspoon in absentia for 25 putting forth this and the work on the part of the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 158 1 railroads to really exceed our expectations in this 2 regard. 3 And again, in an imperfect world, this has been 4 quite a wonderful achievement. And I continue to applaud 5 you and I hope that you continue to go forward positively 6 in this regard. 7 CHAIRPERSON NICHOLS: Thank you for that comment. 8 I would ditto it. And really recognizing that probably 9 the South Coast District will never get over their 10 disappointment and frustration and anger that the MOU was 11 adopted and the way it was adopted. It's here. It's in 12 effect. And I would hope that in the spirit of trying to 13 support the district that we could find a way to work with 14 you to increase its effectiveness. And I guess that's it. 15 And thank you all very much. 16 That is the end of our agenda, except for the 17 requirement under the Bagley-Keene open meeting act that 18 we allow for public comment on matters not listed on the 19 agenda. And we do have one witness who asked to address 20 us. So Mr. Vance, if you are here, this is the moment to 21 make your comments. Please come to the podium and make 22 your comment here at the podium. Thank you. 23 MR. VANCE: Hi. How much time do I have? 24 CHAIRPERSON NICHOLS: Three minutes. 25 MR. VANCE: Three minutes. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 159 1 My name is Jeffrey Vance. I'm from Red Bluff, 2 California, which is Tehema County. 3 Well, I'm here just to bring I guess a lapse of 4 regulation to your attention and then perhaps what's 5 resulted of that and to see what we can do about it. 6 Right now, there aren't any clear regulations 7 regarding pyrolysis techniques for waste disposal, which 8 is basically you put medical waste or other waste in a big 9 room and you heat it up really hot. And then it releases 10 a gas which you burn off. And right now, these 11 technologies don't consider themselves incinerators, so 12 they're able to bypass a lot of regulation and things like 13 EIR reports and air permits. 14 And so -- excuse me. I'm a little nervous. 15 But up in Red Bluff, we've been having this fight 16 for about two-and-a-half years now with a company that, 17 because of the lack of regulations that exist, I think a 18 lot of people would be surprised that a facility is going 19 to come in or is slated to come in that is going to be 20 carting 50 tons of medical waste up Highway 5 across the 21 street from a dairy and down the street from our town. 22 And they're going to be trying this new technology that's 23 never been done in mainland America on medical waste. 24 They've admitted in their own website it's 25 pathogenic, infective radioactive, chemotherapeutic waste PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 160 1 in a technology that their last facility they built in 2 Hawaii, this big room that has to contain the waste, 3 cracked. And the five teenagers that got a job cleaning 4 it up, three of them are dead, two of them are sick, and 5 actually the mother is working on this thing in Red Bluff 6 with us. And one of her daughters has cancer now and the 7 other one has tuberculoses. 8 So I guess my concern is that without regulation, 9 I mean, it's one thing to see these things on paper and 10 see it's a new technology that's going to be taking care 11 of waste. It's one thing if you talk about household 12 waste or commercial waste perhaps. But medical waste that 13 they themselves are saying is highly infectious, 14 radioactive, pathogenic in a room the size of this room, 15 and it's going to be filled with a flammable gas they say 16 themselves. And it's going to be heated to 2,000 degrees. 17 And this is going to take place in Sacramento 18 Valley a mile from the river, ten miles from the snow 19 pack. This is like our water source. And you know, they 20 say it's pretty safe, the gas, they can just burn it off 21 because it's just hydrogen. Kind of like the Hindenberg 22 as far as I'm concerned. 23 And the idea of this is that -- I guess I'm here 24 to ask if you can perhaps consider at least a moratorium 25 on that particular application of this technology. Right PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 161 1 now, I know there's a lot of political push to try to get 2 waste reduction and greenhouse gas down and things like 3 that. And they look really good on paper. But the 4 problem is that this particular case we're doing right now 5 is we're left with just county help. And they haven't 6 been much help. In fact, we've gotten ourselves sued from 7 this company because they said that they have a right to 8 come in there, because there hasn't been any of these 9 regulations on a state basis so they can just step in 10 without an environmental impact report and without air 11 permits. 