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Policy Analysis: AB 398 and AB 617 – Climate Change Package

Publication date: 
Wednesday, August 2, 2017

On July 17, the California State Legislature passed a legislative package that seeks to reduce greenhouse gases and other air pollutants. The package consists of two Assembly Bills (AB):

  • AB 398, introduced by Assembly Member Eduardo Garcia, extends and modifies the state’s Cap-and-Trade program through 2030. It passed 55 to 21 in the Assembly and 28 to 12 in the Senate.
  • AB 617, introduced by Assembly Member Cristina Garcia, increases community-level monitoring of air pollution and requires emission investments in communities burdened by high levels of local air pollution. It passed 50 to 24 in the Assembly and 27 to 13 in the Senate.

California’s greenhouse gas (GHG) emissions account for less than 1 percent of global emissions, and a little less than 7 percent of U.S. emissions. Simultaneously, the state’s air quality is considered some of the worst in the country. According to the American Lung Association, seven of the top ten metropolitan regions with the worst air quality are in California. These urban areas include Los Angeles-Long Beach, Bakersfield, Fresno, Visalia-Porterville, Modesto-Merced, San Diego, and Sacramento. Health officials say the state’s air pollution kills 1,300 people per year, making it the deadliest air in the United States.

Greenhouse Gas Emissions: The Cap-and-Trade Program

Pursuant to the California Global Warming Solutions Act of 2006, the state’s Air Resources Board (ARB) monitors and regulates sources emitting GHG. ARB is required to approve a statewide GHG emissions limit equivalent to the emissions level in 1990 by 2020. The 2020 GHG emissions limit is 431 million metric tons of carbon dioxide equivalent (MMTCO2e). In 2016, the legislature passed Senate Bill 32, which requires California to reduce statewide GHG emissions to at least 40 percent below the 1990 level, 260 MMTCO2e, by 2030. ARB is authorized to use market-based compliance mechanisms.

In 2013, California launched a Cap-and-Trade program, a market-based mechanism that lowers GHG emissions. It sets a statewide limit on sources responsible for 85 percent of the state’s GHG emissions, and establishes tradable emission allowances that are auctioned quarterly to regular emitters. Capped sources include large electric power plants, industrial facilities, and distributors of transportation, natural gas and other fuels. Each year ARB reduces the emissions limit by 2 to 3 percent. It also reduces the number of tradable allowances while increasing their price. Revenue from the auction funds programs intended to reduce emissions. Lastly, instead of buying emission allowances or reducing their own emissions, companies can finance offsets, which are projects that reduce GHG. Carbon offset credits can be financed anywhere in the country.

Reduced Emissions: California is said to be on track to meet its 2020 target. ARB data from 2015, the most recent year with available data, finds that capped sources emitted close to 340 MMTCO2e in 2015, a decrease of roughly one percent compared to the year before. In addition, carbon pollution from uncapped sources also decreased from the previous year. Total 2015 GHG emissions in California equaled 431.9 MMTCO2e.

Auction Outcomes: In early allowance auctions, demand for permits far exceeded supply. However, when the program faced legal challenges from May 2016 to March 2017, demand plummeted. During the May 2016 auction, 11 percent of the permits were sold. This only generated $10 million. Most recently, state regulators announced in May 2017 that nearly all of the permits offered by the state were purchased, generating an estimated $500 million in revenue. The system currently has a surplus of allowances.

Greenhouse Gas Reduction Fund: The State’s portion of the Cap-and-Trade auction proceeds are deposited into the Greenhouse Gas Reduction Fund (GGRF). The Legislature then appropriates money from the GGRF to administering agencies for programs that reduce GHG emissions, collectively referred to as California Climate Investments.

According to the 2017 California Climate Investments Annual Report, nearly $3.4 billion has been appropriated by the Legislature to state agencies. To date, $1.2 billion has been used to implement more than 140,000 projects (see Table). Fifty percent of these projects benefits Disadvantaged Communities.[1] Together, they are expected to reduce GHG emissions by over 15 MMTCO2e. In addition, the full High-Speed Rail Project, which receives 25 percent of the GGRF, is expected to reduce GHG emissions by nearly 59 MMTCO2e over its first 50-years of operating life.

Cumulative Project Outcomes

  • Nearly 30,000 projects installing efficiency measures in homes
  • 105,000+ rebates issued for zero-emission and plug-in hybrid vehicles
  • 16,000+ acres of land preserved or restored
  • 6,200+ trees planted in urban areas
  • 200+ transit agency projects funded
  • 1,100 + new affordable housing units under contract

See map to find where GGRF projects

are located in Southern California.

