US federal court issues injunction against California Low Carbon Fuel Standard

December 30, 2011 |

US federal judge rules that California’s Low Carbon Fuel Standard interferes with the “maintenance of a national economic union unfettered by state-imposed limitations on interstate commerce.”

Today, we look at the ruling’s impact.

Over the past several months, the Digest and other media noted that California was importing ethanol from Brazil, a 6000 mile, diesel-churning tanker haul.

Now, before the California Low Carbon Fuel Standard was put into place, California would have sourced its ethanol needs from, say, Nebraska, some 1200 miles to the east.

The 6000-mile trek was justified, said the authors of the low-carbon standard, on the basis that Brazilian ethanol was produced with a much lower carbon intensity than the aforementioned Nebraskan ethanol.

So, what was happening to the offending gallons from the Nebraska? Were they no longer produced at all?

Actually, they were being exported via a 6000 mile, diesel-sucking tanker haul to Brazil, to make up for the shortfall in the Brazilian market.

Same ethanol molecule, same emissions when burned.

12,000 miles of hauling, instead of 2,400, to burn the same tankfuls of molecules. All in the name of reducing carbon emissions.

We wondered about that. A lot.

The courts act

Yesterday in California, a judge in Federal District Court in Fresno ruled that that California’s low carbon fuel standard violates the federal Constitution’s Commerce Clause, and issued an injunction against its enforcement.

Growth Energy and other plaintiffs filed suit in December 2011 and asserted that the California LCFS violates the Commerce Clause by seeking to regulate farming and ethanol production practices in other states.

Judge Lawrence J. O’Neill ruled: “The purpose of the Commerce Clause is to protect the nation against economic Balkanization.” If every State were to adopt legislation based on a lifecycle analysis of fuels, one of two outcomes may occur. First, the ethanol market would become Balkanized, since a producer would have strong  incentives to either relocate its operations in the State of largest use, or sell only locally to avoid transportation and other penalties. This would interfere with the “maintenance of a national economic union unfettered by state-imposed limitations on interstate commerce.”

“Second, Ethanol producers and suppliers in any State would be hard-pressed to satisfy the requirements of 50 different LCFS regulations which may required 50 different levels of reductions over 50 different time periods.”

What does it mean? What happens next? Why is this important?

Todd Guerrero, a shareholder with Fredrikson & Byron, P.A., practicing in the firm’s Energy Group, was the first attorney, that the Digest is aware of, to identify that the California LCFS violated the Commerce Clause, and would fail in the courts on constitutional grounds.

Today, Guerrero offers an exclusive analysis of the ruling and its impact.

The California LCFS decision

By Todd Guererro, shareholder, Fredrikson & Byron

In a closely watched case, a California federal district judge has agreed with Growth Energy and the RFA that California’s low carbon fuel standard (LCFS) violates the federal Constitution’s Commerce Clause.  Growth Energy and other plaintiffs filed suit in late 2009.  The implications of this ruling, if upheld, could be far ranging with respect to other state’s efforts to regulate carbon dioxide emissions.

What is the Low Carbon Fuel Standard, anyway?

Adopted by the California Air Resources Board in early 2009, the LCFS is intended to reduce California greenhouse gas (GHG) emissions by reducing the carbon intensity of transportation fuels used in California by an average of 10 percent by the year 2020.  Carbon intensity is a measure of the direct and indirect GHG emissions associated with each step of a fuel’s full life cycle – the “well-to-wheels” for fossil fuels and “seed-to-wheels” for biofuels.

How does the LCFS work?

The carbon intensity baseline is measured against gasoline mixed with 10 percent corn ethanol. Fuels that have carbon intensity levels below the baseline generate credits, and fuels with levels above the baseline create deficits.  To comply, a regulated party must show that the total amount of credits equals or exceeds the deficits incurred.  If a party incurs a negative credit balance for two or more consecutive years or incurs a credit to deficit ratio of less than 90 percent, the party will be deemed in violation and subject to civil and criminal penalties.  A real downer.

Carbon intensity is measured in two parts. The first part represents the direct emissions associated with producing, transporting, and using the fuel.  The second part considers indirect effects, including those caused by changes in land use practices associated with producing the fuel.

For corn ethanol, indirect land use changes are a significant source of additional GHG emissions. For instance, gasoline has a carbon intensity of 95.86 megajoules (g CO2 e/mj) measured on a life-cycle basis.  On a direct basis, the LCFS measures corn ethanol at 69.40 megajoules.  But when indirect land use is added, corn ethanol’s carbon intensity jumps another 30 points, so that its life-cycle carbon intensity score is actually higher than gasoline (99.40). 

In other words, the LCFS found that corn ethanol produces more GHGs than does gasoline.  Given the LCFS’ requirement of reduced carbon intensity, it wasn’t difficult to see that corn ethanol would be severely disadvantaged in California.  And with California as the country’s largest ethanol market, the plaintiffs recognized that the LCFS would have impacts outside of the state.

The lawsuit’s strategy

In its lawsuit, the ethanol industry claimed that the LCFS violated the US Constitution’s Commerce Clause.  The Commerce Clause explicitly grants Congress authority to regulate commerce among the states, and has also long been understood to limit the power of the states to discriminate against or unduly burden interstate commerce.

