Midwestern Ethanol Producers Challenge California Global-Warming Regulations

Source: Daniel Fisher, Forbes Staff • Posted: Monday, October 28, 2013

A federal appeals court in California is mulling whether to reconsider a September ruling that upheld state global-warming regulations on ethanol producers. Critics say the decision gives the Golden State carte blanche to regulate virtually anything it doesn’t like, regardless of the impact on interstate commerce.

The Ninth Circuit Court of Appeals, in Rocky Mountain Farmers Union v. Corey, upheld California’s Low Carbon Fuel Standard Program, which grades ethanol based on the “lifecycle” greenhouse gas emissions associated with its production.

Midwestern ethanol producers complain the regs discriminate against them by taking into account factors such as the amount of coal burned in local electricity plants, giving ethanol plants in hydropower-rich California an advantage.

State laws that discriminate against interstate commerce can run afoul of the Constitution. The U.S. Supreme Court has repeatedly struck down bans on importing out-of-state garbage, for example. The ethanol producers won a minor victory by convincing at least one judge on the appeals court to demand a response from California explaining why the Sept. 18 decision should stand. California filed its answer yesterday.

Ethanol isn’t the only product California regulates beyond its borders. Foie gras producers in New York and Canada are seeking en banc review of an August decision upholding a law that makes it illegal to sell the fattened livers of force-fed ducks within the state. And out-of-state egg producers are likely to challenge another law that bans eggs from chickens that aren’t kept in California-compliant cages with enough room for them to flap their wings.

The ethanol challenge may have the best chance of getting a review before the full Ninth Circuit, or failing that, before the U.S. Supreme Court. By upholding the sweeping regulation of ethanol producers from Iowa to Brazil, a three-judge panel of the court left the door open for California to regulate practically anything on the basis of whether it contributes to global warming.

If California can assign a penalty to ethanol produced using coal-fired electricity, why can’t it ding Florida oranges that have to be shipped into the state aboard diesel-burning trains? Or ban gasoline produced from Canadian tar-sands crude?

“Courts have recognized that clever legislators can make protectionist legislation look neutral,” said Jonathan Adler, a professor at Case Western University Law School. “What’s most difficult about the California law is it expressly takes into consideration where ethanol is produced. Not only how it’s produced, but how it gets there.”

California, in its response, says the law passed in 2007 is neutral because it applies the same scientific standard of review for ethanol regardless of where it is produced. The law doesn’t discriminate against out-of-state producers, California says, because some Midwestern producers score higher than California ones, and Brazilian ethanol produced from sugar-cane waste also scores well. Refiners who use ethanol with lower greenhouse-gas scores gain credits they can use to offset carbon penalties or sell them to other companies.

Midwestern ethanol producers say the law violates the Commerce Clause by discouraging refiners from buying their products, and reaching beyond the state’s borders to control how they do business. While California argues its ethanol producers don’t have an advantage, in a 2011 filing, the California Air Resources Board listed as one side effect of the law: “Displacing imported transportation fuels with biofuels produced in the State keeps more money in the State.”

The problem for ethanol producers is so-called Dormant Commerce Clause doctrine is notoriously murky, and California, for political reasons, has gotten a lot of slack when it comes to pollution regulations.

The state long ago appointed itself as vanguard of the environmental movement, starting with the nation’s first automotive emissions regulations in 1961. Originally designed to combat killer smog over Los Angeles and other cities, California’s regulations have expanded to include everything from low-flow toilets to electric vehicles. Manufacturers who can’t afford to bypass the world’s eighth-largest economy frequently have tailored their products to meet California’s stricter regs.

The federal Clean Air Act specifically gives California the power to enact stricter air pollution regulations than the rest of the country, and in its September decision the Ninth Circuit cited California’s “leadership role” in pushing air-quality rules.

Ethanol producers say California has gone too far this time, however. The state cites its need to mitigate the effects of global warming, particularly the damage of higher sea levels on its delicate coastline, but global warming is a global problem. California alone can’t have a significant impact on greenhouse gas emissions, so regulations based on that premise are suspect.

The Supreme Court has repeatedly struck down state laws that claim to be based on public safety but discriminate against interstate trade. One of the key decisions is Pike v. Bruce Church (1970), striking down an Arizona law that required cantaloupes to be shipped in state-approved packages identifying where they were produced. Laws that “regulate evenhandedly to effectuate a legitimate local public interest” shall be upheld, the court ruled, “unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.”

In other decisions the high court struck down a New York law prohibiting the importation of milk purchased out of state at wholesale prices below the state minimum, a Connecticut law requiring beer wholesalers to affirm that prices within the state were no higher than in neighboring states, and an Illinois law requiring state approval of tender offers for companies that have more than 10% of their employees or capital within the state.

Ethanol producers say the California regulations subject them to state regulation by examining every detail of how they produce the fuel, from the diesel burned in tractors in the field to the amount of gas burned to dry the grain. Those regulations are explicitly based on where the ethanol is produced and there’s not much a refiner in, say, North Dakota, can do to alter his local utility’s fuel mix. The regs also don’t take into account factors such as the amount of CO2 that is plowed into the ground before a crop is harvested, or the CO2 intensity of the concrete foundation the ethanol plant is built on.

The September decision upholding California’s ethanol law drew a strong dissent from Judge Mary H. Murguia, an Obama appointee. She said the law facially discriminates against out-of-state producers, citing a “carbon intensity” value for California ethanol of 88.9 versus 98.4 for certain Midwestern refiners. “The majority puts the cart before the horse” by examining the practical effect of the law — and determining that on balance, California ethanol producers don’t have an advantage — before first deciding whether the law is discriminatory, she wrote.

California has a legitimate local interest in reducing greenhouse gas emissions, she said, “but even if …ethanol from other states produces more lifecycle GHG emissions, that does not mean the only way to regulate those emissions is by penalizing out-of-state producers.”

It only takes one judge on the 43-judge Ninth Circuit to ask the parties to respond to a request for en banc review, but it is considered a signal that at least some of the judges may side with Murrguia instead of the majority. And if the Ninth ultimately decides not to review the decision, that could generate some spirited dissents that serve, in the words of one lawyer involved in the case, as “Supreme Court bait.”

The high court’s most conservative justices, Antonin Scalia and Clarence Thomas, have expressed distaste for fuzzy concepts like the dormant commerce clause and may not be helpful to the ethanol producers. But if the Ninth Circuit decision stands, its hard to see where California’s authority ends. Could it assess the “lifecycle” human effects of products manufactured in low-wage plants? The carbon intensity of movies produced in North Carolina instead of Hollywood?

These are perhaps absurd examples, but the ethanol law is equally sweeping in its effect on energy markets. Some Midwestern producers with good rail connections to California have been driven out of the market, and others are retooling their processes to try and compete.

Consumers in water-rich states like Connecticut and New Hampshire suffer with low-flow toilets designed for the California market. Must ethanol producers relocate from states with a lot of coal generation to stay in business?