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).

Has the EU met its emission reduction targets under the Kyoto Protocol? Not if emissions associated with goods Europe imports from Asia are taken into account. So finds a study published this week in Proceedings of the National Academy of Sciences (PNAS).

The study, Growth in emission transfers via international trade from 1990 to 2008, calculates the net increase in global carbon dioxide (CO2) emissions resulting from developed countries’ imports of goods produced in developing countries. The study provides additional evidence of Kyoto’s futility, although the authors, a team of Norwegian, German, and U.S. researchers, don’t draw this conclusion and would likely deny it.

Some key findings:

• Global CO2 from the production of traded goods increased from 4.3 gigatons (Gt) in 1990 (20% of global emissions) to 7.8 Gt in 2008 (26%).
• Emissions from production of exports increased 4.3% annually, faster than the growth in global population (1.4% per year), CO2 emissions (2.0% per year), and GDP (3.6% per year), although not as fast as the dollar value of international trade (12% per year).
• Global emissions increased 39% from 1990 to 2008. At the regional level, emissions from developed countries (classified as “Annex B” countries in the Kyoto Protocol, with quantified emission limitations) largely stabilized, but emissions from developing countries (non-Annex B) doubled.
• However, territorial emission inventories don’t take into account “consumption-based emissions” — CO2 emitted in developing countries to produce goods consumed in developed countries.
• The “net emission transfers” via international trade from developing to developed countries increased from 0.4 Gt CO2 in 1990 to 1.6 Gt CO2 in 2008 — 17% per year average growth. 
• Developed countries ”imported” more emissions than they reduced domestically via efforts to comply with the Kyoto Protocol.
  • “For comparison, if the average emission reduction target for Annex B countries in the Kyoto Protocol (~5% reduction of 1990 emissions) is applied to CO2 emissions only, representing ~0.7 Gt CO2 per year, then the net emission transfers from non-Annex B to Annex B countries is 18% higher on average (1990-2008) and 130% higher in 2008.”
  • “Because estimated Annex B emission reductions from 1990 to 2008 are only ~ 2%, representing only 0.3 Gt CO2, the net emission transfers from the group of non-Annex B countries is 520% higher in 2008.”
  • “Collectively, the net CO2 emissions reduction of ~2% (0.3 Gt CO2) in Annex B countries from 1990 to 2008 is much smaller than the additional net emission transfer of 1.2 Gt CO2 from non-Annex B countries . . .”
• China’s emissions accounted for 55% of the growth in global CO2 emissions from 1990 to 2008. Chinese exports accounted for 18% of the growth in global emissions and for 47% of the growth in Annex B consumption-based emissions.
• Curiously, “International trade in non-energy-intensive manufactured products dominates the net emission transfers (accounting for 41% of the growth), despite the policy focus on energy-intensive manufacturing.”

In the discussion section of their paper, the authors observe that the increase in consumption-based emissions “may benefit economic growth in developing countries, but the increased emissions could also make future mitigation more costly in developing countries.” Right, but that has two obvious implications the authors do not mention: (1) Developing countries are unlikely to accept mandatory emission limits in the foreseeable future; and (2) Kyoto-like controls on developing country emissions could be harshly disruptive to global trade and investment.

The authors argue that the rapid growth in “imported” emissions is not a case of “carbon leakage” — the flight of capital, jobs, and emissions from countries with CO2 controls to countries lacking such controls. They find, for example, that “both the United States and European Union have had a large increase in net emission transfers, but only the European Union has a broad-based climate policy.”  

Undoubtedly multiple factors contribute to the rapid growth of China’s export sector. However, one factor boosting investment in China is low energy cost. A closely related factor is the regulatory certainty that Beijing will not slap a price on carbon in the policy-relevant future or erect political roadblocks to the development of energy resources and infrastructure. How very different is the political climate in the USA! 

America may not have a “broad-based climate policy,” but we have an EPA bent on ‘legislating‘ climate policy via the Clean Air Act, an EPA implementing a panoply of non-climate regulations with the same (or even greater) potential to suppress electric generation from coal, regional greenhouse gas policies, state-level renewable energy mandates, an environmental movement hostile to fossil fuels and natural resource development, politicians in Congress and the White House imbued with the same mentality, and countless NIMBY activists determined to block construction of all energy-related infrastructure.

The researchers, methinks, take too narrow a view of the policy-related risks that can cause or contribute to carbon leakage.