California Low-Carbon Fuel Standard Enjoined

On December 29, 2011, the U.S. District Court for the Eastern District of California (Judge O’Neill) issued two rulings that struck down California’s low carbon fuel program and enjoined its further enforcement. At least some commentators believe California’s recently-adopted cap-and-trade rules under AB32 could be similarly enjoined if the same types of challenges are brought. Following is a summary of the decisions and an explanation of how the rulings in Rocky Mountain Farmers Union, et al. v Goldstene, et al. CV-F-09-2234 could be applied to the AB32 cap-and-trade program.

Background

Signing of Executive Order S-1-07. January 18th, 2007, Sacramento, California

California’s Low Carbon Fuel Standard was announced on January 18th, 2007, through Executive Order S-1-07. The low carbon fuel standards (LCFS) applies to refiners, blenders and importers of petroleum fuels, and requires that the carbon intensity of all transportation fuels sold in California be reduced by 10 percent by 2020.

One of several programs under the Global Warming Solutions Act (AB32) implemented by the California Air Resources Board (CARB) was a low carbon fuels program intended to reduce the “carbon intensity” of motor fuels. Carbon intensity (CI) is a calculated number for specific categories of motor fuels and motor fuel substitutes (such as biofuels) that takes into account the life-cycle greenhouse gas emissions (GHGs), including indirect emissions associated with production and transportation.

Summary of Decisions

Judge O’Neill’s decisions found that the LCFS program violates the interstate commerce clause of the United States constitution. The commerce clause is interpreted to bar states from imposing restrictions on commerce that adversely affect the ability of out-of-state persons to conduct business within another state. The judge’s analysis is important in assessing the potential implications for other AB32 programs, such as cap-and-trade.

The two tests applied to state regulation under the commerce clause are the strict scrutiny test and the balancing test. If a state law facially discriminates against out-of-state businesses, the strict scrutiny analysis assesses whether the law is necessary to achieve a valid state objective and is the least restrictive method of doing so. The balancing test applies if the state law is not facially discriminatory, but has an adverse effect on interstate commerce. Under a balancing test, the court would determine whether the burden imposed on interstate commerce is “outweighed” by the interests sought to be achieved by the state.

Judge O’Neill concluded that the LCFS program is facially discriminatory against out-of-state fuel substitutes because the scoring methodology for carbon intensity assigns a higher CI to Midwestern biofuels than it does to locally-produced fuels because of the distances involved in delivery and the heavier use of coal in Midwestern electricity production. The court found that the factors used to calculate CI are not related to in-state activities or fuel composition, but are related to behaviors outside of California. Judge O’Neill likened such regulation to an attempt to regulate activity (e.g., emissions of GHGs) in other states. The judge effectively found that the discriminatory effect of the program was the relevant factor, regardless of whether the regulatory methodology was superficially neutral.

After finding that the LCFS program facially discriminates against out-of-state biofuels, Judge O’Neill applied the strict scrutiny analysis. He found that the program was adopted to serve a legitimate state interest (reducing GHG emissions to combat global warming), but concluded that the state had not borne its burden of showing that the LCFS program was the least discriminatory program that would have served the purpose. He suggested, for example, that a tax or a fuel standard or efficiency standards could have been imposed to reduce GHG emissions from motor fuels. (UC Davis, Marten Law, 1/25/2012)