Ethanol Sector Details Likely New Legal Challenges To California LCFS

Source: By Curt Barry, Inside EPA • Posted: Wednesday, February 25, 2015

Growth Energy, a trade association that represents some of the largest corn ethanol producers in the country, is detailing extensive legal objections to California’s low-carbon fuel standard (LCFS) re-adoption process, potentially signaling a new round of litigation that could force state officials to further weaken the controversial regulation.

The group — one of whose members, POET, LLC, led a successful challenge to the LCFS that is forcing the current re-adoption — Feb. 17 submitted hundreds of pages of comments to the California Air Resources Board (CARB) reiterating earlier charges that the board’s re-adoption process does not comply with a host of state laws.

An attorney for POET LLC, the South Dakota-based ethanol producer, endorsed Growth Energy’s arguments in a Feb. 17 letter.

Should CARB face new litigation over the re-adopted rule, it will likely perpetuate regulatory uncertainty for many producers of low-carbon advanced biofuels, who are looking to California’s LCFS as an important growth market for their product, especially given uncertainty with EPA’s renewable fuel standard (RFS).

California’s LCFS requires fuel providers to reduce the carbon intensity of gasoline and diesel 10 percent by the end of 2020, compared with a 2010 baseline. Companies can comply by blending cleaner fuels, such as ethanol and biodiesel, into gasoline and diesel and by purchasing credits generated by utilities and other companies that provide natural gas, electricity or hydrogen for transportation purposes.

But Midwest producers of corn ethanol oppose the standard, charging it assesses a greenhouse gas (GHG) “penalty” on ethanol not produced in California, in part by including the emissions created when ethanol is transported to the state via rail or truck. They also oppose state methods for assessing GHG emissions from “indirect land use changes” for producing feedstock. The result is that the Midwest ethanol has a higher carbon intensity level than ethanol produced in the state, making it less attractive to fuel providers to purchase to comply with the regulation, the groups have argued.

While the standard overcame a federal constitutional challenge, POET and others successfully challenged the LCFS in state court, charging that officials violated the California Environmental Quality Act (CEQA) and Administrative Procedure Act (APA) when they first adopted the rules.

The state appellate court’s 2013 ruling in POET, LLC, et al., v. CARB found that CARB failed to comply with CEQA and APA when it approved the LCFS and an accompanying environmental assessment in part because it failed to adequately calculate the potential release of smog-forming pollutants, among other environmental effects.

One part of the ruling held that CARB violated a fundamental policy of CEQA by improperly delegating responsibility for completing the environmental review process to its executive officer.

As a result of the 2013 decision, CARB was forced to freeze its 2013 LCFS requirement — a 1 percent reduction in carbon intensity — through 2015. Clean fuel researchers recently found that CARB’s action contributed to a reduction in estimated production capacity for low-carbon advanced biofuels in 2014 and increased uncertainty for the industry, which has now been pushing for formal re-adoption of the standard.

CARB Feb. 19 passed a resolution to re-adopt the LCFS and a host of regulatory amendments in accordance with CEQA and administrative procedure rules, and tentatively plans a final vote on the revised regulation in July.

CARB was also forced to implement a new two-step process to adopt regulations as a result of the 2013 court decision over the LCFS, where proposed rules are presented to the board, returned to staff for environmental analysis and then rescheduled for final board votes months later.

Alleged Violations

Even as CARB takes steps to address earlier concerns, Growth Energy is charging that the board has again failed to comply with CEQA, APA and AB 32, the 2006 law requiring the state to cut GHGs to 1990 levels by the end of 2020.

In general, the industry group asserts that CARB has failed to properly assess alternative “projects” to the LCFS to accomplish the same goal, as required under CEQA; failed to allow adequate time for public review and comment on the LCFS re-adoption as required by the APA and subsequent related laws; and failed to ensure that the LCFS reduces GHG emissions while not hiking other pollutants, as required by AB 32.

The group is claiming many of the same legal shortcomings for a related regulation — the Alternative Diesel Fuel (ADF) rule — that CARB is also scheduled to finalize in July. The ADF puts in place new regulatory specifications for various blends of biodiesel and renewable diesel fuel.

David Bearden, Growth Energy’s general counsel and secretary, charged in the comments that the revised version of the LCFS that the state plans to re-adopt is based on faulty assumptions that the standard has reduced GHG emissions. Compounding this error, the proposal also assumes it will achieve further GHG reductions, he adds.

“In fact, there is no evidence that the LCFS regulations have done so, to date, and the available evidence demonstrates that there have been no such GHG reductions,” Bearden states. “The staff’s LCFS proposal invites a further assumption that the new LCFS regulations will achieve further reductions in net GHG emissions, but remarkably, the staff has offered no definitive quantitative estimate of those GHG reductions,” he says.

As a result, the revised LCFS “cannot properly be treated as a regulation that meets the purposes of AB 32 because there is no reliable demonstration that the regulation will reduce GHG emissions, and the proposal is therefore not authorized by AB 32 and is invalid under the Government Code,” the group says.

Growth Energy also charges that the board’s CEQA assessment fails to adequately mitigate adverse environmental impacts that will result from the use of biodiesel fuel and also fails to comply with other CEQA requirements, he says.

In terms of APA and other procedural rules, the industry argues in part that CARB has never disclosed to the public “critical information about the assumptions and data on which the LCFS and ADF proposals are based,” he adds.

More broadly, Growth Energy argues the LCFS regulation is no longer needed to achieve the GHG reductions sought by the 2009 regulation. The group claims it has proposed to CARB a “better alternative” to the LCFS, through the expansion of California’s existing GHG cap-and-trade program, the comments say.

Specifically, the group proposed that CARB adjust the economy-wide GHG cap-and-trade to account for whatever increment of GHG emissions reductions would be foregone by eliminating the LCFS.

Growth Energy’s proposal “had none of the unintended negative environmental consequences of the 2009 LCFS regulation, which have been the subject of litigation, and would have eliminated the need for California businesses and consumers to pay for the LCFS program ─ costs which the CARB staff now says may range up to about 12 cents per gallon by 2020,” Bearden asserts.

Market Disruption

In addition, CARB’s new justification for the LCFS regulation “ignores” the federal RFS program. “When it rejected Growth Energy’s proposal last fall, the CARB staff did not properly account for the beneficial effects of the [RFS] program in stimulating fuels diversification and in the commercialization of cellulosic renewable fuels. The CARB staff still has not done so.”

By disrupting the national market for renewable fuels, “the LCFS regulation may increase global GHG emissions,” the group further claims. “Under the new LCFS regulation, corn ethanol produced at Midwest biorefineries will likely be displaced in large part by sugarcane ethanol from Brazil. Midwest corn ethanol biorefineries will be forced to choose between curtailing or shutting down production, or finding other markets for the ethanol that can no longer be sold in California.”

Because external economic factors constrain the output of the Brazilian sugarcane ethanol industry, and may continue to do so, “the practical effect of the new LCFS regulation may be the shipment of Brazilian ethanol to California and Midwest ethanol to Brazil,” the group says. “The ethanol would travel on oceangoing tankers powered with fossil fuels. Intercontinental shipments of ethanol in response to California’s regulation would have the unintended

effect of increasing global GHG emissions.”

The organization also reiterates its longstanding argument that the LCFS discriminates against ethanol producers outside of California.

Asked to comment on Growth Energy’s charges, a CARB spokesman says board officials “are following the law.”