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The Ninth Circuit Decides the California Low Carbon Fuel Standard Case

David Pettit

Posted September 18, 2013 in Curbing Pollution, Health and the Environment, Moving Beyond Oil

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Today, the Ninth Circuit Court of Appeals decided Rocky Mountain Farmers Union v. Corey, reversing a District Court opinion that held that California’s low carbon fuel standard (LCFS) violated the dormant Commerce Clause of the U.S. Constitution.  You can read the court’s opinion here.  For more detailed background, you can read a Switchboard post from me here, a Switchboard post from my colleague Simon Mui here, and an article in LegalPlanet from UCLA Prof. Ann Carlson here.  Bottom line:  this is a very strong decision supporting California’s efforts to fight global warming.

THE LCFS AND THE OIL COMPANY’S LAWSUIT

The LCFS was adopted to reduce the carbon intensity of motor vehicle fuel that is sold in California.  In particular, it works by using a declining cap and market forces to reduce the amount of CO2 that is produced in connection with the manufacture, transportation and sale of ethanol, which has a lower carbon intensity than gasoline.  This makes sense because a pound of CO2 emitted in Kansas has the same effect on California as a pound emitted here.  If the amount of CO2 emitted during the manufacture of ethanol outweighs the CO2 saved by burning a gasoline/ethanol blend, California is losing the fight.  The LCFS also is aimed at incentivizing the use of lower-carbon crude oil in California.

Big Oil and Big Ethanol filed suit against the LCFS, claiming that it violates the Dormant Commerce Clause.  The District Court held that the LCFS facially discriminated against out-of-state ethanol, impermissibly engaged in the extraterritorial regulation of ethanol production, discriminated against out-of-state crude oil in purpose and effect, and was not saved by California’s preemption waiver in the Clean Air Act. 

THE NINTH CIRCUIT DECISION

The Ninth Circuit reversed on all but the Clean Air Act preemption claims and remanded the case for trial.  I’ll describe the Court’s reasoning below.

By way of context, the Court noted that:  “For dormant Commerce Clause purposes, economic protectionism, or discrimination, “simply means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.”  Under the Commerce Clause, “Absent discrimination, we will uphold the law “unless the burden imposed on [interstate] commerce is clearly excessive in relation to the putative local benefits.”  The latter quote refers to the commerce clause balancing test in the well-known case Pike v. Bruce Church Inc., 397 U.S. 137 (1970). 

DISCRIMINATION AGAINST OUT-OF-STATE ETHANOL PRODUCERS

First, the Court looked at the argument that the factors that the LCFS uses to calculate carbon intensity values in its so-called Table 6 prejudice out-of-state producers and help California producers of ethanol.  Preliminarily, the Court found that the District Court had erred in limiting the sources of ethanol with which California-produced ethanol should be compared, and in particular by failing to consider Brazilian ethanol (which is made from sugar cane and has a low carbon intensity).  The Court also held that:  “The district court also erred by ignoring GHG emissions related to: (1) the electricity used to power the conversion process, (2) the efficiency of the ethanol plant, and (3) the transportation of the feedstock, ethanol, and co-products.  Those factors contribute to the actual GHG emissions from every ethanol pathway, even if the size of their contribution is correlated with their location.”  This is a recognition that, as noted above, if more greenhouse gases are emitted in the production process than are saved at the tailpipe, California is not making progress.  As the Court explained:  “If California is to successfully promote low carbon-intensity fuels, countering a trend towards increased GHG output and rising world temperatures, it cannot ignore the real factors behind GHG emissions.”

The District Court held that two of the factors used in the peer-reviewed CA-GREET model that California uses to develop carbon intensity numbers were discriminatory:  transportation and electricity source.  The Ninth Circuit disagreed, holding that “these factors bear on the reality of GHG emissions, with resulting consequences for California . . . California, if it is to have any chance to curtail GHG emissions, must be able to consider all factors that cause those emissions when it assesses alternative fuels.”  This makes perfect sense – why ignore GHG factors that are real and significant?

The Court wrapped up this discussion by holding:

We conclude: (1) that all sources of ethanol compete in the California market and are therefore relevant to comparison; (2) that all of the factors included in CA-GREET’s lifecycle analysis are relevant to determining which forms of ethanol are similarly situated—not just those factors that are uncorrelated with location; (3) that the CA-GREET lifecycle analysis used by CARB, including the specific factors to which Plaintiffs object, does not discriminate against out-of-state commerce.

Second, the Court considered the argument that the way that the LCFS assigns default values under its carbon intensity categories is facially discriminatory.  Those categories take into account, for example, that Midwest ethanol producers are more likely to use dirty coal-fired power, and that the GHG emissions associated with the burning of coal need to be counted, and the default values for carbon intensity in the LCFS are based on values taken from the CA-GREET model.  Accordingly, the Court held that:  “The Fuel Standard’s regional categories for the default pathways show every sign that they were chosen to accurately measure and control GHGs and were not an attempt to protect California ethanol producers . . . This is the type of expert regulatory judgment that we expect state agencies to make in the public interest.” 

