Federal District Court Halts California Low Carbon Fuel Standard

On December 29, 2011, the U.S. District Court for the Eastern District of California ruled that California’s Low Carbon Fuel Standard (LCFS) violates the dormant Commerce Clause of the U.S. Constitution.  The court’s decision in Rocky Mountain Farmers Union v. Goldstene, which was issued in three documents and consists of ten orders, enjoins enforcement of the rule until the litigation reaches a conclusion.  The decision is a significant setback for the state and could have implications for other laws enacted by California and other states that are designed to have extraterritorial reach in order to address regional or global environmental issues. 

THE LOW CARBON FUEL STANDARD

The California Air Resources Board (CARB) adopted the LCFS in April 2010, as one of a set of measures to comply with California Assembly Bill 32 (AB 32), which set a goal of reducing greenhouse gas (GHG) emissions in California to 1990 levels by 2020.

The LCFS is intended to reduce GHG emissions in the California transportation sector by reducing the “carbon intensity” of fuels used in the state by 10 percent by the year 2020.  The LCFS requires California fuel providers to calculate the carbon intensity of fuel sold for transportation, including imported fuel. 

The LCFS assigns different carbon intensity scores to different types of gasoline and gasoline substitutes, including ethanol derived from corn or other biomass.  Carbon intensity is generally measured by a lifecycle analysis that takes into account such factors as: practices used (e.g., the frequency and type of fertilizer used for production of corn ethanol); the types of electricity used by the fuel providers; and the methods used for transporting the fuel.  

Fuel providers can meet their overall carbon intensity requirement either by using lower-carbon fuels directly, or by acquiring credits from producers of such fuels. 

FEDERAL DISTRICT COURT DECISION

Plaintiffs in the case include a group of corn ethanol producers from the Midwest (Rocky Mountain Farmers Union, et al. (Rocky Mountain)) and a trade association representing oil refiners (the National Petrochemical and Refiners Association (NPRA)).  Each group filed separate motions for summary judgment in the District Court contending that the LCFS violates the dormant Commerce Clause.  Rocky Mountain also claimed that the LCFS is preempted by the federal Renewable Fuels Standard (RFS). 

The court granted the summary judgment motions of both plaintiffs on the grounds that implementation of the LCFS violates the dormant Commerce Clause because the rule: (i) discriminates against out-of-state fuel producers; and (ii) regulates activity wholly outside California’s borders.  The court further held that Rocky Mountain’s federal preemption claim raises “serious questions” but that the plaintiffs had failed to establish the proper standard.  Accordingly, the court denied the preemption claim but allowed Rocky Mountain to refine its arguments.

The State of California already has announced that it will appeal the District Court’s dormant Commerce Clause decision to the U.S. Court of Appeals for the Ninth Circuit and seek an order staying the preliminary injunction. 

THE COURT'S COMMERCE CLAUSE ANALYSIS

The dormant Commerce Clause is a judicially created gloss on the Commerce Clause in the U.S. Constitution.  The Commerce Clause authorizes Congress to regulate interstate commerce.  From this affirmative grant of authority, courts have inferred that, absent congressional approval, states are barred from impermissibly burdening interstate commerce or discriminating against interstate commerce.

Briefly, the Supreme Court employs several principles for assessing the constitutionality of state and local measures allegedly violating the dormant Commerce Clause.  To begin with, any state or local measure that discriminates against interstate commerce on its face, in its purpose or by practical effect is invalid unless it can satisfy a “strict scrutiny” standard.  If strict scrutiny is applied, case law suggests that the measure likely will be found unconstitutional.  If, however, a measure is not discriminatory, but nevertheless burdens interstate commerce, courts apply a more lenient “balancing” test from Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).  This balancing test often results in the measure being upheld. Lastly, the Court has held that states are barred from regulating conduct outside their borders—that is, extraterritorially. 

The District Court held that the LCFS is subject to strict scrutiny analysis for two reasons.  First, the court decided that the LCFS directly discriminates against fuel producers operating outside of California, because the rule assigns different carbon intensity scores for the same type of fuel based on their point of origin.  In particular, the LCFS assigns a higher presumptive carbon intensity score to ethanol produced in the Midwest based on emissions resulting from transporting such fuel to California, along with assumptions that electricity used to produce the fuel comes from more carbon-intensive sources.   The court also determined that the LCFS confers economic advantages on in-state crude oil relative to out-of-state crude oil.

Second, the court determined that strict scrutiny should be applied in assessing whether the LCFS violates the dormant Commerce Clause, because the practical effect of the regulation is to control conduct beyond California’s borders.  Noting that the LCFS uses a lifecycle analysis that takes into account fuel production practices, the court reasoned that the “practical effect” of the LCFS is to control conduct occurring wholly outside of California by attempting to change out-of-state practices in order to reduce GHG emissions.

Having so concluded, the court applied the strict scrutiny standard, requiring that the state establish both a legitimate state purpose and that no alternative non-discriminatory means exist to accomplish that purpose.  While the District Court acknowledged that the LCFS serves a legitimate local purpose in reducing global warming, as the U.S. Supreme Court explained in Massachusetts v. EPA, 549 U.S. 497 (2007) (see April 2, 2007 VNF Alert for more information), the District Court nevertheless held that CARB failed to establish that the LCFS is the least restrictive way to serve this purpose.  The court reasoned that other nondiscriminatory means could achieve the goal of reducing GHG emissions, including adopting a tax on fossil fuels in California.  When the state asserted that an in-state tax would encourage “leakage” of fuel production (and therefore emissions) to other states, the court countered that California has no jurisdiction over such out-of-state activities in any event.

POTENTIAL IMPLICATIONS 

As discussed above, the State of California already has made clear that it disagrees with the federal District court summary judgment decision on the dormant Commerce Clause, and that it will appeal the decision to the Ninth Circuit Court of Appeals. 

If the Ninth Circuit upholds the lower court, the decision could have significant implications for California’s efforts to comply with its AB 32 emission limits.  Without emission reductions from the LCFS, the state may have to increase its reliance on other AB 32 measures to achieve the quantity of reductions needed for compliance – including the state’s greenhouse gas cap-and-trade program, which goes into effect this year and imposes allowance surrender requirements on the state’s fuel providers starting in 2015.   

However, the reasoning in the court’s decision also spells potential jeopardy for the cap-and-trade program because that program includes a component very similar to the LCFS.  The program requires the “first deliverer” of electricity imported from out-of-state to surrender allowances corresponding to the emissions associated with the generation of that electricity.  This feature already had come under criticism for violating the dormant Commerce Clause.  The court’s decision could strengthen the case for potential litigants. 

The decision also could inform deliberations in a dispute between the states of North Dakota and Minnesota over a Minnesota law restricting the emissions associated with imported power.  North Dakota v. Swanson, 11 cv 3232, U.S. District Court, District of Minnesota (St. Paul).  North Dakota, which provides coal-fired power to Minnesota, is claiming that the law violates the dormant Commerce Clause.