Carbon Offset Credits: The state limits carbon offset credits to 8 percent of a business’s total reported GHG emissions. Each ARB offset credit is equal to 1 metric ton of CO2e. At present, ARB has developed nearly 42.8 million offset credits and issued about 23.8 million early action offset credits that may be converted to ARB offset credits after ARB approval. The most popular offsets involve preserving forests. Others include turning methane from cow manure into electricity or destroying chemicals that would otherwise escape into the atmosphere.

Carbon offset credits have been criticized by some environmental organizations who doubt the validity and effectiveness of them. In addition, because offsets can fund projects anywhere in the country, another criticism is that the environmental benefits of offsets are not felt locally. These organizations would rather force industries to directly reduce emissions.

The existing Cap-and-Trade program is set to sunset in 2020. In The Proposed Strategy for Achieving California’s 2030 GHG Target, ARB estimates that the Cap-and-Trade program extension would deliver 43 to 100 MMTCO2e reductions. Alternative strategies, involving a carbon tax and direct regulations on a wide variety of sectors, are considered not as likely to meet the state’s 2030 target, according to ARB.

Air Pollution: Local Air Districts

The state is divided into 35 Air Quality Management Districts, referred to as local air districts. These agencies are county or regional governing authorities that have primary responsibility for controlling air pollution from stationary sources, such as factories and refineries.  Local air districts are subject to adopting and enforcing regulations to achieve and maintain the state and federal ambient air quality standards. There is no single state agency responsible for the compliance status of local air districts in achieving air quality standards.

The existing Cap-And-Trade program focuses on reducing greenhouse gases, emissions that are not responsible for air quality issues that contribute to public health problems such as asthma. According to the Centers for Disease Control and Prevention, nationwide 7.4 percent of adults and 8.6 percent of children have been diagnosed with asthma. In California, the numbers are significantly higher: 13.1 percent of adults and 12.5 percent of children have been diagnosed with asthma. Lower income and minority groups are disproportionately affected by asthma due to their increased exposure to air pollution. Air pollution is also known to cause an increased risk of cardiovascular and respiratory illness, lung disease, cancerous tumors, and birth defects.

Existing Laws

Federal Law: Existing federal law establishes National Ambient Air Quality Standards (NAAQS) and monitors six “criteria pollutants” at five-year intervals due to their negative impacts on public health. These pollutants are ground-level ozone, Particulate Matter, oxides of nitrogen, oxides of sulfur, carbon monoxide, and added lead.   Regions that do not meet the national standards for any one of the pollutants are designated “nonattainment areas.” States are required to develop comprehensive plans to attain and monitor air quality standards for each area designated nonattainment for an NAAQS.

The Federal Clean Air Act (FCAA) specifies entities that qualify as major sources of air pollutants. It requires those sources to be permitted and regulated under the requirements in Title V of the FCAA, which is implemented in California by local air districts. The threshold for determining which sources qualify as Title V depends on whether the pollutants are hazardous and whether the source is located in a nonattainment area. Note, Hazardous Air Pollutants (HAPs) are called Toxic Air Contaminants (TACs) in California. Common Title V sources include large factories, refineries, and power plants.

State Law: Existing state law requires the ARB to make available the emissions of greenhouse gases, criteria pollutants, and toxic air contaminants for each facility that reports to the state board and air districts. The Board must also make available the emissions information for each local level for stationary sources and at least a county level for mobile sources.  Existing state law appropriates 60 percent of the annual proceeds of the GGRF for transit, affordable housing, sustainable communities, and high-speed rail purposes.

Existing state law does not limit the authority of local air districts from implementing an emission reduction rule for carbon dioxide from stationary sources already subject to the Cap-and-Trade program.  Additionally, existing state law charges a fire prevention fee on each habitable structure to be used for fire prevention activities. This law primarily affects rural landowners and generates $83 million annually.

Proposed Solution: A Package that Extends Cap-And-Trade and Improves Air Quality

The legislative package seeks to combat climate change by imposing restrictions on large emitters of greenhouse gases and other air pollutants. Specifically, AB 398 authorizes ARB to extend the Cap-and-Trade program through 2030. This bill also includes provisions that modify the existing program. Notable changes to the existing Cap-and-Trade Program include regulations on allowances, offsets, and the GGRF appropriations.

Allowances: The ARB must offer two price-containment points set below a set price ceiling. This price ceiling is established by the state agency after considering the adverse impacts on households, business, and the state’s economy. This bill continues the gradual reduction in the number of allowances given to industries.