In assessing the policy background supporting the way the LCFS is being enforced, the Court reminded us that:

Our conclusion is reinforced by the grave need in this context for state experimentation. Congress of course can act at any time to displace state laws that seek to regulate the carbon intensity of fuels, but Congress has expressly empowered California to take a leadership role as to air quality. If GHG emissions continue to increase, California may see its coastline crumble under rising seas, its labor force imperiled by rising temperatures, and its farms devastated by severe droughts. To be effective, California’s effort to combat these harms must not be so complicated and costly as to be unworkable. California’s regulatory experiment seeking to decrease GHG emissions and create a market that recognizes the harmful costs of products with a high carbon intensity does not facially discriminate against out-of-state ethanol.

LCFS TREATMENT OF CRUDE OIL

The Court then turned to the LCFS provisions concerning crude oil.  Looking at the purpose of the regulation, the Court concluded that that “CARB’s stated purpose was genuine. There was no protectionist purpose, no aim to insulate California firms from out-of-state competition.”  Looking then at the claim that the LCFS favored in-state crude over out-of-state crude, the Court noted that “In cases such as this, where neither facial discrimination nor an improper purpose has been shown, the evidentiary burden to show a discriminatory effect is particularly high.”  Finding that the plaintiffs had not met that burden, the Court remanded to consider whether the crude oil regulations “placed an undue burden on interstate commerce under Pike.”

REGULATION OF OUT-OF-STATE ETHANOL PLANTS

Next, the Court considered the argument that the LCFS operates extraterritorially, that is, controls how out-of –state ethanol producers make their products.  The Court noted that the LCFS “says nothing at all about ethanol produced, sold, and used outside California, it does not require other jurisdictions to adopt reciprocal standards before their ethanol can be sold in California, it makes no effort to ensure the price of ethanol is lower in California than in other states, and it imposes no civil or criminal penalties on non-compliant transactions completed wholly out of state,” and concluded by holding that “Here, California properly based its regulation on the harmful properties of fuel. It does not control the production or sale of ethanol wholly outside California.”  In a broader context, the Court explained:  “The Commerce Clause does not protect Plaintiffs’ ability to make others pay for the hidden harms of their products merely because those products are shipped across state lines. The Fuel Standard has incidental effects on interstate commerce, but it does not control conduct wholly outside the state.”

CLEAN AIR ACT EXEMPTION

Last, the Court addressed CARB’s argument that Commerce Clause challenges to the LCFS are precluded by a provision of the Clean Air Act, Section 211(c)(4)(B).  The Court disagreed with CARB, relying on its prior precedent. 

JUDGE MURGUIA’S DISSENT

Judge Murguia wrote a brief dissent, believing that default carbon intensity scores in Table 6 are facially discriminatory.  She agreed, though, that CARB could create individual carbon intensity pathways that would be legal under the Commerce Clause – and indeed, CARB has created individual pathways for every applicant who has asked for one.

A WRAP-UP FROM THE NINTH CIRCUIT ABOUT CALIFORNIA AND GHGS

The majority’s explanation of the general policies behind its decision is worth quoting in full:

The California legislature has determined that the state faces tremendous risks from climate change. With its long coastlines vulnerable to rising waters, large population that needs food and water, sizable deserts that can expand with sustained increased heat, and vast forests that may become tinderboxes with too little rain, California is uniquely vulnerable to the perils of global warming. The California legislature determined that GHG emissions from the production and distribution of transportation fuels contribute to this risk, and that those emissions are caused by the in-state consumption of fuels. Whether or not one agrees with the science underlying those views, those determinations are permissible ones for the legislature to make, and the Supreme Court has recognized that these risks constitute local threats. See Massachusetts, 549 U.S. at 522.

To combat these risks, the California legislature and its regulatory arm CARB chose to institute a market-based solution that recognizes the costs of harmful carbon emissions. For any such system to work, two conditions must be met. First, the market must have full and accurate information about the real extent of GHG emissions. Second, the compliance costs of entering the market must not be so great as to prevent participation. Plaintiffs attack the lifecycle analysis and default pathways that fulfill these conditions, relying on archaic formalism to prevent action against a new type of harm. It has been sagely observed by Justice Jackson that the constitutional Bill of Rights is not a“suicide pact.” See Terminiello v. City of Chicago, 337 U.S.1, 37 (1949) (Jackson, J., dissenting). Nor is the dormant Commerce Clause a blindfold. It does not invalidate by strict scrutiny state laws or regulations that incorporate state boundaries for good and non-discriminatory reason. It does not require that reality be ignored in lawmaking.

California should be encouraged to continue and to expand its efforts to find a workable solution to lower carbon emissions, or to slow their rise. If no such solution is found, California residents and people worldwide will suffer great harm. We will not at the outset block California from developing this innovative, nondiscriminatory regulation to impede global warming. If the Fuel Standard works, encouraging the development of alternative fuels by those who would like to reach the California market, it will help ease California’s climate risks and inform other states as they attempt to confront similar challenges.

WHAT HAPPENS NOW?

So what happens now?  The case will go back to the District Court for a trial under Pike, a trial that I am confident CARB will win because, as a matter of empirical fact, the LCFS is not hurting the ethanol industry.  Before the trial, the Plaintiffs could ask for a rehearing en banc in the Ninth Circuit, although those are rarely granted.  They could also ask the U.S. Supreme Court to take up the case, also a low-probability matter.

All in all, this is a good day for California’s fight against global climate change.

 

 

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