SENATE BILL NO. 48 "An Act authorizing the Department of Natural Resources to lease land for carbon management purposes; establishing a carbon offset program for state land; authorizing the sale of carbon offset credits; and providing for an effective date." 8:44:38 PM RENA MILLER, SPECIAL ASSISTANT, DEPARTMENT OF NATURAL RESOURCES, introduced the PowerPoint presentation "Senate Bill 48: Summary of Changes/Sectional Analysis" dated May 15, 2023 (copy on file). She explained that she would detail the changes to the bill that were made in the Senate. She skipped to slide 3 and noted that the House Resource Committee had heard the companion bill HB 49 six times and amended it, the House Finance Committee heard the bill five times, the Senate Resources Committee heard SB 48 four times and amended it, and the Senate Finance Committee heard it five times and amended it. The bill passed the Senate earlier in the day and her presentation would be the first discussion of the bill as amended by the Senate. Ms. Miller advanced to slide 4 and explained that she would compare SB 48 with HB 49 as amended. The first change was the title, which was revised to reflect amendments made in the Senate. The changes were as follows: added "relating to the powers and duties of the Alaska Oil and Gas Conservation Commission" [Section 1]; and "relating to oil and gas lease expenditures" [Section 16]. She noted that Section 1 was new to SB 48 and was the same as Section 3 of HB 50. It provided the Alaska Oil and Gas Conservation Commission (AOGCC) with the authority to acquire primary enforcement responsibility for Class VI wells from the Environmental Protection Agency (EPA). She explained that Class VI wells were used to inject carbon dioxide into deep rock formations. Ms. Miller continued that Section 2 was formerly Section 1 of HB 49 and provided a full exemption from the state procurement code. It was amended to exempt only contracts with registries. There was no change to Section 3. 8:48:04 PM Ms. Miller continued on page 5 of the presentation. She indicated that Section 4 was also unchanged from HB 49 and conformed to the new carbon management purpose lease program. She explained that Section 5 was formerly Section 4 and detailed the new carbon management program. The following was added to the section: • DNR must solicit competitive interest on receiving an application • DNR to weigh revenue to state in case of competing leases • Leases must include performance benchmarks and will be terminated if failure to meet • In Best Interest Finding, DNR must consider impacts on mining, timber and other resource development; the known mineral potential in the area; and value to the state • State land will remain open to other resource development • Annual report to Legislature Ms. Miller stated that Section 6 of SB 48 was unchanged and was conforming to Section 5 of HB 49. Ms. Miller advanced to slide 6. She relayed that Section 7 was new and was conforming to the requirement in Section 5 of HB 49 to solicit competitive interest. She noted that Section 8 was formerly Section 6 and established the Carbon Offset Program at the Department of Natural Resources (DNR). The following was added: • Additional criteria to evaluate in a Best Interest Finding, including impacts to other resource development sectors; assessment of mineral potential in area; and potential revenue to the state • State land to remain open to other resource development • Removal of new fund; credit sale revenue will go to general fund • Ability for DNR when considering contracts under the procurement code to evaluate revenue and value to the state • Prohibition against contract commissions over 30% • Annual report to the Legislature • Revisions to definitions section to reflect the evolving nature of the carbon offsets industry and ensure statute durability Ms. Miller advanced to slide 7. She relayed that Sections 9 through 11 of SB 48 were formerly Sections 7 through 9 of HB 49 and there were no changes. Additionally, Sections 12 through 15 were formerly Sections 10 through 13 and there were no changes. She shared that Section 16 was new and would disallow carbon lease or project costs as oil and gas lease expenditures. Finally, Section 17 was formerly Section 14 and was unchanged. She expressed that the department appreciated the Senate's changes to the bill and thought that it made many improvements to the legislation that addressed the concerns about the program. She believed that the programs would be successful if the department could be transparent with the legislature and with Alaskans. She concluded her presentation. 8:54:58 PM Representative Galvin appreciated the information and the work the department had done. She noted that Ms. Miller had referenced prohibition against a contract commission of over 30 percent. She recalled that there were two various potential contractors who had mentioned a contract commission of 20 percent. She was curious about the discrepancy of the two figures. Ms. Miller responded that the two hypothetical scenarios showed up in the department's crediting tables. In the scenarios, the 20 percent figure was applied because it was somewhat of a norm in the field, although it could vary depending on the particular project. Some of the smaller projects required a larger commission than some of the larger projects. The department felt that the 30 percent figure allowed for appropriate negotiating leeway that could potentially include other terms that were of value to the state. If a situation arose in which the 30 percent figure was prohibitive, the department would return to the legislature to discuss the issue. Representative Galvin recalled that two different organizations had presented before the committee about the carbon program. She thought the organizations had told the committee that the contract commission percentage was somewhere between 18 and 20 percent. She asked Ms. Miller to provide some examples of the other terms that could be negotiated as a state. She understood that the norm was up to 20 percent. Ms. Miller responded she thought that the American Carbon Registry (ACR) was one of the organizations that had presented to the committee and had likely echoed 20 percent as the norm. One of the negotiating terms that might increase the percentage was developer training for DNR staff in order to manage future projects in which the department was the sole developer. Representative Galvin relayed that she had done some quick math for one of Ms. Miller's examples and the total was $60 million for one contractor. She was concerned about the increased cost if the percentage was increased by 10 percent and thought it was a substantial sum to dedicate to training purposes. She supported the bill but wanted to ensure that the legislature was protecting Alaska's interests. 