FEDERAL JUDGE’S DECISION STAYING CALIFORNIA LOW CARBON FUEL STANDARD MAY UNDERMINE STATE GREENHOUSE GAS REGULATION

By Luthien Niland, 3rd year GGU law student

A Federal District Court judge from California’s Eastern District has now refused to stay his decision dealing a blow to the California Air Resources Board’s (CARB) implementation of the Global Warming Solutions Act of 2006 (AB 32).  Judge Lawrence O’Neill originally issued a preliminary injunction in December, 2011, that prohibits CARB from further enforcing California’s low fuel carbon standard (LCFS) for transportation fuels, holding that it unconstitutionally interferes with interstate commerce.  CARB plans to appeal both the decision itself and the request for a stay to the 9th Circuit court. AB 32 charged CARB with developing and executing regulations that would reduce greenhouse gas (GHG) emissions in California to 1990 levels by 2020.  As part of these measures, Executive Order S-01-07 set a statewide goal to “reduce the carbon intensity of California’s transportation fuels by at least ten percent by 2020.”  CARB adopted the LCFS as part of its plan to achieve this goal in June 2007.

The lawsuit, Rocky Mountain Farmers Union v. Goldstene,[i] was brought against CARB by a number of farmers and associations representing farmers, plus two organizations representing their member ethanol producers.  The Plaintiffs’ main argument that the court ruled on was that the LCFS violated the Commerce Clause[ii] of the U.S. Constitution because it discriminates against out-of-state corn ethanol.

The LCFS is a regulation adopted by CARB that applies to transportation fuels that are “sold, supplied, or offered for sale” in California.[iii] The purpose of the LCFS is “to implement a low carbon fuel standard, which will reduce greenhouse gas emissions by reducing the full fuel-cycle, carbon intensity of the transportation fuel used in California.”  By focusing on the full fuel-cycle, the LCFS reduces emissions not only by encouraging the use of alternatives to petroleum-based transportation fuels, but also by estimating – and reducing – all GHG emissions caused by the use of ethanol, including from the extraction, refining, and transportation of the fuel.[iv] Transportation fuel providers must calculate the “carbon intensity” of their fuels and compare these values to the statewide average carbon intensity level for the year.  The LCFS implements a trading program for the fuel providers, such that providers whose scores are below the statewide average can obtain credits that they can either sell to providers whose scores are above the average or bank for years when they exceed the statewide average level.

The constitutional challenge to the LCFS arises out of how the carbon intensity scores are calculated.  Four factors influence the carbon intensity scores for corn ethanol: the location of the production facility, the type of corn milling (wet or dry), the type of distillers grains produced (wet or dry), and the fuel used to power the ethanol production facilities.[v] Plaintiffs argue that the LCFS discriminates against out-of-state ethanol producers on its face because California producers will necessarily receive more favorable scores compared to out-of-state producers when assessing the location of their production facilities.

The dormant Commerce Clause prohibits states from placing an undue burden on interstate commerce by favoring in-state interests and burdening out-of state interests.[vi] A discriminatory law will be invalidated unless it can pass strict scrutiny, which requires the defendants to prove that the law advances a legitimate local purpose that cannot be achieved through a nondiscriminatory alternative.  The Plaintiffs in this case argue, in relevant part, that the LCFS “facially discriminates because it assigns a higher carbon intensity score to corn-derived ethanol from the Midwest than it assigns to corn-derived ethanol from California,” even though the fuels themselves are physically and chemically identical, and therefore the court should apply strict scrutiny to this law.  The Defendants counter by asserting “the strict scrutiny analysis is improper, because the LCFS is a neutral law that applies evenly to all fuel-providers within the state of California.”  More specifically, the Defendants argue that the LCFS applies the same modeling tool and regulations to all ethanol sold in California, regardless of its origin.