Offsets: Carbon offset credits are reduced to 4 percent from 2021 through 2025 and 6 percent from 2026 through 2030. Half of all offsets used for a regulated entity’s compliance obligation from 2021 through 2030 must finance projects that have direct environmental benefits in California.

GGRF Appropriations: AB 398 declares the intent of the Legislature that moneys from the GGRF be appropriated in accordance with a specified order of priorities. The bill does not specifically dictate how money from the program will be used. Part of the revenue now replaces funding for the fire prevention activities. Therefore, the fire prevention fee is suspended until 2031. Energy Innovation forecasts that AB 398 will generate over $26 billion in new revenue for the GGRF through 2030. At least 35 percent of these funds are earmarked for Disadvantaged Communities. AB 398 also prohibits local air districts from imposing additional GHG limits on facilities subject to the Cap-and-Trade program.

In addition to its efforts to reduce greenhouse gas emissions, the legislative package seeks to reduce other pollutants. AB 617 mandates a number of new requirements for the ARB in an effort to reduce community level air pollution from large stationary sources. This bill authorizes ARB to be responsible for establishing a statewide system that consults with local air districts in monitoring air pollution, and developing a statewide strategy that approves community emissions reduction programs.

Pollutant Monitoring: Stationary sources are required to report their annual emissions of criteria pollutants and TACs to the ARB. The agency must identify high priority areas subject to criteria pollutant and TAC exposure. Local air districts with high priority areas are required to deploy community monitoring systems. Stationary sources in these areas must also implement fence-line monitoring systems.  

Statewide Strategy: By no later than October 1, 2018, ARB must develop a statewide strategy to reduce TACs and criteria pollutants in communities affected by high exposure. This strategy selects locations for preparation of community emissions reduction programs. Local air districts are required to implement such programs with ARB approval and monitoring. Note, ARB must provide grants to community-based organizations for technical assistance and to support community participation in developing community emissions reduction programs.

AB 617 also establishes a statewide clearinghouse for air quality measures. This includes identifying best available control technology (BACT), best available retrofit control technology (BARCT), and related technologies. Lastly, this bill expedites approved BARCT requirements for large emitters by no later than 2023.

In terms of economic impact, ARB estimates that AB 617 requires up to 72 state positions and 215 local air district positions at a cost of $37 million annually. In addition, ARB estimates contract and grant funding needs of up to $5.2 million during the first year.  This is followed by $3.8 million the second year and $3.4 million annually thereafter.

Support: Reflects a Hard-Fought Compromise to Combat Climate Change

A list consisting of environmental, agricultural, and business organizations support the legislative package. This list includes the Environmental Defense Fund, the National Resources Defense Council, Pacific Coast Producers, and Silicon Valley Leadership Group. Supporters find the package to reflect a balanced, pragmatic approach to supporting competing state interest. AB 398 is considered the most affordable method for reaching the state’s 2030 goal of reducing greenhouse gases, and AB 617 addresses local environmental concerns that disproportionately plague disadvantaged communities.

Opposition: Lacks Good Climate Policy, Increases Gas Prices and Home Utility Bills

A coalition of over 50 environmental justice organizations oppose the legislative package. This coalition includes the California Environmental Justice Alliance, Sierra Club, and the Courage Campaign. They note that AB 398 is bad for the climate due to ineffective carbon pricing, locking of free allowances, and continuance of carbon offsets. They doubt the program is likely to meet the state’s 2030 GHG emissions goal. Under this bill, opponents say that funds for local environmental investments and other greenhouse gas reduction projects will effectively decrease. Also worth noting, the South Coast and Bay Area Air Quality Management Districts opposed the package because AB 398 impedes their ability to set local limits on greenhouse gases.

Lawmakers who opposed the legislative package find AB 398 and AB 617 harmful to the state’s economy. They cite a report by the Legislative Analyst Office that determined that the existing Cap-and-Trade program raised gas prices by 11 cents per gallon. Opponents argue that this is the second time this year that the Legislature has voted to increase gas taxes. Lawmakers opposed to the legislative package also note that proceeds from the Cap-and-Trade Program have been applied to the high-speed rail project, which has surpassed its set budget by more than $20 billion.

If you have any questions or comments, please contact Michelle Ito, Public Policy Intern at [email protected].

[1] Disadvantaged Communities refers to the areas throughout California which suffer from a combination of economic, health, and environmental burdens. The state identifies these areas using an analytical tool known as the CalEnviroScreen created by the California Environmental Protection Agency (CalEPA).

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