Last week, Judge Lawrence O’Neill of the U.S. District Court in Fresno issued a preliminary injunction blocking enforcement of California’s Low Carbon Fuel Standard (LCFS), a regulation requiring a 10% reduction in the carbon content of motor fuels sold in the state by 2020. O’Neill concluded that the LCFS violates the Commerce Clause of the U.S. Constitution because it discriminates against out-of-state economic interests and attempts to control conduct outside the state’s jurisdiction.
The California Air Resources Board (CARB) adopted the LCFS as part of its strategy to implement California Assembly Bill 32, the Global Warming Solutions Act of 2006, which aims to reduce the state’s total greenhouse gas (GHG) emissions to 1990 levels by 2020. Other AB 32-implementing measures include a cap-and-trade program covering the state’s largest emitters, a renewable portfolio standard (RPS) requiring 33% of California’s baseload power to come from renewable sources by 2020, and the state’s motor vehicle greenhouse gas emission standards (AB 1493), which implicitly (and, I argue, unlawfully) regulate fuel economy. CARB estimated that the LCFS would reduce in-state carbon dioxide-equivalent (CO2-e) emissions by 16 million metric tons (mmt), or about 10% of the total 174 mmt CO2-e emission reduction target for 2020.
The injunction is a setback for the California greenhouse political establishment, including former Gov. Arnold “I say the debate is over” Schwarzenegger, who issued the Jan. 2007 executive order directing CARB to develop and adopt the LFCS. CARB says it will appeal O’Neill’s decision. If the injunction is upheld, it should strengthen opponents of similar policies proposed or adopted by other states.
O’Neill considered three separate lawsuits by refiners, truckers, and out-of-state ethanol producers against the LCFS. The injunction focuses on the ethanol producers’ complaints.
The LCFS requires a 10% reduction in the carbon intensity (CI) of motor fuels sold in the state by 2020. CI is calculated on a life-cyle (“well-to-wheels”) basis, taking into account not only the GHGs emitted when the fuel is combusted but also emissions associated with production and transport of the fuel. Life-cycle analysis is an essential planning tool for climate policy regulators, because what supposedly matters climatologically is not the emission reductions from a particular source or jurisdiction but the net reduction in global emissions.
For example, life-cycle analysis indicates that switching from gasoline-powered cars to electric vehicles in China would actually increase net GHG emissions, because almost 80% of China’s electricity comes from coal.
But it’s precisely CARB’s use of life-cycle analysis that puts the LCFS crosswise with the U.S. Constitution. Midwest ethanol producers get much of their electricity from coal. To sell their product in California they must transport it thousands of miles. Their methods of turning ethanol byproducts into animal feed may be more carbon-intensive than comparable operations in California. On a life-cycle basis, ethanol produced in the Midwest, although physically and chemically identical to ethanol produced in California, has a higher CI rating.
Thus, to compete in the California motor fuels market, Midwest producers must either make additional CI-reducing investments California producers do not have to make, or buy surplus low-carbon fuel credits from California producers whose CI score is below the required state-wide average for that year. Either way, the LCFS puts the Midwest producers at a competitive disadvantage. It discriminates against interstate commerce.
In Judge O’Neill’s words:
CARB is attempting to stop leakage of GHG emissions by treating electricity generated outside the state differently than electricity generated inside its border. This discriminates against interstate commerce. Moreover, tying carbon intensity scores to the distance a good travels in interstate commerce discriminates against interstate commerce.
O’Neill also agreed with plaintiffs that the LCFS attempts to control conduct outside of California’s territorial jurisdiction. According to plaintiffs, CARB’s life-cycle analysis “calibrates CI scores so that they regulate, among other things, deforestation in South America, how Midwest farmers use their land, and how ethanol plants in the Midwest produce animal nutrients.” For example, CARB “imposes a substantial penalty — more than 30% of the CI score for corn ethanol — for ‘indirect land use.’ That penalty is used to discourage farmers around the world from converting nonagricultural land into farmland to enter the corn market.”
CARB contends that taking these out-of-state activities into account in calculating CI scores is not the same as regulating those activities. O’Neill disagreed. Just because the LCFS does not “directly regulate” out-of-state activities does not mean it does not attempt to control the conduct of out of state activities. CARB acknowledges that the LCFS assigns higher CI scores based on those out-of-state activities to provide “an incentive for regulated parties to adopt production methods which result in lower emissions.” CARB “cannot dispute that the ‘practical effect’ of the regulation would be to control this conduct — occurring wholly outside of California.” Thus, the LCFS “impermissibly attempts to ‘control conduct beyond the boundary of the state.'”
O’Neill also considered what would happen if many or all states adopt a LCFS. To the extent that distance traveled influences CI, each state’s LCFS would discriminate against out-of-state imports. [A Midwest LCFS would discriminate against California ethanol producers — Ha!] The proliferation of LCFS regulations would “balkanize” fuel markets and “plainly intefere” with free trade in ethanol and ethanol production. Moreover, there is no guarantee that each state would set the same CI reduction targets. “Ethanol producers and suppliers would be hard pressed to satisfy the requirements of 50 different LCFS regulations which may require 50 different levels of reductions over 50 different time periods.”
If upheld, Judge O’Neill’s ruling should embolden opponents of the LCFS proposed last August by the Northeast States for Coordinated Air Use Management (NESCAUM).