9:00:07 PM Representative Josephson recalled that there was an earlier amendment sometime in the bill's hearing process that included language about a $10 million spending cap, beyond which the legislature would need to provide additional oversight. He asked if his recollection was correct. Ms. Miller responded that the Senate Resources Committee had maintained the full exception to the procurement code and had implemented an amendment that would require legislative approval for contracts exceeding $10 million. Ultimately, the Senate Finance Committee sought to remove the requirement for legislative approval to foster a process that would provide transparency, competition, due process, and fairness. Representative Josephson commented that he was aware that the bill had always had an allowance for other potential resource development. He asked how decisions would be made about leaving forests intact in situations in which forest had to be removed, such as in the case of Fort Knox [gold mine]. Ms. Miller responded that the mineral estate was the dominant estate. The bill would not change the fact that an area could only be closed to minerals with the legislature's action. The first step would be for the department to assess the known mineral potential of an area. When a project was created, it was important to know where the high potential areas were and to project the way the area might look in the future. An option would be to exclude a forest from a project area in order to avoid having to account for carbon loss within a project that aimed to increase carbon stock increases. There were also opportunities within a project area to accommodate surface disturbance, including the potential for a subsurface mine, which would help determine how many credits a project would be able to generate. Representative Hannan referred to Section 16 of the bill which included descriptions of oil and gas industry lease expenditure dialogue. She had a conversation with Ms. Miller and was assured that the bill would be unrelated to the sequestration apart from well primacy. She asked for more information on the choices behind the language of Section 16. Ms. Miller responded that Section 16 amended AS 43.55.165(e) which the was current oil and gas tax credit statute and it articulated items that could not be claimed as lease expenditures. She clarified that the items all related to oil and gas activity. There was only one example in which costs were incurred as part of the capital expenditure for a carbon management purpose or a carbon offset project. The change was not related to potential lease expenditures on underground storage projects. She thought the issue would come before the legislature when developing the leasing and regulatory framework for underground carbon storage. There was concern in the Senate that there could be a carbon lease or project on the same surface area as an oil and gas development. If the situation occurred, the Senate wanted to ensure that capital expenditures for the carbon purpose were not to be deducted as lease expenditures from the oil and gas production tax. Co-Chair Foster asked if there were additional questions. Ms. Miller requested that Mr. Neil Steininger speak to the details of the way in which the projects would be funded. 9:06:37 PM NEIL STEININGER, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET, OFFICE OF THE GOVERNOR, (via teleconference), expanded upon the question. There were some amendments made in the Senate related to the structure of the funding of the carbon offset program. The revenue collected under the program would be tracked as a separate fund code in the state budget for the expenditures. The funds would live within the general fund but would be accounted for separately. The amount of revenue collected would be transparent to the public and the legislature and would be published in the Department of Revenue Revenue Source Book released annually. It would be similar to the way in which Department of Motor Vehicles (DMV) receipts were reported upon and appropriated. Appropriations for the operating side of the carbon offset program would be included in the operating budget each year. As the revenues began to flow into the state, expenditures would be transitioned over to the direct expenditures of the new code that would be established by the Legislative Finance Division (LFD). Mr. Steininger continued that appropriations related to the actual carbon offset project would be in the operating budget; however, costs associated with specific projects or credit projects would live within the capital budget which would allow the department to spread the costs over multiple years. There would be carry-forward language beginning in FY 25 in the operating budget which would allow the department to carry over more funds than the amount that was strictly necessary for a given fiscal year. Co-Chair Foster indicated that there were five fiscal notes dated within the last week. He asked whether Ms. Miller would like to speak to the fiscal notes. 