After assessing these arguments, the court found that “the LCFS . . . explicitly differentiate[s] among ethanol pathways based on origin (Midwest vs. California) and activities inextricably intertwined with origin (electricity provided by Midwest power companies vs. California power suppliers and interstate transportation),” such that “the LCFS assigns a higher [carbon intensity] on the basis of origin alone.”  The court held that while the carbon intensity factors may not overtly discriminate based on location, “they do assign favorable assumptions to California while penalizing out-of-state competitors” and so the LCFS is discriminatory on its face and subject to strict scrutiny.[vii]

When determining if the LCFS meets strict scrutiny, the court looked to Massachusetts v. EPA, 549 US 497 (2007), wherein the U.S. Supreme Court recognized that states have a local and legitimate interest in reducing global warming, and found that even though climate change risks are widely shared, this does not minimize a state’s interest in reducing them.  However, the court found the LCFS still did not pass strict scrutiny because nondiscriminatory means (such as a carbon tax) existed by which California could reduce global warming.  Therefore, the court granted judgment in favor of the Plaintiffs, thus invalidating the LCFS.[viii]

The District Court’s decision has an immediate impact.  The LCFS cannot be implemented without a stay granted by the 9th Circuit court.  In addition, this ruling will set the stage for how other states attempt to reduce GHG emissions.  Therefore, the ruling in this case is crucial to future initiatives around the country.

On appeal, the 9th Circuit must take a closer look at what defines a “facially discriminatory” law under the Commerce Clause.  In order to discriminate on its face, a law must make an express distinction between in-state businesses and out-of-state businesses.  The LCFS does not do this.  Instead, in crafting the regulation in accordance with the goal to “reduce greenhouse gas emissions by reducing the full fuel-cycle, carbon intensity of the transportation fuel used in California,” CARB targeted the portions of the lifecycle of ethanol that necessarily produce GHGs – extraction, production, and transportation.  To reduce these GHG emissions, CARB required every ethanol producer to use the exact same metrics to calculate the GHGs that are emitted during the process of getting the ethanol to the user.  While the reality is that in transporting ethanol over a longer distance more GHGs will be emitted, the LCFS in no way distinguished between in-state and out-of-state producers.

To illustrate this fact, imagine that someone in northern California wants to purchase ethanol from a producer.  A producer in southern California may have a higher carbon intensity score compared to a producer from southern Oregon or western Nevada because both regions, while not located in California, are much closer to northern California than southern California.  The portion of their scores that is attributed to the GHG emissions from transporting the ethanol would be lower.  Because the LCFS applies neutrally to all producers, such a scenario is possible and not discriminatory.

Additionally, the district court did not adequately vet the Defendants’ claim that no less discriminatory alternatives to the LCFS exist.  Even though strict scrutiny is a high bar to scale in dormant Commerce Clause actions, is not an immediate bar to all discriminatory laws.  By characterizing CARB’s purpose for implementing the LCFS as “reducing global warming,” the court made the purpose overbroad.  Such an expansion of the purpose effectively invalidates the strict scrutiny analysis by approving nondiscriminatory alternatives that would serve this purpose, but not the more narrow purpose intended by CARB.  The purpose of the LCFS is not to generally “reduce” global warming; if this were the case then even the most insignificant restriction on GHG emissions would achieve this goal, most likely in a nondiscriminatory way.  Instead, the purpose of the LCFS is to build on California’s already-aggressive global warming mitigation policies and further reduce GHG emissions, to levels set by AB 32.

The court quickly dismisses the argument that the LCFS is the only way to achieve these goals by suggesting a law adopting greater fuel efficiency, a carbon tax, or an LCFS that does not contain the “discriminatory” components.  Yet there is no evidence that any of these would achieve the same necessary goals as the LCFS: California is already doing everything it can for fuel efficiency with state and national rules, a carbon tax is likely politically impossible, and not accounting for the GHG emissions from transportation or production eliminates the primary GHG reduction measures of a lifecycle analysis.  The higher court must give more than a passing glance to whether nondiscriminatory alternatives to the LCFS exist that will achieve this narrower purpose of meeting the stringent AB 32 goals to reduce global warming.

