Appeals court rejects industry challenge to Calif. low-carbon fuel standard

Source: Jeremy P. Jacobs, E&E reporter • Posted: Thursday, September 19, 2013

Click here to read the opinion.

The 9th U.S. Circuit Court of Appeals rebuffed a challenge from industry today to California’s low-carbon fuel standard in a victory for the state’s efforts to curb emissions of greenhouse gases.

The judicial panel ruled 2-1 that the California Air Resources Board’s regulations didn’t violate the Constitution’s Commerce Clause by penalizing out-of-state fuels.

“We hold that the Fuel Standard’s regulation of ethanol does not facially discriminate against out-of-state commerce, and its initial crude-oil provisions … did not discriminate against out-of-state commerce in purpose or practical effect,” Judge Ronald Gould wrote.

After the California Legislature in 2006 passed the Global Warming Solutions Act, A.B. 32, the governor instructed the Air Resources Board (ARB) to develop regulations to address greenhouse gas emissions from California’s transportation sector. Transportation accounts for more than 40 percent of the state’s greenhouse gas emissions.

The fuel standard was designed to reduce the carbon content of fuels sold in California by 10 percent by 2020. To meet it, a fuel blender must keep average carbon intensity in its total volume produced below ARB’s annual limit.

Industry quickly challenged the regulations. Because ARB took into account the life cycle of the fuel — meaning where it came from, how it was refined, and transportation costs — industry groups claimed it violated interstate commerce provisions.

Specifically, the Rocky Mountain Farmers Union and the American Fuels and Petrochemical Manufacturers Association, among others, said it violated the “dormant” Commerce Clause, which has been interpreted to mean that while the clause gives Congress the authority to regulate interstate commerce, the inverse is also implicitly true — states may not restrict or discriminate against interstate economic activity.

In December 2011, a lower court judge agreed and issued an injunction stopping implementation of the standard that the 9th Circuit later lifted.

But Gould wrote that a dormant Commerce Clause analysis isn’t as simple as the lower court presumed.

“Under the dormant Commerce Clause, distinctions that benefit in-state producers cannot be based on state boundaries alone,” Gould wrote for the San Francisco-based panel. “But a regulation is not facially discriminatory simply because it affects in-state and out-of-state interests unequally.”

He added that the lower court ruling did not address nuances of the program, including that it is based on the carbon intensity of the fuel, not just where it comes from.

“If producers of out-of-state ethanol actually cause more GHG emissions for each unit produced, because they use dirtier electricity or less efficient plants, CARB can base its regulatory treatment on these emissions,” Gould wrote. “If California is to successfully promote low-carbon-intensity fuels, countering a trend towards increased GHG output and rising world temperatures, it cannot ignore real factors behind GHG emissions.”

Gould, joined in the majority by Judge Dorothy Nelson, held that the standard did not unlawfully engage in extraterritorial regulation of ethanol production. The court also remanded part of the case involving specific ethanol provisions to the district court for further consideration.

Judge Mary Murguia dissented, arguing that the standard did violate the dormant Commerce Clause.

ARB spokesman David Clegern welcomed the ruling.

“This is a very good step for Californians and the fight against climate change,” he said in an email. “We are pleased, on behalf of the people of California and its environment, that the Court recognized the importance of this program and that the low carbon fuel standard remains in effect.”

Industry, however, was quick to criticize the holding.

“While we were not a party to the litigation, we have been very vocal in our view that the LCFS is proving to be an infeasible and extremely costly regulation,” said Catherine Reheis-Boyd, president of the Western States Petroleum Association.


The case was closely watched in California and across the country for how it could influence future challenges both to A.B. 32 and other states’ renewable fuel programs to address climate change.

In addition to the current lawsuit, other litigation is expected challenging California’s cap-and-trade system that may also hinge on the dormant Commerce Clause (Greenwire, Sept. 20, 2012).

Sean Donahue of Donahue & Goldberg, who represented the Environmental Defense Fund and other advocates in the case, said the ruling will be highlighted in future cases nationwide. There is already ongoing litigation challenging Minnesota and Colorado’s climate change efforts, he said.

There is a “real effort to expand and distort the dormant Commerce Clause and use it as a weapon to really restrict states’ efforts,” he said. “The court is saying here that this is a neutral metric that is focused on environmental impacts, not point of origin. That’s one [argument] that states are using to defend their programs in other cases.”

Cara Horowitz, executive director of the Emmett Center on Climate Change and the Environment at the University of California, Los Angeles, School of Law, put it another way.

“If the ruling had come down differently,” she said, “it would have made it much harder for states to regulate greenhouse gas emissions taking into account the life cycle of sources.”