How the Commerce Clause is measured

The U.S. Supreme Court has adopted a two-tiered approach to Commerce Clause analysis.  The first tier applies when a state statute or regulation “directly regulates or discriminates against” interstate commerce.   In such cases, the courts will apply a “strict scrutiny” analysis and generally strike down the regulation without a whole lot of further inquiry.  Think Florida banning California grapefruit.

The second tier is for cases where a state statute or regulation regulates in-state and out-of-state commerce evenly and has only an indirect effect on interstate commerce.  This test, which requires the courts to balance the burdens of a state rule against its purported benefits, has become known as the Pike balancing test, taken from 1970 Supreme Court case which first applied it.

The court’s decision

In its decision, the federal district court held that California’s LCFS’s treats Midwest-derived ethanol differently than similar corn-derived ethanol made in California.  Because the LCFS assigned higher carbon intensity values to Midwest ethanol based on the plant’s location for reasons that Midwest ethanol may be produced in plants that use more coal-based electricity than California-based plants – and that Midwest ethanol would need to travel a farther distance to California than locally-made ethanol, intensities that would ultimately affect the product’s price, the court found the LCFS discriminatory “on its face” and thus violated the “strict scrutiny” test.

Legitimate goals, illegitimate means

While the court appreciated the fact that ethanol produced in California versus the Midwest may have different carbon intensities, and that California’s goal of helping combating climate change is legitimate, that goal “cannot be achieved by the illegitimate means of isolating the State from the national economy.”

The court further found that the LCFS sought to control conduct beyond the boundary of the state, something the Commerce Clause precludes.  The court found that the LCFS’ requirement that land use changes be considered in calculating carbon intensity necessarily regulates conduct that occurs almost entirely outside of California’s boundaries.

Since California harvests only a fraction of the country’s corn, the land use practices that the LCFS finds as GHG-unfriendly occur overwhelmingly outside that state. The court found this is an illegal attempt by California to extend its police powers beyond its borders:  “[California] cannot take ‘legal and political responsibility’ of commerce occurring outside of California, even if the products of that commerce ultimately are sold in California.”

Does the Low Carbon Fuel Standard violate the US’s Environmental Security and Independence Act?

Because the court found that the LCFS violated the Commerce’s clause strict scrutiny test, it found it unnecessary to address other aspects of the industry’s Commerce Clause claims. It also decided not to address the plaintiffs’ claim that the LCFS violated the federal 2007 Environmental Security and Independence Act, and therefore the Constitution’s Supremacy Clause, which invalidates state laws that interfere with or are contrary to federal law.  EISA specifically exempted existing corn ethanol producers from claiming or demonstrating GHG reductions.

What does the decision mean for the industry?

At the moment, the decision doesn’t create legal precedent because it is at the district court level.  The decision will almost undoubtedly be appealed, however, likely all the way to the U.S Supreme Court.  Nonetheless, the ruling represents a significant legal victory for the industry and its analysis will be closely scrutinized by other states and industries involved in disputes over the legitimacy and merit of individual states’ ability to regulate climate change emissions.

The impact in California

But in California, the decision will have immediate impact.  The decision means that the LCFS cannot be applied as currently adopted.  This means that before it can be applied, it would need to be revised, which could take years of state administrative action.  While difficult to predict, a big question is how it will affect the ethanol blend wall.

The impact for other states

A bigger issue may be how this ruling will impact state initiatives directed at reducing carbon emissions.  Clearly this decision shows how difficult it is for states to tackle GHG issues, no matter how legitimate those state interests might be.

In my home state of Minnesota, North Dakota has recently filed suit claiming that Minnesota’s attempt to prevent coal-based electricity from being “imported” into the state likewise violates the Constitution.

As the California federal district court recognized, the Commerce Clause “enshrines the principle that the federal government can regulate commerce in ways the States cannot.”  In trying to regulate GHG emissions through its LCFS, the court has found, not surprisingly, that California has reached beyond its boundaries and attempted to regulate activity “wholly outside its borders” in a manner offensive to the Commerce Clause.

Todd Guerrero is shareholder with Fredrikson & Byron, P.A., practicing in the firm’s Energy Group.

Industry reaction

Advanced Ethanol Council Executive Director Brooke Coleman noted:

“This is the end of a chapter for the California Low Carbon Fuel Standard, but the book is not closed on this or any other fuel standard that rewards the production of low carbon fuels. Hopefully this decision will provide greater clarity going forward with regard to how these types of programs should be designed and implemented, and what states like California can do to reduce our dependence on fossil fuels and curb greenhouse gas emissions from the transportation sector.”

In a joint statement, RFA CEO Bob Dinneen and Growth Energy CEO Tom Buis said: “The state of California overreached in creating its low carbon fuel standard by making it unconstitutionally punitive for farmers and ethanol producers outside of the state’s border. With this ruling, it is our hope that the California regulators will come back to the table to work on a thoughtful, fair, and ultimately achievable strategy for improving our environment by incenting the growth and evolution of American renewable fuels.”

Further reading for free download

The Judge’s ruling on the plaintiff’s motions is here.

The ruling on motions by CARB are here.

The original lawsuit is here.

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