While constitutional violations cannot be overruled based on policy reasons, this decision will significantly impact the ability of states to pass local laws to reduce GHG emissions.  The primary sources of GHG emissions that cause global warming are transportation and industry.  In order to make a lasting impact on global warming, these two sources must be tackled aggressively.  Yet the benefits of using alternative fuels to decrease CO2 emissions from automobile emissions will be effectively cancelled out if making these alternative fuels accessible creates more GHG emissions than they save.  This need to evaluate fuel’s lifecycle emissions was the impetus for the LCFS: to ensure that California truly was reducing GHG emissions by promoting the use of the ethanol fuel that emits the fewest GHGs through its entire lifecycle.  Even the District Court admitted that “the lifecycle analysis is a widely-accepted approach nationally and internationally to reduce GHG emissions.”[ix]

From an environmental perspective, the best outcome should be the 9th Circuit’s (and possibly higher courts’) affirmation of CARB’s position that the LCFS is not discriminatory, but rather applies to all ethanol producers equally.  By upholding the LCFS, the court would not only pave the way for California to meet its AB 32 goals, but also encourage other states to pass similar laws.  Judge O’Neill criticized the LCFS by stating that “[i]f every State were to adopt legislation based on a lifecycle analysis of fuels . . . the ethanol market would become Balkanized, since a producer would have strong incentives to either relocate its operations in the State of largest use, or sell only locally to avoid transportation and other penalties.”[x] When it comes to reducing GHG emissions from fuels, however, this is exactly what the fight against global warming requires.  If ethanol producers relocated and sold their ethanol only locally, one of the largest sources of GHG emissions – transportation – would be greatly reduced. This would also contribute to strong state economies around a sustainable market.

If the higher courts uphold the District Court’s decision, a national policy mirroring California’s goals with the LCFS could achieve the same goals.  Congress would have the power to pass such a law and any discrimination alleged by individual states would not exist.  However, while Congress is stalemated on comprehensive climate change legislation, it is critical that the states be allowed to fashion their own remedies to address GHG emissions.  In the famous words of Justice Brandeis, “It is one of the happy accidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory, and try novel social and economic experiments without risk to the rest of the country.”[xi]


[i] Rocky Mountain Farmers Union v. Goldstene, 2011 WL 6934797 (E.D.Cal.).

[ii] U.S. Const. art. I, § 8, cl. 3.

[iii] Cal. Code Regs. tit. 17, §§ 95480-95490 (2010).

[iv] Carbon intensity is defined as “the amount of lifecycle greenhouse gas emissions, per unit of energy of fuel delivered, expressed in grams of carbon dioxide per megajoule.”  LCFS § 95481(a)(11).  “Lifecycle greenhouse gas emissions” are defined as the “aggregate quantity of greenhouse gas emissions (including direct emissions and significant indirect emissions such as significant emissions from land use changes) . . . related to the full fuel lifecycle, including all stages of fuel and feedstock production and distribution, from feedstock generation or extraction through the distribution and delivery and use of the finished fuel to the ultimate consumer . . . .”  LCFS § 95481(a)(28).

[v] Facilities can obtain individualized carbon intensity values if they can show that they have more efficient equipment or use cleaner electricity when producing ethanol.

[vi] Dept. of Revenue of Kentucky v. Davis, 553 U.S. 328 (2008).

[vii] The court went on to analyze the Plaintiffs’ assertions that the LCFS impermissibly “controls conduct beyond the boundary of the state” and “regulates the channels of interstate commerce.”  The court found that the LCFS did both of these things and was therefore also subject to strict scrutiny on these grounds.

[viii] The court also addressed the Plaintiffs’ claim that the LCFS is preempted by the Energy Independence and Security Act of 2007, but found that the Plaintiffs failed to set forth the applicable standard of review and thus denied their summary judgment motion related to this claim.

[ix] Rocky Mountain Farmers Union, 2011 WL 6934797 *16.

[x] Id. at *15.

[xi] New State Ice Co. v. Liebmann, 285 U.S. 262, 387 (1932) (J. Brandeis, dissenting).

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