12 CHAIRPERSON NICHOLS: Thank you. Mr. Vance, what 13 you've presented to us is certainly of concern. And I 14 appreciate your coming forward. 15 I don't know the answer to the issue that you've 16 raised. I do have some personal familiarity with the 17 medical waste issues from my time at EPA where we dealt 18 with it as a hazardous waste. But you're right. We were 19 focused on the incinerators, and it sounds like this is a 20 different type of technology which perhaps has fallen 21 between the cracks. 22 But I would like to suggest -- I think the Board 23 can't take action as a Board obviously, because it's not 24 an item that's on our agenda. But we can certainly ask 25 our staff to work with you to get the details, to ask them PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 162 1 to contact the Sacramento Air Pollution Control District 2 representatives and see if there's any issue in terms of 3 any legal avenue that you may have available to you that 4 hasn't been presented that we could provide. And we will 5 certainly be willing to follow up on that. Tom Cackette 6 here is our -- 7 MR. VANCE: One of my concerns is in 1996, you 8 know, I have a document that says that a letter came from 9 this Board to a company doing pyrolysis that said they 10 could build it without any EIR, without any air permits. 11 I think that's maybe where this door was cracked open, 12 this original letter that was given to this Board by a 13 company called Interstate Environmental Technologies. And 14 since then -- 15 CHAIRPERSON NICHOLS: I'm sorry. We really can't 16 get into it here at this forum. But we will follow up. 17 And it's the staff who are going to have to provide the 18 assistance for you. And they've indicated they're willing 19 to do that. There's obviously a lot of facts and details 20 behind this in terms of letters and correspondence and all 21 of that. 22 ACTING EXECUTIVE OFFICER CACKETTE: Bob Fletcher 23 I know is aware of some of the details on this, and he'd 24 be glad to talk to the gentleman and see if there's any 25 specific role that ARB can play and to look -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 163 1 CHAIRPERSON NICHOLS: And there's -- exactly. 2 Thank you 3 MR. VANCE: I think the one you could play is by 4 being the lead agency. Right now, you're letting counties 5 just deal with it themselves. And you wrote our local one 6 a letter saying please look extra carefully at this so we 7 can have some kind of consistency in permit granting. 8 That was done two years ago. 9 This Board has addressed this issue over and over 10 and over and over and over again. I don't know if any of 11 you are aware of this. But if anything happened to this 12 facility that's going to be slated to go up in a couple of 13 months now because of lack of regulations from this 14 Board -- 15 CHAIRPERSON NICHOLS: Mr. Vance, I will 16 personally look at your situation. And I promise you I 17 will make sure that I'm satisfied that it's been addressed 18 within the framework of whatever legal authority we have. 19 We're not going to duck this issue. 20 SUPERVISOR HILL: Madam Chair, can we get a 21 report back? 22 CHAIRPERSON NICHOLS: Yes. I'll be happy to make 23 sure the rest of the Board members are informed. 24 MR. VANCE: Do I just leave or is there anyone I 25 can speak to? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 164 1 CHAIRPERSON NICHOLS: Wait here, and we'll tell 2 you exactly who it is you need to talk to you and make 3 sure you have the person's phone number and they have your 4 phone number and they're prepared to follow up. 5 MR. VANCE: Thanks. 6 CHAIRPERSON NICHOLS: Okay. With that, I think 7 we have completed our agenda. Am I correct? And so 8 without further ado, thank you, all. And we are 9 adjourned. 10 (Thereupon the California Air Resources Board 11 recessed at 12:39 p.m.) 12 13 14 15 16 17 18 19 20 21 22 23 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 165 1 CERTIFICATE OF REPORTER 2 I, TIFFANY C. KRAFT, a Certified Shorthand 3 Reporter of the State of California, and Registered 4 Professional Reporter, do hereby certify: 5 That I am a disinterested person herein; that the 6 foregoing hearing was reported in shorthand by me, 7 Tiffany C. Kraft, a Certified Shorthand Reporter of the 8 State of California, and thereafter transcribed into 9 typewriting. 10 I further certify that I am not of counsel or 11 attorney for any of the parties to said hearing nor in any 12 way interested in the outcome of said hearing. 13 IN WITNESS WHEREOF, I have hereunto set my hand 14 this 10th day of August, 2007. 15 16 17 18 19 20 21 22 23 TIFFANY C. KRAFT, CSR, RPR 24 Certified Shorthand Reporter 25 License No. 12277 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345