9:09:45 PM Ms. Miller commented that the committee was already familiar with three of the fiscal notes dated within the last week. The main change was revising the narrative to reflect the elimination of the carbon offset fund. There were two fiscal notes the committee had not yet heard. The first was related to OMB component by the Department of Commerce, Community and Economic Development (DCCED) with the control code azWox (copy on file). The fiscal note related to the addition of Section 1 of SB 48 which would grant AOGCC the authority to pursue primacy from the U.S. Environmental Protection Agency (EPA) over Class VI wells. There was $908,000 in FY 24 and $888,000 in FY 25. She noted that AOGCC had applied for grants from the EPA to help with the costs of the responsibility of enforcement, which would supplant the general fund. Ms. Miller continued that the second new fiscal note was OMB component 2888 by DCCED with the control code qqAuO (copy on file). The fiscal note related to the Alaska Energy Authority (AEA). She forgot to mention earlier that the Senate had amended the bill so that 20 percent of the revenue generated from the carbon offset program would be deposited into the renewable energy grant fund [AS 42.45.045]. The change had generated the fiscal note, which was indeterminate. Representative Josephson asked if the carry-forward dollars would be subject to the sweep. Mr. Steininger responded that the monies would not be subject to the sweep. Representative Josephson asked if the reasoning was because the legislature had fully appropriated the monies already. Mr. Steininger responded in the affirmative. Representative Stapp commented that his main concerns about the bill were related to the procurement process, the lack of oversight, and the competitive interest clauses. He did not want the bill to be used as a capital expenditure in order to sequester carbon and receive a state tax credit, which he thought would have happened if the amendments in the Senate were not passed. He asked if the committee was "missing anything." He wondered if all concerns had been addressed. Ms. Miller responded that the department had heard similar concerns from legislators in both bodies. The department appreciated the Senate's collaboration in working towards resolutions and finding ways to provide transparency and responsiveness to the legislature and Alaskans. 9:15:03 PM Representative Galvin drew attention to page 10, line 3 of SB 48. She understood that a typical contract commission agreement was 20 percent or less. She asked if the department would be severely impacted if the figure increased to 25 percent. Ms. Miller responded that the department felt that 30 percent would offer flexibility and would avoid statutorily contracting negotiated terms while preventing a potential situation in which the prudency of entering into the contract would be questioned. She noted that the industry was rapidly evolving and she had heard that the allowance was following norms. Some projects involving smaller surface areas could generate more than 20 percent commissions and the department would like the opportunity to pursue such projects. Future projects could involve environments like tundra and the department did not want to limit itself. JOHN BOYLE, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES, responded that the intent was to maximize the amount of revenue and value of the resources used in the projects. He recalled that one of the slides in the presentation showed the various types of carbon projects available. It could be true that some organizations saw a certain commission range, but if the state were to look to other types of carbon projects, the projects might not fall into the same parameters. The 30 percent figure seemed to be a good compromise and would allow for the desired flexibility. For example, kelp projects were nascent and accrediting bodies were still crafting the logistics of the projects. It was important to preserve the flexibility, but the Senate felt that it was also important to implement a percentage cap. 9:19:24 PM Representative Galvin asked for some examples of projects that rose above 20 percent. She understood that the committee had been told that the general cap was 20 percent. She was hoping for reassurance that the extra 10 percent was necessary. She reiterated that she was supportive of the bill but wanted to ensure that the legislature had set the correct guidelines. Ms. Miller replied that she did not have additional data because many of the project contracts were not available to the public. She relayed that the committee had heard from both ACR and the contractor Anew Climate, which both related to the improved forest category, that the 20 percent figure was the norm for current projects. She noted that the committee had also heard from potential developers that for smaller niche projects, commissions could go higher particularly because the project areas were smaller which was something of which "they" wanted the department to be aware. Representative Galvin asked who "they" were. She understood that ACR was aware of projects that would surpass 20 percent but the projects were not yet common. Ms. Miller responded there were no protocols available at a registry for a kelp project but developers and other registries were actively working on fine-tuning the science of how to verify the amount of carbon that kelp at the bottom of the ocean had sequestered. She added that ACR had shared that different projects could generate different types of commissions. Representative Galvin understood that the ceiling of 30 percent was being requested because there could be smaller projects that could reach the figure and the department would be limited. She asked if her understanding was correct. Ms. Miller responded in the affirmative and explained that it was one reason for the request. A cap of 30 percent would allow for some flexibility for the department to pursue other projects that would be in the state's best interest. Co-Chair Foster set an amendment deadline for SB 48 for 11:30 a.m. on May 16, 2023. SB 48 was HEARD and HELD in committee for further consideration.