Introduction

(Many thanks to Tyler Blix for his research and contributions for this post).

California Assembly Bill 32 (“AB 32”), also known as California’s Global Warming Solutions Act of 2006, set a goal for the statewide reduction of GHG emissions to 1990 levels by 2020. In addition, Executive Order S-01-07, issued by Governor Schwarzenegger in 2007 set a goal to “reduce the carbon intensity of California’s transportation fuels by at least 10 percent by 2020.”  The Executive Order tasked the California Air Resource Board (“CARB”) with the development and implementation of numerous regulations to achieve this goal. In April 2010, CARB adopted the Low Carbon Fuel Standard (“LCFS”) pursuant to AB 32. The LCFS seeks to “reduce greenhouse gas emissions by reducing the full fuel-cycle, carbon intensity of the transportation fuel used in California” by 10% in 2020. A number of fuel suppliers challenged the constitutionality of the LCFS, arguing that it violates the US Constitution’s Commerce Clause and sought to enjoin its enforcement. The case was heard in the United States District Court for the Eastern District of California and  issued in ten orders in December 2011. It was appealed in the United States Court of Appeals for the Ninth Circuit with decision in December 2013. The following is a summary of the main issues and holdings in the litigation.

Low Carbon Fuel Standard

The carbon intensity of a particular fuel is calculated by determining the GHG emissions created throughout the full life-cycle of a fuel, from production to distribution and consumption.  CARB assigned carbon intensity baseline values to different fuels based on the source of fuel involved such as biomass or crude oil as well as the “pathways” used to get the fuel to California. The carbon intensity score for a particular producers’ fuel is calculated and then compared to the statewide average carbon intensity level established for that year. A fuel provider can generate credits if the carbon intensity of their product is lower than the statewide average. However fuels with a score above the statewide average will create deficits which providers must offset with previously accumulated credits or by purchasing credits from others. Producers may also apply for a customized carbon intensity score if they can show that their production processes and pathways used differ from those calculated by CARB.

Rocky Mountain Farmers Union v. Goldstene (Case Number CV-F- 09-2234 consolidated with Case Number CV-F-10-163)

Two separate cases were enjoined, the Rocky Mountain Farmers’ Union et al v. Goldstene (representing the California Air Resources Board (CARB), and The American Fuels and Petrochemical Manufacturers Association et al. v. CARB. In the District Court, the plaintiffs argued that the LCFS was legally defective for four reasons. First, the LCFS is impermissibly discriminatory against out of state corn ethanol and discriminated against out-of-state crude oil.  Second, the LCFS impermissibly regulates commerce and the channels of interstate commerce (or impermissibly controls extraterritorial conduct). Third, the LCFS excessively burdens interstate commerce without producing local benefits. And finally, the LCFS is preempted by the Energy Independence and Security Act of 2007 (“EISA”), and preempted by federal Renewable Fuel Standard within the Clean Air Act.

The district court decision focused primarily on the commerce clause challenge, rejecting California’s arguments that Section 211(c)(B) of the Clean Air Act (CAA) provided authority to violate the Commerce Clause. A state law violates the commerce Clause if it is found to “discriminate against an article of commerce by reason of its origin or destination out of state.” Discrimination means “differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.” The industry plaintiffs argued that the LCFS was discriminatory because it assigned higher carbon intensity values to some out-of-state ethanol producers than it did to California ethanol producers. California countered that in determining carbon intensity values, the LCFS applies a uniform lifecycle analysis, which includes many different factors, to all ethanol in a nondiscriminatory manner. The court found that the LCFS “explicitly differentiates among ethanol pathways based on origin…and activities inextricably intertwined with origin”, such as transportation. The court held these differentiations to be facially discriminatory to out-of-state ethanol, discriminatory in purpose and effect against out-of-state crude oil and therefore discriminatory towards interstate commerce.

The court next considered whether the LCFS controls extraterritorial conduct. Answering the question in the affirmative, the court emphasized CARB’s statement that carbon intensity values would provide an “incentive for regulated parties to adopt production methods which result in lower emissions.”  The court found that the practical effect of such attempts to incentivize the reduction emissions would be to control conduct occurring “wholly outside of California”. As such the court held that the LCFS impermissibly controls conduct outside of its borders.

After a determination that a state’s regulation discriminates against interstate commerce, the state must show that the law “serves a legitimate local purpose” and that the purpose could not be achieved as well by available nondiscriminatory means. The plaintiffs maintained that since climate change is a global problem, attempts to regulate GHG emissions do not serve a local purpose. However, citing dicta from Massachusetts v. EPA, the court found that a state does have a local legitimate purpose in reducing global warming. Despite this finding, the court held that California had “failed to establish that they could not achieve [its] goal through other nondiscriminatory alternatives”. Therefore, the court determined that the LCFS failed the applicable commerce clause strict scrutiny analysis and struck down the regulation as unconstitutional.

After his decision in the case, Judge O’Neill refused CARB’s petition to stay his preliminary injunction pending the outcome of the appeal in the Ninth Circuit. Judge O’Neill determined that lifting the injunction “would require this court to reconsider and reverse the core issues of the appeal” and it was thus beyond his jurisdictional authority as it would alter the status of CARB’s appeal. However, the stay was subsequently granted by the Ninth Circuit Court of Appeals.

The Ninth Circuit then heard oral arguments in October 2012, and while the decision was pending, California has been able to continue its enforcement of the LCFS.

Rocky Mountain Farmers Union v. Corey (representing CARB) 2013 (Case Number 12-15131 09/18/2013)

The Ninth Circuit Court of Appeals issued its decision in September 2013. While the court reversed and remanded some holdings to the lower court, it also remanded for renewed decision on another holding.  The following summarizes that main issues decided.

The Court considered whether the Clean Air Act provides California the authority to violate the Commerce Clause and upheld the lower court holding that CARB cannot use CAA as authority to violate the Commerce Clause.

On the issue of whether the LCFS facially discriminates against interstate commerce, the Court held that the ethanol provisions do not facially discriminate against interstate commerce and that the crude oil provisions do not discriminate against out-of-state crude oil in purpose or effect. However, the issue was remanded to the district court to determine whether the ethanol provisions discriminate in purpose or effect. If yes, the district court should apply strict scrutiny to the provisions. If not, the District Court should apply Pike v Church balancing test, which states that “[w]here the statute regulates even-handedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits”.

Therefore, the burden is on the plaintiffs-appellees (Rocky Mtn et al.) to show that the LCFS imposes a burden “clearly excessive in relation to local benefits”. The Court also directs the court to apply the Pike balancing test to the provisions for crude oil, although they also stated that the crude oil provisions are not discriminatory in purpose or effect.

Finally, on the question of whether the LCFS constitutes impermissible extraterritorial regulation, the court ruled in favor of CARB, reversing the lower court decision. Therefore, the LCFS does not impermissibly regulate outside the jurisdiction.

It will be interesting to follow how the District Court will decide whether the ethanol provisions are discriminatory in purpose or effect. While purpose may be relatively easily shown to be non-discriminatory based on the suite of regulations including the LCFS adopted largely to lower greenhouse gas emissions, discrimination in effect may be more difficult to disprove.

Watch this space for future developments on the LCFS!

Disclaimer: This is for informational purposes only and is not meant to provide legal advice.