California Reaches Beyond Its Borders With Rules, From Ethanol To Eggs

Source: Daniel Fisher, Forbes Staff • Posted: Monday, December 23, 2013

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Tharaldson Ethanol Plant No. 1: Blindsided by California global-warming regulations.

Tharaldson Ethanol Plant No. 1 sits just west of Casselton, N.D., population 2,329, a gleaming collection of silver fermentation vats and grain-storage silos with capacity to produce 153 million gallons of alcohol a year.

The $250 million plant was built with California’s strict fuel regulations in mind. It’s close to rail lines leading straight to the Golden State, and for the first two years of its existence, Tharaldson No. 1 sent 25% of its output to refineries operated by BP, Shell and Valer

“California was our whole business model,” says Ryan Thorpe, manager of the Tharaldson plant. “We’re on the Burlington Northern railroad. We’re a westward-facing plant.”

Then California decided it didn’t like North Dakota ethanol. Under the state’s Low Carbon Fuel Standard that went into effect in 2010, Tharaldson was judged according to its “lifecyle” greenhouse-gas emissions and penalized for the high amount of coal burned in local power plants. California ethanol producers, who use electricity from gas and hydropower, had an edge. Tharaldson now sells less than 1% of its ethanol to California.

Normally, the Constitution prohibits such shenanigans. Under the Interstate Commerce Clause, states aren’t allowed to erect barriers to the free flow of goods, and the U.S. Supreme Court has repeatedly struck down state laws that give advantages to local producers of everything from milk to garbage.

But so far, California seems to be getting a pass. A three-judge panel on the Ninth Circuit Court of Appeals approved the state’s ethanol regulations in September, and a month earlier the same court upheld a California law that prohibits the sale of foie gras from force-fed ducks (there’s no other kind). Out-of-state egg producers are fighting another law that bans the importation of eggs from hens that haven’t been kept in California-compliant cages (apparently, the state’s voters were disturbed by videos showing hens in cramped quarters).

There’s no question states can ban products they think are unhealthy or dangerous. But it’s a stretch for California to effectively ban ethanol from the Midwest because the diesel burned in a farmer’s tractor in North Dakota contributes to the global warming that one day will threaten multimillion-dollar beach houses in Malibu.

“You are allowed to regulate within your borders,” says Jonathan Adler, an expert on interstate commerce law at Case Western University Law School. Courts are supposed to distinguish between legitimate safety regulations and disguised trade barriers, however, “and California seems to be crossing that line.”

California argues that since all ethanol is chemically identical, it has to look beyond the molecule to how it is produced in order to address the problem of global warming. To do that, it has a complex formula that accounts for everything from how far the grain fields are from the silo to how much fuel locomotives burn hauling the ethanol to California. Under that formula, Brazilian ethanol produced from sugar-cane waste scores better than Midwest ethanol from coal-burning states.

“They’re not going to take my ethanol that’s only a few hundred miles away by train, but they’ll take it from thousands of miles away by ship,” Thorpe says.

California also reached beyond its borders with the foie gras law, passed under stiff pressure from animal-rights activists alarmed by the centuries-old practice of force-feeding ducks for the 21 days before they are slaughtered in order to expand their livers.

“Our point is pretty simple: You can’t induce a disease in an animal just to make it taste better,” says Carter Dillard, a lawyer for the Animal Legal Defense Fund, who says the ducks suffer progressive liver failure in the three weeks before they are killed.

Foie gras producers in New York and Canada counter that they are selling a safe and federally-approved product that is still legal even in California. Unlike child pornography or machine guns, Californians can still ship all the foie gras into the state they want. The law just prohibits California businesses – read: expensive restaurants – from selling it to consumers. Even the California Food and Agriculture Dept. found the procedure isn’t cruel and urged then-Gov. Arnold Schwarzenegger to veto the bill (he didn’t).

“What is the legitimate local interest here?” asks Michael Tenenbaum, a Santa Monica lawyer who is pressing the Ninth Circuit to rehear a challenge to the foie gras law. “California doesn’t have a legitimate interest in getting New York farmers to change their methods.”

California voters, again outraged by undercover videos, passed Proposition 2 in 2008 requiring veal calves, hens and pregnant pigs to be raised in cages or pens large enough for the animals to “lie down, stand up, fully extend their limbs and turn around freely.” Fair enough: Californians are entitled to tell their farmers how to raise animals within state borders.

But California egg producers complained they’d be at an economic disadvantage with their suddenly more expensive, free-range cages. The California Legislature came to the rescue in 2010 by passing a law banning retailers in the state from selling non-California-compliant eggs, no matter where they came from. Then-Gov. Schwarzenegger signed that law, too. Suddenly farmers across the country were being forced to choose between paying to upgrade their operations to California standards or withdrawing from interstate commerce. Congressman Steve King (R-Iowa) has sparked a battle in Washington by trying to pass a federal law prohibiting states from regulating farming practices across their borders, and Missouri Attorney General Chris Koster is thinking about suing.

Legal scholars who oppose the California laws note that if California can ban products based on how and where they are produced, not the characteristics of the products themselves, there is no reason it can’t ban automotive fuel produced from Canadian tar-sands crude, or slap a global-warming tax on Florida oranges that have to be shipped into the state. Worried about low manufacturing costs driving jobs to Alabama? Ban products produced with wages below the California minimum.

Midwestern ethanol producers and duck farmers got some good news recently when the Ninth Circuit ordered California to submit its legal justifications for both laws as the court considers an en banc appeal before all of the judges. The oft-overturned Ninth would be wise to consider the Supreme Court’s many previous rulings in this area, including a decision last year striking down a California law banning the sale of meat from “downer” animals that can’t walk into the slaughterhouse under their own steam. (That one, like the egg ban, was inspired by undercover videos.)

“I think I can lower my score,” he says. But the bigger question is, why?